iMedia Brands Inc (IMBI) 2003 Q4 法說會逐字稿

Good morning, and welcome to ValueVision Media's fourth quarter 2003 and four-year earnings conference call. Your lines have been placed on listen-only until the question and answer session. Today's call is being recorded. Before we begin, Anthony Giombetti, Director of Corporate Communications, will read a brief statement.

Today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such forward-looking statements. More detailed information about these risks and uncertainties is contained in ValueVision Media's filings with the SEC.

I would now like to turn the call over to Mr. William Lansing, President and CEO of ValueVision Media.

Good morning. I'm here with Dick Barnes, our Chief Operating Officer and CFO, and Nathan Fagre, our Chief Legal Counsel.

I would like to first begin by sharing with you a couple of observations about the business performance in 2003, and then I would like to spend the bulk of the time talking about the opportunities the Company has going forward, some of the challenges we have and how we're going to deal with those challenges, and then I will take your questions. So let me start with a few comments about '03.

2003 was a good year for us in some ways and a challenging year in others. On the bright side, we achieved record sales, growing from 555 million to earn $617 million. Our Internet business continued to achieve record sales, up 18 percent, growing from 94 million to 111 million. And I believe there is much more potential to exploit in this business. We also had positive EBITDA for the year.

On the home distribution front, we increased our footprint by 9 percent from 51 million to 55 million cable and satellite homes at the end of 2003. We added 463,000 customers, an increase of 5 percent over last year. At the end of the fourth quarter our new customer count was up 14 percent versus a year ago. And finally, unit growth was up even more, up 22 percent versus the year ago period, and up 36 percent in Q4.

On the challenging side, our sales productivity at $11 per home is not where we would like it to be. While we have made progress in the back half of 2003, we still have a challenge ahead of us in diversified our product mix and (indiscernible) appealing to a broader audience in the jewelry and customer segment that is so fond of us today. We also still want to grow our distribution footprint. Most importantly, we would like to be more profitable than we are today. And so '03 was a good year, and yet we still have work to do.

Let me turn to 2004. Let's look at the opportunities I see before us and how we intend to address the challenges and take advantage of those opportunities. Something you all know from looking at our financials, this is a tremendously high fixed cost business. We have a different cost structure in cable and distribution costs than our competition. As opposed to a percent of sales, we pay a fixed amount for our homes. As a result, we're penalized when we're smaller, and yet we benefit when we are larger since our distribution costs remain constant. I would say that today at 617 million in revenue, we are just approaching minimum sufficient scale. We are a business that is really close to breaking through to the solid profitability that comes with the high operating leverage that we have in our business model. That is tremendous upside in our business as we continue to grow.

And yet, we have challenges in our customer base. Today we have built a healthy business focused predominantly on jewelry and gems, with a very satisfied, very loyal and demographically attractive customer. As we move to a broader customer group by diversifying our product, by bringing down the average selling price, by entering new product categories, we have a communication challenge. We have to reach out and touch these new customers who might be interested in the product. And frankly, we must also retain the core customer that has historically come to us for jewelry and gems. So you will see -- as we go forward, you will see that we will be spending more time, more money, more energy and marketing to broaden our customer base, while retaining the valuable core customers we already have.

I'm going to take you piece by piece through where we're going in '04 and beyond. Let's start with distribution. Historically, this business has grown by adding homes, with heavy fixed cost investment and waiting for those homes to mature. And at some level we're really no different than our competition; we have scale now reaching 56 million homes. But in another respect, we're quite different from our competition. Where our competitors penetrate as much as 8 percent of the homes they are in -- meaning they sell to customers in 8 percent of the homes that they're in -- we have to date only achieved a penetration of about 1.5 percent, which I see as tremendous opportunity waiting to be exploited.

We're already available in those homes. We have already bought and paid for the distribution into these homes. By lowering the average selling price, by broadening the product categories in which we participate, and making sure that potential customers understand this, we can anticipate that our penetration will go up within the existing footprint as we appeal to a broader segment of our audience -- all of this without adding additional homes. So I would expect over time that our sales productivity per home and our penetration rates of the homes that we're in will increase. I think you will see both of those occurring in 2004, particularly in the second half.

Now let me turn to our marketing opportunity. One thing worth pointing out with respect to marketing and the way the home shopping industry has grown over time is that our competitors grew up in an analog world. They launched and matured in a 40-80 channel universe. They could afford to wait for their customers to channel surf to their shopping channel and start buying, and that happens for us, too. In large part, the customer base we have built today has come to us without much marketing support.

I believe that in a digital universe, and increasingly our distribution is digital, it's incumbent on us to be much more proactive. We need to reach out and find would be customers and bring them to our network. We need to share with them when they can find the kind of product and the kind of programming that they are interested in. As we continue to build this business in an increasingly digital universe, I think you're going to see us focus on the marketing side of the equation and try to connect up micro-segments of customers with the kind of programming that they will be interested in.

On the merchandise side -- and remember, this is fundamentally a product business; about selling product uniqueness, newness and value to customers. So we have the challenge of growing beyond the jewelry and gems product category that we've been so strong. This is not a brand-new thing; we've been at it for almost nine months now in a serious way, and I think we're well along our way in this product diversification initiative. We're now in a lot of categories beyond jewelry and gems. You find us in home, cosmetics, apparel, consumer electronics, fitness equipment, personal computers.

In the fourth quarter of 2003, sales in the categories of fitness, home, cosmetics and apparel accounted for 21 percent of the business compared to 15 percent in 2002. So you can see in the product mix we've really broadened it. We're starting to appeal to a broader mix of customers, and it's working, it's definitely working. But at the same time we have this marketing challenge that goes with it -- our core jewelry and gem customer who used to be able to get jewelry and gems from us most of the day now comes to our network and finds other products, not necessarily the jewelry and gems that she wants. So our marketing challenge is to tell her when she can find the jewelry and gems that she's interested in, and then be consistent in our programming efforts so that she is never disappointed.

At the same time, if we want to attract new customers for, say, fitness equipment or home, we need to conduct marketing efforts to support that and then bring that would-be fitness customer -- bring that customer right to our network so they can find the product on our network. And we're in the process of doing that. You're going to see our marketing move in that direction going forward.

You know, I come from a direct marketing background. We look at the profit on the transaction stream of a customer and we discount it back to the present. We take that NPV (ph), the lifetime value of the customer, and we compare it with what it costs to acquire a customer. Now if you look at the lifetime value of our customer at ShopNBC, it is high; it's in excess of $200. We can afford to spend a lot of money to acquire a customer in our business. To date, we have spent very little money on customer acquisition. So you can expect us to apply direct marketing science to this business and spend some money on marketing, as long as it is well below -- on a per customer basis -- the lifetime value of the customer.

I would also like to take a moment to address our brand positioning. We have the benefit of being able to leverage the NBC brand with its tremendous brand equity, which reflects the highest values in quality entertainment, credibility and integrity. At the same time, we're in the television home shopping business, which has historically had an attribute around it of being less classy than some other forms of retailing. I want to address that, because I think we have a tremendous opportunity here.

I was at a party recently and a friend of mine said, "Oh, I see you've gone over to ShopNBC. That's kind of an upscale QVC, right?" And I said to him, "You're right, that's exactly what we are. We're kind of an upscale QVC." Now that's a little bit of shorthand for you, but I think it does at some level capture our brand positioning. We are a television home shopping network that stands for quality and value. Demographically speaking, however, we appeal to a more affluent household than our competitors. I would like to believe we stand for a higher-quality product. We stand for value at any price point. I think you're going to see us leveraging the NBC brand as we go forward, both in direct marketing and on-air, trying to really leverage the quality attributes that that brand represents. So from a brand positioning standpoint, an upscale QVC is a good shorthand description, and leveraging the NBC brand is really where it's at.

Let me just say a word about inventory and margin. We have historically operated at gross margins in the 36-37 percent range, our inventory levels have run in the 65-$70 million range. I would anticipate that our gross margins over time will be lower. I believe this is a volume business. It is a business that we'll need to do on lower margin and with many more units. Because this is a very high fixed cost business, running it for volume makes sense. We can do many more units without adding another store. As I said earlier, we're in some 56 million times and we sell to roughly 1 million of them, so we have a huge opportunity here. And as we have seen in the last two quarters, we've been growing our unit claims by over 30 percent. The potential is definitely there.

On the inventory side, we will focus heavily on inventory turns, but I would expect our inventory to grow slightly as we expand our product categories, along with receivables as we finance a growing topline. On production and presentation, these are both important attributes of being in a television retailing business. I think on this dimension we are strong in some categories and have opportunities in others. I believe that our hosts in general are excellent; I would put them up against the best salespeople in any bricks and mortar retailer any day of the week. Which is one of the great advantages of television, our hosts can be more charming and more charismatic and better informed and better salespeople than salespeople you will find at bricks and mortar competitors.

That said, we still have an opportunity to upgrade our presentation and production values and what we present to our viewers, and so I think you can expect that we'll spend some time focusing on our on-air look and feel and making it more attractive. Let me also just say that we do not for a minute believe that on-air presentation is a substitute for having great product at a great price, but because those are not mutually exclusive, we anticipate working on both.

Programming. Programming is an area we're spending more time on. We used to have the luxury of focusing predominately on jewelry and gems, attracting the jewelry and gems customer, and knowing that we had a pretty good match of who was watching and what we were offering. But as we expand our product categories, we have a greater need to be consistent in our programming. We must program fitness into the same time slot; personal computers into the same time slot; distinguish between men's and women's programming; differentiate between luxury jewelry buyers and liquidation closeout bargain hunters. And so, we're spending a fair amount of time focusing on how to get the programming consistent. And we're communicating that new schedule, that new programming lineup to our customers and would-be customers.

We believe that customer service is very important to this business. Because the lifetime value of the customer is so high, because it is relatively difficult to find someone who is interested in buying on television, we treat that customer with tremendous attention. We spend more time and attention and money on our customer service than a lot of other retailers, and I expect that to continue. I think we will continue to do the cost benefit trade-off between retaining a customer and winning a new one, and it is usually more financially attractive to retain the existing customer. I also believe we can improve our retention rate and hang on to more customers with greater attention and resources expended on customer service, so you're going to see that reflected in our business going forward.

Let me summarize our actions for '04 and what we hope to get out of them. You will see our product mix continue to broaden beyond jewelry, with an emphasis on home, cosmetics, fitness, apparel, computers and electronics. You'll see us moving in the direction of more competitively priced product than we even have today. Even though we have good values today, they're going to get better. You'll see more unique offers from us, unique product that is only available for a limited time. You'll see great emphasis on product packages and offers that are differentiated and distinct from what you would find in a store in the mall. You'll see our marketing support our merchandising. You'll see higher levels of communication with our current customer and with customers we're trying to acquire. You'll see effort and energy and resources spent on production, on production values, on presentation, on our hosts, and how we look and feel. And you will see investment in IT infrastructure -- in our systems, call centers and customer support -- in order to hang on to a customer and ensure that we have a very satisfied customer who has an excellent customer experience. And we will provide the best intelligence tools to our entire organization.

I am really excited about being here. I came to this business because I thought that television home shopping is in its infancy, that we're still in the early days, that it still his tremendous opportunity to grow. One question I got when I took the job was whether I believed television retailing still has legs in an Internet world. Was it a mode of retailing that was going to go by the wayside because the Internet is more convenient, with more robust search capabilities. I'm a guy who's spent a lot of time in the Internet world, and the conclusion I came to is this -- they are both different and yet complementary. I can say with absolute confidence the Internet is not going to displace television.

The trick for us is to focus on the things that television does uniquely, things you can do on television that you can't do in a bricks and mortar environment or things you can't do in an Internet environment. I think one of those things is demonstrating product, focusing on a solution sell, demonstrating benefits and features. Whenever we have a product or service or a combination that provides a solution that can be explained by a host in a way that you could not get from the Internet, in a way that the average salesperson in a retail store is not going to be available to deliver well, there you have an opportunity for television retailing.

Let's not forget about our rapidly growing Internet business, which is a wonderful business for us. It is both a complement to our TV business and it is also an independent growth vehicle. Among many things, we use it as a tool for order taking and reducing our cost, making it more convenient for our customer to shop with us. Whenever a customer places an order on the Internet instead of through a call center, which happens over 20 percent of the time, we save nearly $2 dollars on that order. So we like it, the customer likes it, and we'll continue to grow that.

I would also add that the Internet lets our customers find products that we have aired in the past, products that we have aired earlier in the day, and products that we have not aired at all and never will. The Internet gives the customer an opportunity for that search utility that can only be found on the Web. You will see as continuing to invest in the Internet business, and you're going to see continued growth in the Internet side of our business.

When I look out to the future, I see a future with really, really robust production values -- leveraging the television medium through video and demonstration of product in a way that we have not seen before. So I'm excited about it, and I think there's a lot of upside here.

Before concluding today, where does all this go? What does this all add up to? We're going to wind up growing this business a lot over the coming years. We've got the right mix of people in place to execute against our goals. They're really a good team who get the TV retailing business. I also think you will see '04 as an investment year for the Company. This is a year in which we're going to take the profit from the next 100 million of incremental sales and reinvest it in the business. That's an important point, and I'm going to repeat it. We are going to take the profit from the next index $100 million and reinvest it in the business.

So all the things I just talked about -- the marketing, the merchandising mix, the improvement in production values, the improvements in customer service, the information systems support infrastructure -- all of that investment which is occurring today as we speak is something we anticipate accomplishing in 2004.

What more can you expect in 04? You can expect revenue up in the low to mid teens. You can expect relatively flat EBITDA from '03 to '04, and that will be phased in. You're going to see it much more in the back end of the year than in the first half. During the first and second quarters, we will be making the infrastructure investments and testing various marketing initiatives that we think will have a big payoff in the latter half of the year.

I wish I could give you more precise guidance, but this is a moving target. We're just going to have to see how quickly the payoff comes from the investments that we're making. But I think it is reasonable to assume that you will see double-digit revenue growth in the low to mid teens and positive EBITDA most likely flat year-over-year.

You will also see our merchandise gross margins come down a little because we're making the product pricing more competitive, but unit volumes will grow much faster than sales. You will see our customer count go up and dramatically higher customer levels. We had 800,000 customers at the end of '03; I think you will see us in the 950 range at the end of '04 and well over 1 million in '05. You will also see our customer satisfaction improve significantly. Retention of existing customers will rise and new customers will be added more quickly. Our return rates, which have historically run in the mid 30s, will come down. And that is a function of greater value in what we have to offer; it's a function of lower average selling prices; it's a function of high customer satisfaction. So I think you're going to see that reflected in our return rates.

Same thing for our cancel rates. The cancel rates in our business are higher than we like, but we make it easier for a customer to cancel and order because we'd rather see them cancel it than have us ship to them and to have it returned. That said, it would be nice to get our cancel rates down. Given the value in what we're offering and the uniqueness in what we're offering and how competitively priced it will be, I anticipate our cancel rates will diminish.

On a final note, beginning with this earnings release, we're releasing additional operating metrics to help you gauge our progress against our strategic objectives -- things like sales productivity per home, new customers added, home penetration, product mix, unit growth, average selling price.

Finally, before we turn to your questions I would like to welcome our three new board members; Allen Morgan, managing director at Mayfield, John Buck, CEO of Whitefish Ventures, and Ron Herman, President and CEO of GE Equity. I would like to reiterate that our new board members bring years of experience in direct marketing, e-commerce, technology and business development. I really appreciate their energy and enthusiasm, what they bring to the table, and I look forward to working with them as we achieve the full potential of our company.

So we have got an ambitious 2004. I'm very comfortable with the direction we're headed, and I'm really excited about the opportunity. On that note I'm going to stop, and Dick and I will take your questions.

(Operator Instructions). Robert Routh, Natexis Bleichroeder.

A few quick questions. Obviously you guys are going through a quick turnaround and there is a way to go in '04, but I am just curious given you're expecting your customers to be up, your homes to be out, your revenues to be up, yet EBITDA is still going to be flat year-over-year. And no offense, but this is a company that is notorious for missing numbers by the broad side of a barn. I am just curious if you could give us how confident are you that with all of these positive things on the topline, that at least on the EBITDA and the net income line that you can at least maintain it at the level that you reached in '03. And as a second question, I am wondering if you could give us what you think your operating cash flow from operating activities will be in fiscal 04?

I think that is a fair question. We have around a 30 percent contribution margin, so when we add 100 million of sales, theoretically 30 million ought to drop down. We are going to take that 30 million and reinvest in the business. As I said earlier, it is going to be front loaded; we're investing more of it in the first half of '04 and we expect to see the payoff more in the latter half of '04. But your question is a good one. How confident are we of being able to hit the EBITDA levels of '03. And to that I would say that we are spending the money in a measured way. Some of the money, a substantial part of the money is being spent in the marketing area where we test programs as we go and we only fund them if they work. So I am reasonably confident we can hit the EBITDA levels with -- because the spending is somewhat in our control.

So it's safe to say that the spending, it is all going to be expenses incurred rather than capitalized, and that's part of the reason that the cash flow is going to be flat?

That's right.

Just to add a comment on operating cash flow. Likely at operating cash flow, there will be a use of cash next year predominately driven by the funding of working capital as we drive our topline. So I would expect somewhere between 10 and $15 million as a use of cash in 2004 to finance that growth.

Great. One final question. Obviously when Liberty released their earnings and they gave guidance for QVC, they said they were going to have operating cash flow growth in the high single digits, which was the first time they have ever said that. And the market did not react too well to that. I'm wondering whether you can comment in general, what do you think comments like that coming out of Liberty, and then what you guys are seeing -- what do you see about the home retailing, interactive retailing business? Where do you see it going from here? Is it a mature business or do we still have material growth forward?

That's a great question. We wrestle with that everyday. I would say that between us and Liberty, between us and QVC, there is an enormous amount of growth potential. They penetrate 8 percent of their homes and we penetrate 1.5 percent of ours. So you can look at their 8 percent, even if that was a theoretical maximum on kind of the ceiling on how many people in this country are willing and able to buy on television -- and I'm not convinced that that's a ceiling, I think the number is probably double that -- but if that were the ceiling, 8 percent, we have kind of fivefold growth within our existing distribution footprint before we run into any of that kind of issue. I think we have, because of where we are, we have a lot more growth potential than our competitors.

So you don't see the industry as being mature yet?

Far from it. I think there are 2 pieces -- one is catching up to the penetration rate of our competitors by broadening the product mix and making it more acceptable and lowering the average selling prices and things like that. That gets us to one level; and then the second level is I think the whole industry is still in a growth mode, and you can see it with the proliferation of new small home shopping channels, you can see it with the infomercial growth, you can see it with even traditional manufacturers are putting direct selling messages right into their television commercials -- the world is getting more comfortable with purchasing on television. And that is only going to get easier as technology evolves. I mean, I would anticipate several years from now people will be buying right off their remote control.

Bob Evans, Craig Hallum Capital.

Will, can you comment -- give us an example or two -- you talked a lot about direct marketing and trying to make it fit within certain programming slots. Can you give us an example of something you've either done or you would expect to do along those lines?

Sure. I think that's a good question too. I said we have this challenge of bringing in the new customer. When we (indiscernible) put fitness equipment on air, our traditional jewelry and gems customer is occasionally interested in fitness equipment. But more often than not, the challenge is to bring in the would-be fitness buyer who is not our traditional jewelry and gems buyer. If you do the (indiscernible) diagram of jewelry customers overlaid with fitness customers, the shading is a small area. And yet we strongly believe that fitness equipment is a terrific category on television, it is a good demonstration product. The informational industry has demonstrated that it works well, and so we're committed to building it. So how do you do that? You do it with marketing. You do it by reaching out to the natural fitness customers, to the subscribers of fitness magazines and that sort of thing, those kinds of publications. And you bring them in to the network. And you have to have the integrity around the programming, you have to have the scheduling so that you can actually communicate in a direct marketing way with these would-be customers in bringing them to the programming at the appropriate time. But if you can do that, and I believe we can, you don't have to just rely on the channel surfing to build your business.

When should we expect to start to see some of those changes occur?

We're doing that as we speak, so we're testing all kinds of marketing programs right now. You'll see a lot more marketing from us.

As it relates to the NBC brand, you said you're going to use it both more in direct marketing and on-air. Can you elaborate?

As we all know, the NBC brand is a fabulous brand, and it has helped us on-air and gives our shopping network a level of credibility that it probably otherwise would not have. But I think that it is also really a natural brand to exploit in the direct marketing space. I think the NBC brand is one that just absolutely jumps out of your mailbox and stands apart from the heap of direct mail that one would otherwise receive. So I am looking forward to leveraging the brand in our communication with customers and potential customers.

To your knowledge has anyone else direct marketed the NBC brand?

NBC does a little bit of it, but I would say that in general it is underexploited in this area.

And finally, can you comment on what -- you took this job not to grow it to an $800 million business -- I assume much bigger. Can you give us some sense of intermediate term, what is your vision for what you can grow it to, and margins, where you can grow them over time?

That's a good question, and obviously I've thought a lot about it. The first thing I would say is I don't see any ceiling on the growth of this company, not in the next several billion dollars I don't see a ceiling on the growth of this company. And you look at our competitors and you can see why. But in the more short-term what does this company do, what can it do? I really do believe we're at this inflection point. I think that we are just in '04 achieving minimum sufficient scale, and then I then I think it becomes a wildly profitable company. I think we can be a $1 billion company in 3-4 years. I think we can be doing -- approaching $100 million EBITDA in three or four years. And certainly we can enjoy 10 percent and higher EBITDA margins as we grow from there. So I expect us to be a very profitable and fast-growing company into the indefinite future.

Brian Warner (ph), Performance Capital.

Could you talk a little about the $200 value of the customer that you mentioned before, and sort of maybe some of the inputs or metrics go into that? And on that same topic, can you talk about your expectations for full-time equivalent sub adds, and whether there's conversions going on in your market where you become part time to full-time?

Sure. First on the lifetime value of the customer. As I mentioned before, in direct marketing science, the way we do that is we look at the present value of the profit flows that come out of the relationship with the customer. And then at kind of a theoretical level, as long as that number exceeds your customer acquisition costs, you have a positive NPV (ph) and you have a nice business. In our business, I said the number is north of $200.

The way we get there is if you look at our kind of average number of orders with a customer before they leave us, it is little over 3, call 3-3.5. And average order size of around $250, and a 30 percent contribution margin. You do the math and you get to a little over $200. I anticipate that the lifetime value will go up over time because we will do a better job on retention, and we'll wind up getting more transactions out of a customer. But even at the current level when you compare what a customer -- a current customer is worth to us with what it costs us to acquire one, the gap is enormous. And we spend 10, 20, $30 to acquire a customer, and a customer is worth well over 200. We should theoretically be willing to spend 50 or 75 or even $100 to acquire a customer that is worth $200 dollars to us.

So the opportunity on the marketing side is absolutely enormous. And I think this is different from the way the business has been run historically. In the old days you would not spend money on marketing. It didn't make sense to because your customer showed up by channel surfing. So I would call this a little bit of technology from another industry being applied to an industry it's never been applied to before. But I have high expectations that it's going to work, because it's really all about the math.

In terms of FTEs, we are still adding FTEs and we will continue to add FTEs. We add them kind of organically through our deals with DirecTV and some of the satellite deals. We continue to add digital distribution wherever we can, and I would anticipate that we will continue to do that this year. We're not out looking for any mega, mega deals, not until we can demonstrate that we can be more profitable on a per home basis within the footprint that we have today. So my view is we spend a lot of money on distribution, really a lot of money on distribution. We're not as productive within those homes as we should be. So until we demonstrate that we can do a better job, get more profitable within those homes, I think we add distribution slowly. Not to say we won't do it, but it is just that we do it slowly. That's '04.

A quick follow-up if I'm still on. Could you give us a sense of some of the marketing initiatives in terms of what you're spending money on, in terms of advertising, perhaps?

Yes. As I said, I am a direct marketer, so everything we do has to be measurable. And we're very focused on what does it cost per lead, what is the conversion rates, what does that turn into from a cost per customer standpoint. And then we have to measure the value of those customers that come out of that initiative to see if they stand the test of time, because one-offs are not very useful to us; we want to build the relationship with a customer. We are doing all kinds of things, testing all kinds of things. You will see us doing billing inserts in some of the -- with some of the satellite partners. You will see us do other kinds of direct mail, you'll see us do e-mail programs, that sort of thing.

Greg (indiscernible).

Any updated thoughts on any potential acquisitions this year?

We're always willing to look and consider and think that. If we could find something that was accretive that was also strategic, I think we would consider doing it. My sense is that we have so much opportunity in our core business right now, and there is so much work to be done in really exploiting it, that that is where our attention is going to go. That is not to say that we could not acquire something if the right opportunity came along, but I would not say that we're really actively looking to do acquisitions. It's something that I expect we will be doing over time. I think if you look out into '05 and '06, I could imagine us being a much more aggressive acquirer of assets. But I think in the short-term we're really focused on our core business.

(Operator Instructions). Alan Aronson (ph), AVRS.

First let me welcome the new crew aboard and wish you all kinds of luck.

Thank you, Alan.

I was one of the founders of ValueVision and was Vice Chairman of the Board in 1941. In 1941, we felt that all we had to do was reach a $10 million volume and we would have it made in the shade. And every year we have progressed, we keep growing. And my big question is when in the devil are we really going to become profitable? We have over the years made a number of bad investments that we have had to write off. And the only thing in my recollection we've really been successful with outside of our own core business is in buying and selling TV stations. But I am all for concentration on our core business and being less involved in acquisitions, but my big question is -- gentleman, when are we going to become profitable?

And that is a good question. Let me say this, I think that the reason that profitability has eluded this company for such a long time is partly attributable to our operating model. If you think about trying to build a television home shopping business years after QVC, years after HSN; when you go and you look for distribution, the percent of sales model does not look so appealing to the distribution partners because we don't have a lot of sales to take a percent of. And so the distribution strategy that we embarked on starting years ago was let's build a big distribution footprint and we will do it on a fixed cost basis. And that has enormous pain for a small company, because you don't have the sales, you don't have the profit to support that kind of a distribution cost. But it has tremendous benefit to the Company once it gets big. So I would say that we have over the years added distribution and added distribution and added distribution, and so we sit at 56 million homes today, which is really a sizable footprint. But until this point, we really have not had the sales to cover that enormous distribution cost. But if we continue to grow at the rate that we're growing right now, and I anticipate that if anything we will be growing even faster, that distribution cost will become a much smaller part of our total operating cost, and we will become quite a profitable business. So I think the answer to your question is in the coming years we will be very profitable.

Which are the coming years?

I think I was clear about it earlier. 2004 is an investment year, and you can anticipate the same level of profitability in '04 that you saw in '03. And '05 should be substantially more profitable than '04.

I just want to last that long.

We'll look forward to talking to you on the calls then.

Beth Lilly, Woodland Partners.

Philosophically, Will, I wanted to get your opinion about if in fact you're able to achieve the 10 percent EBITDA targets -- and you will be generating a lot of cash, and there's cash on the balance sheet -- can you talk about down the line your priorities for the use of that cash?

In the short-term, and I would say the short term is '04 and '05, that cash is going to be used primarily to fund our growth, our topline growth. And so it will be a little bit in inventory and it will be a bit more in receivables. We do a substantial amount of our business on what we call value pay, which is a pretty low-risk form of credit. It is where we hit our customers Visa and MasterCards a number of times over a number of months. We have very low bad debt associated with that, but it does wind up being a use of cash. And so as we grow the business, if we continue to rely on value pay -- which we very much intend to do -- I would anticipate our receivables financing appetite will be substantial. So that is probably the number one use of cash. Down the road, to be determined. I could imagine when we become very profitable we would use it for acquisitions and things like that. We would look at it then.

Kathleen Heaney, Maxim Group.

Will, you had made a statement earlier that you said this is a volume business. And I just wanted to take that a little bit further and talk about the average unit price, because obviously that is going to be a big driver of it. And if we looked at the number you gave, about $185 in the fourth quarter, which is probably skewed a little bit because computers could be strong in the quarter, where do you actually see that number going? What is the trade-off? How low does that go to drive (multiple speakers) volume?

Great question, great question. Here's the challenge -- on the one hand we have everybody in the direct business aspires to have a high average order size. And we are blessed with a very high average order size. But the reason we have a high average order size is that we have high price points, and because we have high price points, our appeal is not as wide as we would like it to be. And that explains part of why we have 1.5 percent penetration instead of 8 percent penetration like QVC. So our strategy has been to mix in, hopefully without losing our core customer, to mix in a lot of lower average selling prices -- lower selling prices to bring down our average selling price so that our offers become more accessible to a broader audience. I think that that 185 could still go lower. I would imagine it will go lower. But there is a place where kind of you approach (indiscernible), and I'm not show where that number -- I don't know if it's $150, I'm not sure where it is. But I know that for sure we're not interested in doing really low price points, because really low price points are hard to make money on. At enough volume you can do okay, and when we get to really sizable customer counts and big audiences and big volumes, I imagine the selling price would go down even lower, like you see it on QVC. But that is years away. So I would say that we will continue to head downward slowly.

Howard Rosenkrantz (ph), Value Advisory.

What I'm trying to assess is you have had this huge growth in homes over the past few years, you've something like tripled homes. Are the homes that you have on longer, are they homes that do 20 or $25, and is it a function that more of the homes just have to come to maturity? Is there a simplicity aspect to that?

There is a simplicity. It's partly tied to region and the market it's in, a lot of it is tied to whether it is analog or digital, because that speaks to how diffused you are in the channel choices. But there is no question that more mature homes perform better than brand-new ones, and so there is a benefit that comes with just the maturing of our footprint, our distribution footprint.

On the homes, the 20 or 30 million homes that you had 2-3 years ago, are those 20-$25 dollars and no we have to get the other $3 homes up to -- can you give me some perspective on what (multiple speakers) more mature homes do?

We do have some $25 homes and we have some $3 homes, and so the challenge is to get the one towards the other. Some of them may never hit that level though. Realistically, when you're dealing with satellite and digital and hundreds of channel choices, I am not sure that it is realistic to expect those digital homes to reach the same level of productivity as our analog, our mature analog homes. But will they get much better than they are today? Absolutely.

And just as a function of maturity, no rocket science at your end. Is that a fair statement?

I would like to believe there is going to be a little bit more than maturity going for us in this business. So yes, the maturity will help, but I would say that all the other things we're planning to do ought to help us extract more sales from those homes.

Let me add one other thing on that, which is trying to pick up customers in a digital environment and a satellite environment where they have so many different channel choices really is a marketing opportunity. It says let's go get those customers and bring them to the network, let them know where we are, let them know what kind of product they can find, what kind of programming they can find it, when they can find it. And if you build the scheduling discipline around it and communicate that schedule to them, I think you've got a much better shot at getting sales out of them. If we do that, you will see the sales productivity go up dramatically.

Robert Routh. Robert Routh.

One follow up. You mentioned that you were not looking at acquisitions at this point because you're going to focus on turnaround (indiscernible) and getting that going, which I think is admirable. The question is, is anybody looking at you? Can you tell us have you had any inquiries from anybody, given that many would say that you and Shop at Home (ph) (indiscernible) considered kind of the weak sisters in the home shopping arena compared to HSN and QVC. Has there been any talks or discussions or approaches by another party, or even internally, about potentially merging with another stronger partner in order to really get things going on the distribution front and on the revenue generation side?

I think there's always a lot of interest in a company like ours and an asset like ours, and over the years there have been a lot of inquiries and feelers. And I think that, certainly current management believes that the asset is worth a lot more than we're trading today. And so until we can demonstrate that value, I'm not sure that we have a lot of interest in being acquired. I think that is the short answer to your question. I think the inquiries will continue to come. I think that it's a very attractive asset. There are very high barriers to entry in this business. It's virtually impossible to build the kind of distribution footprint that we've built here. And so it is interesting to a lot of people.

Just one follow. Given QVC's recent sale to Liberty Media, it would seem Comcast would be more than interested now in giving you expanded distribution than in prior years. I am wondering if you could give us an update on the discussions you're probably currently having with them, given that they are the largest MSO at the moment?

We continue to have discussions with them and with other cable systems. As I said earlier, our goal right now is to try to extract a little more productivity out of our existing footprint before we add a lot of additional cost in distribution. So I'm not looking to do a mega deal that tips our profitability in the wrong direction. I think when we see the marketing programs work, when we see the merchandising programs work, when we see the programming and production improvements, when all of that stuff comes together and you see our penetration rates start to climb and our productivity per home climb, at that point I think we become much more interested in going and adding big step function increases in distribution. But until then, I think it's going to be small incremental moves.

Brian Warner.

Touching on a question asked a little bit earlier, in terms of your talking to outside parties. Can you give us a sense of what NBC, what their agenda might be and what their -- how the relationship has shifted over time?

I can't give you that much history. I will tell you that NBC is very supportive today, and we have three board members who come from NBC and GE; two from NBC, two great guys -- Brandon Burgess (ph) and Jay Ireland (ph) out of NBC, and Ron Herman out of GE. So I think if you just look at the stature of our three board members, and their stature in the GE and NBC organizations, it gives you some sense of the level of commitment that comes out of NBC to ShopNBC. I would anticipate that to remain in place. We have a great relationship, we spend time together, and they're very supportive.

Thank you. This does conclude the question and answer session. I would like to turn the call back over to Mr. Lansing for closing remarks.

I think it's great that you guys have joined us here today. I'm very excited about being here, and look forward to your continued support and interest as we grow the Company. I look forward to talking to you next quarter. Thank you.

This does conclude today's ValueVision conference.