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LodgeNet Interactive Corporation (LNET)

Q4 2010 Earnings Call

February 25, 2011 10:30 AM ET

Executives

Ann Harper – Director, IR

Scott Peterson – Chairman, President and CEO

Frank Elsenbast – SVP and CFO

Analysts

David Kestenbaum – Morgan Joseph

Frank McEvoy – Craig-Hallum Capital

Mike Demaray – Elevated Capital

Peter Reed – Mast Capital Management

Michael Platt – Blue Mountain Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the LodgeNet fourth quarter 2010 earnings conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Ann Harper, Director of Investor Relations for LodgeNet. Please go ahead.

Ann Harper

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

Our speakers for today’s call will be Scott Peterson, Chairman and CEO of LodgeNet Interactive and Frank Elsenbast, our Senior Vice President and CFO. Scott and Frank will review our fourth quarter 2010 earnings and will then welcome your questions and your comments.

This call is being webcast live over the internet through our company website, www.lodgenet.com. We also have slides posted on our website which correspond with today’s comments, and they can be found under the Investor section.

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 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 (inaudible) by 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 Peterson.

Scott Peterson

Thank you Ann and good morning everyone. During 2010 we continued to deliver on our strategic plan, which is focused on driving free cash flow, strengthen our balance sheet and growing our business through strategic initiatives.

Free cash flow continued to be a top financial highlight. It was up 23%, $80 million in 2010 versus the prior year and on a fully diluted share basis, that free cash flow represents about $2.00 per share which represents substantial value for our common shareholders given our current share price.

We also continued to strengthen our balance sheet. We reduced our debt levels by 20%, just shy of $100 million during the year. As a result, we improved our leverage ratio ending at 3.5 times on a net debt basis.

Third, our strategic missions are driving growth and producing results. During 2010, our diversified revenue initiatives generated nearly 8% greater revenue per room with higher margins on that revenue versus the prior year.

We had particularly strong revenue cash flow growth from advertising and healthcare. Advertising revenues were up more than 40% benefiting from a recovering ad market and transition to interactive media and overall, diversified revenues are now approaching $200 million per year and represented 43% of our total revenue last year. That’s more than double the revenue contribution percentage versus 2006 when we kicked off this initiative.

High definition rooms continue to generate 6% greater revenues compared to our analog systems. Our interactive platform is now in 270,000 of our rooms. That’s only 16% of our interactive room base so this continues to represent a significant growth opportunity for us.

And we’re pleased to announce today we successfully launched our first Invision site. That’s our next generation interactive platform in January. We’re very pleased with the results so far and I’ll tell you more about that in a few minutes.

And lastly, we re-launched our broadband business with a new strategic alliance with DOCOMO interTouch, which we announced in early January. We also believe this represents an excellent growth opportunity for our company as less than 10% of our media rooms presently take broadband services from us.

So at this time, I’m going to turn the call over to Frank Elsenbast, our CFO, for further comment and color regarding the results.

Frank Elsenbast

Thanks Scott. I will take a few minutes to provide a financial review of our fourth quarter and full year results. I’ll be referring to the slides that were issued this morning with our earnings release and are available at our investor relations website.

As an overview of the quarter, the company saw significant revenue growth from our revenue diversification initiatives including health care, system sales and advertising, while our guest entertainment revenue declined versus last year.

Gross margin remained strong at 43.8%, which is flat to Q4 of last year. Our results meet our guidance for both adjusted operating cash flow and earnings per share, and we’re slightly below the low end of our revenue guidance.

The company paid down nearly $17 million in debt during the quarter and achieved a net leverage ratio of 3.35 times, which is significantly below our leverage covenant of 3.50.

Starting with slide number three, full year revenue for 2010 was $452 million, which was a 6.7% decline versus prior year. Guest entertainment revenue for the full year declined by 12.6%. This decline was partially offset by the strong growth in our diversification efforts led by advertising, which achieved 43% sales growth in 2010.

Read the rest of this transcript for free on seekingalpha.com