TVG Poised to Serve 20+ States; Gemstar-TV Guide Posts Strong Earnings

Gemstar-TV Guide believes it has clear legal authority to begin expanding the TV Games network into 23-28 states.

During an earnings teleconference late Wednesday, company executives said growth of the satellite horse racing and interactive wagering network had been hampered by uncertainties in federal law. Those obstacles were removed in December when Congress clarified language in the Interstate Horseracing Act to specifically allow interstate merged pari-mutuel pools and interstate account wagering between consenting states.

"The federal legislation will allow us to move into 23-28 states," said Peter Boylan III, co-president and co-chief operating officer for Gemstar-TV Guide. "These are states where our three competitors are already operating."

Expanding TVG's reach will begin this year, Boylan said.

Boylan also said he was optimistic about TVG ultimately getting a foothold in New York City. The company is a partner with the New York Racing Association in a bid for New York City Off-Track Betting Corp., a not-for-profit franchise owned by the city. Four companies and/or partnerships have submitted bids to buy a major interest in NYCOTB for a minimum of $250 million. The city is expected to announced the top bidder within a couple weeks. Last year NYCOTB handled $1 billion through its 75 betting outlets.

Boylan said he likes TVG's chances.

"We don't think anyone can obtain that franchise without NYRA involved," he said.

The main topic of Wednesday's teleconference was Gemstar-TV Guide's third quarter and fiscal year results, which exceeded expectations with double- and triple-digit increases in revenue and earnings.

Deciphering how the company performed for the year was more complicated than usual because Gemstar-TV Guide (Nasdaq:GMST) has just started using a calendar year instead of a fiscal year ending March 31. Gemstar also did not consolidate its operations with TV Guide until July 12, 2000 so straight-forward comparisons with 1999 are skewed. The company adjusted for the acquisition of TV Guide by providing a 12-month pro forma estimate, which means they presented information as if Gemstar and TV Guide had been merged companies for all of 1999 and 2000.

For the third quarter ending Dec. 31, Gemstar-TV Guide reported a 459% increase in revenue to $358 million. A large part of the revenue came from the sale of licenses for patented interactive television program guide, video recording, and electronic book technologies. Earnings per share for the quarter was a loss of 31 cents per diluted share, down from a gain of 9 cents per diluted share for the same quarter a year ago. The loss was caused by a $227.5 million amortization of intangible assets assoicated with Gemstar's acquisition of TV Guide.

For the year, pro forma results showed a 24% increase in earnings before interest, taxes, depreciation, and amortization (EBITDA). The company reported $112.3 million in EBITDA, or 25 cents per share compared to a year ago when the company reported 20 cents in EBITDA per share.

Pro forma cash earnings per share rose 40% to 14 cents per share compared with 10 cents per share reported a year ago.

TVG is part of the company's investments and holdings sector, one of four divisions within the company. Last year Gemstar-TV Guide invested $59 million in the company for "operating losses and capital expenditures," according to the company's earnings report.

Revenue for the investments and holdings sector fell 21% to $94.4 million because of a decline in large-dish satellite service subscribers. Many of those customers are being converted to the small digital dishes as part of a deal with EchoStar. Though revenue fell, expenses for the sector fell even further so EBITDA for the year rose 2% to $16.6 million.

The market reacted positively to the company Tuesday in anticipation of good news. Gemstar-TV Guide stock rose nearly 5% to $47.81. The stock's 52-week range is $33.50-$107.44.