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Gemstar fast-forwards from VCR Plus+ to TV portal
Its pilot episode featured a foolproof way to tape a TV program and investors have enjoyed the show. Now Gemstar hits the play button on patented program guides and the potential for huge ad revenues.
By George S. Mack
What you meant to do was record a television special. But what you got instead was an infomercial with Ron Popeil cooking two chickens in his rotisserie machine.
No need to feel stupid. Almost the same thing happened 10 years ago to former TRW research scientist Henry Yuen when he tried to record a Boston Red Sox game. Yuen missed and got shut out. His response -- along with fellow researcher Daniel Kwoh -- was to form Gemstar International Group (GMST) and produce the now familiar VCR Plus+, which allows users to punch in a code number from the newspaper listings. No misses and no errors.L I V E V O T E
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But the market has noticed that there's a lot more to the company than a few bucks in royalties for each VCR sold. It now sports a $7.4 billion market capitalization. If you invested $10,000 one year ago, your Gemstar stock currently would be worth $36,384, for a 264% total return. Compare that to the Internet information providers index, which is up 194%, or the S&P 500 which looks relatively flat with a 19% return for the same period.
Just point and click
In addition to the older VCR Plus+, the Pasadena, Calif.-based Gemstar has developed the patented Guide Plus+ Gold that's pre-programmed into most new TV sets. It allows the viewer to scroll an on-screen menu interactively and get expanded information about programs. The viewer then can select a show for on-the-spot viewing or record it for later use. It's all done from the easy chair with modern homo sapiens' most sacred appendage: the remote control. Select, enter, done.
Guide Plus+ is getting attention from investors because its on-screen advertising capability already is starting to produce revenue -- and there could be a lot more on the way. In addition, beyond the VCR Plus+ and Guide Plus+, Gemstar has a full line of services:
At one end of the spectrum, the company merely licenses its intellectual properties and allows the licensee to design its own guide. For example, America Online (AOL) recently signed an agreement allowing the use of Gemstar's electronic program guide technology in AOL TV, which will launch next year. Microsoft (MSFT) has licensed Gemstar's intellectual property as well. (Editor's note: Microsoft owns and publishes MSN MoneyCentral.)
On the other end, Gemstar provides technology, broadcast data and everything else needed to make the guides work, which is exemplified by its deals with television manufacturers Thomson Consumer Electronics and Sony (SNE).
Unlike many high-flying Internet stocks, Gemstar is actually earning money. Fiscal 1999 saw revenues of $166.5 million and 67 cents per share in earnings. Analyst Michael Graham of BancBoston Robertson Stephens rates Gemstar a "strong buy" with an earnings-per-share estimate of 77 cents on $210 million in revenues for 2000, followed by EPS of $1 on $270 million in revenue for 2001.
Beyond those published figures, Graham is dangling some tantalizing numbers like a carrot, causing investors to salivate. He doesn't hesitate to talk about a possible upside of five to 10 times current levels in both earnings and stock price. "That will take a few more years to kick in, but that's the magnitude I'm thinking," he says. Gemstar now gets $10 per unit annually in licensing revenue for its Guide Plus+, but future on-screen set-top box advertising fees make $100 per unit look like a reasonable figure, according to Graham. "That's where the upside comes from," he says. No wonder they call it Guide Plus+ Gold.
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Could top 3 million homes
One deal that really looms large for Gemstar is its litigation with TV Guide (TVGIA). The two companies are now in court-supervised settlement discussions. AT&T (T) and its cable subsidiary TCI (which owns half of TV Guide) are using TV Guide's electronic program guide in 2 million cable boxes, according to Gemstar, in violation of its patents. If Gemstar wins the arbitration, its guide would zoom from being used in 500,000 homes to being used in more than 3 million homes. That would propel the company immediately to the critical mass needed to sell significant advertising, says Graham.
Graham says the ongoing settlement talks will be resolved soon. "We certainly feel that with both Microsoft and AOL licensing Gemstar's guide, as well as the fact that Gemstar has never lost a lawsuit, that points to a good chance of success," he says.
There's also a binding arbitration going on with cable and satellite-box manufacturer General Instrument (GIC). The conflict is both a patent issue and a contractual dispute. Both Gemstar and General Instrument now are suggesting the case should be resolved by the end of September. Set-top-box company Scientific-Atlanta (SFA) and high-end consumer electronics firm Pioneer (PIO) also are involved in disputes with Gemstar.
If the company prevails in these cases, Graham says, Gemstar would be positioned "right at the center" of the interactive television industry. Serving as a gateway for TV programming, the company will be collecting licensing fees and a share of ad revenues from the three biggest companies in that space: America Online, Microsoft and AT&T. "This will be very good for the stock," says Graham.
Ad potential could be huge
Gerard Klauer Mattison analyst Alan Gould says Gemstar is one of his firm's "strongest recommendations," particularly if the General Instrument arbitration is successful. "If the arbitrators enjoin GI from shipping boxes with any program guide in them, then that would be a major victory for Gemstar," he says.
Gould says if the company lost both the General Instrument and TV Guide cases, the stock price would, of course, suffer in the short term because it's been so strong of late. But even without those contested revenues, the deployment of TV sets with Guide Plus+ should give Gemstar some "nice fundamental growth," says Gould, enabling the company to hit his EPS estimates of 95 cents in 2000 and $1.25 in 2001. Gould is only factoring in $3 million in ad revenue for fiscal 2000 and $25 million for fiscal 2001. He says those numbers are a "tiny fraction" of the ad potential, but he'd rather not quantify how much upside he's talking about. When pressed, he'll only say, "It's a unique company."
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Yuen, Gemstar chairman and chief executive, sums it up as follows: Gemstar, he says, has acquired two interactive program guide providers over the past two years. It has added unmatched talent and experience in development of the technology as well as providing the service. Second, Gemstar now has the right infrastructure in place to deliver data to either the television or to the box sitting on top and to refresh the data continually. In addition, Gemstar has contracts with all the major television networks as well as with more than 700 broadcast TV stations in the United States alone.
Pointing to the final nail in the coffin for potential competitors, Yuen says his company is in a very strong patent position. He believes it would be difficult, "if not impossible," to put up a decent program guide without trespassing on Gemstar's intellectual property.
Even with its tremendous run-up this year, analysts believe the Gemstar story still is under-appreciated. People tend to view the company as a program guide and VCR controller. But in the end, Gemstar wants to be a portal for interactive television -- sending viewers to places where they can look at ads and spend money -- sort of like Yahoo! (YHOO) does on the Internet. |
