Salem Media Group Inc (SALM) 2015 Q4 法說會逐字稿

Welcome to the Salem Media Group fourth quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Evan Masyr, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you and thank you all for joining us today for Salem Media Group's fourth quarter 2015 earnings call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website at www.salemmedia.com. I'm joined today by Edward Atsinger, Chief Executive Officer; David Santrella, President of Broadcast Media; and David Evans, President of Interactive and Publishing.

We'll begin in just a moment with our prepared remarks and once we are done, the conference call operator will come back on the line to instruct you on how to submit questions. Please be advised that statements made on this call that relate to future plans, events, financial results, prospects or performance are forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on currently available information. Actual results may differ materially from those anticipated and reported results should not be considered an indication of future performance.

We do not intend or -- and undertake no obligation to update our forward-looking statements, including forecasts of future performance, the potential for growth of existing markets, the opening of new markets or the potential growth from future acquisitions. More information on risks and uncertainties that may affect our business and financial results are included in our annual report on Form 10-K and other public filings we have made with the Securities and Exchange Commission.

This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically, station operating income, EBITDA, adjusted EBITDA and free cash flow. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the investor relations portion of our website at salemmedia.com. I would now like to turn the call over to Ed.

Thank you Evan. Welcome to all of you who have joined the call. Let me start by discussing our financial performance for the fourth quarter and then I want to focus on a few recent acquisitions and I'll end my comments by briefly commenting on free cash flow and our dividend policy. When I finish my prepared remarks, I'll turn the call back to Evan. Evan will drill down into more detail on fourth quarter and also give guidance for first quarter 2016.

For the quarter, total revenue was up 4.9%. Recurring operating expenses increased 3.3%, resulting in adjusted EBITDA growing by 11.9%. Obviously, we're very pleased with that result.

I want to drill down by division. Broadcast revenues increased 5.2%, which by the way, compares favorably with the industry as a whole which was up 0.3%, at least in the markets in which we operate, according to the Miller Kaplan data. More of our Broadcast revenue in the fourth quarter of 2014 included almost $850,000 in political revenue, while the fourth quarter of 2015 had about half that, or $425,000 of political revenue.

So to put it in a little further perspective, if you back out the impact of political for both quarters, broadcast revenue would have been up 6.1% for Q4 2015. It's also worth mentioning a few of the key areas that contributed to this performance. Our block programming revenue grew by 5.7%, principally due to increased demand for air time and largely driven by new program launches. Additionally, non-traditional and event revenue had impressive increases during the quarter, as we continued to focus on new ways to bring value to our audiences.

Broadcast expenses were up 2.1%, which led to a robust 13.1% increase in station operating income. I should add that most of the expense -- most of the increase in expenses were due to the cost of 12 radio stations that we acquired in the calendar year 2015.

If we look at expenses on a same-station basis, they were up only 0.2% and on a same-station basis, SOI would have been up -- or is up 13.8%. Again, favorable comparison to the industry as a whole.

Our Digital revenue was up 3.8% and there was strong growth in traffic and revenue from our Christian mobile apps. The two areas of concern that we mentioned in the past have been the continued challenges that we face with declines in Facebook traffic to our sites and the difficulties associated with the transition from desktop to mobile. The Facebook issue continues to be a challenge but we are getting better at figuring out how to monetize our mobile page views.

With regards to Publishing, our Publishing revenue was up 4.2% for the quarter, this was driven primarily by two titles published at both Xulon Press -- a number of titles at both Xulon Press and Regnery Publishing. Expenses, however, were up 12.6% because of the need to take write-downs on a royalty advance and because of unsold copies of Ed Klein's Unlikeable.

The actual sales of this book were well below our expectations. You might recall that Ed Klein had a terrific blockbuster, New York Times Best Seller with us the prior year and probably raised our expectations for the second book a little too high.

As we look forward, we have some noteworthy titles coming up in the first half of 2016. Erick Erickson recently released on February 22, a title, You Will Be Made To Care: The War On Faith, Family and Your Freedom To Believe. In June, we will be releasing two books, first, There Goes My Social Life from Clueless To Conservative by Stacey Dash and Liberty's Last Stand By Stephen Coonts.

During the last quarter of 2015, we purchased KKSP-FM in Little Rock, Arkansas. Additionally, we closed on the remaining five stations that we acquired from the Disney Company. For the year, we acquired 10 AM stations from Disney as well as two FM stations in the Little Rock market from different sellers. All of these stations have been reformatted or are currently in a start-up mode.

The guidance that Evan will discuss in a few minutes contemplates the launch and start-up costs associated with these recently acquired stations. During the quarter, I should also mention that we made two modest digital acquisitions, buying the website, dividendyieldhunter.com for $42,500 and Instapray app for $118,000.

Let me then close my comments by commenting briefly on a dividend and free cash flow. On December 29, we paid $1.7 million in dividends, or $0.065 per share, which increased -- which rather represents a 5.4% dividend yield based on yesterday's closing stock price. Our Board's current policy is to return approximately 20% of our free cash flow to shareholders in the form of a cash distribution.

For the quarter, free cash flow increased 11.3% to $7.2 million. For the year, free cash flow grew 4% to $27 million, or $1.06 per share. At our current share price of $4.85 based on yesterday's closing price, this represents a 21.9% free cash flow yield.

Of course, our Board will continue its practice of reviewing and approving the dividend on a quarterly basis. There will be an announcement regarding the next dividend payment soon. And with that, I'll turn the call back to Evan.

Thank you, Ed. I'll go over some of this in a little bit more detail with some of the numbers. For the fourth quarter, our total revenue increased 4.9% to $69.1 million. Operating expenses on a recurring basis increased 3.3% to $55.8 million and adjusted EBITDA increased 11.9% to $13.3 million.

Net broadcast revenue increased 5.2% to $51.3 million. And broadcast operating expenses increased 2.1% to $35.7 million, resulting in station operating income of $15.6 million. On a same-station basis, net broadcast revenue increased 4% and SOI increased 13.8% to $15.7 million.

More importantly, our same-station SOI margin increased from 28.2% to 30.9%. These same-station results include broadcast revenue from 106 of our radio stations in our network operation and represents 99% of our net broadcast revenue.

Now I'll just review our broadcast revenue by format. 43 of our radio stations are in our foundational Christian teaching and talk format. These stations contributed 43% of our total broadcast revenue and increased 4% for the quarter. Our 31 news talk stations had an increase of 8% in revenue for the quarter and overall, these stations contributed 18% of total broadcast revenue.

Revenue from our 12 contemporary Christian music stations contributed 21% of total broadcast revenue and decreased less than 1% in the quarter. We have nine stations that we have programmed in our Spanish language Christian teaching and talk format and those decreased by 2% in total and this format is 2% of our total broadcast revenue.

Our last strategic format is business talk, and we have 14 stations in that format. It contributed 2% of total broadcast revenue and increased 3% for the quarter. Our Network revenue increased 7.8% for the quarter and represents 8% of Broadcast revenue.

Publishing revenue increased 4.2% to $5.7 million and represents 8% of total revenue. And revenue from our Digital Media businesses increased 3.8% to $12.2 million and represents 18% of our total revenue.

At December 31, 2015, we had $274 million due on our Term Loan B and we also had $3.3 million drawn on the revolver. Our leverage ratio decreased from 5.61 last quarter to 5.47 compared to a compliance covenant of 6.25. For the first quarter of 2016, we're projecting total revenue to increase between 3% and 5% over first quarter 2015 total revenue of $61.9 million.

We're also projecting operating expenses before gains or losses on the disposal of assets, impairment losses, depreciation, amortization and stock-based compensation expense to increase between 4% and 7% compared to the first quarter of 2015 operating expenses of $51.1 million. These numbers are impacted by the results of the 12 radio stations, as Ed mentioned, that we acquired during 2015 that we reformatted. Excluding the performance of these start-ups, we would be projecting revenue growth of between 2% and 4% and expense growth of between 2% and 5%.

This concludes our prepared remarks. Now we'd like to answer any questions that you may have and we'll turn this back over to the operator.

We will now begin the question-and-answer session.

(Operator Instructions)

And our first question will come from Michael Kupinski of Noble Financial.

This is Stephanie Grant for Michael. Congratulations on the quarter. Does Donald Trump leading have any impact on the sales of conservative books or the political advertisements?

Well, it's probably the impact of political advertising. David, what do you think about the book?

Typically, we will see larger book sales in a political year than a non-political year. The fact that Donald Trump is leading the race probably isn't an issue. But the fact that he's created such noise around the race -- if you look at the ratings for these debates, they're an absolute record. So, clearly, there's a lot of interest in politics right now, which should help political book sales and help political advertising.

Okay. Great. Thank you. What are your political advertising expectations for the year?

Well, if you look at what we did in the last mid-terms two years ago, we had about $3.25 million in political revenue. The last presidential year we had $5.5 million.

It's hard to predict. You don't know where the key races are going to end up, and whether they'll be in states where we are in. But we certainly have some reasonable expectations about political for 2016.

Okay. And one last question: Is there, more or less -- with Trump in the lead, is there more or less interest in your conservative websites?

There's more interest. Page views are strong. People are extremely interested in who's going to win this contest, and visits are up.

Great. Thank you so much.

The next question will come from Barry Lucas of Gabelli & Company.

Good morning, thank you. I have a few.

If we go back to 4Q results, Ed -- really nice overperformance, outperformance both on the revenue line and better performance on the expense line. I was just hoping maybe you could get into that a little bit further -- why you're doing better than your peers? Anything along those lines would help, on both line items.

Well, on the broadcast side, I think I'll defer to Dave Santrella, who is President of that division -- let him comment on the broadcast side. And then we can -- maybe Evan and I can think a little bit about the expense side.

Hi, Barry. It's Dave Santrella.

So, on the expense side, I would just say this: In February of 2015, we really -- just looking really at the Miller Kaplans from the first couple of months, sensed that it was probably not going to be a really robust year in radio. And so, in February, we started making some expense cuts.

And like any expense cut, you realize a lot more of it later on than you do early on when you're having to perhaps pay out severances and things like that. So, I think what you saw in fourth quarter was kind of the full experience of the expense cuts that we had done as early as February, and then ongoing thereafter.

And then from a revenue perspective, it was a very good quarter. And not so much with political revenue because, as we pointed out, we didn't have a lot of political revenue, but just with interest in all things political, which helped us. Certainly, our involvement with the debates, exclusively through CNN, has created some other event opportunities for us, and all of that led towards a pretty good revenue quarter.

Great. And as long as I've got you, Dave, but it sounds like the guidance on a same-station basis, you're either not quite as optimistic on the expense controls or revenues, or is it the fact that you're lapping those initial expense reductions of February 2015?

You hit it on the head, Barry. The reason why you see that expense guidance may be a little bit higher than what we had in the fourth quarter is that we are anniversarying a lot of those expense cuts that we did in the early part of 2015.

Okay. Last one from me: David, there was some discussion at the beginning of the call about doing better with Facebook, but this is the first up quarter in Digital revenues in four or five. So, maybe you could expand a little bit on that? And -- (multiple speakers)

The key improvement has been in the area of mobile. We're seeing growth in mobile traffic, and more importantly, we've seen a lot of improvement in how we monetize mobile.

Advertisers have realized they have to be on mobile devices. They're figuring out how to get mobile to work.

So, there's just more demand and more competition from advertisers, and that's helping drive our mobile revenues. So, that's been the key improvement from prior quarters.

Great. Thanks very much.

Our next question will come from Lisa Springer of Singular Research.

Good afternoon, and congratulations on a very nice quarter.

Thanks, Lisa.

My question concerns new program launches in the Broadcast segment. I wonder if you could give me a little bit more color on new program launches?

On the Christian teaching talk side, of course, which is our biggest group of stations, Dave Ramsey, who has a very successful program on general market radio with a focus on financial stewardship, financial responsibility, launched a new program designed for the Christian audience. And we entered into an agreement with him so that he had a big launch with us in quite a number of stations.

Then there are always two or three other organizations that launch new audio products designed for that format, the one that features the block programming. And they'll start up, and they'll start up modestly, and as they get traction, they will add additional stations. So, we've seen increased demand from programs that, say, started three, four years ago that are beginning to get traction.

Typically for a lot of these organizations, when they launch a program on our Christian teaching talk stations, essentially they have to develop listener support. So, they're all tax-exempt, non-profit, religious or educational organizations that build a donor base over time, and ultimately they get to a place where they -- the base is big enough to support the expansion, and then after that, they get into surplus and they're able to expand.

So, typically, that process with start-ups can be anywhere from 3 to 5 to even 6 years of building the audience and getting to the place where the revenue flow is not only enough to satisfy all the costs associated with that addition, but they'll get into surplus where they can begin to retire the deficit they incurred in getting there.

A lot of them, the return on investment in many of those is probably five, even six years today. But those that stick with it, stay in, typically have great longevity. I mean, it's -- becomes a bit like an annuity for them. Once they get over that hump, then it just keeps developing, if the program is compelling, and we try to focus on compelling programs.

Okay. Great. Thank you very much.

(Operator Instructions)

Our next question will come from Pete Enderlin of MAZ Partners.

Thank you. Good morning. Evan, there were some big changes in the tax rate during the quarter -- during the year sequentially, and also year to year. Can you give us some additional color on what caused those fluctuations?

Not much I can think of that really caused the fluctuations, other than you have your typical Q3 true-up as we go through and do our actual compliance and do our tax returns. So, there was some changes based on rates there. But there was nothing else really significant that happened during the year.

Okay. And in the fourth quarter, for non-GAAP analysis, so to speak, what tax rate would you apply to the change in the valuation of the interest rate swap?

Well, I guess you could just apply a 40% tax rate to that. But I look at it and go -- that's not a cash transaction for us -- doesn't create any taxable -- a real taxable event. And also we have NOLs to cover any gains if we were to try to get out of that swap.

Yes, but the idea is -- what impact does it have on a per-share basis (multiple speakers) like $2.5 million?

Right. I would just use a 40% tax rate.

Okay. You paid some widely varying prices for AM versus FM stations and translators. What does that say about the relative valuations, or value for FM versus AM, which include a lot of the Disney stations, and also the potential for using translators in conjunction with those new properties?

Well, we bought some FMs. The FMs we bought were in Little Rock, Arkansas, which is a relatively small market. I think you're talking here about 500,000 or 600,000 of population in that market. So, it's hard to compare that, say, when you turn around and buy a big signal AM in Atlanta, say, or in Dallas. (multiple speakers)

Right. But you paid a lot more for the Little Rock station than for the other stations that you bought.

I think we're dealing with two Little Rock stations that we bought. We paid $1 million for the first one from Disney, and then we have some capital investment to upgrade the signal from 3 kilowatts to 6 kilowatts. So, we thought that was a very attractive purchase for us.

The second one I think we paid -- from memory I think it was $1.5 million. It's a little bigger signal. It was a Class C2 or C3, so the footprint is bigger. It has a larger pop count, and often you're going to value these things on the number of people that it serves. I think that one had a bigger pop count.

Sometimes, you're going to pay a little premium to get the second one to lever up -- to basically build a cluster so that you can -- you have a little better operating leverage.

If you're trying to compare it to the last five Disney stations that we acquired in this quarter -- comparing that FM to AMs -- those AMs were inexpensive. You probably saw that we -- actually on a few of them had a gain on bargain purchase. Disney was looking to get rid of all of their terrestrial stations by the end of the year, and so we picked up those last five at a pretty impressive deal.

When they got to the end -- they had about 30 -- what was it, 30-plus stations. I can't remember the total number. But when they got to the end, and it was a year-plus process, they were anxious to wrap it up. We made an offer, one blank -- a basket offer for all of them at a very attractive price per station.

So, a bit of a unique situation, I -- but it is -- there's no question that the AMs are going to be certainly valued less. We -- if we buy an AM that we think we can do something with it, we have a format.

Our pro forma's base it usually on a 5 multiple. We usually don't want to pay more than 5. With the FMs, you're going to go maybe 7, 8, and even higher sometimes.

Well, that's helpful color.

For the fourth quarter, revenues were a little more than generally expected, and for the first quarter your guidance is slightly less than estimates. Is that some kind of an industry seasonal pattern or overall trend?

Well, fourth -- this is Dave Santrella. Fourth quarter provided some unique opportunities for us with events. One event, in particular, that we did with our listeners in Q4 we can't replicate in Q1. And so, I think it's reflective of that more than anything.

Right. But the political season seems to be heating up, so are you just being conservative, would you say?

It's just harder for us to predict with political. While it is heating up, we don't know ultimately where those battle lines are going to be drawn, and if we have radio stations in those cities from which we will benefit from political advertising. So, I guess you could say there's some conservatism there, but it's more of a caution than anything else.

I think the overall advertising market is a little softer in Q1 compared to Q4. If I had to put an explanation on that, I'd say that the stock market started the year real soft. The market was down, what, 5%, 10%, and that kind of uncertainty does lead advertisers to be a little bit more conservative in their spending. So, I think that would be a factor that impacted our guidance.

But Q1 is always softer than Q4. Q4, you have all the holiday spending. And when a lot of retailers, a lot of advertisers get to the end of the fourth quarter, they've shot a lot of money around the holiday season. They want to take a bit of a hiatus.

Remember, the weather's bad in the East Coast, the Midwest, so in those cities where weather's bad, people just -- it slows down. Every year, Q1 is a bit of -- is the slowest quarter on the calendar, and it will contrast probably most dramatically with Q4.

Okay. Understood.

And then lastly for me, what can you say, maybe not very specifically or with a timetable, about the potential for achieving an operating profit in the Publishing group?

In the Publishing business, we had a fantastic 2014 -- very strong operating profits, driven by a couple of extremely strong titles that were New York Times number-one best sellers. In 2015, we didn't have that same level of titles. And in fact, we had a title with Ed Klein that underperformed our expectations.

So, it's really about the strength of the lineup. We think we've got a pretty strong lineup for 2016. It helps that it's a political year, and there's definitely -- Regnery always does better in political years than non-political years. We are indeed expecting 2016 to be profitable, and it will really come down to having a couple of titles that do extremely well on the New York Times best-seller list, and that drive our revenues. (multiple speakers)

Is it always going to be a function of a couple of blockbusters, or is there a potential for, let's say, sustained profitability based on a back list and a broader list of product offerings?

Your general market book publishers have much stronger back lists than we do. Regnery is in the political business -- titles that are driven by the news cycle, and they just don't -- titles like that don't have as strong a back list potential. So, our back list revenues, as a percentage of total revenues, are in the 15% to 20% range, which is much lower than your typical New York general market publisher.

But the question is: Can you do something structurally or strategically to make the profit stream more sustainable?

Well, if you look at Regnery's income statement for the last six years, it's been profitable five out of six. So, we think that based upon that history, the profits are indeed sustainable, but there are going to be some hits and misses along the way. Unfortunately, 2015 did lose money, but it's been the only year in six where it's lost money.

Now, to your point about what can we do strategically to build a stronger back list and be less reliant on one or two hit titles, we are in the process of launching a Christian faith imprint in Regnery, so that we are both a political publisher and a Christian faith publisher. We think that faith imprint has got significant potential because of our radio platform, because of our Christian website platform, and those titles are less dependent on the news cycle and do have much stronger back list potential. So, we think that is a good move, and obviously more news to come on that as we publish our first Christian titles this year.

Great. Thank you very much.

Ladies and gentlemen, at this time, we will conclude the question-and-answer session. I would like to turn the conference back over to Edward Atsinger for his closing remarks.

Thank you, operator, and again, thanks to all of you for joining us on the call. We'll look forward to speaking with you again when we give results for Q1 2016.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.