An Unknown Small Company That’s About to Turn the Corner

When Princess Diana died, all I really wanted was a movie rental.
I would have paid almost anything for it: I was in the hospital for an appendectomy, and, after 48 hours of nonstop Diana coverage, I was ready for the doc to remove my brain, too.

The limited entertainment choices in hospitals don’t seem like a big deal. Hospitals are supposed to help people get well, not take in a show. But hospitals are leaving money on the table and unhappy patients in their beds. If my hospital had offered me an upgrade to a premium movie channel or a video rental, I’d have jumped at the chance. Many health-care providers are still missing out on easy revenue from the sale of video-on-demand and broadband internet services.

But that’s changing.

Hospitals can now buy interactive television systems similar to what you see in millions of hotel rooms across the country. The U.S. leader in providing these services to hotels will likely emerge as the leader in health care, too. The company, in fact, already has these services installed in 43 hospitals. And, promisingly, 55 more are under contract to install.

The company is LodgeNet (Nasdaq: LNET), and if you’ve ever stayed in a hotel, you’ve likely come into contact with its bread-and-butter product. With service to more than 10,000 hotels, this $100 million company is the world’s largest supplier of in-room entertainment to the hospitality industry.

The company offers video-on-demand, games, music and by-subscription sports to anyone staying in one of the 1.9 million hotel rooms that feature its products. It also offers cable television programming to 1.1 million rooms and Internet access to 200,000 rooms.

While the hotel-guest entertainment segment still makes up a majority of the company’s revenue, its efforts to diversify are beginning to pay off. For the first nine months of 2006, the guest-entertainment segment totaled $173 million in revenue, or 79% of the company’s $219 million total revenue. For the same period in 2009, it accounted for $226 million, or just 61% of revenue.

LodgeNet’s healthcare system turns a regular television into an on-demand entertainment and communication tool. Patients can watch movies, play video games, listen to music, browse the Internet, and even order meals from the hospital cafeteria. Heathcare facilities such as the Oklahoma Heart Hospital, the M.D. Anderson Cancer Center, and NorthShore University HealthSystem have already signed up for the company’s service.

While LodgeNet has already inked deals with about 100 hospitals, it’s just the beginning. There are more than 5,800 hospitals in the United States, and nearly one million hospital beds. The company sells its system for $1,000 to $1,500 per bed, and recurring revenue per month comes to $25 to $35. Of this, 30% to 40% is the company’s gross profit.

LodgeNet has seen growth across the board, but the most impressive numbers are in health care. Hotel services increased +169% from 2006 to 2009. But here’s the kicker: Advertising and healthcare revenue, which the company reports together, surged +400% during the same period. It now accounts for 12% of the company’s total revenue.

Net income for the quarter ended Sept. 30 came in at -$5.0 million, slightly better than the company’s previous quarter results of -$5.2 million, as well as the year-ago period’s -$6.3 million. Revenue came in at $118.3 million, about even with the previous quarter, but $14 million lower than the same period in 2008.

LodgeNet has been paying down its substantial debt, which now stands at $492 million. That’s a -15% reduction from $580 million at the end of 2008. The company also has been increasing its free cash flow at a quick pace. In the third quarter, it amounted to $61.8 million, up from $7.8 million from the same quarter in 2008. Free cash flow measures operating cash flow minus capital expenses, and it’s a critical metric because without it, the company would not be able to pay down debt or make acquisitions. The company’s balance sheet shows $26 million in cash.

Though several trends bode well for LodgeNet, it’s not for the risk-averse. Still, a rebound in global travel and its promising health-care business offer plenty of upside potential.