Salem Media Group Inc (SALM) 2016 Q1 法說會逐字稿

Good day and welcome to the Salem Media Group First Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note that 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 all you for joining us today for Salem Media Group's first quarter 2016 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. Today, I'm joined by Edward Atsinger, Chief Executive Officer; David Santrella, President of our Broadcast Media Division; and David Evans, President of Interactive and Publishing.

We'll begin in just a moment with our prepared remarks. 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 in 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 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.

With that, I would now like to turn the call over to Edward Atsinger. Ed.

Thank you, Evan. Good afternoon to all of you joining us for today's call. I want to begin my comments by looking at the financial performance in the first quarter as I normally do and I want to spend a little bit of time on our acquisition strategy, particularly as it relates to our websites. And then I'll conclude with a few comments about quarterly dividend, free cash flow. I'll give it back to Evan, who will take you into more detail on the quarter's performance and provide some guidance for second quarter.

With that said, let me jump into our performance for Q1. For the quarter, total revenue was up 4.4%, recurring operating expenses increased 6%, resulting in adjusted EBITDA declining 3.2%. This decline includes a couple of unusual expenses that need to be commented on. First, we had nearly 300,000 start-up losses for the recently acquired radio stations. Additionally, we include 500,000 is a reserve and a litigation matter. Last month an award was issued against settlement contract dispute. Salem will be appealing the award and pursuing all remedies to recover this amount from the actual responsible parties, including file any new lawsuit. But without the startup losses in the litigation reserve, adjusted EBITDA would have increased 3.7%. I think the legitimate take away from these numbers that further reduce the first quarter's performance is very encouraging fundamentally with revenue of 4.4% controlled expenses and positive adjusted EBITDA, absent these two items. I also want to comment on the fact that we had a good quarter for political revenue, we booked $1.2 million of total political revenue in the first quarter. That compares with $200,000 in the first quarter of last year. We're currently pacing ahead of the last presidential election cycle when we recorded $900,000 of political revenue for the first quarter of 2012.

Let me break the numbers down further by talking about results from each of our divisions. Broadcast revenue was up 4.2% and that compares favorably to the market generally, which was up about 1.7%, at least in the markets in which we operate according to Miller Kaplan. Our block programming had another solid quarter, up 7.1%, local spot revenue grew 3.6%, network revenue grew by 16.7%. Geographically, we have a strong market performance for Los Angeles, Chicago, Atlanta while facing some weakness in the Dallas market.

Results on a same-station basis and excluding the impact of the legal accrual I previously discussed, our same station revenue was up 2.5%, while expenses increased 2.2% resulting in a kind of strong operating leverage of 3.3% increase in same station operating income. I think this is a more accurate picture of the fundamental performance of our broadcast business in Q1.

Revenue in our digital division was up 4.6% compared to the first quarter of last year. That was an improvement on both our Christian and conservative websites. Revenue on the Christian websites increased 6.7%, largely due to the growth in mobile apps despite it might had a continued decline in Facebook traffic. Our conservative websites were up 11.4%, again as you might expect, driven largely by increased traffic related to the election season and the strong interest in the Republican primary process. We have continued to make concerted efforts to keep expenses under control, which resulted in an increase of only 2.1% in our digital division. This led to a 17.1% increase in digital operating income.

Lastly, our Publishing Division experienced a revenue increase of 6.5% over prior year. We had a better roster of titles in the first quarter of 2016 compared with Q1, 2015. The strongest titles were Defeating Jihad by Sebastian Gorka, Nine Presidents Who Screwed Up America by Brion McClanahan and You Will Be Made to Care by Erick Erickson. Our expenses were up 10%, but mostly due to a credit from the reversal of a royalty reserve in the first quarter of 2015. While we had a loss in the first quarter, Q1 is typically a weaker quarter for Regnery with fewer books, titles being published. We have a stronger lineup of both in Q2, including two books under the newly launched Regnery Faith imprint, which we're quite enthusiastic about. These books are Strong Fathers, Strong Daughters Devotional by Dr. Meg Meeker and Marriage Done Right by Jim Daly. We will utilize our multimedia platform that focuses on the Christian audience to help make these books a success. I might add that both authors have roll-in programs that are carried on a number of our stations.

During the quarter, we acquired a King James version Bible app for Android devices for $4 million. This is our fifth major Christian mobile app acquisition over the last 12 months. These acquisitions have transformed the makeup of our Christian website business from one that was overly dependent on desktop and particularly [Facebook] traffic, the one that is now much more focused on mobile and has a more diversified mix of traffic sources. In Q1 2015, the total number of visits to our Christian websites and apps was approximately 145 million. In the first quarter of 2016, this total has grown to 250 million. In Q1 of 2015, 32% of our Christian traffic came from desktop and 68% came from mobile or tablet. In the comparable Q1 2016, desktop had dropped to 13% and mobile and tablet increased 87%. Finally in the first quarter of 2015, approximately 50% of visits came from Facebook in Q1 2016 this has dropped approximately 15%. While the trend in Facebook traffic became apparent, I might say when they became apparent. We made some strategic decisions to best position ourselves to continue to grow traffic while decreasing our reliance on Facebook as a source. These acquisitions are already making a solid contribution to cash flow and are highly accretive. Although mobile monetization still lags desktop, we believe these acquisitions are consistent with where the weather is slowing mobile and tablet and give us a more diversified mix of traffic sources. Finally, with regard to leverage, we continue to make progress, our leverage ratio improved from 5.47% to 5.36% from the beginning to the end of the quarter. We expect to see continued improvement during 2016 with the impact of political and growth of the radio stations that we acquired last year. We also expect a slower pace of acquisitions going forward. The Disney acquisitions last year were a one-time opportunity and with that opportunity behind us, we are committed to steadily reducing leverage.

On April 5, we paid $1.7 million of quarterly dividends or $0.065 per share. This represents a 3.5% dividend yield based on today's closing price of our stock. Our current policy is to return, as most of you know, approximately 20% of our free cash flow to shareholders through the dividend. Over the last 12 months, our free cash flow was $25.6 million or $1 per share based on the current stock price that represents an attractive free cash flow yield of 13.5%. So with that I will hand the call back to Evan Masyr for additional details on the quarter and to provide some guidance for the second quarter 2016. Evan?

Thank you, Ed. For the first quarter, our total revenue increased 4.4% to $64.6 million. Operating expenses on a recurring basis increased 6% to $64.1 million and adjusted EBITDA decreased 3.2% to $10.4 million. Net broadcast revenue increased 4.2% to $48.5 million in broadcast operating expenses increased 6.1% to $36 million, resulting in SOI of $12.5. On a same station basis, net broadcast revenue increased 2.5% and SOI decreased 0.6%. However, excluding the impact of the litigation accrual that Ed previously talked about same-station SOI increased 3.3% and our same station SOI margin increased to 27.4% from 27.1% a year ago. These same station results include broadcast revenue from 105 of our 160 radio stations and our network operations, representing 98% of our net broadcast revenues.

Now, take a quick look at our broadcast revenue by format. 42 of our radio stations are programmed in our Christian teaching and talk format. These stations contributed 44% of total broadcast revenue and increased 4% for the quarter. Our 31 news talk station had an increase of 9% in revenue for the quarter, and overall, these stations contributed to 17% of total broadcast revenue. Revenue from our 13 Contemporary Christian Music stations contributed 20% of total broadcast revenue and decreased 6% for the quarter. This was largely driven by the softness in the Dallas market that Ed previously mentioned. The nine line stations, we have programmed in Spanish language Christian Teaching and Talk increased by 19% in this format. Now, comprises 2% of total broadcast revenue. Finally with respect to the major formats that we have. We have 13 stations there any business talk format. This format contributed 2% of total broadcast revenue and increased 21% for the quarter. Our network revenue improved 16.7% for the quarter and represents 9% of total broadcast revenue. Our publishing revenue increased 6.5% to $4.8 million and represents 7% of our total revenue and revenue from our digital media businesses increased 4.6% to $11.3 million and represents 17% of our total revenue. During the quarter, we repaid $1.6 million on our term loan B and at March 31, we had $272.4 million due on the term loan B, and also had $3 million drawn on the revolver. Our leverage ratio decreased from 5.47 to 5.36 compared to a compliance covenant of 6.0.

For the second quarter of 2016, we are projecting total revenue to increase between 1% and 3% over second quarter 2015 total revenue of $67.3 million. This revenue guidance is impacted by two timing issues. First, Easter was in the first quarter of 2016 as compared to the second quarter of 2015. Our Church Products division experiences increased revenues during the Easter season. Additionally, our strongest book title last year which was Ann Coulter's Adios America, was released during the second quarter. This year, we made a decision to release Dinesh D'Souza's Hillary's America in July to coincide with the Democratic National Committee's Convention and we are also projecting operating expenses before gains or losses on the disposal of assets, depreciation, amortization and stock-based comp to increase between 3% and 6% compared to second quarter of 2015 operating expenses of $53.8 million.

And this concludes our prepared remarks and we now like to answer any questions. I'll turn it back to the operator.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Michael Kupinski, Noble Financial.

Thank you. Congratulations on your quarter. A couple of questions. I know that you said that this year, you claim to more aggressively pare down debt. Can you just talk a little bit about where you would like the debt to be and what if you have any target multiples and so forth?

Well, we are in general during the remaining life of our current credit facility, we want to move the leverage down to between 4 and 4.5, that's the target that we're focusing on and we're going to be fairly aggressive in getting there. The current credit facility matures in March of 2020, but we will do a refi obviously probably a year before that, maybe even the last quarter of 2018. So that would be when we would -- we would try to get our leverage into that category, so that we would be in a good position to renegotiate the remaining debt at terms that are attractive. Roughly speaking, we try to commit about 50% of our free cash flow to debt retirement. We've already mentioned 20% goes to dividends and the remainder was available for acquisitions or other investments. But we probably will downplayed that part of the equation for the next year or so until we can catch up a little bit. Our first year after we did this kind of facility, we spent more on debt retirement. The second year we spending a more on acquisitions because of the unique Disney opportunity and by the way, we bought those stations at very attractive prices and they will be leverage positive in my view in a fairly short order. So we feel good about those. When we do acquisitions in the future, we're going to be looking at acquisitions that are either leverage neutral on leverage positive delivering and that probably means we'll focus more on digital acquisitions but the problem with the radio side even where we get an attractive situation, we almost inevitably have to reformat that station when we acquire it, and that means it will have no income to start with, and in fact will have operating losses. If we buy them right, and we have a good format to adopt for that particular facility. If it's a tuck-in acquisitions in a market where we already have captured most of the overhead and scale is important, we typically can get those to be cash flow positive quickly and to be leverage neutral at least in a fairly short order and that's our goal. So I would probably down de-emphasize that part of the acquisition strategy going forward for a period of time and focus on digital opportunities that enhance our leverage position, that is our leverage basically reduced leverage rather than increased leverage. So that's a pretty general answer, but I think it's probably pretty accurate as to how we're thinking.

Well, I appreciate the color. Can you talk a little bit about Dallas and give us a little color on what you're expecting there in terms of a turnaround?

Yes, I mean our ratings in Dallas remain really stable, particularly in core demo in [2554]. We are really right now just going after a lot more direct business, because the transactional business, as it's just not been there for us with some group deals that go on in the market. Michael, I think probably one of the great pieces of news about this is that we had a lot of great organic growth in spite of Dallas. And so it's good to see the core strength of our radio division even when one of our larger performers is not doing as well.

And in terms of political advertising it was up by 33% from the past cycle that and in keeping with the past trends we've seen in political, but do you have any thoughts on political advertising and how we end up for the year, are you seeing bookings into the third and fourth quarter. Any thoughts in political for the year.

Look, it's been structure on unusual cycle and more volatility, more unpredictability than I think any of us have ever experienced. So it's a little crazy to try to estimate. I'm fairly optimistic that there will be quite a bit of spending of trough now we'll have to do quite a bit I think to shore up the base and to convince the base that he is actually conservative enough for them to avoid a party split, that should benefit us, but then trying to predict what he will do, of course, is a losing proposition. So, I will just simply offer that is probably the one encouraging -- that would suggest that we would probably see a good spend on that side of the ticket.

So you've exceeded expectations in virtually every line item in the second quarter and I'm pleased to see that digital seems to have turned the corner with now another quarter growth, but digital revenues with -- should see some strength into a political year, I would say. And it seems a little bit softer than what I would hope for, I guess, can you add any color on your thoughts on the digital segment and what kind of growth rate we should anticipate as it performs in a political cycle?

Yes. The challenge that we faced with digital is Facebook continuing changes to that news feed algorithm. As Ed mentioned, on our Christian websites a year ago, Facebook was 50% of our visits. That number has dropped consistently over the last 12 months because Facebook is making a concerted effort to keep users within the Facebook environment and not clicking away to other sites. So, to address that challenge, we diversified a way through these acquisitions of these five mobile apps. And our traffic mix today looks quite different than a year ago, but that's really been the challenge is traffic from Facebook. We are now much more diversified, we've got these mobile apps, we think we're through worst of that and things should be a little easier going forward. How much will political impact us? I think I'd have to repeat what Ed said, it's a very unpredictable and very volatile political cycle. We would certainly hope to be a beneficiary of it. But we're just going to have to see how it all plays out.

Do you think that the revenue growth for digital site could accelerate to the double-digit range as you go through this year?

No, I think, double-digit is too aggressive. We given the challenges of Facebook and changing traffic sources, I'm looking for a solid single-digit growth.

Lisa Springer, Singular Research.

Thank you. Good afternoon. I noticed that you acquired another investment newsletter during the quarter. I was wondering if you could comment how the investment newsletter type product fit with the rest of your portfolio and if you see this as an area that still offers some acquisition opportunity?

Yes. The investment newsletter business was part of a multi-faceted acquisition a couple of years ago, we bought the assets of Eagle publishing. They owned two [conservative] websites. They owned the largest independent publisher of Christian books and they also owned this investment newsletter business, as well as a health supplement business. What's interesting about this business is there's considerable overlap with our core audience. The average age of a purchaser of an investment newsletter is about 60 years by age 85% of the time they are male. that demographic has tremendous overlap with our conservative websites and our news talk radio stations. So there is a very good cross-promotional opportunity there because of that audience overlap and that explains why we purchased this additional investment newsletter. This is what I prefer to described as a retirement newsletter because it offers all kinds of information and education on personal finance issues related to retirement and that's a subject to great interest to our audience again on a concerns websites and radio stations.

And I might add to that, we have 13 business stations that target the business talk and the demographic is very similar to the folks that the subscribe to the newsletter. So there is great synergy with those with the variety of our formats for that kind of a product.

Okay, great. Thank you. I do have a question about the publishing segment as well. In the book publishing, what percentage of revenues during the quarter is derived typically from titles that were released that quarter?

Very high. We have much higher than a typical general market book publisher any point in time, probably about 80% - 85%, our revenues are from front list titles released in the last year, probably only about 15% or 20% of backlists. That is quite different than the New York publishers have much more backlist. The reason for that is our titles are in the main highly political new sense type calls that just you can't really be considered backlist titles, because they are so timely to the political events in any given year.

Okay. Thank you, gentlemen.

Thank you.

(Operator Instructions) Pete Enderlin, MAZ Partners.

Thank you. Good afternoon.

Hi, Pete.

Evan, the leverage ratio covenant is at 6.0 times and I think it was 6.25, does it continue to go down further over the life of an agreement?

There is one more step down, effective January 1, which really would be tested next March 31. It steps down to 5.75 and it stays there for the rest of the life of the facility.

Okay. So it's going to be hopefully quite academic anyway?

Correct.

So now on the political advertising front and looking specifically at the broadcasting piece of that is there a sense of whether national candidates use, meaning of presidential, not state or local candidates, use radio significantly or do they almost all TV and digital advertising on the national scene?

No, they've used radio significantly. There is quite a bit of black money that's come in. So TV is certainly a political advertising monster, but radio does quite well with presidential candidates and federal candidates, I should say.

When you see the discussions of their spending, basically radio gets lost in the shuffle, I think, but obviously for you guys, it could be significant. In 2012, do you have an idea what percentage of your political advertising was state and local candidates versus presidential?

Pete, I don't have that. Maybe offline, we could look and see if we could figure that out for you, but I don't have that available now.

Okay. Yes, I'd like to get an idea of that. And do your marketing teams proactively go after these candidates or do they sort of let them come to you find you, so to speak?

No, we are not at all reactive. We are extremely proactive in a number of ways at getting political business. It's been quite frankly a strong suite of Salem's for a long time.

Okay. And then, one more. Ed, I understand that you're putting acquisitions on the back burner quite a bit, but CBS Radio recently said, they're going to sell their entire group, I think. Does that lend itself any sort of niche opportunities for you at all, or would you say probably not?

I would be surprised. I mean, if they actually put it on the market -- I mean, the impression we get as we looked into it is they intend to maybe spin it off as a separate unit, but the strength of it is to keep it together. If they start breaking it up, the values is there as a unit with the footprint they have and if they start trying to spin off pieces of it, it's contradictory to their business model. So I would expect that if something happens there, they either spin it off as a separate division and hold it, and let it trade separately or they spin it off to a group that buys the entire package and buying the entire package is not practical for us, because the formats are not a good mix with our focus. They kind of focus on a different demographic and a different psychographic and ours is a much more focused approach in all of our platform. So I wouldn't see it as providing any realistic opportunities.

Right. And that's a good insight. Well, thanks for taking my questions.

Thank you.

Thank you, Pete.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Edward Atsinger, CEO, for closing remarks.

Thank you, operator. Again thanks to all of you for joining us. We'll look forward to visiting with you again when we report on Q2 earnings.

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