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February 28, 2007

Martha Stewart Living Omnimedia Q4 2006 Earnings Call Transcript

Filed under: Conference Call Transcript — Tags: — admin @ 12:00 am

Martha Stewart Living Omnimedia, Inc. (MSO)
Q4 2006 Earnings Call
February 28, 2007 10:00 am ET


Howard Hochhauser – Chief Financial Officer
Susan M. Lyne – President, Chief Executive Officer, Director


Lisa Monaco – Morgan Stanley
Michael Meltz – Bear Stearns
Robert Routh – Jefferies & Company



Good morning and welcome to the Martha Stewart Living Omnimedia fourth quarter 2006 earnings conference call and webcast. (Operator Instructions) At this time, it is my pleasure to introduce Howard Hochhauser, Chief Financial Officer of Martha Stewart Living Omnimedia. Sir, you may begin when ready.

Howard Hochhauser

Thank you very much and good morning, everyone. Welcome to our conference call to review fourth quarter 2006 results. Susan Lyne, our President and CEO, will discuss some recent initiatives and I will talk about our recent performance and our outlook for 2007. Our prepared remarks should take about 20 minutes and then we will open it up for your questions.

Before turning the call over to Susan, let me remind you that our discussions will contain forward-looking statements which are made pursuant to the Private Securities Litigation Reform Act of 1995 as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors.

Now, let me turn things over to Susan.

Susan M. Lyne

Thank you, Howard, and to all of you joining us on our fourth quarter earnings call and webcast, good morning. The numbers we are sharing with you this morning are a great capper to what has been a robust and productive year for the Martha Stewart company.

2006 revenues were up 36%, driven by growth across all businesses and we came in well ahead of our EBITDA guidance despite additional investment in key initiatives like Blueprint, the relaunch of our website, and design support for several new merchandising lines.

All in all, it has been a very good year. Revenue increased $79 million and EBITDA improved $46 million. It is worth noting that excluding a one-time litigation reserve in Q3, net income would have been modestly positive compared to a prior year loss of $75 million.

We began 2006 fully focused on two goals; to position the company to capture an increasing share of the digital ad market and to diversify our revenue streams and distribution channels by building new businesses in categories where we have brand equity, home décor and design, cooking, entertaining, home organizing and crafts, and we have done just that.

Over the course of the year, we completed an ambitious rebuild of our website for a Q1 launch and we forged licensing agreements in key categories with first-in-class partners, including Macy’s, Lowe’s, and Kodak, to name a few.

By year-end, we will have a presence in most key tiers of the retail pyramid, with new revenue streams that will contribute significantly to the company’s future earnings.

The year ahead is an important one for us as we move from a period of recovery to one of expansive growth. Our publishing division is already in high-gear. They had a truly extraordinary year, marked by robust increases in ad revenue and circulation across every one of our titles. We expect to build on their success in 2007 with ad revenue growth again far outpacing the industry.

In March, our new Internet platform goes live and we will continue to add new applications and functionality with each quarter. In the coming months, we will be unveiling many of the merchandising initiatives announced in ’06. Our new paint line launched at Lowe’s in April, our crafts line rolls out nationwide at Michael’s Arts and Crafts stores in May, and the Martha Stewart collection at Macy’s will launch in late summer.

I should point out that while we fully expect 2007 to be a year of tremendous growth, these initiatives, as well as our Internet relaunch, will not begin contributing until the second-half of the year.

In addition to our new merchandising programs, we continue to refine and where appropriate extend our more established product lines. We are refreshing our Martha Stewart Everyday soft home assortment at K-Mart later this year and we recently introduced a fifth collection in our Martha Stewart furniture line with Bernhardt.

While we felt the impact of the soft residential real estate market along with everyone else, our Martha Stewart KB Homes in Cary, North Carolina and Atlanta, Georgia, continue to sell and our confidence in the value of this collaboration remains high. We recently opened two new communities in Paris, California and Katy, Texas, and we are at work on four more in Florida, Georgia, North Carolina and California.

We are not alone in our enthusiasm for this partnership. BusinessWeek included the Martha Stewart KB Homes on its list of top 20 most innovative products for 2006.

For those of you who may not have been on previous calls, I want to spend a few minutes talking about our new product launches. We operate on a licensing model so a relatively small investment is required for us to establish a presence in what are high-margin and high-growth businesses. We have no inventory or capital costs. Our principal investment is in our design staff, which we have expanded to meet the demands of our new product lines.

In April, we will be introducing the Martha Stewart Colors line of interior and exterior paint at Lowe’s Home Improvement stores across the country. The Lowe’s deal is an important building block in our move into the home improvement category. We continue to build out this category with floor coverings, lighting fixtures, bathroom fixtures and closet organizers and expect the full collection to debut late this year, initially in KB Studios nationwide.

In May, we launch our new Martha Stewart Crafts line of scrapbooking, paper-based crafting, and storage products at Michael’s Arts and Crafts stores. There are more than 900 of them in the U.S. and Canada. The line will roll out to independent retailers later this year.

I know paper crafts may sound like a quaint pursuit but the fact is that scrapbooking is a rapidly growing $3 billion business. In the future, we expect to expand this line into other segments of the overall $31 billion crafts industry, including jewelry crafting, knitting, and fashion crafts. If you step into Michael’s this spring and browse our products and tools, you will understand why we are confident that Martha Stewart Crafts will make an impact in this high-margin growth area.

The same team that developed our paper crafts line is also working on our digital photo products. Last fall, we collaborated with Kodak to introduce Martha Stewart Holiday Cards, the first piece of a digital line that has expanded since the holidays to include photo albums, stickers, invitations, baby announcements, and calendars.

While we were able to launch only a limited selection of cards for the key holiday period, we did hit our target percentage of Kodak sales in the category and those targets have been steady or higher for the new categories we launched early this year.

The digital photo product business is still fairly nascent but it is growing enormously year over year and should hit an inflection point when the ubiquity of digital cameras is matched by consumer awareness. We believe we can help drive acceptance with product that closes the quality gap between online and offline offerings.

The most significant of our many merchandising initiatives is our Martha Stewart Collection for Macy’s and We are on track for the late summer launch of what is a fantastic line of products. Bed and bath, textiles, houseware, casual dinnerware, flatware and glassware, cookware and holiday decorating and trim-the-tree products. Macy’s will carry other Martha Stewart branded products on a non-exclusive basis. Our Bernhardt furniture is already selling extremely well at Macy’s 67 furniture galleries and we anticipate a similar positive response to our area rugs with Safavieh, which we will be offering at Macy’s and through independent retailers beginning in the spring.

As a company, we are committed to diversifying and growing our merchandising business but we choose our partners deliberately and we are careful not to venture into areas where we have no business. We developed a few key criteria early on that allow us to quickly and comfortably assess any potential new venture. This is a category where we have got equity, where our customer would expect to find us. Can we create a distinctly different or better product, and is it worth the investment of time and resources? Is the market large enough that in success, this could move the needle for the company?

Our upcoming launches all passed that test and we are looking forward this year to getting all this new product into stores and better still, into the hands of our customers.

The charge to diversify our business was not limited to merchandising. We are following the same strategy in our media businesses. Our Publishing segment delivered a very strong performance in ’06, with total revenues up 24% year over year, driven by growth across all titles. Martha Stewart Living, our flagship magazine, had a particularly outstanding year with a 41% increase in ad pages and revenue per page significantly outpacing page growth.

I want to note here that we recently hired a new editor for Living, the very talented Michael Boodro. Michael was most recently editor-in-chief of Culture and Travel, a magazine he developed with James Truman. He was also editor-in-chief of Garden Design and features editor at Vogue for a decade. He brings an impressive knowledge of our content areas as well as a stellar reputation in the industry.

In addition to advertising growth, the magazines registered significant rate base increases last year and that trend continues. Publishing also produced four newsstand-only special issues and a best-selling book, Martha Stewart’s Homekeeping Handbook, published by Clarkson Potter in November. At 744 pages and weighing in at over four pounds, it is the one and only such guide you will ever need. As The Washington Post noted, it is the ultimate homekeeping resource.

Our younger publications are gathering steam. Everyday Food magazine, which we launched in ’03, became profitable last year, a year ahead of schedule. Body and Soul saw a 41% increase in ad revenue and a 33% gain in circulation to become the leading magazine in its category.

Our newest magazine, Blueprint, is currently shipping its third issue. Blueprint is designed for women ages 25 to 39, a magazine-hungry demographic that advertisers are eager to reach and one that we understand very well. Our company is filled with women in that demo — talented, busy women who want a magazine that speaks to their needs, their style, their lives. They love magazines but they also spend a lot of time online and with that in mind, we are going to a hybrid publishing model — six issues of the magazine this year, along with fresh daily content on

The staff has moved downtown to our Starrett Building where they will work side by side with their Internet counterparts to deliver the best of both worlds. The web has been a great source of early subscriptions to Blueprint and we believe we can create a more cost-effective subscriber acquisition and retention model through viral marketing and daily contact with our user/reader.

Blueprint was named one of the hottest launches of the year by Media Industry Newsletter, and publisher Sally Preston was honored as one of three launch people of the year. Sally spear-headed the test launch while also leading Martha Stewart Living through a period of astonishing growth. Now that we are through the test phase, Sally is handing the reins to Amy Wilkins, a talented publishing executive we recently hired to serve as the dedicated publisher for Blueprint and Weddings.

Our broadcasting business had a strong year, propelled by revenue from our nationally syndicated daily television show and the Martha Stewart Living radio channel on Sirius. The Martha Stewart Show reaches 1.7 million viewers daily and drives them to our magazines, our Internet site, and to retailers that carry our merchandising lines.

This year we are bringing back more of what Martha is known for, teaching and how-to inspiration. Viewers seem to like what they are seeing. Ratings have been steadily moving up from a 1.3 in September to a season high 1.6 last week. Ad inventory for the second season sold out at above-market increases and we got an early renewal for a third season, a ringing endorsement for a show that is also a powerful marketing vehicle for us and a key element of our business success. Just last month, we kicked off the third season of our successful and profitable Everyday Food TV series on PBS, with strong ratings that continue to rise.

I noted that our Internet business was a focal point in ’06 as it will be this year. We completed our transition from a direct commerce site to an ad-supported content site, a move that is already paying off. Advertising revenue increased more than 240% to $8.2 million, up from $2.4 million in the previous year.

To ensure that the trend continues, we recently brought in Beth-Ann Eason from Yahoo! to serve as the Senior Vice President of Internet, overseeing advertising, marketing and biz ops for the segment.

This quarter, we will launch our new redesigned and rebuilt website. We expect to unveil the site in mid-March, with marketing and promotion kicking in a month later. In addition to having a fresh look and feel, it will be easier to search and navigate, delivering a rich array of related content, original video and access to what will be thousands of web resources, hand-picked by Martha and our team of experts.

Our digital offerings will continue to evolve throughout 2007, with new applications each quarter that allow for increased personalization of the user experience and more robust community. After our launch next month, we expect an initial decrease in traffic while web search engines re-index the site. By the end of Q2, that trend should turn positive and we expect to post strong gains with a seasonal Q4 ramp in Internet usage.

It is worth noting that we will be registering the costs associated with our relaunch in the first-half of ’07, with a major share of ad revenue coming in the second-half of the year.

No content company can afford to be a bystander in this digital arena, certainly not one that aspires to be the dominant lifestyle brand as we do. This relaunch is an important company-wide priority because we know what a huge opportunity the Internet presents. 90 million women currently online and no market leader in that lifestyle channel. Very few companies have the brand awareness, the deep and focused content, and the creative resources of MSLO. We are ideally positioned to become the go-to lifestyle destination, and to that end, we will continue to invest in our Internet business this year.

Our goals for 2006 were ambitious, but we were confident that we could attain them and we did. We are just as confident that 2007 will be another very good year for the company. We will continue to increase our share of ad dollars in print, broadcast and online. We will continue to diversify our merchandising portfolio in categories where we see opportunity or need, and we will continue to expand our customer base online, in print, and in-store.

As we look forward, we are committed to growing our brand and our revenues aggressively but smartly, extending our core businesses to deliver strong, near-term results and actively pursuing new opportunities to position the company for even stronger long-term growth.

With that, I will turn the call back over to Howard to walk you through a more-detailed financial review and our guidance.

Howard Hochhauser

Thank you, Susan. Today I will cover three topics; first, a review of our financial performance; second, an overview of our business trends; and finally, full-year and first quarter guidance.

Beginning with the business review, fourth quarter results capped a very strong year. Total revenue in the quarter rose 15% to $97 million, while operating income improved $12 million to $14.6 million and adjusted EBITDA improved $9.9 million to $21.5 million.

Excluding the benefit from our one-time, $2.8 million broadcasting gain, adjusted EBITDA would have been $18.7 million, ahead of our guidance of $16.5 million to $17.5 million.

Our 2006 full year performance illustrates how we are managing the business for growth. We began the year with adjusted EBITDA guidance in the $10 million to $12 million range, and reported adjusted EBITDA of $19.6 million. Excluding three one-time gains during the year totaling $8.5 million, we achieved our goals.

More importantly, we met our guidance while increasing our investments by $3 million to $4 million in new initiatives such as Blueprint, Macy’s, and our Internet business.

MSLO has returned to growth and in 2006, we strategically invested in projects that will bear fruit in 2007 and beyond.

Turning to business trends, I would like to give you an idea by segment of our outlook for 2007. In Publishing we tend to grow CPMs in order to drive revenue growth. CPM growth will be aided by rate-base increases which were detailed in the press release. We are less focused on page growth for its own sake. For example, we are seeing double-digit revenue growth driven mainly by higher revenue per page.

For Publishing as a whole, we expect advertising revenue growth of approximately 25%, with circulation growth of approximately 7%.

A final note on publishing in 2007 is that we intend to invest in Blueprint. At this time, we expect a 2007 investment of $8 million. Naturally, this will depress our publishing margin in the near-term but we are investing for growth in the long-term and Blueprint is part of our strategy to extend our consumer and advertiser reach.

For 2007 broadcasting, our TV show will continue to serve as an important marketing platform for the business, particularly in 2007, given the launch of several new initiatives.

We do not expect to record one-time gains as we did last quarter, or to generate revenue from cable distribution, so expect to see lower revenue and adjusted EBITDA in broadcasting this year. That said, the business is performing better than initially expected, with ratings maintaining holiday gains and product integrations becoming an important revenue stream.

Revenue from our Sirius agreement will remain unchanged in 2007.

For 2007 merchandising, there is a great deal to discuss. Revenue from our K-Mart agreement will increase this year due to the guaranteed minimum payments. Our Macy’s line will become available in certain stores over the summer in advance of a September consumer launch. We have said before that homes is a $4 billion business for Macy’s and that we would like to be at least 10% of that category. Based on the initial buyer feedback, we are confident in those targets.

Our craft business launches in Q2 and we expect consumers will be eager to buy our new Martha Stewart crafts products.

Revenue from our Lowe’s agreement begins this year and at this point, we believe that it should approximate revenue from our former agreement with Sherwin Williams on a run-rate basis. The key with the Lowe’s agreement is the strategic importance of entering the home improvement store market.

Overall, merchandising numbers are somewhat fluid given our multiple new product launches. It is important to point out that given the fixed cost nature of this business, incremental margins are essentially 100%. We will be able to get a better sense of each new line as it rolls out.

For 2007 Internet, the three revenue drivers are advertising, digital products, and our flowers business. Advertising is our key focus and we think we can double our online ad revenues in 2007. Much of that revenue will come in the second-half of the year, given our Q1 site relaunch. Thus, Q1 results will reflect expenses for the site relaunch while that investment will bear the fruit of higher ad revenues only in later quarters.

With digital products, we are actively developing new business by adding new products and expanding our distribution. For flowers, we expect relatively modest top line growth.

For 2007 corporate expenses, we tend to balance our investments in the business segments with tight cost controls and overhead. Overall, we believe that 2007 corporate expenses should decline slightly year over year.

Our 2007 non-cash equity comp will be weighted very heavily towards the first quarter, given the vesting of warrants related to the successful distribution of our syndicated daily television show.

With that overview of the year, let me now provide you with 2007 guidance. On a consolidated basis, we are expecting revenue in the range of $330 million to $340 million; operating income in the range of $5.5 million to $8.5 million; and adjusted EBITDA in the range of $32 million to $35 million. CapEx should approximate $6 million and we do not expect any material tax charges for the year.

Finally, let me give you a first quarter 2007 guidance on both a consolidated and segment basis. On a consolidated basis, we are expecting revenue in the range of $62 million to $66 million; operating loss in the range of $18 million to $19 million, and adjusted EBITDA loss in the range of $6 million to $7 million.

On a segment basis, our guidance is as follows: for Publishing, first quarter revenue is expected to be approximately $40 million, while adjusted EBITDA is expected to be $1 million to $2 million.

Broadcasting revenue is expected to be $9 million to $10 million, while adjusted EBITDA should be break-even.

Merchandising revenue for the first quarter is expected to be approximately $10 million to $12 million, while adjusted EBITDA is expected to approximate $5 million.

We expect Internet revenues to be $3 million to $4 million for the quarter and adjusted EBITDA is expected to be a loss of $3 million.

Corporate expenses will be approximately $10 million.

We remain confident in our brand and our growth opportunities. We remain confident in the ability of our people to deliver strong results in 2007 and remain confident that having brought the business back to growth over these past three years, we can deliver meaningful returns for our shareholders in the years to come.

This concludes the formal part of our presentation. I would now like to turn the call back to the conference call operator for Q&A. Stacy?

Question-and-Answer Session


(Operator Instructions)

Our first question is coming from Lisa Monaco from Morgan Stanley.

Lisa Monaco – Morgan Stanley

Howard, could you just give us an idea for ’06 what the losses were for the special issues and Body and Soul and Blueprint in aggregate? I assume Weddings had a modest profit. And then, what you expect those losses to be in ’07?

Howard Hochhauser

Yes, let’s go through that on a top line basis. Weddings was actually profitable in 2006 and I do not want to get into too many details, but let’s call it $1 million, or 10% margin business. We said Everyday Food was profitable, and that is after launching this in September ’03, so a year ahead of expectations and only three years after the launch. Body and Soul lost approximately $3 million. Next year that business should be profitable. Our specials on an aggregate basis generated about $1 million.

I would say that in 2007, I do not want to give guidance by title other than to say we expect to have continued growth in all publications with the natural exception of Blueprint where we are increasing our investment and increasing our revenue growth.

We have also allocated some dollars for additional investment outside of Blueprint to test some new product areas.

Lisa Monaco – Morgan Stanley

How are you thinking about your target margin for the overall Publishing segment and over what timeframe do you expect to get there?

Howard Hochhauser

Our target margin, excluding any investment in Blueprint or any other title, is about 25% over the long term. Just to put that in some historical context, back in 2002 our EBITDA margin for the publishing segment was 36%, so our 2010 target of 25% ex investment is a pretty reasonable number and in line with where the industry is. I think realistically Publishing will be higher than that, given its ad base and the strength in the circulation.

Everyday Food pulls from naturally the food category and those CPMs tend to be lower, and Blueprint pulls from fashion and beauty, which tend to be higher CPMs. So it depends upon the mix of the business, but right now we are targeting a 25% long-term margin.

Lisa Monaco – Morgan Stanley

Just over the next couple of years, this is probably difficult to specify but just to give us an idea of how you are going to balance the investment spending in these new products versus raising the margins of the overall segment.

Howard Hochhauser

As the core business grows, these investments on a relative basis become smaller. So one thing that we need to do and we have set out to do this year is really to diversify the business. Martha Stewart Living used to be 80% of publishing. Our goal is to have a diversified mix so that Living is half of the business, so we want to continue to invest, although again, on a relative basis, there will be more modest amounts.

Lisa Monaco – Morgan Stanley

Great, and then Susan, if you could just speak to — you have a lot of things in the hopper in ’07, which we should start to see some of the benefits in the second-half of the year. How are you thinking about potential new partnerships? Do you feel you have enough on your plate or do you expect — I’m sure you are looking at new partnerships all the time but what is the reality in terms of being able to handle new relationships?

Lastly, on Sirius, is your relationship impacted at all by the proposed merger? Thanks.

Susan M. Lyne

I will take the Sirius one first, because that is the quickest. We expect business as usual there. No impact.

On the new opportunities front, one of the things that we talked about last year was food. Given all of the execution of new products we had on our plate last year, we could not focus on it fully, despite the fact that we do believe it is the largest single opportunity in front of us. That has now moved to the front burner and I think we will be focusing very intently on how and with who we enter that market.


Our next question is coming from Michael Meltz from Bear Stearns.

Michael Meltz – Bear Stearns

I have three questions. First, on merchandising, understanding there is going to be a lot of seasonality, could you just walk through or try to give us a little bit more detail on what to expect throughout the year? I know you gave guidance for the first quarter, but how outsized will the fourth quarter be?

Secondly, could you just tell us what K-Mart performance was in the quarter, as well as what the actual retail sales were for the full year? And then I have one follow-up.

Howard Hochhauser

Let me make sure I get all your questions; actual retail sales at K-Mart for the full year were approximately $900 million. That is helpful as you look into ’08 and ’09 and try and forecast what our royalties will be.

In terms of seasonality of the business, it is not so much seasonality as it is when they launch, meaning our business once it is up and running is not a big Q4 business. Having said that, this year with Macy’s really having a public launch in September, it is heavily Q4 weighted.

So merchandising EBITDA, the lion’s share, the substantial majority we recorded in Q4, you also have the step-up in the K-Mart gap, all of which gets recorded in Q4.

I do not want to give Q2, Q3 and Q4 guidance but it is very heavily Q4.

Michael Meltz – Bear Stearns

You gave publishing guidance for the full year. Can you do the same for merchandising?

Howard Hochhauser

We gave publishing ad and circ guidance. To give you a better handle on merchandising, you should step up merchandising for the $5 million increase in the gap, and then I am hesitant to give out the EBITDA number. Just to recap the business for those that are not aware, we have our fixed headcount as we go into the year. If we sell an extra dollar of royalty, that is basically a dollar of EBITDA, so I am hesitant to give out segment level EBITDA guidance.

Michael Meltz – Bear Stearns

How about revenue guidance?

Howard Hochhauser

Let’s look at revenue. Give me one minute. Our revenue should increase approximately 20% in merchandising ’07 over ’06. Let me give you — you also asked for Q4 performance over prior to K-Mart. On a comp store basis, our sales declined approximately 9%. We have seen, just to put some color on that, some weakness in soft home and I will just remind you that this fall, we are working to relaunch a substantial amount of product in the soft home category, so we continue to make that product vibrant and want to keep our consumers very happy.

Michael Meltz – Bear Stearns

And then one question on the Publishing group. Obviously you guys are doing a good job in improving yields and you mentioned that as room to lift CPMs. Could you just talk a little bit about what you are seeing year-to-date? I know the ad pages have been uneven, but it does sound like you have pretty good revenue growth. What are you seeing and what should we expect going forward?

Howard Hochhauser

I will say that the closes, meaning the public close date, becomes closer and closer to the press time, so there is less visibility than we have had in the past. Having said that, I could talk to you about Q1, because that is closed. For example, you will see an 8% increase in pages and our revenue growth will be approximately double that, or our ad revenue growth for Martha Stewart Living will be approximately double. You will see a similar trend in Everyday Food.

Just to be clear, that is not going to existing advertisers and not partnering with them. This is a mix of new business and rate base increases and rate increases. So we went to the market this year with an approximate 5% rate increase as well as a 2.5% rate base increase for Martha Stewart Living. So on a melded basis, they are at 7% to 8% total rate increase.

Susan M. Lyne

Michael, we have been very focused on making sure that revenue per page grows significantly year over year because that is the best insurance that we can continue to grow that segment at levels that outpace the industry going forward.


Our next question is coming from Robert Routh from Jefferies and Company.

Robert Routh – Jefferies & Company

I just have a few quick questions. First, as I am sure you are aware, there have been all kinds of rumors flying around and whatever. I know you probably do not comment on rumors about people approaching you and considering taking you private or doing whatever. I am just wondering if you could comment in any way, shape or form as far as is that true? If it was true, would you consider it, given how well your deals are going but a lot of them are not going to kick in for a while, so once they kick in, obviously the numbers should be significantly better than they are now, which is significantly better than other people expected.

Second, obviously we have addressed this before, you are over-capitalized, especially making money next year and your cost of capital is your cost of equity. I am wondering if Charles or Susan or Howard or any of you guys are looking at possibly reducing your cost of capital to increase the net present value in the share price.

Finally, is the Lowe’s deal probably going to be expanded? I would assume it would. Are some of the advertisers in the magazine now kind of clamoring and saying hey, we want to advertise in the magazine but we also want to advertise on the Internet, which could really help things, you know, kind of saying hey, we want to be both places. I am wondering if you are hearing any of that rumbling from the advertisers that you are getting now.

Susan M. Lyne

Let me take a couple of these. It is a long list but we will try to hit all of them. You are right, we do not comment on rumors but we also do not want to encourage any speculation in that arena. We are not focused on going private in any way, shape or form. We are focused on really delivering value and growth for our shareholders.

On the second one, which I believe was Lowe’s, well –

Robert Routh – Jefferies & Company

Second was over-capitalization.

Howard Hochhauser

The second one was over-capitalization.

Susan M. Lyne

Okay. No, we are using capital a lot more right now. We are obviously investing in Blueprint, in our Internet business. We will continue to do that.

Howard Hochhauser

Let me add on, I will take the capital structure and I will hand it back to you for Lowe’s. So on this cap structure, we finished the year with north of $60 million in cash. Based upon the guidance we gave, we will generate free cash flow this year of approximately $30 million, so you will see meaningful growth in free cash flow this year, so this question really becomes relevant in 2007, and particularly in the back-half of the year.

So we are more active than we have been in the past with a comprehensive M&A strategy. We obviously have not announced anything but we are focused on doing some small tuck-in acquisitions.

We are also evaluating other organic growth opportunities this year. We are going to invest $8 million in Blueprint. We are going to invest another $2 million in CapEx in the Internet business. So right now, there is no plan to. We are not going to pay another dividend.

Because of a complaint I get from a lot of people on this call about our float being too thin, we are not going to buy back any stock. So right now, this is really an evaluation for our Board meeting 12 months from now.

Robert Routh – Jefferies & Company

Okay, but is it safe to say that in the future, if things continue to go as well as they have and the cash flow keeps building, you would consider some kind of financial restructuring when it made sense?

Howard Hochhauser

Absolutely. When this makes sense, we will consider it. The beauty of this business, there are no cap needs, so our biggest expense, 40% of our expenses are people and that runs through the P&L on an annual basis. We have no capital demands. We have no hard assets to speak of. So absolutely, next year, late 2007 or early 2008, we will evaluate the best way to return the cash to shareholders.

Let me give Lowe’s to Susan.

Susan M. Lyne

Clearly one of the reasons we chose to move our paint business to Lowe’s was because we saw greater opportunity there. It is also worth noting that I think 60% of all paint sales are now taking place at those home improvement chains, that means Home Depot and Lowe’s. So we want to be where people buy paint, but the larger strategic reason for doing it is because we think we can have a greater partnership with them, so yes, we anticipate being able to add product there.

Howard Hochhauser

Let me talk about the crossover in advertisers. So now we have on a weekly basis a 360 sales meeting with all our heads of sales and it has become very active in selling programs. Without being too specific, just this year we sold 360 and brought TV advertisers like GE and 3M into the Internet business and give them one uniform idea that is communicated typically through print, online and in broadcasting.

The other piece of that is the integrations, so we are sold out for TV and now it is really a ratings issue, but we have had our big demand in integrations. For the fourth quarter, we did just north of $1 million in integration last year at this point. That was a few hundred thousand dollars, so we are continuing to focus on integrations and using that as a hook to get people into our website and our magazines.

Susan M. Lyne

I want to just add one thing there. We obviously have aggressive goals for the Internet this year and one of the ways we are going to get there is by moving away from just responding to RFPs to creating really strategic partnerships with larger advertisers, and our best root to that is often with a 360. So our advertising teams are working much more closely now to make sure that we are going to key advertisers with a full cross-media plan.

Robert Routh – Jefferies & Company

Okay, so they are really interested in this at this point, it is just a matter of will they do it or not and when, but this is not an impossibility, it is more likely than not?

Susan M. Lyne

Actually, they are already doing it. The issue is how much can we build that. We are very focused on it.


(Operator Instructions)

Our next question is a follow-up question coming from Lisa Monaco from Morgan Stanley.

Lisa Monaco – Morgan Stanley

Howard, could you just update us on what your thinking is on ’07 retail EBITDA, given your transition at K-Mart that year?

Howard Hochhauser

I think you are talking about ’08 EBITDA. It sounds like you are in a helicopter, so ’08 EBITDA we expect to be roughly consistent with 2006 EBITDA in the merchandising segment, excluding the one-time gain we had. So again, it is a fluid business but at this time, based upon the launches we have and the feedback we have had from some of the buyers, we expect ’08 merchandising EBITDA to be roughly consistent with ’06 EBITDA, excluding that one-time benefit we had this year.


Sir, it appears we have no further questions.

Howard Hochhauser

Well, thank you for your participation. We will close the call and see you in two months. Thank you.


Thank you. This concludes today’s Martha Stewart Living Omnimedia fourth quarter 2006 earnings conference call. You may now disconnect.

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