LodgeNet Reports Results for Fourth Quarter

LodgeNet Entertainment Corporation today reported its 41st consecutive
increase of comparative quarterly revenue, with an increase of 4.7% to
$60.3 million in comparison to the fourth quarter of 2002. Operating
income was $735,000 in the fourth quarter this year versus a $(1.1)
million loss in the fourth quarter of 2002. Net loss in the fourth quarter
of 2003 was $(7.9) million versus $(11.2) million in the fourth quarter of
2002. Long-term debt levels were flat at December 31, 2003 from the level
existing as of June 30, 2003. For its fiscal year ended December 31, 2003,
LodgeNet reported revenue of $250.1 million, an increase of 6.5% over
2002. LodgeNet also reported operating income of $6.5 million and a net
loss of $35.1 million, or $(2.80) per common share for the year.

“Throughout 2003 we delivered a solid financial performance despite an
occupancy-challenged lodging environment,” said Scott C. Petersen,
LodgeNet President and CEO. “We were operating income positive in each of
the four quarters, and delivered on our pledge of not increasing long-term
debt levels during the second half of 2003 while continuing to
substantially grow our business. We expanded our digital room base by 19%
or 61,700 rooms during the second half of the year, and at year-end, total
rooms served reached 994,000. Our new digital platform is now installed in
385,000 rooms, or 42% of our interactive room base. The digital system is
operating very well, generating approximately 39% greater revenue than our
traditional tape-based systems.”

“We set quarterly records for revenue and gross profit, despite flat
revenue per room results as compared to the fourth quarter of 2002,” said
Gary H. Ritondaro, Senior Vice President and CFO. “These results were
driven in part by our expanding digital room base, in part by an increase
in gross profit margin—the first expansion in this metric in over seven
quarters—and in part by our focus on operating costs. The capital
investment per new digital room now stands at $391, a decrease of 8% from
a year ago, and 7% below the cost of a tape-based room before the
transition to our digital platform.”

“Through the many features of our digital SigNETureTV(SM) system, we are
delivering additional products for guests, which are driving hotel demand
for our services and are expected to increase revenue and operating income
over the long-term,” added Petersen. “Our goal in 2004 is to continue our
room growth at a rate comparable to 2003, while maintaining our current
debt levels. Lodging industry experts are forecasting improving occupancy
trends for 2004, and we remain well positioned to benefit from the
improving outlook.”

Total revenue for the fourth quarter of 2003 was $60.3 million, an
increase of $2.7 million, or 4.7%, compared to fourth quarter of 2002.
Revenue from Guest Pay interactive services increased $2.6 million, or
4.6%, resulting from a 5.6% increase in average rooms in operation. On a
per room basis, revenue decreased nominally to $21.29 per month in the
fourth quarter of 2003 from $21.49 per month in the fourth quarter of
2002. Movie revenue per room decreased from $16.84 to $16.40, due to less
compelling movie content during the quarter as compared to Q4 of 2002.
Revenue per room from other interactive services increased 5.2%, from
$4.65 per month in the fourth quarter of 2002 to $4.89 in the current year
quarter. This increase was driven by the continued expansion of revenue
from TV Internet, TV On-Demand, digital music, cable television
programming, and other interactive TV services available through the
digital system.
Gross profit increased 6.2% to $34.0 million in the fourth quarter of 2003
compared to $32.0 million in the fourth quarter of 2002. The overall gross
profit margin increased to 56.4% in the current quarter compared to 55.6%
in the prior year quarter. The increase was attributable to decreased
programming costs, driven by reduction in Nintendo(R) video game costs,
offset by lower margins realized on the Company`s TV Internet service.

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Guest Pay operations expenses were $8.1 million in the fourth quarter of
2003 as compared to $8.0 million in the year earlier quarter. The nominal
increase was primarily due to the 5.6% increase in average rooms in
operation, offset by continued operating improvements in areas such as
system repairs, tape duplication, and freight costs. As a percentage of
revenue, Guest Pay operations expenses decreased to 13.4% in the fourth
quarter of 2003 compared to 13.9% in the year earlier period. Per average
installed room, Guest Pay operations expenses decreased to $2.93 per month
in the fourth quarter of 2003 compared to $3.08 per month in the prior
year quarter.
Selling, general and administrative expenses increased by $235,000, from
$5.7 million in the fourth quarter of 2002 to $5.9 million in the fourth
quarter of 2003. As a percentage of revenue, SG&A remained flat at 9.8%
for fourth quarter 2002 and 2003. Per average Guest Pay room, SG&A
expenses decreased to $2.14 per month in the fourth quarter of 2003
compared to $2.18 per month in the prior year quarter.

Depreciation and amortization expenses remained relatively flat at $19.3
million in the current year quarter versus $19.4 million in the fourth
quarter of 2002. As a percentage of revenue, depreciation and amortization
decreased to 32.0% in the fourth quarter of 2003 versus 33.6% in the
fourth quarter of 2002.

Interest expense increased nominally by $95,000 to $8.5 million versus
$8.4 million in the fourth quarter of 2002. The average principal amount
of long-term debt outstanding during the fourth quarter was approximately
$364 million, at an average interest rate of 9.3%, as compared to an
average principal amount outstanding of approximately $347 million, at an
average interest rate of 9.7% in the prior-year quarter.

As a result of factors previously described, the Company generated
operating income of $735,000 in the fourth quarter of 2003, an increase of
$1.8 million compared to an operating loss of $(1.1) million in the year
earlier quarter. Operating income exclusive of depreciation and
amortization increased 9.3% to $20.0 million this year compared to $18.3
million in the fourth quarter of 2002. The Company`s net loss improved by
29.5% to $(7.9) million as compared to $(11.2) million in the year earlier
quarter.

Cash provided by operating activities for the fourth quarter was $2.8
million while cash used for investing activities including growth or
expansion-related capital was $11.6 million, resulting in a net change of
$(8.8) million. As compared to the fourth quarter of 2002, cash provided
by Operating Activities was $4.4 million while cash used for investing
activities including growth or expansion-related capital was $15.0
million, resulting in a net change of $(10.6) million. The improvement
from 2002 was driven by reductions in the Company`s cost per new room and
selective deployment of certain product lines such as TV Internet and
interactive video games. Cost per new installed room decreased 8.0% from
an average of $425 per room in fourth quarter of 2002 to an average of
$391 per room for the fourth quarter of 2003.
Total revenue for 2003 was $250.1 million, an increase of $15.2 million,
or 6.5%, compared to 2002. The increase resulted from a 6.5% increase in
average Guest Pay interactive rooms in operation, Guest Pay interactive
revenue increased $17.5 million, or 7.7% over 2002. Revenue per Guest Pay
room increased 1.1% to $22.59 per month in 2003 from $22.34 per month in
the prior year despite an occupancy decline of 70 basis points from the
previous year. Other interactive revenue per room increased 10.3%, from
$4.57 per month in 2002 to $5.04 in the current year. This increase was a
result of the continued expansion of revenue from TV Internet, TV
On-Demand, digital music, cable television programming, and other
interactive TV services available through the digital system.

Gross profit increased 3.0% to $138.2 million in 2003 compared to $134.2
million in 2002. The overall gross profit margin decreased to 55.2% in the
current year compared to 57.1% in 2002. The decrease was attributable to
lower margins realized on the Company`s TV Internet service, higher hotel
commissions directly related to the Company`s “pay for performance”
program, which rewards hoteliers with higher commissions for greater
sales, and increased programming costs.

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