A New Look for an Old View

02/21/2012 7:30 am EST


Marc Gerstein

Editor, Forbes Low-Priced Stock Report

It's a pretty straightforward business, but this company has revamped its business model and will be gaining ground as the economy improves, writes Marc Gerstein of Forbes Low-Priced Stock Report.

Creative destruction is a term we’re likely to hear a lot as long as Mitt Romney is in the Presidential race.

In this regard, a January 14 Forbes.com article entitled “Creative Destruction Is Not a Management Philosophy” sums up the essence of what’s taking place at LodgeNet (LNET), the dominant supplier of television programming to hotels.

The business is OK given the tendency of hotel guests to watch regular TV and periodically order premium content. But indefinitely staying the course might lead to a poor outcome for LNET, given the way the world is changing—particularly the way the proliferation of laptops, smartphones, and tablets are making it easier for hotel guests to get in-room entertainment without using anything supplied by the hotel, except perhaps Internet access.

But LNET is doing exactly what Adam Harting, the article's author, proposes: avoidance of “more of the same” (the Kodak (EK) formula) and instead being “willing to learn from trends and steer in the growing direction” (a la Apple (AAPL), et al).

One new trend involves dealing with Hollywood in such a way as to give LNET access to new movies just 60 days after theatrical debut, well before cable and streaming services. So right away, guests can get things from LNET that they can’t access on their own elsewhere unless they get to a theater, which can be easier said than done in unfamiliar locales, often with limited access to transportation.

Helped by increased marketing efforts, this puts LNET’s on-demand channel at No. 5 in hotels, behind only ABC, CBS, NBC, and HBO, and is a huge driver of LNET revenue. A LodgeNet app lets customers use Apple devices in lieu of the in-room remote control to engage the system (and glean hotel and local information).

Next is the screen itself. It’s one thing for a guest to be able to get more conventional content on a laptop, but would they choose to do so if they could watch it on HDTV?

The move toward HD is a recently launched and ongoing effort on LNET’s part. To date, HD rooms have been generating 60% more revenue than non-HD rooms, and there’s plenty of upside given that HD hotel penetration is currently only 20%.

Another especially promising innovation is LNET’s Envision platform, introduced in late 2011 and starting to gain traction among hotels. Besides entertainment, this is almost an electronic front desk, room service, and concierge platform that, in addition to ordering in-room entertainment, lets guests order room service, make reservations (for restaurants, golf, etc.), purchase local event tickets, etc.

Hotels using Envision are seeing triple the level of guest interaction (not just with the TV, but with Envision apps for customer devices) relative to conventional in-room systems.

LNET is also moving beyond hotels and into hospitals, where patients are much more likely to focus on in-room TVs. This fledgling operation delivers entertainment, facility information, and patient education.

Recent revenue trends have been soft due to the economy (the latest per-room comparisons finally turned positive) and LNET’s discontinuance of lower-end hotels interested in emphasizing free rather than premium content. But that may have run its course, and should give way to momentum from expanding HD, adoption of Envision, growth in the Hospital business, and gains in other LNET areas such as provision on Internet access.

Debt is high, as often occurs in media-related businesses, but positive cash flow and lower capital spending (the big investments have already been made) are allowing LNET to reduce the debt (which, even at current levels, is manageable with interest at less than one-third operating profit plus depreciation).

So we have, here a double-barrel investment case: de-leveraging plus business growth. LodgeNet is a buy.

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