Gemstar Stock Plummets 37%

Shares in Gemstar-TV Guide International Inc. plunged to a three-year low Tuesday after the company disclosed it had reported almost $80 million in revenue last year that it had not collected in cash.

Gemstar recorded revenue that came from advertising swaps and licensing fees the company hopes to collect through a lawsuit.

The money accounted for less than 6% of Gemstar’s total revenue in 2001, most of which came from TV Guide magazine and related ventures. Nevertheless, the disclosures in Gemstar’s annual report, which the company filed Monday after the markets closed, caused at least two analysts to drop their recommendations to buy Gemstar stock.

“The accounting items ... raise questions about the company’s revenue growth, revenue quality and revenue risk,” said CIBC World Markets analyst John Corcoran. “These items do relate to the company’s primary catalyst, they do relate to its fastest-growing and highest-margin business segments.”

Analysts said Gemstar followed the rules. But the pounding the Pasadena-based company took on Wall Street reflects investors’ heightened sensitivity to accounting issues in the wake of the collapse of Enron Corp.

Henry Yuen, Gemstar’s chief executive, told analysts in a conference call the company was simply responding to the Securities and Exchange Commission’s call for more detailed disclosures from all companies. The company will collect much of the revenue it reported, Yuen predicted, once its legal dispute with set-top box maker Scientific-Atlanta Inc. is resolved.

Gemstar shares closed at $9.01 on Nasdaq in heavy trading, down 37% from Monday’s close of $14.36. Shares fell as low as $8.88 on Tuesday. Since August 2000, the company’s stock has lost 90% of its value.

Yuen devoted the conference call to defending three disclosures in Gemstar’s annual report.

First, the company said it had not collected almost $59 million of the $327 million in licensing revenue reported in 2001, and $107.6 million of the $767 million in licensing revenue reported since July 1999. Instead, the amounts represent license payments that Gemstar claims it is owed by Scientific-Atlanta.

Scientific-Atlanta had a license to distribute set-top boxes with Gemstar’s electronic program guide, but that license expired in July 1999. Gemstar has accused Scientific-Atlanta of continuing to distribute set-top boxes with Gemstar’s software or similar technology that violates Gemstar’s patents.

Second, the company revealed that $20 million of the $101 million in interactive advertising revenue it reported last year came in the form of technology, not cash. The company bought technology from Fantasysports.com for nearly $21million, Yuen said, but Fantasysports paid back $20 million of that amount to buy advertising on Gemstar’s electronic program guides.

A third issue noted by Salomon Smith Barney analyst Niraj Gupta was the disclosure that a significant amount of the interactive advertising fees came from companies that were licensees, vendors or strategic partners of Gemstar. Gupta downgraded his Gemstar rating from “buy” to “neutral.”

Yuen said the sale of advertisements on the program guide grew significantly, even excluding Fantasysports.

“The viability of this new media is absolutely not in question,” he said, adding that the company was “continuing to sign very blue-chip advertisers.”

Corcoran said the market reacted strongly because licensing fees and advertising sales on the program guide are critical to Gemstar’s future.

“Having a clean audit letter from your accountant does not mean you have the blessing from your shareholders,” Corcoran said. “The Street didn’t bless it. Shareholders didn’t bless it, and they reacted today.”