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LodgeNet Interactive Corporation (LNET)

Q3 2010 Earnings Call Transcript

October 26, 2010 11:00 am ET

Executives

Ann Parker – Director, IR

Scott Petersen – Chairman and CEO

Frank Elsenbast – SVP and CFO

Analysts

David Kestenbaum – Morgan Joseph

Frank McEvoy – Craig-Hallum

Pallo Blum-Tucker – Aladdin Capital

Peter Reed – Mast Capital Management

Alex Khatibi [ph] – Investment Advisor

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the LodgeNet quarter three 2010 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions) As a reminder, today’s call is being recorded.

At this time, I would now like to turn the conference over to the Director of Investor Relations for LodgeNet, Ms Ann Parker. Ms Parker, you may begin.

Ann Parker

Thank you operator. Good day everyone. I would like to thank all of you for taking the time today to listen to our third quarter 2010 conference call. You should have received copies of our earnings release, if not, please call me at 605-988-1000, and we will make sure you do get a copy.

Our speakers for today's call will be Scott Petersen, Chairman and CEO of LodgeNet; and Frank Elsenbast, our Senior Vice President and CFO. Scott and Frank will review our third quarter 2010 earnings, and we will then welcome your questions and your comments.

This call is being webcast live over the Internet through our company Web site www.lodgenet.com. We also have two sets of slides posted on our Web site, which correspond with today's comments, one is labeled the Q3 2010 earnings, and the other is labeled as the supplement to the Q3 earnings. They can both be found under the Investors Section of the Web site.

Before we get started, I'd like to remind you that some topics to be discussed today that do not relate to historical performance may include or constitute forward-looking statements within the meaning of the Federal Securities laws and are subject to risks, uncertainties, and other factors that could cause actual results, performance or achievements of the company to be materially different from those expressed or implied by such forward-looking statements. Certain of the risk factors, which could affect the company are set forth in the company's 10-K and other filings.

With that said, I'll now turn the call over to Mr. Scott Petersen.

Scott Petersen

Thank you Ann, and good afternoon everyone. During the third quarter, we continued our strategic focus on driving free cash flow, reducing debt, and governing our business with our very strategic initiatives. I guess we are very pleased with the results that we saw from our strategic growth initiatives. The revenue per room was up almost 13% versus one year ago, and we see accelerating growth in High Definition convergence starting now in the fourth quarter.

Our free cash flow continued to be the top financial highlight, over $15 million was generated during the quarter, which exceeded our guidance, and our trailing fourth quarter free cash flow number right now is right around the $80 million mark. During the quarter, we continued our conservative operating plan. We maintained our OpEx structure that we had in place for this year, and then again we saw substantial reduction in the average investment per

High Definition room installed during the quarter down about 23% versus one year ago, which really pushes the return then on our invested capital within the new High Definition space. Of course we continued to strengthen our balance sheet. We achieved our final covenant step down during the quarter and we ended the quarter on a net debt basis right about 3.4 times.

So with that said, I am going to turn the call over to Frank Elsenbast, our CFO, for additional comments and color on the quarter. Frank?

Frank Elsenbast

Thanks Scott. For the third quarter, the company saw significant revenue growth from our strategic initiatives including Healthcare, System Sales, and Advertising while our Guest Entertainment business declined versus last year.

Gross margins were very strong across every service line with an overall increase of 60 basis points versus last year. Our results were within our guidance range for both adjusted operating cash flow and earnings per share. Cash flow results for the quarter exceeded our guidance. The company paid down $14 million in debt during the quarter and achieved the final covenant step down by delivering a net leverage ratio of 3.40.

I will now walk you through the slides that were issued with our earnings release last Wednesday. Starting with slide number 3, revenue for the quarter of $114 million was a 6% decline versus last year. During the third quarter, revenue from our diversification initiatives increased 9% over last year, and now comprised 43% of total revenue, up from 37% last year.

Guest Entertainment revenues were up 15% for the quarter, due to the 5% reduction in the average number of Guest Entertainment rooms with the remainder driven by the decline in revenue per room. We continued to see the impact of poor Hollywood content, and conservative borrowing behavior from our customers even as occupancy rates have improved somewhat. The year-on-year decline from the Top 10 Theatrical Releases was $3.3 million, which accounted for nearly 30% of our Guest Entertainment revenue decline.

On slide number 4, you will see the break down of our Hospitality revenues. Hospitality revenue per room was $21.55, down 2% versus last year. Strong growth in Hotel Services, System Sales, and Advertising offset 70% of the decline in Guest Entertainment. Revenue per room from our growth initiatives grew nearly 13% versus prior year.

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