Audacy Inc (AUD) 2012 Q2 法說會逐字稿

Good morning, and welcome to Entercom's second-quarter 2012 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, Cory, and thank you, everyone, for joining us here on a Friday in early August. And I'd like to welcome you to Entercom's second-quarter earnings conference call. We released our earnings information this morning, and it's available on the wires and at www.Entercom.com.

This call is being recorded. A replay will be available on our Company website shortly after the conclusion of today's call, and also there's a telephone replay number noted in our release this morning. With our notice of today's call, we ask that you submit your questions in advance of this call to the e-mail address questions@entercom.com. In addition, I am always available for any follow-up questions if you wish to call me directly at 610-660-5647.

Before we begin the call, I would like to make 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 such actual results to differ materially is described in the Company's SEC filings on Forms 10-Q, 10-K and 8-K. We assume no obligation to update any forward-looking statements. By the way, as an aside, the Company anticipates it will file its 10-Q for the quarter later this afternoon, which will give you more detail beyond what we will cover in today's call.

During this call, we may reference certain non-GAAP financial measures. We refer you to our Company website, at www.entercom.com, for a reconciliation of such measures and other pro forma financial information.

So with that housekeeping aside, we will turn the call over to David Field, President and Chief Executive Officer.

Thanks, Steve, and good morning, everyone. I appreciate your participation in today's call. I will walk you through a few of the quarter's highlights, followed by some additional color on a few key Company and industry developments, and then touch on Q3 pacings before turning it back to Steve for your questions.

Our second-quarter revenues were flat, at $104.6 million. EBITDA for the quarter was up 12%, to $32 million, as our ongoing focus on business model reinvention enabled us to reduce operating expenses by 5%, and expand operating margins by over 300 basis points. You will notice that over the past three quarters, we have now achieved year-over-year operating expense reductions of 4%, 4% and 5%, respectively.

Second-quarter revenues and expenses included two months of results from our new San Francisco station, KBLX- FM, which we began operating on May 1, under a time brokerage agreement. We completed our acquisition of this station on June 28. Excluding the impact of KBLX, our second-quarter revenues declined 1%, while expenses were down 6%. I will give you some additional color on this acquisition in a few moments.

Some additional color on the quarter. May and June revenues were both up slightly, materially stronger than April, which was down mid-single digits. Our best performing markets during the quarter were Indianapolis, Memphis, Denver and Milwaukee. Our strongest categories were drugstores, health and medical, insurance, automotive and financial. Local revenues were flattish, while national was down, and digital was up double digits. Political revenues were up considerably, but just under 1% of total revenues, as we expect the bulk of political revenues to impact September and October, as in past election cycles. Unfortunately, we are unable to provide any color on market share performance, as that data is temporarily unavailable in a number of our markets.

Now, as you recall from prior earnings calls, we made a strategic decision in 2011 to initiate a number of format changes last year, including three moves in our two largest markets. While these changes have adversely impacted our short-term results, we expect them to enhance our growth prospects going forward. I noted on the last call that we expected these new brands to no longer be a drag on our performance during second quarter, and to grow sequentially going forward. As expected, in Q2 these new formats collectively performed in line with the rest of our station group, and we anticipate they will have a positive impact on our revenue growth during the second half of the year.

As I mentioned earlier, we completed our acquisition of KBLX during the quarter, bringing our total number of San Francisco area stations to five. We have already successfully integrated the station into our San Francisco operations, and realized significant operational synergies. On our last call, we noted that the transaction will be accretive and leverage-neutral. We are currently running in line with those expectations.

But other than this unique acquisition opportunity, which we are very pleased with, we remain vigilantly focused on operations and business model reinvention. As we have demonstrated over the past few quarters, we have been able to drive down expenses, while at the same time increasing our investments in new local brands and content, expanded distribution, enhanced digital platforms, stronger operating systems, and sales product development. These actions and initiatives are having an impact, enhancing our competitive position and our growth potential. We are increasingly excited about our future opportunities, as we continue to deepen our audience engagement, and deliver enhanced multi-platform marketing solutions to our customers.

In June, we announced a new partnership with mobile radio leader TuneIn to expand the distribution of our stations to their more than 30 million monthly active listeners. This new partnership enables listeners to access our content on TuneIn's 150 platforms, which include smartphone apps, connected vehicle dashboards, internet home entertainment systems, and online. Our partnership should drive incremental listening, greater listener convenience, and new revenue opportunities.

Turning to our recent Spring ratings, we did quite well across our station group. In Denver, our brands ranked first, second and third among women 25 to 54. We also have the top three brands with women in Norfolk. In Greensboro, our stations hold the top four positions among adults 25 to 54. And in Seattle, we have the top two brands among adults 25 to 54. Finally, in Boston, our sports station, WEEI, is on a nice ratings roll, as the number one sports station in the market, and number two among all stations, men 25 to 54. Overall, we are very pleased with our ratings across the country.

I would also like to share a few brief updates on the current health of the medium. Our core business is strong, as the public's usage of radio continues to grow, and remains robust. Radio today is one of America's three dominant reach media, along with television and the internet. And reinvention is enabling us to deepen our audience engagement across multiple digital platforms, while providing our customers with highly effective multi-platform marketing solutions that were unimaginable just a few years ago.

Here are a few recent developments which underscore the fundamental health of radio listening. Radio is at an all-time high of 242 million weekly listeners, 12-plus, 93% of the population. Radio reaches more people morning through afternoon than any other medium. Radio is thriving in a digital age. A recent study shows that 70% of listeners follow their favorite stations and personalities on social media. A new USC study shows 82% of Americans have a personal relationship with their favorite radio personalities. A new media mix analysis by Arbitron and Sequent shows radio is 80% more effective for advertisers than previously thought.

And finally, satellite and internet radio have just a minimal impact on local listening levels, only taking small niche shares. Local AM-FM stations capture over 90% of all radio listening. Compare that to television, where satellite cable and YouTube, collectively, take very large shares of TV viewership. There is a dramatic contrast between radio's vibrancy and a number of other media which are struggling to survive. Radio has massive and growing reach, very limited fragmentation, no DVRs, and is highly cost effective.

Now finally, turning to the current business climate, core July revenues finished up 4%. Core third-quarter pacings are currently up 2%. I would note that this is sequentially 300 basis points stronger than where our Q2 pacings were at the time of our first-quarter earnings call. In addition, this does not reflect the modest anticipated lift from political, which is expected later in the quarter. While global and domestic economic conditions remain mixed, we are cautiously optimistic about the remainder of the year. The combination of top line growth and margin expansion should enable us to deliver strong gains in EBITDA during the second half of the year.

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

Thank you, David. This quarter, we had several significant items impacting our operations, our balance sheet, as well as accounting for our intangibles, which I'll cover in a minute. As well as, we're glad to talk about a successful outcome toward a future industry agreement on music license fees that should benefit us and our industry, us particularly in the third quarter.

First, on June 28, as we noted in the release, we completed our acquisition of KBLX-FM in San Francisco for $25 million. We funded this transaction with cash on hand, and a draw down of our revolver. Our financial results for the quarter include two months of revenue and expense for this station, which we began operating effective May 1. We also incurred about $250,000 in time brokerage agreement expense from May 1 up to the close of this transaction. This TBA expense is shown "below the line" on our financials as a separate line item. You should think of it as interim financing costs, renting, until we closed on the transaction. We will have no further TBA expense from this transaction going forward.

As David covered, and as we've discussed on prior calls, in the second half of last year we took a series of cost reduction actions. Our second-quarter expenses were down 5%, demonstrating the continued benefit from those actions on our business model. In fact, excluding the expenses of our San Francisco acquisition that we incurred for two months of operations this quarter, we would have been down about 6% for ongoing operations. And as David noted, this follows a similar reduction that we were able to show you in the first quarter of this year and the fourth quarter of last year. I would make a note now, as we move to the second half of the year, we will have tougher comps on station operating expenses as we lap those prior-year actions.

Let me talk about BMI for a moment, and the industry's agreement. During the second quarter, the radio industry reached a preliminary agreement with BMI, which is one of the three music rights organizations that our industry pays for royalties on our broadcast signals. Since this is still a preliminary agreement with BMI, we have not recognized any benefit from this agreement in our financials in this quarter. I realize some in the industry may have recognized this benefit in the quarter. We are waiting until this agreement is approved by the federal rate court before we recognize any accounting impact.

We do expect the rate court to approve the agreement in the third quarter. That is our hope. We are not in control of that, obviously; but that is the game plan. And when it does take action, we would realize a one-time benefit of a retroactive expense adjustment in the third quarter, plus then we and our industry will benefit from a more favorable rate going forward. So, to give you some color on the third quarter, assuming the court action does occur in the third quarter, and we book this retroactive catch-up, we would expect third-quarter expenses to be down mid- to low-single digits versus the prior year.

Let's look ahead to the fourth quarter. As we look to the fourth quarter of the year, I would expect a slight increase in station operating expenses versus prior year in the low-single digit. But that is a mix of several items. We'd have flattish growth to slightly down on our core operations, but we'd have incremental expenses in the fourth quarter experienced from our new broadcast rights for the Buffalo Bills football games; and of course, we have added expenses for the recent acquisition of our San Francisco radio station we covered earlier.

I'm sure some of you will want to talk about political revenues, obviously a big factor in play for us and our broadcast brethren this quarter. Political in the second quarter was about $900,000. This amount is pretty similar to what we experienced in the second quarter of 2008, the last quadrennial election cycle. And we believe that the primary impact of political on radio would be expected in the third and fourth quarter.

Looking at our balance sheet. The second quarter is when we annually perform a test of our intangible assets, our FCC licenses and our goodwill. As a result of this process this year, we took an impairment loss of $22 million to the value of our FCC license in Boston -- FCC licenses, I should say, collectively, in Boston. The impairment primarily reflects a shift in the assumptions used in the analysis about the relative market share of the performance at different classes of AM and FM signals in this radio market.

Second-quarter net interest increased to about $13.5 million. This included $1.1 million of non-cash deferred financing costs. It also included a little over $500,000 of expenses from our last remaining interest rate swap, which expired during the quarter. Our June 30 debt was approximately $611 million. Looking at our leverage, with adjustments for cash on hand and our acquisition trailing pro-forma operating results, our bank leverage for June 30 was 5.7 times versus our covenant of 7.25 times. We expect interest expense for the third quarter to decrease about $13.3 million, as a result of continued debt pay down and the expiration of our hedge in the second quarter.

Non-cash equity compensation expense was about $1.3 million in the quarter. We would expect the fourth quarter to be about $1.4 million. And as I mentioned to you on our last call, we would expect an increase in the fourth quarter to about $1.8 million to $2 million, due to year-end accounting true-up of non-cash equity compensation. A small housekeeping note -- on an adjusted basis, excluding the impairment loss, our adjusted diluted shares outstanding would have been about 37.6 million on June 30.

Before I go to your questions, a personal note. Both David and I would like to salute Bishop Cheen of Wells Fargo, who is retiring effective today, August 3. Bishop's knowledge of the intricacies of the business, both radio and television, will be greatly missed. I personally have known Bishop for over 25 years, and will miss his inquisitive mind and his ability to put the small pieces into the big perspective. Bishop, you always got the big picture, and we wish you the best.

So with that, we will go to your questions.

And I think appropriately enough, the first questions will be from Bishop Cheen. David, Bishop asks if you could provide more color on the TuneIn alliance that we announced this quarter, and what that can do for Entercom and its business models in the foreseeable future?

We touched on that, obviously, during our remarks here. We believe that sharing our content across any distribution platform where we could construct a business arrangement that makes sense for our Company is a good thing. We were able to accomplish that with TuneIn. Strategically, it delivers our content to their market and provides access to listeners using their technology.

In terms of our business model, we expect it will have an incremental impact on our listening levels. There are also some opportunities for us on the revenue side that are not -- that I cannot share. But I don't expect them to be material in the short term, but we are excited about where this takes us in the long term.

Good. Before I get to another question from Bishop, I think it's probably -- let me go to a related question that came from Marci Ryvicker, also at Wells Fargo.

David, a lot of companies have chosen to join iHeartRadio, and announced that this quarter. What's Entercom's thoughts on this?

As you would expect, we've had conversations with Clear Channel. Let me first say that I tip my cap to them. They have done a remarkable job of building out that platform and that brand, and I think, very exciting what they are achieving. We were not able to reach mutually agreeable business terms with them, which is why we are not on that platform. We will remain open to that opportunity in the future, should it make business sense for us at any point in time down the road.

Okay. Let me go to my last question we will receive from Bishop Cheen. Steve, is there a near-term opportunity for Entercom to restructure pricing on its debt facility in November -- from last Fall?

Bishop, obviously we will look at that. Of course, you won't be around to opine on it. I would say there is probably nothing significant on the short term, given where things are trading and where the market is. But obviously, as we said last year when we did the facility, we enjoyed for many years a very favorable facility, and we would look to reprice when -- certainly when anything is in our favor.

Kind of let's stay on some balance sheet themes, David. There are several questions that come in related to the balance sheet. This is around use of free cash flow. A question from Marci Ryvicker and from others, would you look at the Cox Radio stations which have been announced? And a related question from Mike Kupinski at Noble Financial Group, which is -- what are your priorities on the use of future free cash flow, as you look to the future?

Consistent with what we have been saying over the last few calls, our principal focus is on delevering and using our significant free cash flow to reduce our outstanding debt. We had a unique opportunity this Spring in San Francisco to do a market fill-in deal, which we found -- and the economics on that were quite compelling, as we have discussed. And, in fact, get leverage-neutral to the Company. That said, again, our principle focus is on delevering and continuing to drive down debt to a point where we can, along with our Board, look at opportunities such as dividends, buy backs, and other uses of free cash flow.

As far as the Cox stations in particular, they happen to be in smaller markets than we are really focused on, from an acquisition standpoint. And furthermore, again, given the overall -- overarching goal of delevering, I do not expect us to be players in that process.

Okay. Let me take a couple calls for me while we are a little bit on the balance sheet theme here.

Many people noted that our capital expenditures was fairly low, in fact, showing about $100,000, roughly, for the quarter. What does that mean for the year?

Let me just make some comments. You will see it in our Q. We are still holding with our guidance of $4.5 million to $5 million for the year. Some of that was due to timing, and also some tax credits received, which offset. So, don't be confused. I think we are holding with our outlook of $4.5 million to $5 million for this year.

David, several people asked the question -- can we give any color on auto? You mentioned auto was a strong category for Q2, but what do you see for the outlook as we go into Q3?

Well, again, as you said, Q2, automotive was strong. We had strong growth in that category. We are feeling similar enthusiasm about auto spending in third quarter. Beyond that, obviously not much visibility as we look down the road. But it's certainly a category that has been a positive for us in recent times.

Another question from Marci Ryvicker. CBS recently announced a launch of a sports network in conjunction with another operator. Will this have any impact on Entercom's sports stations at all?

It's interesting. You've had now a number of announcements from a number of large organizations to become bigger players in providing national sports content to radio. We think that, as one of the largest players in local sports, that is a beneficial development for us going forward, and we very much like our position as the leading sports provider in a number of important markets across the United States.

We'll stay on the sports theme. Kind of an operating question from Janet Clay at Liberty Mutual who asks -- with Q2 top line being flat, how much of your revenue is influenced by poor performance, her words, of some of the sports teams that we carry?

Well, actually, we actually are performing quite well in the sports area. If you look at the Boston Red Sox, for instance, which is our largest baseball rights agreement, along with the Oakland A's and the Kansas City Royals, Red Sox sales are actually very strong. And while the Red Sox may not be having their best season of all time, they are a very competitive team, which always captures the extraordinary interest and engagement of the fan base, not just in Boston and across New England, but of course, across the country as well. We are pretty optimistic, now that many of their injuries are behind them, I think the Red Sox are well positioned going forward. It's always interesting.

It is indeed. I will switch gears from the sports teams to the political arena. Mike Kupinski at Noble Financial asks about a read of political as we go through the year.

Maybe I will take that, David.

Mike, and others on the phone, it's always tough. I think, as I have said on past calls over the years and years and years, that past is prologue. So, let me remind you of some data points. In 2008, we achieved about $7.5 million to $8 million in political revenue. That was the last political cycle. And that was predominantly based third and fourth quarter, heavily weighted to the fourth quarter. I earlier gave you the data points for Q2.

Mike, you said -- it seems like you should be able to do north of $10 million in political. Your thoughts on a number?

I don't know, is the short answer. We obviously read in here the same that you all do on the amount of fundraising, the political scene. And I would hope that we would see some escalation beyond the $7.5 million we achieved in 2008. I will just say that is a hope we would see an increase beyond that.

Mike, you also asked -- Mike Kupinski also asked for percentage of business booked for the month of August.

I will give you the data point. I don't know how it will help. The old axiom is, we typically -- and this is a generic comment -- you generally enter the month about 80%. As of today, we have about 85% booked of where I think we will end up for August. Obviously, we have a ways to go. I will just pass that on. I don't think it will help you much.

And as I look across the questions submitted, I think we have covered them all in a bundle, either specifically -- except for one last one which I will throw to you, David, and then you can wrap up the call.

Mike Kupinski asked -- some companies have been paring back their daily deal efforts. Can you provide an update on Entercom's initiatives?

Yes, we are believers in the space. Clearly, there has been a little bit of a shakeout here in recent months, which is not unexpected in a burgeoning new business arena, like the daily deals business. We recently switched technology partners and are now aligned with Group Commerce, an organization which we are pretty excited about, and feel very optimistic about where the space goes, going forward. We think it's a very natural fit in our business model, and we believe that it is part of an integrated product line that we will be able to lever to drive larger shares of our customers' business going forward. So, we are excited about the space, acknowledge that there is some shakeout in it, but feel very good about it for the long term.

With that, before we sign off, let me just add my tip of the cap to Bishop Cheen on all of his outstanding work over the years. We will miss him, as Steve says, but wish him all best in his future endeavors.

And for everybody else, thank you all for joining us on today's call, and we look forward to reporting back to you all in three months. Thank you.