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Technology Stocks : Gemstar Intl (GMST)

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To: FLSTF97 who wrote (390)	9/30/1999 7:46:00 AM
From: NY Stew	Read Replies (2) of 6516

GEMSTAR As with most valuation models there are certain assumptions made with regards to product deployment and the revenue formula. As to the former I agree with the recent Forrester Research projection: By 2004, EPGs such as GuidePlus will reach 55 million households, enhanced broadcasts will be viewable in 24 million households, and TV-based Web browsers such as WebTV will penetrate 13 million households. This Tornado will not be confined within the US borders of these referenced numbers and is scalable by a factor of more than 5. The latter revenue formula consideration is more speculative at present however we have studies of viewer behavior from the 100+ channel US satellite industry from which to plot an intelligent model. In addition, TV Guide has also released similar data from its users. From the Hoak Breedlove Wesneski & Co research report dated 6/28/99: Data released by the company indicates that interactive guide usage is frequent and spans all demographics. Not only do viewers visit the main screen 3x-4x per hour, but they also use the flip and browse features 4x-8x each per hour. I have not seen much variance in the 84 page impressions per household per day. (Note that this in not per person.) In fact, my belief is that the Gemstar guide with messaging and near-real time updated news headlines (MSNBC) and sports scores may well get more traffic. Other free informational courtesies may be forthcoming and a click of the remote away. My model used the 84 impression factor. The rate card factor has been almost as low as the $5 that you suggest. The range is from $5.09 to $13.95. Some models have the CPM increasing with time while other have it decreasing. This will need to be the subject of another post but I see the guide as a premium locale for the promotion of content and products. A viewer may make a purchase with a simple click of the remote. No telephone, STB, internet connection or wires are needed. Nor will they suffer any subscription fees. A sustainable $10 CPM is probable and I use it in my model. The advertising sell-through percentage has the most range in its projections. The 3 models (base, conservative & aggressive) for TV Guide that I have seen range from 12.19% to 36.20%. I believe that Gemstar will likely fall between midpoint and the upper end of this range. They will be able to tie-in their ad inventory as they have agreed to do with WebTV. I see them working successfully with their licensees in this area. My call is for 30%. Thomson alone from its GE, RCA & Proscan brands will deploy 8 million second generation guides. The agreement calls for 10 million but I believe that 1 to 2 million were first-generation and of no forward looking revenue value. Thomson's 8 million base by 2004 will generate 2.2 billion in ad revenues using the 84/30/10 model. If you decrease the sell-through percentage by 20% it would generate 1.77 billion from the 84/24/10 model. In 2004 it would not be much of a surprise if I were to read that the Gemstar base was 100 million households worldwide. The Deutsche Telekom agreement for deployment to its 17+ million households in Germany has been slowed due to unrelated events however they are working closely with Gemstar in upgrading their system(s). Henry has reported that the technological cooperation is going well. He also stated that he was going to be in Germany so I look forward to an update in that market. You don't get any better partners in Japan than Tokyo News and Dentsu. The IPG JV is promising. Gemstar has cleared the regulatory hurdles and launched ahead of schedule. Hitachi has the G Guide in TV models. I am excited about the Gemstar Asia division and the G guide. Gemstar also has a Sony STB agreement in Japan. This agreement is exclusive. Differences of opinions define a market. I view Gemstar as being undervalued by a multiple of at least 5 and believe that the US-centric focus by the analysts will correct itself with time. Most too good to be true stories are just that. A few are not. Diligent panning will not always produce a Gem. Sometimes it does. Good luck to you with your investments. Regards Stew

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