Audacy Inc (AUD) 2010 Q3 法說會逐字稿

Good morning, and welcome to Entercom 's third quarter 2010 earnings release conference call. All participants will be in a listen-only mode. This conference is being recorded.

I would like to introduce your first speaker for today's call, Mr. Steve Fisher, CFO and Executive Vice President. Sir, you may begin.

Thank you, operator, and good morning, everybody, on this Friday morning. I would like to welcome you to Entercom Communications third quarter conference call. As indicated, this call is being recorded. A replay will be available on our Company website shortly after the conclusion of today's call. And additionally, it is available by telephone at the replay number noted in our earnings release this morning.

With our notice of today's call, we had asked that you submit your questions in advance of this call to the email address questions@entercom.com. In addition, I'm always available for any follow-up questions if you wish to call me directly at 610-660-5647.

This note, should the Company make any forward-looking statements, such statements are based on current expectations, and involve risks and uncertainties. The Company's actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially is described in the Company's SEC filings on form 10-Q, 10-K and 8-K. The Company assumes no obligation to update any forward-looking statements.

Now, during this call we may reference certain non-GAAP financial measures. We refer you to our website at entercom.com for a reconciliation of such measures, and other pro forma financial information. So with that exciting open out of the way, I'll turn it over to David Field, President and Chief Executive Officer.

Thanks, Steve. This morning, we announced Entercom's third quarter earnings results. Net revenues increased 3%, and margins expanded slightly as we generated a 4% increase in station operating income. Adjusted net income increased 7% to $0.30 per share, while free cash flow rose 7% to $0.63 per share. It is worth noting that in the first nine months of 2010, we have now generated $1.59 of free cash flow per share, which exceeds by $0.01 our free cash flow generation during the first nine months of 2007, which was of course the year before the recession hit. This is a wonderful testament to our business model.

Some additional color on the quarter. National revenues grew just under 10%, while local revenues were flat ex-political. Digital revenues increased 34%. August was our strongest month, modestly better than both July and September.

Our best performing markets were Denver, Milwaukee, New Orleans and Rochester. The strongest categories during third quarter were retail, auto, telecom, financial and professional services. We continue to be pleased with our ratings performance, and had a good set of summer Arbitron results. I will mention a few situations where we are particularly well positioned.

Our Seattle rock stations both posted their best ratings in years, with the end regaining the number one slot with men 18 to 34, and KASW scoring number one positions with men 18 to 49 and 25 to 54. In Denver, Alice nailed down the number one position with women 25 to 54, bumping sister station KOSI to the number two slot after four books at number one. We also had particularly strong books in Sacramento, where we have all the top three stations with adults 25 to 54, in Greensboro where we have four of the top five stations with adults 25 to 54, and in Norfolk where we have all of the top four stations with women 25 to 54. Of course, you never bat 1,000, but overall we feel very good about our ratings, and think we are going into 2011 in very good shape with our brands.

And we continue to focus on innovation in a number of areas to enhance our capabilities, and boost our growth potential. We are developing new proprietary content, building new platforms and revenue channels, and adding management talent in new growth areas. All of these moves are enabling us to enhance our audience engagement, and expand our business opportunities in a meaningful way. It is exciting to see our business being transformed.

Couple of highlights of our progress. During third quarter, we launched iPhone apps for more most of our stations. And while most of the apps have only been available for a few weeks, we are already at several hundred thousand downloads, with thousands more each week. Just this past month, in October, WEEI.com reached a new milestone with over one million unique visitors. In sum, a lot of great progress is being made with our brands, our people and our capabilities.

Now let me add a few observations on Q3. We grew revenues and profitability, and generated close to $25 million in free cash flow. In addition, we're well on our way to completing a full year of strong double digit growth in EBITDA and free cash flow. And to put this in some historical context, as those of you who have followed our company over the years know, we have a long standing track record of outpacing our peer group. In fact, over the past three years, we have outperformed the industry's revenue growth by an average of 240 basis points per year.

Nonetheless, we hold ourselves accountable for consistently delivering top tier relative performance, and in third quarter we did not perform up to our standards. Why? First, our execution fell short in a few of our markets. Plain and simple, we just didn't get the job done in these markets. And second, we experienced some growing pains, as we continue to press the pace of innovation with the Company. We didn't do a very good job of integrating some of our initiatives this quarter, causing some distraction, and defocusing our sales teams.

I suppose if we were a football team, we would put this in the context of a long season during which we have a great won/loss record, and ask ourselves if there were some fundamental issues that dampened future performance expectations. Looking at our team and our prospects, the answer to that question is an emphatic, no. We feel good about our prospects based on our strong brands, top notch management team, and an expanding arsenal of digital capabilities. Fourth quarter pacings look promising. As we mentioned, we will finish 2010 with strong double digit growth in EBITDA and free cash flow. We fully expect to return to our long-term track record of delivering top tier performance in 2011.

Now I want to elaborate a bit on current business conditions, and share a couple of observations before turning it over to Steve. First, fourth quarter pacings are pretty strong. We finished October up 9%, obviously aided by strong political. October revenue would have been up double digits were it not for the absence of Red Sox playoff games this year. November and December look pretty good right now. And what is particularly encouraging is that local pacings are up meaningfully for the first time in quite a while.

While we do not have much visibility on 2011, we are cautiously optimistic for a number of reasons. Radio has had an outstanding year of growth in 2010 in national revenues, and Katz Media, a national rep firm, is anticipating another year of healthy growth in 2011. In addition, our digital revenues should continue to grow at a solid double digit rate. Local, of course, is the big question. The simple reality is that radio's growth in 2010 has been predominantly national. There has been no meaningful recovery in local ad revenues. They remain dramatically lower than their pre-recession levels.

Should we see any meaningful bounce in local business confidence and ad spending, we could experience significant growth in radio ad revenues over the next couple of years. And while I would caution that it is very, very early, so far we are seeing promising increases in rates and volume on our 2011 business. In addition, the principal ad agency planning tool squad is pointing to healthy increases in radios' cost per points for 2011.

Looking down the road, radio's fundamentals remain solid, as audience usage trends remain strong in contrast with some other traditional media. Innovation is creating compelling new opportunities to engage listeners and advertisers in exciting new ways, and create new opportunities for revenue growth. And radio remains the most undervalued medium, judged by the stark contrast between its share of the public's time, and ad dollars.

And with that, I will turn it over to Steve for some additional thoughts before we turn to your questions.

Thanks, David. I will give you a few highlights on the recently completed quarter, and then let's also step back and look at the Entercom business model for the full year as we come down the home stretch. David previously covered our revenue results for the third quarter, up 3%, but I know many of you want additional color on political revenues.

For political in the third quarter, we had about $1.5 million, and looking at the fourth quarter, with political obviously now completed, we would expect about $3.3 million in the fourth quarter. That would mean our full year 2010 political revenue would be about $6.4 million, and that would compare to the last non-presidential election year in 2006, when we had political revenues of $4.7 million. So obviously an increase in political spend on comparable cycles. As another reference point, during the 2008 political year, obviously a presidential year as well, we had about $7.4 million of political revenue.

Our same station operating expenses increased by a little less than 3% for the quarter. This was due to timing of certain expenses. And while this represented the highest growth rate of expenses in a quarter, I would expect our fourth quarter expense growth rate to be down to around 2%. By the way, this would result in full year expense growth of just 2%.

This quarter we also had a non-cash accounting adjustment to deferred financing costs in our interest expense line of $500,000. I point that out because we would expect to report lower interest expense in the fourth quarter of 2010. Additionally, I would expect non-cash compensation expense to increase in the fourth quarter to about $1.7 million, and that's an early estimate.

A point on taxes. Last year we had certain accounting treatments, which resulted in recording minimal GAAP taxes on our financial statements we provide to you. This year we are making full GAAP tax accruals, but a reminder that this is an accounting provision, we do not pay cash taxes currently.

Looking at the balance sheet, we ended the quarter just slightly below six times leverage, and we will be lower on a leverage data point by the end of the year. A reconciliation of our quarterly bank agreement leverage calculation is now available to you on the investor tab of our Company website. Our CapEx for the quarter was about $0.5 million. We would expect 2010 CapEx to come in between $3 million and $3.5 million.

So now before we go to your questions, let's step back and kind of take a step back from the quarter, and look ahead at the full year as we come down to the home stretch. Expenses should be up only 2% for the year. Our CapEx has been reduced to the ballpark of $3 million this year, as it was last year, and we don't see any significant increase in the years ahead.

We won't pay cash taxes this year due to the considerable tax shields we enjoy, and which will continue to benefit us in the future. Earlier this year, we amended our senior bank facility, which provides us with extremely attractive financing rates, which benefit shareholders, which means that we continue to generate significant free cash flow, over $80 million expected this year, which allows us to reduce our debt, as David indicated, by about $80 million this year.

And if you step back, an interesting data point, if you look back to when the economy went into this prolonged slump in late 2008, we will have reduced debt by $200 million over that period of time. I'd say that's a strong business model.

So with the conclusion of those remarks, I'll go to your questions.

What I've attempted to do is summarize those questions that were submitted in advance of the call. And again, feel free to call me if we have not gotten to your specifics. David, first couple of questions I think centered around the performance this quarter and your indication of underperformance. Your comment did not get the job done. So how did your 3% revenue growth compare to your growth in the markets and how much do you think you left on the table this quarter?

I don't think we minced words. We're disappointed in the quarter. We hold ourselves accountable for delivering top tier relative performance. We didn't get that done. We didn't live up to that standard in third quarter. There are a number of companies that reported growth that is sort of in line with us or slower than us, but we hold ourselves accountable to a higher level. We didn't achieve that and the bottom line is that we did fall a couple points short of what our markets did and, frankly, we expect to do better than that.

Was your underperformance related to ratings or under investment in product or promotion?

Absolutely not. We, as I mentioned and, frankly, went into some length on the call, we're very excited about where our brands are, where our ratings are right now and absolutely no product issues. We think that's a, frankly, a strength as we go into 2011.

Some of your media peers have cited what appeared to be a slowdown in revenues in the third quarter? Did you see overall radio revenues slowing down toward the end of the quarter?

A bit. Pacings for September had looked pretty robust earlier when we did our second quarter call. The September numbers did fizzle a bit, although they remained obviously up, but not as strong as we hoped for.

CBS reported stronger numbers than you yesterday. Are you seeing any significant difference between larger and smaller markets?

Not much. Clearly, as noted, national remains considerably more robust than local. But having said that, we don't see a clear pattern between larger and smaller markets.

Looking ahead to the fourth quarter, you get a sense that pacings are accelerating or decelerating, or is business being booked sooner or later?

Well, clearly we're seeing a phenomenon where business is being placed sooner than last year. That is happening. But as to the overall question of are we seeing a sequential acceleration or deceleration, fourth quarter right now looks to be stronger than third quarter and, as noted, pacings are good and we're pretty optimistic about where things are headed.

Well, that's a great segue line to the next questions on where things are headed. What's your view on 2011 and specifically, David, last year in the fall you gave a specific vision on the future year in revenue growth potential. What do you think for 2011 and how are pacings for the first quarter?

We touched on that. We have, as everybody knows, very limited visibility on the first quarter at this time. So it is difficult to speak with any substance to that. Having said that, as noted, good feedback from Katz Media on their expectations for national revenues next year and I mentioned the squad numbers, which are a pretty important source of pricing for agencies around the country and they are showing very healthy increases in radio cost per points for 2011. Again, another good factor. And maybe most of all, again, it goes back to local. We didn't get the local bounce in 2010. We have continued to have some issues, obviously macroeconomic issues across the country, and if one believes that there will be any improvement in the tone of local business and local business confidence, it could position us for some significant growth next year. But we'll have to see.

You may have covered that, but one of the in that segues as well to question that was asked, which is your view on why throughout this year has local continued to be relatively flat? I know you just touched on it somewhat in your answer on 2011, but would you like to expand on that , any

I think we have pretty much covered that. I think clearly in the third quarter we saw a headlines about potential double dips. We had the back beat of a very divisive political battle where the economy was being questioned everywhere you looked. So I am hopeful that now with the election behind us as well and with some optimistic economic signs, we might see a pickup which will, economic pickup, which of course would lead to greater advertiser confidence and a pickup in local ad time.

Again, you touched on it briefly, but several questions that come in on what are you seeing in pricing, specific pricing in your markets and what have we experienced?

Third quarter pricing was fairly flattish. Maybe slight growth in pricing in third quarter. We are seeing improved pricing as we get into fourth quarter and as we look into 2011, as I've now mentioned on a couple of occasions, but definitely see progress on the pricing front looking ahead?

We had a question that came in that asked about kind of the rankings of your larger markets of Entercom platform larger markets. Can you expand on that?

Sure. I would say that we have seven markets that would be our largest, being Boston, Denver, Kansas City, Portland, Sacramento, San Francisco and Seattle, a handful of other markets that are very close behind them.

I'd note that that was in alphabetical order, not necessarily a revenue ranked order.

You would be correct.

Okay, I know my alphabet. I guess I'll give myself a question that came up. Expenses were light, appeared to be lighter in the quarter that indicated earlier, any color? And I think as David indicated, we started to see some slowdown. Some of that is going to be revenue related from what our revenue expectations were when we kind of indicated expense guidance. As David said, it did slow down at the end of the quarter. And so as we saw that slowing, we began to take a few expense actions, so it was relatively a small delivery where we came in under expectations. Changing gears. I saw that, or the question came in. I saw that Entercom signed a new Arbitron contract this quarter. Did you look at or consider some of the competitive services or consider dropping ratings in smaller markets, like some of your radio peers.

Obviously, we look at all of our options, but Arbitron remains the standard for ratings in the industry and we'll continue to evaluate our options going forward, but we are -- but for today we think Arbitron is the, again, is clearly the standard and we were happy to renew our agreement with them.

Questions as it relates to Washington, D.C. and I don't know if your answer is going to be colored by the recent election, but what's your view on the performance royalty settlement proposed by the NAB and what might that cost you in the future?

Well, first by way of disclosure, I'm on the NAB board and a former chair of the radio board. I support the NAB's position on this. And look, nobody is happy to add an additional line item cost, expense line item to their P&L, but when you soberly without emotion look at the overall situation and the negotiation as it is played out, I think that it is a wise decision to move forward with an agreement along the lines that has been articulated to eliminate what I believe is a very small risk, but some risk of a royalty being imposed to end the confrontation and to, in addition, achieve a number of important strategic goals, such as getting FM radios on cell phones. And that warrants what I believe is a manageable expense, which at a rate of 1% or less of music revenues would be approximately $3 million or less to our Company.

And a note. I believe the settlement said that that would be phased in over time.

All that potentially negotiated.

And that's all to be negotiated. I guess I'll take the next one. Entercom your bank facility expires in 2012. Many of your peers have been issuing bonds in the market, Are you considering tapping this market? So I guess I'll take that one. Sure, we're very aware of the capital markets. We are very comfortable with our capital structure. As you've seen, significant delevering over the past year and we will expect to see it over the coming quarter and into the future. We constantly look at, as a management team and board of directors, our capital structure. I would say right now we're extremely pleased with our existing structure and the favorable rate we have and you would expect us to perhaps look at this more significantly later in 2011. And the last question. Several media companies have recently announced programs to return cash to shareholders via dividends or buyback. Now that you appear to be delevering, what will be your primary focus of free cash flow into the future.

As you know we have delevered quite a bit. We have generated a lot of free cash flow. Our principal goal for now remains to use that free cash flow to reduce debt further, but yes, at some point in the future we'll, of course, evaluate all of our alternatives here in terms of ways to return cash to shareholders, but it's premature to have that conversation today.

So that concludes the questions submitted in advance.

Thank you all. We look forward to reporting back to you in 90 days.

Thank you for participating in today's conference call. You may disconnect at this time.