iMedia Brands Inc (IMBI) 2006 Q4 法說會逐字稿

Good morning and welcome to ValueVision's fourth-quarter and year-end earnings teleconference. Following today's presentation, there will be a formal question-and-answer session. At that time, instructions will be given. Until that time, all lines will remain on listen-only mode. At the request of ShopNBC, today's call will be recorded for instant replay. Any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Amy Kahlow, Director of Communications. Ma'am, you may begin.

Thank you. Good morning and welcome to today's conference call. 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 like to now turn the call over to Mr. William Lansing, President and CEO.

Good morning. It is my great pleasure to share with you the results of yet another very strong quarter and full year at ValueVision. Our fourth quarter was a record quarter; $217 million in revenue. This is a 3.5% increase over our revenues last year, but it is actually up 11% on a comparable days basis. We converted to a 4/5/4 retail calendar and in the process lost one week versus last year.

The fourth-quarter EBITDA also exceeded a very strong fourth quarter last year. We had $8.8 million of EBITDA, up 10% from the $8 million in the same period last year. Both these figures exclude modest option expense. And it really pleases me to point out that we were net income positive for the quarter; $3.5 million compared to $3.4 million in the same quarter last year.

This fourth quarter is a nice close on a strong year. Our annual results are a record $767 million in revenue, up 11% versus last year. Our full-year EBITDA is $17.7 million, excluding $1.6 million in option expense, up dramatically from the $3.3 million in EBITDA we earned last year. These results reflect above industry average growth, which we expect to continue.

It is also a reflection of the fact that we're growing into our cost structure. As you know from discussions about our business model, ours is a high fixed cost business and revenue growth translates rapidly into high profitability. The EBITDA growth in 2006 is a demonstration of the leverage in our business.

Our business has been strong across all categories with particular strength in LCD TVs. Our diversification initiative is largely complete with jewelry comprising a comfortable 35% to 40% of our business. Other categories -- cosmetics, ready-to-wear, watches and home -- have continued to perform well. Ours is a real-time business and we rapidly tune the business with product mix shift on the margin to optimize sales and gross profit.

Full-year gross margin was 34.8%, up from 34.5% last year. We remain comfortable with our gross margin and believe that this margin level is sustainable and in fact susceptible to further improvement. Obviously, this depends in part on our product mix and we will continue to focus first on profit dollars per hour, not margin rate, to achieve the highest air-time productivity possible and to maximize the Company's overall profit.

Our marketing initiatives are strong and getting stronger. Our customer acquisition efforts remain highly successful with active customers climbing 5.2% to $846,000, up from $804,000 in the same period last year. We continue to win new customers on television and the Internet. Customers find us through channel surfing. Customers find us in response to cross-channel television promotion. Customers find us through Internet search and Internet affiliates. And customers find us in response to direct mail and e-mail campaigns.

Our efforts to retain the customer are bearing fruit. Retention has climbed to 47% today from 44% last year. This is partly attributable to our focus on great products and attention to our value proposition. It's equally attributable to our improved communications with customers bringing them offers that are relevant based on what we know about them and maintaining the relationship once established.

Our Internet business remains very strong growing at over 26% per year and in the current quarter, accounting for over 25% of our business. We believe that the Internet business will represent an increasing percentage of our overall business and we are investing in that business accordingly. We have very high ambitions for our Internet business. We believe that ValueVision is uniquely positioned at the intersection of Internet video and e-commerce and when we intend to capitalize on our leadership position.

It is no great secret that the biggest thing happening on the Internet today is Internet video. Broadband penetration into consumer homes is now at 70% and with MPEG-4 and advances in flash, watching video on a computer screen is now becoming more prevalent. In the next 12 to 24 months, it will become mainstream.

ValueVision, as a television network, already has an enormous investment in producing video. We will likely see many retailers attempting to supplement their Web presentation with video. Why? Because video improves conversion rates and helps sales, but producing video with high production values is a hard thing to do and we believe that ValueVision will be among the limited number of Internet retailers who will be able to do so well. We have the investment in studios, sets, lighting, sound, producers, directors, hosts, all of the ingredients of high production values.

We are currently repurposing our television video for the Internet, editing the segments and posting them in our product pages, offering the consumer additional sales help in the form of our host explaining features and benefits, but this is just the beginning of our video efforts.

We anticipate that in 2007, we will offer an enhanced television network experience on the Internet. Meaning that a consumer will be able to see everything that he or she sees today on television, but will also be able to get the benefit of the additional functionality that we can provide on the Internet. Besides the high-quality real-time video feed of our television network on the Web, the consumer will be able to get all of the timeshifting benefits that the Web offers.

For example, high-quality archives will let the consumer review past programming. For example, microchannels will let the consumer focus exclusively on the product categories of most interest. For example, TiVo-style DVR functionality will let the consumer record upcoming shows for future playback on the Internet.

We will also be able to top the ultimate constraint for any television network, the fact that there are only 24 hours in a day. We obviously have much more product than we can share on air and we have always used the Internet as a means to offer our customers additional product, things they haven't seen on air. This will become much more interesting when we start to broadcast a 25th hour, a 26th hour, a 27th hour of programming live on the Internet.

We could spend a lot of time on the possibilities of Internet video and where ValueVision is going with it. But I would rather share our plans with you as they materialize. You will see our Internet video plans materializing throughout 2007.

I want to comment on our guidance for 2007. We indicated that we expect to grow revenue at a high single digit rate. We believe that we can continue to grow faster than the rest of the industry. This is partly our strong execution skills and partly our sense that we have cracked the code on Internet customer acquisition.

We also indicated that we expect EBITDA to be in excess of $20 million in 2007, ex the equity contribution of Polo.com. Some of you may believe that we are guiding to numbers that we can beat. Perhaps there is a measure of conservatism in our guidance, but the fact is that we are investing heavily in 2007 to take advantage of the terrific opportunity on the Internet. We aspire to being a leading-edge Internet video retailer to showing the rest of the e-commerce world what the future e-commerce looks like and to benefiting financially from our leadership position in Internet video e-commerce. And of course, we're balancing that investment against a desire to show continued improvements in profitability. So I hope that that explains our guidance.

We are proud of the financial performance of the Company in 2006 and are excited about the strong prospects for 2007 and we are all waiting for the stock price to start to reflect the strong and getting stronger financial performance and the outstanding future prospects of our Company. On that note, I will stop and take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Michael Kelman.

Thanks. It's Susquehanna Financial Group. I have two questions. The first one revolves around the investment in the Internet that you have just spoken about. Can you talk a little bit more specifically about what you will be spending on and perhaps maybe you could quantify that a little bit more so we have a better idea of what you plan to spend?

And then secondly, can you talk about your approach to share repurchases, particularly, one, given the stock price and two, given that you're going to be generating positive free cash flow next year and third, obviously, your strong and healthy balance sheet?

Sure thing. On the investment in the Internet, I won't put too much specificity around it. Partly because we don't want to share too many trade secrets and partly because it is a work in-process. But it will be in the category of getting our television network broadcast on the Internet and then all of the enhancements around that. Some of the things that I mentioned earlier, everything from archiving to recording future shows to microchannels with product categories. You could watch all jewelry or all apparel or all skincare.

The 25th hour of broadcasting is a more complicated thing that we hope will come later in 2007. But the theory there is that we have what we call hard changes in our programming where we move from jewelry to electronics or from jewelry to home to electronics, and we know that when we make those kinds of programming changes in our schedule, we lose some of our audience and then we have to rebuild new audience with the new show.

The theory of the case here is that we can bring some of that audience to the Internet and broadcast live on the Internet and carry an audience that we might otherwise lose. Say a jewelry viewer who might otherwise have left us when we switched to something else, we could carry them to the Internet and continue to get sales with live broadcasts on the Internet.

That obviously involves having multiple studios, operating in real-time, two control rooms, two sets of directors, two sets of producers, two hosts working simultaneously. And we have a lot of that infrastructure, but we don't have all of it. So the idea is that we would make some small incremental spend -- not so small -- we'd make some incremental spend, call it in the $3 million to $5 million range that would let us leverage our call it $100 million investment in television video production so that we can put it all on the Web. I hope that gives you a little more flavor on the Internet side.

On the share repurchases, we did not repurchase any shares in the fourth quarter. We have a committee of the Board that makes the determination of whether we want to be participating in the market or not and so we were not participating in the fourth quarter. We were blacked out during some part of the quarter when the stock was particularly low. I will say that I believe that share repurchases are a good idea. That our stock is a great value where it's trading today and I believe that the Company should be buying more of it and it is a discussion that we have internally all the time. Can you look forward to more share repurchase in the future? I hope so.

Thank you.

Bob Evans.

Craig-Hallum Capital. Good morning and nice job on the quarter and the year. First, actually, before the Internet discussion, I just want to make sure I heard correctly. Did you say in terms of active customer count this year was at 846 versus 804 --

Yes, that's correct.

-- year-over-year? Okay. I just wanted to make sure I had that right. Can you talk a little bit more in terms of the Internet spending that you are going to be -- or investment that you're going to be making this year? How much of that do you see as kind of one-time investment versus recurring and then beyond just building the infrastructure, do you see spending additional dollars on marketing?

I would say most of the incremental spend that we're talking about here is recurring. I don't want to suggest that it is all -- that it's a one-time investment or all capital. It is not. It is some people and recurring spend. I believe that in time, and I don't know if it will be within twelve months or it will be a year from now, in time, these investments will well be paid for. They will pay for themselves. It is just a question of whether we can get it done within the year or not. Our internal modeling does not assume tremendous incremental revenue from the Internet video initiatives and, yet, we have high hopes.

There is also some incremental marketing spend. I think that our team has really finally after extensive testing of many different approaches and different programs cracked the code on customer acquisition and we're doing a really nice job of acquiring customers on the Internet profitably and our spending there is climbing. There's probably $2.5 million of incremental spend in '07 for Internet marketing specifically and we would spend more if we could spend it well.

Okay, and can you elaborate a little bit more in terms of you said you have done some testing and gotten a good response without getting into too much detail, but can you give us a sense of kind of why you have the level of confidence that you do?

Yes, I can. We run this business -- I think I have said this in the past on some of our calls. We really run our business as a direct marketing business. We think of ourselves as direct marketers. We do the balance between the cost of customer acquisition against the lifetime value of the customer and the big question with the Internet -- we know what the lifetime value of the customer acquired on television is. We have a pretty good sense. We have had a lot of experience with it over the years and we know that on average, a customer we get on television buys from us four times -- an average customer buys from us four times, average $200 order size, $75 profit on that, and so we can quickly get to a net present value, a net present lifetime value of the customer and set that against the customer acquisition cost and understand it.

On the Internet side, historically it has been less well understood because we don't have as much experience. We don't have the history of knowing how long these customers stick around and obviously, customers from different sources have different values. Customers from some sources who are extreme bargain hunters may or may not be good long-term customers. Customers from other sources turn out to be very good customers. But we did not know that going in. We had to test a lot of different Internet sources to identify where the best prospects were.

What we have now is enough history with all these different acquisition programs, different search programs, different pay and search programs, different affiliate marketing programs to understand what the lifetime value of these customers is by channel, by source, and to have an informed point of view on how much we should be willing to spend to acquire one of those customers.

So what is happening now is we are spending a lot more because we have very high confidence in the quality of the value of the customers we are acquiring. We know where to get them. We know how to get them. We know what we're going to pay for them and that equation is a good equation. It is a profitable equation. That is why I have the confidence I have. It's the value of having 18 months of customer acquisition, Internet acquisition history to study and inform our lifetime value analysis.

Okay, okay. Thank you. And a couple of detail items. CapEx for this year, I think you were around $10 million in '06. Where would we expect to be for '07?

It could be --.

Yes, I think we came in close to $12 million for '06 and we are forecasting right now for another $12 million in '07.

Okay. Okay. $12 million in '07 and I assume not a lot of change in D&A?

The D&A -- the run rate for the first two quarters will be similar to what you're seeing at the end of '06. It will fall off a little bit in the second half as we have got some large IT investments that are going to be fully depreciated in the second half of '07.

Okay. Okay, great. Thank you.

Barton Crockett.

Hi, with JPMorgan. Thanks for taking the question. I wanted to ask you a question about the expense lines here now to think about these going forward? And first thing is you were talking about some of this incremental spend, $3 million to $5 million or so for Internet, another for infrastructure, I guess, related to putting Internet video up and then a couple of million for incremental spending, I think you mentioned, will for customer acquisition.

Does the video stuff fall into the G&A line or the distribution and selling line? That would be one kind of question and then the second thing is, just in terms of as we look at this distribution and selling line, you guys have pitched in the past kind of this ideal model where the two biggest elements of that would be the spending per home at about $2 per home reached and another 7% or so of sales would be a variable. Is that changing over time?

As you look at these distribution contracts -- I know there has been some things rolling off and there may be some renegotiations ahead of that that and maybe some changes, lower spending per home, but maybe lower revenues as you move to digital tier. How should we think about a kind of ideal model going forward as it applies to this expense line? Thank you.

I think, Barton, on the model, the mature model is exactly the way you just described it, which is think about distribution running $2 a home. Maybe it will get cheaper over time, but right now, modeling $2 a home is pretty reasonable. And then, seven points for variable expense, order capture, fulfillment, customer service is also a pretty realistic variable expense. But we're not mature. We are still adding homes and so until we reach that -- until we get more mature, I guess I should say, you won't see as much of the contribution margin dropping to EBITDA.

In terms of the categorization of where the expense goes, Frank, do you want to take that?

Yes, I think you will see it split between the G&A line and the S&D line. Certainly all of the folks, the crews, the directors, the additional hosts, the additional studio expense that we have, that will flow through the selling and distribution line. The IT resources, those will go through G&A, so I would say it is probably going to be 75/25 split, 75% in the selling and distribution, 25% up in G&A.

Okay, that's great. And then if I could follow up with a question about the revenue composition as we look into your high single digit guidance for the year. What are you presuming there in terms of the relative growth of the TV sales channel versus the Internet sales channel for the merchandise sales in aggregate? Obviously, the Internet in this most recent quarter was much better than the TV side of it. Would you expect that level of kind of variance and performance to continue into the fiscal '07?

The short answer is yes. First, I guess I should point out that TV grew in the fourth quarter. The only reason it looks like we didn't have growth there is that we lost the week on the accounting treatment. On a same days basis, on a comparable days basis, we're actually up 5% on the TV side. So I don't think there's anything to be concerned about on the TV side.

I would add one other thing, which is a trend which we will continue, we run the businesses together. The TV and the Internet businesses are closely related and we send traffic from the TV side to the Internet side and we do order capture sometimes in the call center and sometimes on the Internet from television. We have TV viewers whose orders are being captured through the two mechanisms.

We call it TV if they come in through the call center; we call it Internet if they come in through the Internet. But the Internet numbers are really composed of two pieces. There's the piece of the Internet numbers that are TV viewers ordering on the Internet and we call them an Internet sale and then there is the Internet customers who come in from paid search or affiliate marketing or stuff like that, which I would say is a much more pure Internet customer.

So one of the things that we have seen through '06 and you'll see it in '07 again is a bit of a shift from, as we define it, TV to Internet because you have an increasing number of customers ordering online what they see on TV. It is just an easier way -- for some customers, it is in easier way to place their order and for us, we love it because it is obviously a lower-cost order capture.

So that is a long answer to your question, but it says, yes, you're going to continue to see Internet outpacing TV significantly. A little bit of that is overstated because some of the Internet number is actually a TV number in disguise.

Okay, alrighty. That's helpful. Thanks a lot.

Kevin Foll.

Hey, guys. Magnetar Capital. Congratulations on a nice year. In terms of your guidance for revenue, I guess, for '07, can you talk about how much of that high single digit expectation you are looking for from kind of transaction growth versus average price? I imagine some of the pricing has been -- some of the pricing you saw in '06 was related to the mix shift, maybe selling more LCD TVs that carry a higher ticket. Maybe you can comment kind of how much of that you expect to continue and how to think about that in '07.

There was a time when we had as a strategy, I guess when I joined the Company in '04, there was a deliberate strategy to bang down the ASP, the average selling price. The theory of the case was that if we had a much lower selling price, we could attract a wider range of customers.

What we do today is we have a wide range of prices. We have some low-priced items, which are really entry items designed for our consumers who have never shopped with us before so they can try us on a low-priced, low ticket item and get comfortable with us and then we have the high ticket stuff like LCD TVs and computers and Serta Mattresses for that matter. And so we have a mix of it.

Today, you know, it balances out at around a $200 average selling price and I don't imagine that that is going to change a whole lot. We don't manage to that level, but it somehow seems to shake out around that level. So I don't see a lot of downward pressure on the ASP, certainly not deliberate pressure downward.

At the same time, I don't see deliberate pressure upward because I think if we felt it climbing, we would just see that as an opportunity to introduce more low-priced, low ASP product to try to broaden our customer acquisition in that. So that is a long way of saying expect virtually all of the revenue growth to be from the transactions, not from a change in ASP.

Okay, and then can you talk about the fourth-quarter kind of mix shift you saw in the business across the categories year-over-year?

The fourth quarter is traditionally a little bit heavier on electronics and this fourth quarter was no different. The flipside of that, the reciprocal is that jewelry and watches are a little bit lighter and we expect that to shift back a little bit in the first quarter. That is typical also. So we are, today, in a world of 35% to 40% jewelry, percent of total and I think that is going to continue. I would expect it to be in that range for the indefinite future.

Again, not so much by design, but that is what are customers want. We make decisions monthly, weekly, daily and hourly on what product category is going to wind up with the marginal air-time and we make product mix shifts all the time on the margin. We probably swap out, I don't know, 5% of our hours on very short notice to either take advantage of bargains that have come our way that we want to pass to our consumers or said another way to optimize the productivity of the air-time because we think we have something that will do a little bit better. And that winds up with a bit of mix shift on the margin and we let the customer guide us there. That is not a heavy design point.

Okay, and then in '06, I guess your watches, apparel, and kind of health & beauty subsegment looks like it is 37% of sales in fiscal '06 versus 26% last year. So there's a pretty meaningful mix shift there. Maybe you can comment on the impact of that mix shift on gross margin.

Watches have done very well. That is doing well and doing better. The only thing that really affects margin from a mix shift standpoint is electronics, which we run at a lower margin. We target a lower margin there, but then the ticket prices are so much higher that we make up for it in sales. So on a profit per hour, on a profit per minute, on an air-time productivity measure, electronics is a terrific category for us even though the margin rate is lower. But I would say any mix -- any pressure downward on margin comes from electronics.

Okay, great. Thanks.

Ross Taylor.

Caxton Associates. You're rightfully proud of what you have accomplished in the last 12 months. The Company has gone where it is generating nice EBITDA numbers. It looks like you're going to grow those numbers pretty significantly going forward. We're looking at you being cash flow positive going forward. You have an asset rich balance sheet, a lot of cash, other noncore assets that could be monetized and you are clearly in favor of a buyback, yet your Board committee seems reluctant to commit capital into a name even though it is trading substantially lower than it was a year ago in spite of all of these accomplishments.

I have two questions with regard to that. One is, is GE -- are GE directors on that buyback committee and if so, is there a possibility that their interest given the nature of their investment are actually at odds with the interest of the balance of the shareholders? And two, what directors are on that committee so that shareholders like ourselves can put more direct pressure on those individuals to basically bring their actions more in line with the success you have had operationally?

Thanks, Ross. I will take this message back to the committee and obviously, the board members are on the phone and they are well aware of a desire by many of our shareholders to increase the buyback activity and I don't think it is a closed topic by any means. I think that we continue to evaluate and address it.

In terms of the GE question, I think that the GE directors' interests are aligned with other directors and other shareholders on this subject and I would not single out any GE directors for a point of view or opinion on this particular subject that is contrary to what would be good for shareholders.

Okay, I think that you know we have had many conversations with you and your directors and our feeling has been that the key was -- the business has an asset value that is substantially in excess of the current stock price and we would think getting a buyback in place would be an important step. Otherwise, quite honestly, it is hard to argue since the market seemed to have been more than willing to ignore all of your accomplishments. It is hard to argue the strategic alternative wouldn't be better for the current shareholders than waiting around to see if the market will ever wake up and recognize what you have accomplished?

Ross, we have $70 plus million on the balance sheet and we are doing very well and our stock continues to languish and it represents a great value at its current level and so there is no argument from me. I believe that buying back our stock would be a terrific investment for our Company and for our shareholders and that thought has not escaped our Board. Our Board is well aware of it and they are plenty of folks on the Board who believe that is the case too and so the subject is not closed. We will keep working on it.

Great, thank you.

And you know what? It is really helpful that on every one of these calls, our shareholders make their opinions heard because we go back to the board room and talk about it.

Fantastic and keep up the operational good work.

Thanks, Ross.

Bob Evans.

Hi, Craig-Hallum Capital. Just a follow-up on -- what is your plans on distribution? What are you looking at for distribution growth this year? Maybe a flavor of both digital and analog.

I think we could comfortably look at three million homes. We are opportunistic about it and we have historically done a little bit better than that. I don't know if we will do better than that, but I think three million homes growth is pretty reasonable to assume.

Would you expect most of those to be, I assume, digital?

It is actually a mix. We have had pretty good luck in getting analog homes also. We go in and do short-term deals. We picked up a lot of carriage in the past year. As Shop-at-Home exited, we picked up some of their carriage. As America's Store has left, we have picked up some homes there. So there's nice homes to be acquired that way. We have satellite growth, so it is a mix.

Okay, and just to clarify one other point, the EBITDA guidance of greater than $20 million or at least $20 million, that excludes the Polo.com. Is that correct?

It does. It does. We had about $3 million of equity income from Polo.com in our $17.7 million of EBITDA this year in '06 and if you assume the same $3 million in '07, the guidance would be north of $23 million. So, yes, on an apples-to-apples basis, there is $3 million more there.

Okay, alright. Thank you.

I'm showing no further questions at this time.

Okay, well, thank you very much. Look forward to another great year.

That does conclude today's conference and you may disconnect at this time.