Gemstar-TV Guide Announces Third Quarter 2007 Results

Gemstar-TV Guide International, Inc. (NASDAQ:GMST) announced that for the quarter ended September 30, 2007, the Company reported revenues of $159.6 million, an increase of 7% versus the prior year’s quarter. Operating income for the third quarter of 2007 was $5.0 million, compared with operating income of $12.9 million for the third quarter of 2006. The Company’s operating income was impacted by an increase in programming and associated marketing costs at TV Guide Network and a national cross-platform consumer marketing campaign which launched in late September, both as previously planned. These costs were partially offset by a 20% increase in revenues in the Guidance Technology and Solutions segment and further significant decreases in operating expenses at TV Guide magazine. Net income for the third quarter of 2007 increased to $123.2 million, or $0.29 per share, compared with net income of $17.5 million, or $0.04 per share in the third quarter of 2006. Net income in the quarter benefited from the reversal of approximately $115 million in valuation allowance against the Company’s deferred tax assets. For the third quarter of 2007, the non-cash benefit from reversing the deferred tax assets valuation allowance, on a per share basis, was approximately $0.27 per share. Gemstar TV Guide’s Chief Executive Officer Rich Battista said, "I am encouraged by the progress we made again this quarter executing on our business initiatives. The quarter was one of investment in key areas, particularly in programming for our TV Guide Network; the further development of My TV Guide, our suite of personalized cross-platform guidance products and services; and the launch of our national cross-platform consumer marketing campaign. I am pleased with the continued expansion of our IPG patent licensing both internationally and to new media platforms. To that end, we recently announced new agreements with MediaFlo in the mobile arena, as well as with Sky Italia, Italy’s leading digital TV service, and with three German consumer electronics companies. I am also pleased with the performance of TV Guide magazine, where ad paging was up 25% and losses were down significantly from Q3 2006. We remain focused on our business objectives while we continue to review strategic alternatives for the company with the goal of maximizing shareholder value.” THIRD QUARTER AND FIRST NINE MONTHS 2007 SEGMENT FINANCIAL PERFORMANCE The schedule below reflects Gemstar-TV Guide’s performance for the third quarter and the first nine months of 2007 and 2006 by segment. The following segment information is presented and reconciled to consolidated income from continuing operations before income taxes. More detailed information is contained in the Company’s Form 10-Q for the quarter ended September 30, 2007, which was filed with the Securities Exchange Commission today. GEMSTAR-TV GUIDE INTERNATIONAL, INC. CONSOLIDATED SEGMENT PERFORMANCE(1) (In dollars, thousands)   Three Months Ended September 30, Nine Months Ended September 30, 2007   2006 2007   2006 Guidance Technology & Solutions: Revenues $ 68,337 $ 57,137 $ 214,887 $ 167,686 Operating expenses(2)   24,737     22,103     70,614     61,131   Adjusted EBITDA(3)   43,600     35,034     144,273     106,555   Media Networks: Revenues 50,565 48,432 147,654 145,269 Operating Expenses(2)   47,644     37,401     124,432     115,624   Adjusted EBITDA(3)   2,921     11,031     23,222     29,645   Publishing: Revenues 40,649 43,378 109,353 113,313 Operating Expenses(2)   42,854     50,711     118,671     144,126   Adjusted EBITDA(3)   (2,205 )   (7,333 )   (9,318 )   (30,813 ) Cross Platform Costs: Operating Expenses(2)   27,216     16,804     54,216     43,156   Adjusted EBITDA(3)   (27,216 )   (16,804 )   (54,216 )   (43,156 ) Consolidated: Revenues 159,551 148,947 471,894 426,268 Operating Expenses(2)   142,451     127,019     367,933     364,037   Adjusted EBITDA(3) 17,100 21,928 103,961 62,231 Stock compensation (1,348 ) (627 ) (2,720 ) (1,463 ) Depreciation and amortization   (10,752 )   (8,420 )   (29,398 )   (24,987 ) Operating income 5,000 12,881 71,843 35,781 Interest income, net 6,556 6,788 19,180 18,566 Other income, net   276     86     469     337   Income from continuing operations before income taxes $ 11,832   $ 19,755   $ 91,492   $ 54,684   (1)   Segment information is presented and reconciled to consolidated income from continuing operations before income taxes in accordance with SFAS No. 131. Intersegment revenues and expenses have been eliminated from segment financial information as transactions between reportable segments are excluded from the measure of segment profit and loss reviewed by the chief operating decision maker. (2) Operating expenses means operating expenses, excluding stock compensation, depreciation and amortization and impairment of intangible assets. (3) Adjusted EBITDA is defined as operating income (loss), excluding stock compensation, depreciation and amortization and impairment of intangible assets. The Company believes adjusted EBITDA to be relevant and useful information as adjusted EBITDA is the primary measure used by our chief operating decision maker to evaluate the performance of and make decisions about resource allocation to the segments. Guidance Technology and Solutions   --   Guidance Technology and Solutions segment revenues for the quarter ended September 30, 2007 were $68.3 million, an increase of 20% versus the prior year's quarter and represented 43% of the Company's total revenue.   Growth came primarily from IPG Patent Licensing revenues, which increased by $9.5 million, or 30%, to $40.7 million, for the third quarter of 2007 when compared to the same period in the prior year. This was mainly due to new international IPG patent license agreements, including BSkyB (fourth quarter of 2006) and Sky Italia (third quarter of 2007), and an increase in our U.S. cable and satellite licensees' digital subscribers.   IPG Products and Services revenues in the third quarter were $18.5 million, an increase of $3.8 million, or 26%, primarily due to the addition of revenue from Aptiv, which was acquired on March 29, 2007, and an increase in U.S. digital cable subscribers that receive our i-Guide IPG.   VCR Plus+ revenues, as anticipated, continue to decline. For the three months ended September 30, 2007, VCR Plus+ revenues were $5.8 million, a decrease of $3.3 million, or 36%, versus the prior year's quarter.   -- Adjusted EBITDA for the quarter ended September 30, 2007 increased to $43.6 million, up 24% versus the prior year's quarter, due to higher revenues noted above. Media Networks   --   Media Networks segment revenues for the quarter ended September 30, 2007 were $50.6 million, an increase of 4% versus the prior year's quarter and represented 32% of the Company's total revenue. While revenues at TV Guide Network remained essentially flat, revenue increased by 84% at Online Networks.   -- Adjusted EBITDA for the quarter ended September 30, 2007 was $2.9 million, a decrease of 74%, versus the prior year's quarter. In the third quarter, TV Guide Network debuted America's Next Producer and Surreal TV. As a result, anticipated programming and associated marketing costs in this segment were significantly higher compared to the third quarter of 2006. Publishing   --   Revenues for TV Guide magazine for the quarter ended September 30, 2007 were $40.6 million, a decrease of 6%, versus the prior year's quarter and represented 25% of the Company's total revenue. This decrease was primarily due to lower subscriber revenue and the absence of $2.6 million in revenues which were the result of the third quarter of 2006 having an extra fiscal week. The drop in subscriber revenue was partially offset by an increase in advertising revenues driven by a 25% increase in advertising pages and by a 45% increase in newsstand revenue resulting from a reduction in initial placement order fees and rack acquisition costs.   -- Adjusted EBITDA for the quarter improved from negative $(7.3) million in the prior year's quarter to a negative $(2.2) million for the quarter ended September 30, 2007. The current quarter benefited from the increase in advertising revenue noted above, and a $5.5 million decrease in production expenses. Additionally, general and administrative expenses also decreased, compared to the prior year's quarter, primarily due to operating efficiencies. As was the case in 2006, the Company anticipates spending significantly more on subscriber acquisition and promotional activities in the fourth quarter than it spent in previous quarters of 2007.   Based upon TV Guide magazine's performance to date and the outlook for the remainder of the year, the Company currently anticipates incurring adjusted EBITDA losses in the $20 to $23 million range for full year 2007. The Company anticipates continuing, but declining losses for approximately the next two to three years thereafter. Cross Platform Costs   --   Total Cross Platform adjusted EBITDA for the quarter ended September 30, 2007 was negative $(27.2) million versus adjusted EBITDA of negative $(16.8) million in the prior year's quarter.   Product Development and Technology expenses in the third quarter of 2007 were $4.8 million compared with $5.0 million in the prior year's quarter. Costs incurred to develop next generation guidance products and services were $13.2 million for the first nine months of 2007. The Company expects to incur approximately $19 million in such expenses for full year 2007, as previously announced.   Corporate Marketing, a group formed in the second quarter of 2006, incurred expenses of $6.6 million in the third quarter of 2007, bringing the year-to-date corporate marketing costs to $9.6 million. For the full year 2007, the Company expects to incur approximately $22 million in corporate marketing expenses, including expenses for the national cross-platform consumer marketing campaign launched at the end of the third quarter of 2007. We believe this marketing campaign will drive greater usage of our products and elevate consumer perception of the TV Guide brand.   Corporate General and Administrative expenses in the third quarter of 2007 were $15.8 million versus $11.0 million in the prior year's quarter which benefited from the reversal of $3.9 million in accrued legal expenses relating to a former CEO. For the nine months year to date, corporate general and administrative expenses were $31.4 million. For full year 2007, the Company expects to incur approximately $50 million in corporate general and administrative expenses, which includes $5.5 million in costs relating to the Company's exploration of strategic alternatives and a $10.7 million benefit from the reversal of accrued liabilities relating to a patent rights agreement with a former CEO. FIRST NINE MONTHS 2007 CONSOLIDATED FINANCIAL PERFORMANCE For the nine months ended September 30, 2007, total revenues were $471.9 million, an increase of $45.6 million, or 11%, compared with revenues of $426.3 million for the nine months ended September 30, 2006. The increase was primarily due to a $39.2 million increase in IPG Patent Licensing revenue and a $12.0 million increase in IPG Products and Services revenue, partially offset by a $5.7 million decline in VCR Plus+ revenue. Operating income for the nine months ended September 30, 2007 was $71.8 million, which included depreciation and amortization charges of $29.4 million, an increase of 101% compared with operating income of $35.8 million for the nine months ended September 30, 2006, which included depreciation and amortization charges of $25.0 million. This was primarily due to a $20.3 million decrease in TV Guide magazine production costs, partially offset by a $6.6 million increase in TV Guide Network programming and associated marketing costs. The nine months ended September 30, 2007 also included a benefit of $10.7 million from the reversal of accrued liabilities relating to a patent rights agreement with a former CEO of the Company and $3.2 million in costs relating to the exploration of strategic alternatives. The nine months ended September 30, 2006 included the benefits of both a $8.9 million reversal of accrued liabilities due to a settlement agreement with a former CFO of the Company and a $1.7 million benefit from the reversal of accrued legal costs relating to a former CEO. Net income for the nine months ended September 30, 2007 increased to $178.4 million, or $0.42 per share, compared with net income of $40.7 million, or $0.10 per share, for the nine months ended September 30, 2006 mainly due to the reversal of the valuation allowance against the Company’s deferred tax assets mentioned above. The Company now has a history of generating, and accurately forecasting, pre-tax book income. The 2008 annual budget and long-range plan process, which coincided with the preparation and review of the Company’s interim financial statements for the third quarter of 2007, projects adequate future taxable income to utilize its deferred tax assets. These factors make the realization of the Company’s deferred tax assets more likely than not, and therefore in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, the valuation allowance is no longer necessary. LIQUIDITY & CAPITAL RESOURCES At September 30, 2007, the Company’s cash, cash equivalents and marketable securities were $546.7 million, excluding restricted cash of $32.4 million, an increase of $33.1 million versus December 31, 2006. Outstanding short- and long-term debt, made up entirely of capital lease obligations, was $12.3 million, compared with $12.7 million at December 31, 2006. Net cash provided by operating activities was $57.7 million for the nine months ended September 30, 2007, compared to $68.5 million for the same period last year. Income from continuing operations before income taxes during the nine months ended September 30, 2007 was $91.5 million compared to $54.7 million during the same period in 2006. We made $12.9 million in net income tax payments in the first nine months of 2007, versus the receipt of $44.7 million in net income tax refunds during the same period in 2006. The first nine months of 2006 also benefited from the release of $8.4 million in restricted cash due to a settlement agreement with a former CFO of the Company. REVIEW OF STRATEGIC ALTERNATIVES On July 9, 2007, the Company announced that its Board of Directors had authorized the Company and its advisors to explore strategic alternatives intended to maximize shareholder value, which may include a sale of the Company. This review is currently in progress. There can be no assurance that any particular strategic alternative will be pursued, or that any transaction or transactions will occur, or on what terms. CONFERENCE CALL The Company will host a conference call for investors and analysts today, which will be broadcast live via both teleconference and Internet webcast. Investors and analysts may connect to the call by dialing (866) 383-8108 (domestic) or (617) 597-5343 (international). The conference ID number is "65044251". To listen via webcast, link to the Company’s website http://ir.gemstartvguide.com. Investors unable to listen to the call live may access an audio replay, which will be hosted for one week following the conclusion of the call. To access the replay, call (888) 286-8010 (domestic) or (617) 801-6888 (international). The conference ID number is "80647495". An audio archive will also be hosted on the Company’s investor relations website at http://ir.gemstartvguide.com. Replays will be available approximately two hours following the conclusion of the call. ABOUT GEMSTAR-TV GUIDE Gemstar-TV Guide International, Inc. (the "Company”) (NASDAQ:GMST) is a leading global media, entertainment, and technology company that develops, licenses, markets and distributes products and services that maximize the video guidance and entertainment experience for consumers. The Company’s businesses include: television, publishing, and new media properties; interactive program guide services and products; and intellectual property licensing. Additional information about the Company can be found at www.gemstartvguide.com. This news release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance or results to differ materially from those in the forward-looking statements, including risks and uncertainties related to the timely availability and market acceptance of products and services incorporating the Company's technologies and content; our investments in new and existing businesses; the impact of competitive products and services; and the other risks detailed from time to time in the Company's SEC reports, including the most recent reports on Forms 10-K, 10-Q and 8-K, each as it may be amended from time to time. The Company assumes no obligation to update these forward-looking statements. Note to Editors: Gemstar and TV Guide are trademarks or registered trademarks of Gemstar-TV Guide International, Inc. and/or its subsidiaries. The names of other companies, products and services used herein are for identification purposes only and may be trademarks of their respective owners. GEMSTAR-TV GUIDE INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)     September 30, 2007 December 31, 2006 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 458,895 $ 464,637 Restricted cash 32,409 31,814 Marketable securities 87,807 48,938 Receivables, net 80,320 73,786 Deferred tax assets, net 33,724 13,491 Current income taxes receivable 65,069 49,588 Other current assets   22,728     18,329   Total current assets 780,952 700,583 Property and equipment, net 67,929 68,182 Indefinite-lived intangible assets 62,140 61,921 Finite-lived intangible assets, net 85,715 92,340 Goodwill 262,591 260,503 Income taxes receivable 10,873 22,731 Deferred tax assets, long-term, net 73,325 3,141 Other assets   11,266     14,336   $ 1,354,791   $ 1,223,737     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 22,918 $ 32,392 Accrued liabilities 86,092 104,259 Current portion of capital lease obligations 642 605 Current portion of deferred revenue   127,669     128,516   Total current liabilities 237,321 265,772 Long-term capital lease obligations, less current portion 11,625 12,111 Deferred revenue, less current portion 337,998 368,950 Other liabilities 71,501 123,779 Commitments and contingencies Stockholders’ equity: Preferred stock, par value $0.01 per share — — Common stock, par value $0.01 per share 4,337 4,337 Additional paid-in capital 8,454,423 8,456,117 Accumulated deficit (7,715,672 ) (7,950,421 ) Accumulated other comprehensive income, net of tax 3,075 665 Treasury stock, at cost   (49,807 )   (57,573 ) Total stockholders’ equity   696,356     453,125   $ 1,354,791   $ 1,223,737     See accompanying Notes to Condensed Consolidated Financial Statements in Form 10-Q. GEMSTAR-TV GUIDE INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)   Three Months EndedSeptember 30, Nine Months Ended September 30, 2007 2006 2007 2006     Revenues $ 159,551 $ 148,947 $ 471,894 $ 426,268 Expenses: Costs of revenues 54,888 54,273 150,564 167,656 Selling, general and administrative 88,911 73,373 220,089 197,844 Depreciation and amortization   10,752   8,420   29,398   24,987 Operating income 5,000 12,881 71,843 35,781 Other income: Interest income, net 6,556 6,788 19,180 18,566 Other income, net   276   86   469   337 Income from continuing operations before income taxes 11,832 19,755 91,492 54,684 Income tax (benefit) expense   (111,360 )   2,303   (83,238 )   14,031 Income from continuing operations   123,192   17,452   174,730   40,653 Discontinued operations: Income from discontinued operations before income taxes — — 5,858 — Income tax expense   —   —   2,217   — Income from discontinued operations   —   —   3,641   — Net income $ 123,192 $ 17,452 $ 178,371 $ 40,653     Basic and diluted per share: Income from continuing operations $ 0.29 $ 0.04 $ 0.41 $ 0.10 Income from discontinued operations   0.00   0.00   0.01   0.00 Net income $ 0.29 $ 0.04 $ 0.42 $ 0.10   Weighted average shares outstanding: Basic 428,404 426,210 428,155 426,190 Diluted 431,222 426,262 429,438 426,244   See accompanying Notes to Consolidated Financial Statements in Form 10-Q. GEMSTAR-TV GUIDE INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)   Nine Months Ended September 30, 2007   2006   Cash flows from operating activities: Net income $ 178,371 $ 40,653 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,398 24,987 Deferred income taxes (90,417 ) 6,631 Stock compensation expense 2,720 1,463 Other 3,510 2,834 Changes in operating assets and liabilities: Restricted cash (595 ) 7,868 Receivables 394 448 Income taxes, net (3,623 ) 51,410 Other assets (2,595 ) 11,033 Accounts payable, accrued liabilities and other liabilities (27,631 ) (27,276 ) Deferred revenue   (31,809 )   (51,527 ) Net cash provided by operating activities   57,723     68,524   Cash flows from investing activities: Acquisition of Aptiv, net of acquired cash of $4,466 (11,814 ) — Other acquisitions and investments (2,681 ) (3,241 ) Purchases of marketable securities (178,783 ) (81,258 ) Maturities of marketable securities 141,574 34,541 Proceeds from sale of assets 10 8 Additions to property and equipment   (15,675 )   (15,807 ) Net cash used in investing activities   (67,369 )   (65,757 ) Cash flows from financing activities: Repayment of capital lease obligations (449 ) (414 ) Proceeds and excess tax benefits from exercise of stock options   3,353     123   Net cash provided by (used in) financing activities   2,904     (291 ) Effect of exchange rate changes on cash and cash equivalents   1,000     133   Net (decrease) increase in cash and cash equivalents (5,742 ) 2,609 Cash and cash equivalents at beginning of period   464,637     465,131   Cash and cash equivalents at end of period $ 458,895   $ 467,740     For additional information please see Notes to Consolidated Financial Statements in Form 10-Q. ADDITIONAL SEGMENT OPERATING STATISTICS   Media Networks Operating Statistics:         Sept 30,2007 June 30,2007 Sept 30,2006 June 30,2006 Subscriber Data (in thousands)(1)   TV Guide Network 83,494 82,398 79,911 78,475 TVG Network ("TVG”) 28,100 27,500 18,600 18,500   Online Networks unique users(2)(3) 5,291 4,493 3,117 2,458 tvguide.com unique users(2) 4,783 4,021 3,117 2,458 (1)   Subscriber data as of the above date represents:   --   Nielsen households for the domestic TV Guide Network -- Households for TVG, based primarily on information provided by distributors   (2) Average monthly unique users for the three month period, as measured by Nielsen/NetRatings.   (3) Online Networks comprises the unduplicated unique users of tvguide.com and our other Web sites, subsequent to the date we acquired them. Publishing Operating Statistics:       Sept 30, June 30, Sept 30, June 30, 2007 2007 2006 2006 (in thousands)   TV Guide magazine circulation (in thousands)(1) Newsstand(2) 261 211 292 283 Subscriptions 2,867 2,881 2,842 3,097 Sponsored/Verified 169 171 150 12 Total circulation 3,297 3,263 3,284 3,392 (1)   Average weekly circulation for three months ended.   (2) Current period numbers include an estimate for returns. Prior period numbers are updated to reflect actual returns.