Rollout of Gemstar-TV Guide IPG Slower than Expected

The slower-than-expected rollout has been a boon for Gemstar’s VCR Plus technology, which has gained a foothold in lower-priced DVD recorders. The IPGs have so far found their way into about 50 products. But the lag time between signing of a licensing agreement and the first sales of an IPG-based product averages about a year, including about 7-8 months of development work before the devices are released for production, Douglas Macrae told us.

“We had expected more [products] to have IPGs by now,” Macrae said. “What happened was a lot of the product, particularly the recorders, were raced to market and if they could not get the IPG in on time, they switched to VCR Plus. We still had a very good quarter, the mix was just different than we anticipated because things take longer than anyone gives it credit for.”

Gemstar has signed a series of licensing agreements since unveiling a new version of its TV Guide on Screen in 2003 that cost less than $10 to put into use. That cost was down substantially from the company’s earlier guides, which had gained only limited support from Thomson and Zenith, among others.

Revenue from the inclusion of the IPG in CE products rose to $3.6 million in the 3rd quarter ended Sept. 30, from $2 million a year earlier, Gemstar said. Overall, Gemstar’s CE licensing revenue declined to $22.8 million, from $24.1 million a year earlier, due largely to the shifting of DBS-related revenue to be included in the company’s cable and satellite segment. As a result, DBS licensing revenue declined to $272,000 from $6.8 million. VCR Plus revenue increased to $12.2 million from $10 million. VCR Plus is marketed under the G-Code and ShowView brands in Asia and Europe, respectively.

In the cable and satellite segment -- which also benefited from the signing of a licensing agreement with EchoStar in a settlement of a patent infringement suit -- revenue increased to $61.5 million from $39.1 million. Revenue from TV Guide Interactive, an IPG targeting MSOs and satellite operators, rose to $21.1 million from $6.1 million, while those from the TV Guide Channel jumped to $26.8 million from $22.4 million. The cable and satellite business also benefited from licensing pacts with Comcast, which is deploying an iGuide jointly developed with Gemstar, and Time Warner Cable. In an effort to expand the presence of the TV Guide Channel, a satellite version tailored for the DBS market will be tested in the first half of 2005, company officials said. Tests will begin this year of TV Guide Land, which will offer reviews and previews of programs for cable, satellite, broadband and wireless applications.

Overall, Gemstar said its 3rd-quarter net loss widened $98.3 million from $18.1 million a year earlier, as it took a $131.6 million charge related to goodwill ($72.2 million) and intangible assets ($59.4 million) such as copyrights of TV Guide magazine. It posted a $13.2 million gain on the sale in Sept. of its 16.9% stake in Youbet.com

Revenue at TV Guide magazine declined to $77.4 million from $89.9 million, largely because of a continued downturn in newsstand sales of the weekly publication. Overall magazine sales declined to 8.97 million from 8.98 million copies, but those at the newsstand dropped to 445,000 from 638,000. Subscription sales increased to 5.84 million from 5.47 million, but revenue per copy declined 22.5%, dragged down by promotional expenses and offers. Operating expense declined 16.5% to $93.1 million due to a $1.8 million reduction in compensation expense.

“We no longer believe that TV Guide magazine, with its current mix of television listings and editorial content, can recapture its competitive position at the newsstand,” against larger, 8.5"x11” publications like People and US, Gemstar said. The flagging sales at TV Guide magazine come despite Gemstar’s spending $20 million last year revamping it. In an attempt to regain its footing, TV Guide will introduce the first of several magazines in the first half of 2005 targeting specific demographic groups, CEO Jeffrey Shell told analysts in an earnings conference call.

Gemstar’s earnings were also hurt by an increase in legal expenses in the 3rd quarter to $17.7 million from $14.4 million a year earlier. The increased costs were tied to on-going legal battles involving former CEO Henry Yuen and CFO Elsie Leung, as well as Scientific-Atlanta (S-A). The 9th U.S. Appeals Court, San Francisco, has set Dec. 15 to rehear its ruling that Yuen and Leung could seeks to collect “termination fees” of $22.5 million and $6.9 million, respectively, as well as $7 million and $1.2 million in unpaid salary, bonuses and unused vacation. Yuen and Leung, who left Gemstar in 2002 after News Corp. bought a majority of the company, sued the SEC in March 2003 seeking to dissolve a $37.6 million escrow fund set up while the SEC pursued an investigation.

Meanwhile, S-A filed a petition Nov. 1 seeking a rehearing before U.S. Appeals Court, D.C., of an order that an ITC 2002 decision be vacated and Gemstar’s claims of infringement and damage to the domestic market be reconsidered. The Sept. appeals court decision centered on Gemstar’s so-called ‘121 patent, which describes a TV controlled by an electronic program guide that receives information for “manipulation and display” in a grid guide. Most of the original defendants in the ITC case, including EchoStar and Pioneer, have reached settlements with Gemstar. - Mark Seavy