Audacy Inc (AUD) 2010 Q4 法說會逐字稿

Good afternoon and welcome to Entercom's fourth-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 afternoon, everyone. I'd like to welcome you to Entercom Communication's earnings conference call for the fourth quarter and for the year 2010. We have put an earnings release up on the wires, I'd like to also note that this call is being recorded. A replay will be available on our Company website shortly after the conclusion of today's call, and available also by telephone replay at the telephone number noted in our release. With our notice of today's call, we ask that you submit your questions in advance, to the e-mail address Questions@Entercom.com. In addition, everyone should note that I'm always available for any follow-up questions if you would wish to call me directly at 610-660-5647.

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 Forms 10-Q, 10-K, and 8-K. The Company assumes no obligation to update any forward-looking statements.

During this call, we may reference certain non-GAAP financial measures. We would refer you to our website at Entercom.com for a reconciliation of such measures and other pro forma financial information that might be helpful to you. With that, I'll turn the call over to David Field, President and Chief Executive Officer.

Thank you, Steve, and good afternoon, everyone, thanks for joining us on today's call. I'm pleased to report that Entercom finished 2010 on a very positive note. Net revenues for the quarter increased 6%, and station expenses increased by 2%, enabling us to expand margin significantly, and achieve 14% growth in station operating income. On a same-station basis, net revenues increased by 7%. Adjusted net income for the quarter increased 28% to $0.37 per share, while free cash flow per share increased 20% to $0.71.

For the year, net revenues grew 5%, and station expenses were up 2%, resulting in an 11% increase in station operating income. Adjusted net income increased 29% to $1.12 per share, while free cash flow per share rose 19% to $2.30. It is worth noting that our 2010 free cash flow came within $0.08 of equaling our pre-recession 2007 level of $2.38, obviously on materially lower revenues. Our outstanding free cash flow enabled us to continue to deliver rapidly.We reduced leverage from 6.0 times at the end of third quarter, to 5.6 times at the end of the fourth quarter, and we are positioned to be able to bring leverage down much further over the course of the year.

A few operating highlights I would like to add. First, national revenues continued to be strong during the quarter. In addition, after remaining fairly lackluster for much of the year, local revenues began to accelerate as well. Political was, of course, strong, and digital revenues continued to post robust growth as well, up close to 50% for the quarter. Our best performing markets were Denver, Milwaukee, New Orleans, Sacramento, and Rochester. Our strongest categories were auto, insurance, professional services, travel, and, of course, political. We continue to be pleased with our ratings performance, and had a very good set of fall Arbitron books.

And we continue to focus on innovation in a number of areas to boost our growth potential. On our last call, we discussed our smart phone apps, which are now in excess of 800,000 unique downloads. Another area that has been rapidly accelerating is e-commerce. We have made significant investments in personal and capabilities in this area and are seeing significant revenue growth in this new channel. These are just two of the exciting areas that are redefining our business, and how we engage our audiences and generate revenues.

We are also excited about the new growth opportunity we have created in San Francisco. We recently announced the acquisition of The Fox in San Jose, a classic rock station, which is one of the highest-rated stations in San Jose, and also generates very solid ratings in the San Francisco metro. We also announced an agreement with the University of Southern California to transfer the intellectual property of our San Francisco classical station, KDFC, which they are broadcasting on their non-commercial segments in the market. Now we are simulcasting The Fox on the former KDF signal, and with the combination of these two signals, we have created the strongest FM super station in the entire market. We have pretty high confidence that The Fox will rank among the market's rating leaders, providing substantial revenue and cash flow upside.

Switching gears. On our last earnings call in November, I commented extensively on my disappointment with our relative operating performance in the third quarter. I noted that we have always held ourselves accountable for delivering top tier relative performance, and in the third quarter, we did not perform up to our standards. I added that our fundamentals look very strong for 2011, and expressed confidence that we would return to delivering top tier performance in 2011. Well, I am pleased to report that we bottomed out in October, ahead of schedule. While we posted solid revenue growth in October, quite frankly, our growth was significantly behind our markets. On the other hand, we were back on our game in both November and December, outpacing our market peers.

Entercom is very well positioned for 2011 with strong ratings, and our enhanced and expanding line-up of new products and capabilities to bolster sales. Furthermore, we are optimistic that after a year of growth led by national and digital, we should see a meaningful recovery in local ad spending as the economic recovery accelerates, and we have a strong and rapidly delevering balance sheet as well. As a result of all of these factors, we are quite optimistic about business for 2011.

January numbers were held back for a number of reasons. January pacings were flattish, adversely impacted by the unusually ugly weather in much of the country, that did meaningfully impact business conditions in many markets. In addition, we faced tough comparisons in both political and the NFL post-season, which of course last year featured the Super Bowl-winning New Orleans Saints, whose games we broadcast. Having said all of that, February and March look much better, and Q2 looks strong, albeit it remains quite early.

In addition, advertiser sentiment is positive, with a number of clients telling us they have deferred some of their marketing from January until later, either due to weather-related issues, or other strategic reasons. We continue to expect strong performance from national and digital and our growing e-commerce business during 2011, and remain optimistic that we will see a significant acceleration of local revenues this year. So the headlines for the quarter would be, strong Q4 operating results, rapid delevering of our balance sheet, creative high ROI business opportunity in San Francisco,accelerating results from innovation, and strong 2011 revenue expectations, despite a stormy January. With that, I'll turn it over to Steve for some additional thoughts before we turn to your questions.

Thanks, David. Well, as you covered, it was a great quarter that capped off a year of growth and significant activities and initiatives, which positioned Entercom for the future, and we're excited about the future. During the past year, it's great to point out to you that we were able to significantly delever our balance sheet. This was as a result of our outstanding free cash flow, our great credit facility, retirement of our outstanding high-yield notes, our low capital expenditure requirement and the significant tax shields which we enjoy.

As David indicated, for the fourth quarter, our same-station revenues were up 7%. Now, this it was is a sequential increase from up 5% in Q2, and up 3% in the third quarter. David mentioned political, for those of you who want color on political revenues, in the fourth quarter, we had about $3.3 million in political revenues, and that compared to about $800,000 in the prior year. That $3.3 million in political revenues for the fourth quarter was up sequentially from $1.5 million in the third quarter. That resulted in political revenue for the full year 2010 of $6.4 million. While obviously political helped in the quarter, we were also slightly diluted in revenue performance due to lack of any post-season baseball in October of this year versus last year. And as noted in the release, our same-station operating expenses for the quarter increased by just 2%.

Looking at the balance sheet at year-end, we ended the year at about 5.6 times leverage under our bank facility calculation. This represented a significant reduction in leverage over the past year, and during 2010, we reduced debt by almost $80 million, and it's exciting to note that we have reduced our debt by over $180 million over the past two years, and this was during a severe economic recession, no less. Pretty exciting. A reconciliation of our bank agreement and leverage calculation is available to you on the investor tab of our Company's website. Our capital expenditures for the quarter was about $800,000, which brought the full year CapEx to about $3.3 million. Actually slightly under $3 million.

Let me pause now and turn to 2011. And while we don't provide specific guidance, I do want to give some input on the expense and below the line items as you model Entercom for the new year. Let me point out that our expense growth in 2011 will be in the mid-single digit range. I realize at first this looks higher than our historical 2% to 3% expense growth, but let me note that this is more a reflection of catch-up items from prior-year expense reductions, investments to drive significant revenue growth in new initiatives, and accounting for product costs of our emerging e-commerce initiative, which I'll get to in a moment.

Let me also make a note as we look to 2012 and beyond, we see no significant structural cost increases. We're merely playing catch-up, if you will, in 2011. We would expect 2012 expense growth to be in line with our historical 2% to 3% growth. Now, to put everything in context, as a reminder, we covered $23 million in expenses following the economic crash in the fall of 2007, and we indicated through various calls with you, that about two-thirds of those reductions were permanent reductions to our business model, but the other one-third of those $23 million in costs was temporary. With our confidence in the outlook now for 2011, we lifted our two-year wage freeze effective January 1, and later this summer, we have communicated to our staff that we'll reinstate our 401-K employee savings matching plan.

We have a significant initiative in the Company on e-commerce. Think of it as our own Groupon or Living Social business, and just as Groupon, we have a product cost and purchasing or recognizing the costs of goods of services from our advertisers or vendors. Depending on the arrangement with the advertisers and vendors, we may have to record a cost of good expense, so this growing revenue opportunity does come at a higher incremental expense hit on the financials, with probably lower margins than what we have in our traditional business model.

I would also note that for 2011, this is the final year of our roll-out in Arbitron's PPM methodology to our top 50 markets. As you know, this measurement system comes at a higher cost than diary method, and that it is phased in over multiple years. As we have phased in now, over the past couple of years to all our top 50 markets. 2011, we believe, represents the highest bump in this expense, and we would expect 2012 increases in this line item to be much more modest.

David mentioned as well in his comments the exciting new reformat of our former classical station in San Francisco, taking advantage of the purchase of a very successful classic rock FM in the San Jose area. This simulcast format will give us signals in both areas, a super station in the Bay area. and for the first quarter, we have committed significant marketing dollars towards this new format launch.

I would note that even with the impact of these items, our overall costs expected in 2011 are still below, well below our expenses of 2007. Our corporate expenses will likely grow to approximately $20 million to $21 million in 2011, as we support our growing digital and e-commerce platforms. Additionally, below the line, our non-cash compensation expense for 2011 should be about $8 million for the year, about $2 million per quarter. I'll refine that estimate on our next call based on actions by our Board Of Directors on equity compensation awards. I mentioned another below-the-line item area, I mentioned the San Jose FM transaction announced in January. We'll have a TBA fee, a time brokerage agreement fee, due to the seller until this deal receives FCC approval. While it's uncertain exactly when that closing would occur, I would suggest you model this $9 million acquisition at the end of the first quarter, and show a TBA fee of about $650,000 for the first quarter.

Capital expenses for 2011 should be around $4 million. And as for taxes, as you know, and we continue to point out, we have significant tax shields, as well as an NOL position of approximately $97 million at the end of 2010, to apply to future periods. Consequently, while we do record a GAAP tax provision on our financials, we do not expect to be a cash taxpayer next year, this year, or many years into the future. Our GAAP tax rate will be about 41% for the year, but will be subject to quarterly fluctuations and periodic adjustments. For your models, I would slightly increase your fully diluted shares to about 38 million in the first quarter, and about 38.4 million in the remaining quarters of the year.

So with that by way of background on some of the line items for 2011, let me go to your questions that were. submitted by e-mail prior to the call. I think we have answered quite a few of them, but, David, the first question, let's go back to local advertising. You mentioned in your script, local advertising growth. Paul Sweeney of Bloomberg Research asks, aside from the vagaries of local market fluctuations, what structurally has to happen in the radio business to begin meaningful, local advertising growth?

First of all, I think we need to see, and I think we are seeing, advertiser confidence and conviction improving. I think, to a large extent, we were restrained last year by the fact that local businesses, in an era of high unemployment and still economic malaise, did not meaningfully ramp up their spending last year, and I think that was the biggest challenge that we faced. Having said that, I think radio's value proposition remains extremely compelling, and perhaps more compelling than ever, when you look at how usage of the medium remains strong, and very ubiquitous.

Other choices for advertisers, many of them have been impaired by disruption from technology and declining usage. We remain the low cost provider to reach large targeted audiences in the country, and our innovation has provided for new products and new services for our customers, and we will continue to innovate so that they can tap our audiences on not just our platform, but also engage with our audiences on the other platforms that we have and are continuing to develop.

Follow-up question from Marci Ryvicker at Wells Fargo. Any additional color on first quarter revenues, and specifically, any categories that we're seeing in the first quarter?

We already, I think, commented on that a bit in the call, obviously, we did experience a little sluggishness in January for the reasons I've already cited. We are feeling acceleration into the rest of the quarter, and no real color yet on categories, although you would expect that the categories that were most impacted by weather in auto, retail, restaurants, and so forth, particularly in January and the affected markets, ones that would have been the most impacted.

I'm going to come back to a category question, but first let me go to a related pacing question from Marci's partner at Wells Fargo, Bishop Cheen. Can you give additional color of how much was booked in the first quarter versus expectations, and David why don't I take that? Bishop, we have got right now about 70% on the books for the first quarter to where we think we'll end up. So 70% and, yes, we do recognize that the first quarter does tend to be the most choppy quarter.

I'm going to go back to a related category question. You know how much I love categories. And Marci's question was, as well, remind us of your largest ad categories, and how has this changed over recent years. Why don't I take some of that data. Clearly for Entercom, and I think for all of the radio peers, automotive is the largest. It had a significant double-digit growth in the fourth quarter. When you drop -- step back in perspective and look at other categories below that, clearly, automotive, by far and away the largest category.

Second category for Entercom, at least in our platform, would be restaurants, fast-foods, and nightclub. When you drop below that, it becomes an aggregation of many categories, no one significantly different than the other categories, like department stores, financial services, home furnishings, professional services, amusements and concerts. You get the sense. And telecom.

And then last element of Marci's two-part question on that was any significant change over the past couple of years in those categories with the recession? Again, I'll pause and answer the question. If I look at contribution by category in our revenue mix, now that we have finished 2010, and trend that back to 2007, I would say there's only been one meaningful change, and that's the decline in auto, and of course, you've seen that in unit volume, and that reached it's low point in 2009 in terms of percentage of contribution as a whole, and ramped back in 2010. Obviously you read the same things we do, expect some positive signs for that in 2011. Beyond that, nothing significant in the mix of categories.

Let me, David, go to Mike Kupinski at Noble Financial, asked for a breakdown between local and national in the fourth quarter.

National grew, I would say, significantly more quickly, albeit local had a good quarter, and, as I mentioned, accelerated, and in fact November was our strongest local month of the year.

A question from [Nindrick], individual shareholder, on how to look at interest for the year. That's a good question, and several of you asked about our balance sheet intent, so I'll probably package these two together. We'll see a decline in interest rate for 2011, if we do not refinance our balance sheet, and I'll come back to that in a moment, and that's as a result of our debt pay down. We also have a couple of hedges that come off in the first quarter.

Several of you, so I won't identify specific names, but several shareholders and analysts asked about intentions on refinancing. We do, obviously, as mentioned earlier, have an extremely favorable bank agreement with very attractive financing costs. We're very aware of the activities in the capital markets. Our current facility expires in June 2012, and the Board of Directors and the management of the Company will obviously be looking at this category throughout this year. We feel no pressure to act quickly, but we will be prudent in managing our balance sheet.

I'm going to jump back, then, David, a question from you, a follow-up from Mike Kupinski, in terms of non-traditional revenue, Internet revenues. What kind of percentage contributions did that represent to the Company in 2010?

It represented about 5% of our revenues in 2010, and as I mentioned in my prepared remarks, we were up 50%, or just under 50% in the fourth quarter, and expecting that to continue to grow, and we made some big investments, and as Steve said, we're continuing to pursue that area aggressively and do not see an end in sight.

Well, this is an interesting one, just to make sure everybody out there is staying awake, this comes from John Sherman. Is there any expected impact from the Packers winning the Super Bowl?

We're not the Packers rights-holder, I would add, I believe I won a $100 bet, and that's about the only specific benefit that I think I can point to.

Let's go back to obviously an important subject that I believe you covered in your remarks, that you might expound on, Jim Boyle of Gilford Security asks. Entercom has long outpaced its markets and peers, but in the fourth quarter, as in the third quarter, and for the total year, it appeared not to. When might that revert back to historical trends, and why did that happen?

Great question, and one which I attempted to address to an extent on the call. My remarks, I think, speak for themselves. I think we've been pretty transparent and up front about saying we're the first ones to put the spotlight on ourselves when we're not living up to our standards, and we didn't live up to our standards for a portion of 2010. I had said that we should be back on our game in 2011. I was confident of that fact.

October, as I mentioned, was a bad month for us, relatively, but the great news was in November and December we were outpacing our peers again. Candidly, I didn't expect us to be back on our game in November and December, and we would still like to accelerate our relative performance, so I'm not claiming victory here, but we feel very good about where we're going in 2011. The ratings are in place. I think we're executing better on sales now. I think when I look at our products and services, and I look at how our brand is positioned in the markets, and the team we have on the field, I see no reason that 2010 or a portion of 2010 would be anything more than a brief aberration of what has been a pretty consistent record over our 12 years as a public Company, of outperforming our markets by a significant margin in 11 of those 12 years.

I'm going to package about two or three questions into one that I'll frame, which I think captured. And it says many people have asked for thoughts on mergers and acquisitions, there have been several deals announced in the industry recently, and what are your thoughts, David, on mergers and acquisitions. Are you a net seller, or a net buyer?

We generate a tremendous amount of free cash flow as a Company, and we've been very focused on delevering, and we will continue to focus on delevering as we look at all of our available options. We'll look at dividends, we will look at stock buy-backs. We will look at acquisitions, if they make sense for our shareholders and create value, and we believe that there are a number of options for us to look at in any given point in time, but, we're always open-minded to what makes the most sense for our shareholders.

I'm going to go back to a question from Marci Ryvicker. With the acquisition of San Jose and the reformatting in San Francisco of The Fox, what financial impact would you expect to see in incremental revenue and expense? Why don't I take the expense and you address the revenue format ratings. Clearly, at the San Jose station, we are in effect, operating as a repeater. We will have incremental expense.

I mentioned in my prepared remarks, that particularly in the first quarter, with that format launch, we launched -- we gave the station some marketing support. Obviously very expensive in San Francisco with television. On an ongoing basis, it will increase our expense, I baked that into my mid-single digit thoughts for the year, as we have the overhead of that station in San Francisco, and it's a higher product cost versus classical. Any comments on the revenue side?

On the revenue side, we'll have to see how the station lands, but we thought we saw a unique creative opportunity to take a station which had achieved very strong ratings in San Jose, which is an embedded portion of the San Francisco market, and strong ratings in San Francisco, and now by extending the signal to cover the entire metropolitan area, better frankly than any other FM in the market, we think based upon its existing ratings, that we have a very good shot of landing as a top-ranked station in the market, and if that's so, we're looking for explosive revenue and cash flow growth on this property, but we'll have to wait and see what the ratings say.

I believe we have about two more questions before we wrap up. You did address this, I believe, in your remarks, but I don't know if you want to add any more color, from Mike Kupinski, will the first quarter be influenced in any way by the weather in the Midwest and the northeast?

Yes, you feel a little bit like you're whining when you talk about, gee it was snowy in January. Well, guess what? But the fact is, the weather has been unusually disruptive this year, we're all aware of that, and it absolutely played an influence. We've seen certain categories of customers impacted. Their businesses have been impacted in a number of our markets, in the southeast, northeast and midwest, and in addition national agencies have also been, to some extent, shut down by this over significant periods of time, as some of the major buying centers have been disrupted. So, it's not the end of the world, we'll get through it pretty quickly, but I think it probably, at the margin, impacted our January numbers.

So you're in effect promising global warming, or April, will deliver us from this dilemma.

We are not having this conversation.

All right. Last question from Paul Sweeney revolves around Internet. Has Entercom seen increased level of competition from the Internet in local markets, and do you believe Internet-related companies will impact our business model and local revenues going forward?

We live in a dynamic world and the nature of competition is rapidly evolving, I don't care what business sector you're in. We have new competitors, and we have some competitors that are getting stronger and we have some old competitors that are getting weaker. At the end of the day, I look at our value proposition and I look at our usage, and with 93% of Americans listening to radio every single week, and as the low-cost provider, it gets a mere 7% of ad dollars, I would argue that our value proposition stacks up better than any other medium out there.

Furthermore, digital is a great opportunity for us, and it's not just a conceptual opportunity, it's an explosively growing opportunity that we're exploiting by finding opportunities to engage our audiences in different ways, and enable our advertisers to engage our audiences on those other platforms, all powered by radio. Right? And the beauty of those platforms, powered by the megaphone of the radio, is a uniquely potent combination, which we are becoming more and more adept at using effectively with our customers. And so we're very optimistic about the net impact of the digital world on our business model.

With that, I think we're at the end of our questions but, David, any finalcomments?

No. Look forward to reporting back shortly. Thank you.

Thank you, everyone.

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