Thursday, September 3, 1998
Gemstar International Group
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Phone: 626-792-5700
Website: http://www.gemstar.com
Price (9/2/98): $35 9/16
HOW DID IT DOUBLE?
Hello VCR Plus+, goodbye annoyances. For anyone who has ever had trouble programming a VCR, this Double falls into the woulda, coulda, shoulda pile. Except, who really would have thought that a simple solution to one of our little consumer electronics nightmares could become a stepping stone to a four-bagger over the last 16 months, a two-bagger since January, and a sparkling $2 billion market cap?
While Gemstar is best known for its system that lets you plug in a number from you local TV listing and easily tape the show you want, its interactive program guide could make it something like the Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> of television. Its wealth of patents, licensing deals, and strategic partnerships with the likes of Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and General Electric's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> NBC have sent revenues soaring from $55 million in FY96 to $127 million in FY98. Even better, this company's ultralight business ensures stunning profitability.
Gemstar's meteoric rise this year followed a mid-January deal with Microsoft in which the two companies agreed to cross-license their intellectual property in the interactive program area, with Microsoft paying Gemstar $45 million up front plus a per-copy license fee for programming guides distributed in WebTV or cable set-top box systems.
The stock sagged in March, though, as joint venture talks with Prevue Channel operator United Video Satellite Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UVSGA)") else Response.Write("(Nasdaq: UVSGA)") end if %> apparently broke down. Yet, behind the scenes, United Video, which is 73% owned by Tele-Communications Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %>, had made a $2.8 billion ($45 a share) cash offer for Gemstar. That offer represented a 50% premium to the stock's price at the time.
Gemstar's board mulled the offer, but CEO and founder Henry Yuen demurred, despite the fact that he holds over three million options that would have vested immediately, allowing him a fat and fast payoff. On July 6, United Video made the offer public, but to no avail, as Gemstar adopted a "poison pill" to fend off any unwanted takeover. Indeed, Gemstar has since filed a suit against United Video, whose Prevue Interactive program guide allegedly infringes on Gemstar's patents.
All of this action has intrigued investors since June when United Video agreed to pay $2 billion to acquire TV Guide from News Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %>. If legendary dealmakers such as TCI's John Malone and News Corp.'s Rupert Murdoch were willing to pay ample cash dollars for Gemstar, perhaps its stock is worth a whole lot more.
The company's board seems to think so. With cash rolling in, Gemstar announced on August 19 that it would buy back up to $100 million worth of its own shares. That news sent the stock up slightly to the $41 1/4 range, though it's still off the $46 1/4 high set in early July.
BUSINESS DESCRIPTION
Gemstar develops, markets, and licenses patented systems that make entertainment technologies more consumer-friendly. Its lead VCR Plus+ offering is a de facto world standard for VCR programming. Consumers who want to tape a show simply look up the PlusCode number published in 1,800 newspapers and TV program guides. Available in 40 countries, this system has been licensed to nearly all major television and VCR manufacturers, including Matsushita, Thomson (which owns 4.2% of Gemstar), and Philips.
The company has 62 issued U.S. patents and 135 pending; it also has 73 foreign patents with 161 pending. Other major licensees include leading consumer electronics, satellite, cable, and PC companies such as Cox, MediaOne, Scientific-Atlanta, Time-Warner, Samsung, Sony, Sharp, and Toshiba.
Gemstar also provides electronic program guide services. The new Guide Plus+ Gold system allows a consumer to use a remote control to get info on a TV show, sort shows by categories, or select shows to record for later or to automatically turn on. Viewers can continue watching the current program in a corner screen while previewing the other offerings.
The ABC, FOX, CBS, NBC, UPN and PBS networks all carry the requisite Gemstar Guide Plus data. And NBC recently signed on as charter advertiser for the new interactive service. TV and set-top box manufacturers license the technology for $10 per unit, a boost from the $3 per unit price for the older VCR Plus+ guide.
Competitors include United Video's Prevue channel and TV Guide unit as well as Satellite Service Company's SuperGuide. Insiders hold more than 36% of the shares, with 24% controlled by Chair Thomas Lau and over 11% by CEO Henry Yuen.
FINANCIAL FACTS
Income Statement
12-month sales: $134.8 million
12-month income: $56.1 million
12-month EPS: $1.09
Profit Margin: 41.6%
Market Cap: $1965.2 million
Balance Sheet
Cash: $175.6 million
Current Assets: $181.2 million
Current Liabilities: $56.7 million
Long-term Debt: None
Ratios
Price-to-earnings: 32.6
Price-to-sales: 14.8
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Investors might have spotted Gemstar from any screen of companies delivering fast-growing revenues and profits. The Microsoft pact also should have been fair warning that the company was onto something exciting.
Major purchase orders from cable TV operators for new interactive set-top boxes plus investor enthusiasm for the Internet portals such as Yahoo! also might have led the imaginative investor to conclude that the curiously well-positioned Gemstar was undervalued considering the opportunities of interactive TV.
WHERE TO FROM HERE?
Gemstar's business model is light, light, light. It spends only to develop and market technology that it then licenses to manufacturers and others who help make the services indispensable. Newspapers actually pay to run Gemstar's PlusCodes!
The success of VCR Plus+ bodes well for Guide Plus+ Gold, which is Gemstar's potential gold mine given the opportunities for selling interactive, customer-specific advertising. That's because a smart agent built into the technology can determine what shows you like and thus what ads will most appeal to you. So, Gemstar has a way to bring the interactive marketing potential of the Internet to the mass-market audience of TV land.
Consider that the average viewer, who watches seven hours of TV a day, is expected to use the guide four times an hour and look at three pages on each visit. That's 84 "page views" per person per day. By next year, Gemstar hopes there will be two million TVs in U.S houses capable of delivering such interactive program guides. That's 170 million daily page views.
Now consider that Yahoo!'s $10 billion plus market cap came from just 115 million page views per day as of June. Moreover, Gemstar has only begun to tap this advertising stream.
The only published analyst estimate calls for $1.30 per share for FY99 ending next March versus about $1 per share for FY98 (excluding acquisition charges). Long-term growth is pegged at 35%, a number some investors find conservative. While stocks trading at 15 times sales aren't usually considered values, few companies manage 42% profit margins on sales over $100 million. The interest from United Video, the lack of insider sales this year, and clear expressions of confidence by the board all add to the story.
A number of developments could hurt the company, including new technology, defections among its various partners and licensees or surprises in its legal squabbles with United. Still, Gemstar appears to be more than a shooting star. In fact, the evidence suggests it just might find a privileged place in a bright new constellation of interactive media companies.
-- Louis Corrigan
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