Future acquisitions for USA Networks Inc. will likely fall in the interactive commerce arena, chairman and CEO Barry Diller said last week, although the company will continue to keep its eye out for potential targets in the programming sector.
In a conference call to discuss USA's third-quarter results, Diller said that the company will stick to its strategy of accretive acquisitions. And in the current economic climate, that means interactive.
"Interactive commerce is clearly strong and it's a very broad category," Diller said during a conference call with reporters. "That broad category is where I would like for us to grow. On the entertainment side, it's tougher. There are very few things that become available and our process is to invest in individual program development areas and use that to build new assets. But if something [big] comes along, we'll go after it."
Diller added that USA was not interested in two recent programming properties that recently came on the block — Telemundo Communications Group and Fox Family Worldwide Inc. — because of the high prices that the owners of those networks were asking.
Telemundo sold to General Electric Co.'s NBC Inc. earlier this month for $3 billion in cash and stock. The Walt Disney Co. closed its $5.2-billion acquisition of Fox Family last week.
For the quarter, USA's revenue rose 13 percent to $1.26 billion and cash flow was up 15 percent to $197.1 million. However, the company warned that fourth-quarter revenue would be flat and cash flow would dip between 12 percent and 16 percent in the quarter as a result of the Sept. 11 terrorist attacks and the continuing downturn in the advertising market. Prior to Sept. 11, the company had projected that cash flow would grow about 25 percent in the quarter.
Diller said that the advertising downturn should continue until at least the second half of next year. And though advertising only makes up about 15 percent of USA's total revenue, it didn't stop Goldman Sachs & Co. Inc. analyst Richard Greenfield from downgrading the stock.
In a report issued prior to USA's third-quarter results, Greenfield downgraded the stock to "market outperform" from its "recommended" list, citing the uncertainty in the travel and advertising markets.
Although the third-quarter results weren't bad, Greenfield had concerns about expected fourth-quarter performance — flat revenue and a 12-percent to 14-percent reduction in cash flow at its core businesses. Greenfield had projected 3-percent revenue and cash-flow growth.
"We believe this will pressure the stock in the near-term as estimates for this year and next (given a lower base for 2001) will need to come down," Greenfield wrote.
USA stock closed at $18.65 per share on Oct. 24, down 81 cents each.
Diller said on the call that the downturn in the travel market as a result of the attacks would not deter USA's decision to launch a travel channel — part of its pending acquisition of online travel service Expedia.com — although it could delay the launch a few months.
"We were thinking that at best it would be up and going by January," Diller said. "It now means that we'll probably get it up and going by June. It doesn't deter us in the slightest from the activity itself. We absolutely believe travel is a great interactive category and will grow over the near-, mid- and long-term."
Diller confirmed published reports that USA will scale back its original movie production this year, noting: "We decided less is more. We're better off putting more resources in fewer movies. The results will be far greater than making 25 original movies a year. I think those days have passed, certainly for us."
USA's Home Shopping Network division was hit hardest by the terrorist attacks, with sales virtually non-existent in the 10 to 14 days after the events. In the call, Diller said that HSN has already begun to rebound and should recover fully during the fourth quarter.
In the cable and studios segment, which includes USA Studios and the cable networks USA Network and the Sci Fi Channel, revenue rose 19 percent to $398 million while cash flow was up 31 percent to $155.2 million. Cash flow grew 31 percent at USA Network to $113.7 million on a 7-percent increase in revenue to $214 million. At Sci Fi, revenue was down 2 percent to $63.1 million, but cash flow rose 6 percent to $23.9 million.
USA vice chairman Victor Kaufman said the rise in Sci Fi's cash flow was due mainly to a large hike in affiliate fees — 19 percent — tied to an increase in subscribers.
BANNED: 'DOPEY' GUIDANCE
USA did not issue guidance for the year, instead opting to take a new tack — making its operating budget available publicly.
Diller called the common practice of issuing guidance for future revenue and earnings "dopey" and vowed that USA would continue to issue and update its operating budget numbers from now on.
Diller said that the decision to make the budget public first came about three weeks ago.
"At some point about three weeks ago, we said why don't we just get out of this circus and release our budget?" Diller said. "There were some who said we can't do that, but a few days later, we said we were going to do it. It's the right thing to do. [Issuing guidance] is a dopey way of doing things."
According to the budget information, USA expects revenue to drop 2 percent at its USA Networks cable channel to $808 million in 2002, rebounding to $909 million in 2003. Cash flow at the network also is expected to drop 8 percent to $391 million in 2002, rising to $444 million in 2003.
At Sci Fi, revenue should rise 16 percent to $314 million in 2002, gaining another 12 percent to $351 million in 2003. Cash flow is expected to be up 17 percent to $124 million in 2002 and another 30 percent to $161 million in 2003.