Gemstar Takes a Fall Amid Missteps
Skeptical investors who have squeezed billions of dollars of value out of Internet companies have turned their doubtful eyes toward the once-invincible stock of Gemstar-TV Guide International.
After the Pasadena-based company began touting its technology for interactive television program guides in 1998, its stock steadily climbed from a split-adjusted price of about $10 to an all-time high of $107.44 in March.
But since then, the stock has been on a downward spiral, pummeled by investor wariness of companies whose futures depend on new interactive technologies and more recently by the company’s own missteps.
One blunder was Gemstar’s decision to release an incomplete quarterly financial statement two weeks ago that, among other things, omitted a $116-million net loss. It was the first report since July, when Gemstar closed its $14.3-billion merger with longtime rival TV Guide, and bewildered investors responded by erasing 18% of the company’s value the next day.
Shortly after, news reports appeared that Gemstar was looking to bolster its fledgling electronic-books division by buying retail bookseller Barnes & Noble. When the company made no effort to dispel the rumors, already skittish investors began to worry that the company was losing its focus.
As a result, Gemstar’s stock has sunk 42% this month. It closed at $39.50, up $1.28, in Nasdaq trading Wednesday.
“Gemstar is finally falling prey to some of the same issues that all the interactive players are falling prey to, which is that a lot of their business is based on future growth,” said Stacy Bingler Forbes, a research analyst with Janco Partners in Englewood, Colo. “Gemstar may need to prove out its model a little bit before investors come rolling back in.”
On Wednesday, Gemstar finally put an end to the Barnes & Noble rumors. In a statement, the company said it has “no current plans for a merger, acquisition or business combination” with Barnes & Noble. But Gemstar Chairman and Chief Executive Henry Yuen said he would pursue a “strategic alliance” with the bookseller.
Executives from the traditionally closemouthed company declined to be interviewed for this story. When he released the company’s latest quarterly results, Yuen said only that he was “extremely pleased with [Gemstar’s] financial performance.”
Analysts attribute much of Gemstar’s stock decline to similar concerns that have plagued Internet stocks--that its actual growth won’t meet lofty expectations.
The company’s interactive program guide, used in 8.5 million U.S. households, is considered a key technology for the future. As cable and satellite TV companies cram ever more channels onto their systems, menu-driven interactive guides that can be navigated with TV remote controls are becoming an increasingly essential part of the channel-surfing experience.
The guides sort through reams of TV listings and help viewers make sense of them. Users can set them so that sports or sitcoms are displayed at the top of the screen, and by tracking which programs the viewer prefers, the guide can even suggest shows.
The guides are also a platform for electronic commerce, offering movies on demand, targeted advertising and one-click access to products ranging from football jerseys to pepperoni pizza.
With more than 100 patents in its portfolio, industry experts say Gemstar is the essential company for anyone who wants to deploy an interactive program guide--potentially as important to television as Web portals such as Yahoo are to the Internet.
But its recent growth has disappointed Wall Street. Analysts were optimistic that its merger with TV Guide--publisher of the weekly magazine and the largest supplier of interactive guides to the cable industry--would unleash more deals with new customers.
Before the merger, Gemstar and TV Guide were embroiled in complex patent litigation involving key technology for the guides. Many potential customers preferred to wait out the dispute on the sidelines rather than risk being drawn into a contentious court battle.
The Gemstar-TV Guide merger in July produced a truce between the companies. It also gave Gemstar a chance to improve its often icy relationship with the cable industry.
Gemstar earns a licensing fee of between 30 cents and $1.10 per subscriber each month, and it also keeps 85% to 90% of the advertising revenue generated by the guides, according to analysts. Cable executives complained that such terms were too stingy. But an unsympathetic Yuen, who was trained as a mathematician and a lawyer, used patent infringement lawsuits to coax them to the bargaining table.
By joining with TV Guide, which has friendlier ties to the cable industry, analysts hoped the combative Gemstar would adopt a more conciliatory manner that would enable the company to strike more deals. In October, Gemstar settled its patent litigation with TV set-top box maker Motorola by striking a $200-million licensing pact.
But a week later, Gemstar was back in court with a new lawsuit against EchoStar Communications. Following the pattern of several previous suits, Gemstar accused the No. 2 satellite TV provider of infringing its patents by deploying interactive program guides without obtaining licenses. An EchoStar spokeswoman said she couldn’t comment on the suit but said the company hasn’t infringed any patents.
Concern about slowing growth was reinforced by Gemstar’s recent quarterly report. Although it showed that cash flow for the newly combined company had increased by about 30%, the firm reported revenue of $338 million, down slightly from $341 million the combined company would have reported in the same quarter last year.
But what really troubled Wall Street was that the company didn’t report its net income or per-share results. When Gemstar later made its formal filing with the Securities and Exchange Commission, the company revealed it had a quarterly net loss of nearly $116 million, or 30 cents per diluted share, compared with a combined profit of $16.4 million, or 7 cents, in the same quarter last year.
Later that week, after watching its stock suffer, four top Gemstar executives held a 2 1/2-hour conference call with analysts to provide more financial details and guidance about the company’s prospects.
“It was a monster conference call,” said John Corcoran, a new-media analyst with CIBC World Markets in New York who downgraded Gemstar from “strong buy” to “buy.” “The last time I was on the phone that long was never.”
The call made Wall Street more upbeat. But it wasn’t enough to prompt Corcoran to raise his Gemstar rating back to “strong buy.”
During the marathon conference call, Gemstar Co-President and Co-Chief Operating Officer Peter Boylan detailed the status of negotiations with cable operators like Comcast, Cox Communications, Adelphia Communications, Charter Communications and Time Warner and left analysts believing more deals were imminent.
Several analysts said they now think Gemstar can have its guides in 10 million households by the end of the year and 20 million by the end of 2001.
But there is still some lingering concern about a general “softening” in the advertising market, which could hurt Gemstar despite distribution gains, Forbes said. “Investors are looking for more increased distribution in the guides and for real growth in ad revenue.”
There are also concerns about growth in Gemstar’s new electronic-book division. The company’s big bet on the nascent technology isn’t paying off as fast as Yuen forecast in January, when he bought the two leading e-book publishers, NuvoMedia and SoftBook Press.
It took analysts and investors a while to understand Gemstar’s foray into electronic books. But recent rumors about a potential merger with Barnes & Noble reawakened feelings of uneasiness. The prospect of a company that relies on intellectual property to produce high profit margins taking over operation of nearly 1,000 retail bookstores didn’t sit well with analysts.
“That’s not the Gemstar I know,” said Corcoran, who like other analysts would back a more limited joint marketing arrangement between the two companies. “Gemstar’s core strength is licensing proprietary technology and generating very high margins.”
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Not With the Program
After nearly two years of steep growth, shares of Gemstar-TV Guide International have recently come to resemble volatile Internet stocks. Slower-than-expected growth for its key interactive program guide technology and its nascent electronic-book business caused investors to erase more than 40% of the company’s value in November. Weekly stock closes and latest:
Source: Bloomberg News
