Salem Media Group Inc (SALM) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Salem Media's Fourth Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Evan Masyr, Chief Financial Officer.

Thank you, and thank all of you for joining us today for Salem Media Group's Fourth Quarter 2017 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.

With me today are Edward Atsinger, Chief Executive Officer; and David Evans, President of Interactive and Publishing.

David Santrella, President of Broadcast Media is unable to be with us on the call today.

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

Once we are done, the conference call operator will come back online 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 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 or SOI, EBITDA, adjusted EBITDA and adjusted 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 the company's website at www.salemmedia.com.

And with that, now, I'll turn the call over to Edward Atsinger.

Ed?

Thank you, Evan, and thanks again to all of you for joining us on the call today.

I'll begin my prepared remarks by touching on the highlights of our fourth quarter 2017 performance.

I will include in that discussion comments that will update our M&A activity for you.

And then, I'll finish my prepared remarks with a brief update on our dividend.

At that point, I'll turn the call back to Evan and Evan will provide some additional and more detailed information on Q4.

And Evan will also provide you with guidance for the first quarter of 2018.

So with that said, our fourth quarter 2017 total revenue was down 4.9%.

Expenses were down about 2.8% resulting in a decline of adjusted EBITDA of 12.6%.

The 4.9% revenue decline represented approximately $3.5 million.

And we've identified 4 key contributing factors to the decline.

The single largest factor was the fact that 2017 was a nonpolitical year followed by a presidential election year.

This affected the revenue performance on virtually all of our divisions.

The Broadcast division, which consists of both radio and network, recorded $500,000 less in political revenue in Q4 2017 compared to Q4 2016.

In our Digital division, the revenue decline in Q4 '17 over Q4 '16 was approximately $1.3 million driven both by less political spending in '17 and also a decline in page views on our conservative opinion websites.

And I should add that there is always a page view decline in a year following an election, particularly a presidential election year.

There's a certain amount of listener fatigue that takes place after the intense -- intensity sort of subsides after the election is over.

A second factor contributing to the decline in Q4 revenue was directly related to our decision to discontinue the publishing of 4 loss-making magazines in May 2017.

This resulted in Q4 revenue declining $400,000.

And then, a third contributing factor is the fact that we're no longer operating our cluster of radio stations in Louisville, Kentucky.

Instead, we are LMA-ing the stations to a third party.

Revenue in the fourth quarter 2017 was down $300,000 directly related to this LMA.

Again, I should point out that the profitability of the Louisville cluster has actually improved because the LMA fee that comes in -- or under the LMA, the total revenue is always lower in that we only record the net revenue with the LMA.

There are no expenses because the LMA, or lessee in this case, pays all of the expenses.

So the number that we get is always a net number representing our profit, but it does exacerbate revenue comparisons as there is technically no revenue.

And then, finally, revenue was negatively impacted in Q4 '17 and continues to be negatively impacted as we move into 2018 by the increased competition for ad dollars from Facebook and Google.

Facebook's U.S. advertising revenue increased 41% in the fourth quarter of 2017, while Google's U.S. revenues increased 24% during that same period.

It's fairly clear to us that they are taking revenue from both our radio and our digital businesses.

But we are taking a number of steps to address the revenue shortfall.

And one of the most obvious things, of course, that we always do when we're expecting a revenue decline is to manage expenses more tightly.

Expenses this quarter were down 2.8%.

So we were pleased with that.

As far as the political revenue impact goes, that will be somewhat self-correcting in that 2018 is an election year, albeit a midterm election year.

It won't be quite as intense as a presidential election year and it likely will be more back-loaded with revenue showing up more in Q3 and Q4, which is more typical of a midyear election.

We normally do well with political revenue in midterm elections.

Not quite as well as we do in a hotly contested presidential election, but we still do well.

And as I say, there will be some self-correction in terms of revenue there.

We're also focusing on fixing a number of small problems in problem markets when we have a little more time to focus.

And with revenue, when you have a revenue decline, you take the time.

A good example is our national operation, which includes -- well, it included 3 radio stations, 2 music networks and a number of magazines.

As I mentioned earlier, in the middle of 2017, we closed down or sold all of the loss-making magazines and we've made some organizational changes in the music networks to improve efficiency and profitability.

The early results have been promising.

For example, we had a loss of $400,000 in the first quarter of 2017 in Nashville, but we turned that into a profit of $100,000 in the fourth quarter of 2017.

We're taking that approach in other markets as well.

You may have noticed that we announced the sale of WBIX-AM in Boston recently for $685,000.

We acquired that station from Radio Disney in 2015 for 300 -- for $500,000.

So in addition to selling it at a profit, we also eliminated losses of approximately $100,000.

We tried to work with the format idea there, gave it about a year.

It didn't work very well.

So it was best to exit the markets, cut the losses and then record a bit of a profit on the sale.

We're also selling our 1360 AM frequency, AM station in Miami, for $3.5 million and we're moving the format and the call letters from that 1360 position on the dial to 1080 AM, which is, by the way, a better facility.

The call letters will remain WKAT.

So a very profitable format for us.

The new facility is a better facility.

We've been operating 4 stations in Miami for some period of time.

3 have been productive, 1 has been lagging in productivity so spinning the station off will not have any negative impact on profitability or efficiency in that market.

By making that change and a few other adjustments, we expect to significantly improve the profitability as well as record a gain on the sale of the property.

Additionally, we are addressing the move of advertising dollars, moving from digital, by expanding our local digital product offerings.

To date, our local digital monetization efforts have been largely focused on selling advertising on our own websites, our apps, our streams, but it's become increasingly clear to us as new digital products become available to all advertisers, particularly our local small advertising customers and large customers, for that matter, that they're looking for digital help beyond what they -- the resources they have.

Effective digital advertising requires a good bit of expertise and we've developed local market specialists now in all the markets we're in and we're in the process of rounding that out in a number of other places.

We've hired a new VP of Local Digital that we're very impressed with, that will lead the effort and we've established regional specialists that will then help train all of our folks to be able to assist our customer base in their own digital ad campaigns.

This represents a revenue source for us and we also think it represents an opportunity to integrate their total promotional efforts better with our -- with the radio products and the Internet products that we sell.

So we're hopeful that we will be able to see some good results there.

With respect to other M&A activity, I mentioned the sale of Boston and I mentioned the sale of Miami.

We also closed on 1 transaction during the quarter.

We acquired WSPZ-AM.

We changed the call letters to WWRC in the Washington, D.C. market.

We acquired that on November 20 for $620,000.

We had previously purchased the transmitter site for that station on September 15 for $1.5 million.

On December 28, we sold just the tower site for $1.9 million and we obtained a very favorable, attractive leaseback arrangement for the station.

So all in all, we're very pleased with that transaction.

We've recently, in March, have entered into an agreement to purchase KZTS-FM in the Little Rock, Arkansas market to wrap out the cluster that we've been building there since acquiring the Radio Disney station a number of years ago.

And then, finally, on December 29, we paid $1.7 million of quarterly dividends or $0.065 per share at $0.26 per share annually.

That represents an attractive 6.5% dividend yield based on the current stock price.

So with that, I conclude my remarks.

I'll turn the call back to Evan, who will give you more detail under the Q -- the quarter performance and also provide guidance for first quarter 2018.

Evan?

Thank you, Ed.

For the fourth quarter, total revenue decreased 4.9% to $67.2 million, operating expenses on a recurring basis decreased 2.8% to $53.9 million and adjusted EBITDA decreased 12.6% to $13.3 million.

Net Broadcast revenue decreased 2.9% to $50.7 million and Broadcast operating expenses decreased 0.4% to $36.7 million, resulting in a 9.0% decline in station operating income to $14.0 million.

On a same-station basis, net Broadcast revenue decreased 2.4% to $50.6 million and SOI decreased 9% to $14.1 million.

These same-station results include Broadcast revenue from 114 of our 119 stations in our network operations and it represents 99.8% of our total net Broadcast revenue.

I'm going to briefly review our performance of our strategic formats.

41 of our radio stations are programmed in our foundational Christian teaching and talk format and these stations contributed 41% of total Broadcast revenue and decreased 5% for the quarter.

It's worth noting that national block programming ministry revenue remained stable and was flat for the quarter.

Local spot and local block programming revenue combined was down 9% as some of our customers are moving marketing dollars to digital.

As Ed alluded to, Google search, programmatic display ads and Facebook.

Our 32 news talk stations had a decrease of less than 1% of revenue for the quarter.

Overall, these stations contributed 19% of total Broadcast revenue.

And revenue from our 13 contemporary Christian music stations contributed 20% of total Broadcast revenue and decreased 2% for the quarter.

Our network revenue increased 3.4% for the quarter and now represents 10% of total Broadcast revenue.

Revenue from our Digital Media businesses decreased 12.8% to $11.1 million and represents 16% of total revenue.

Excluding the impact of political, revenue would have declined 2.8%.

Our Publishing revenue decreased 5.8% to $5.4 million and represents 8% of total revenue.

As of December 31, 2017, we had $255 million outstanding on our 6.75% notes and had $9 million outstanding under our revolver.

The leverage ratio was 5.66.

In looking at the first quarter of 2018, we are projecting total revenue to decline between 1% to 3% from the first quarter 2017 total revenue of $65 million.

We're also projecting operating expenses before gains or losses on the sale of disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense and amortization expense to be between a decline of 1% and an increase of 2% compared to the first quarter 2017 non-GAAP operating expenses of $54.6 million.

And this concludes our prepared remarks and we would now like to answer any questions anyone has.

Operator?

(Operator Instructions) Our first question comes from Davis Hebert, Wells Fargo.

I wanted to ask around -- you gave first quarter guidance.

I want to ask around the trajectory of leverage.

It seems it could head a little higher in first quarter, but I know political revenue may come in through the remainder of the year.

So just if you could walk us through the balance sheet and how you anticipate leverage playing out over the year, that would be great.

Davis, that's a great question.

And you're right.

I mean, with the guidance that we gave, we certainly can see leverage inching up a little bit during the first quarter.

However, we do expect the balance of the year to have a better performance.

And we also are going to be aggressive on continuing to pay down our debt.

You've seen the revolver balance drop quite a bit.

It was $9 million at the end of the year and you'll continue to see us working on paying down debt.

Okay.

And I apologize if I missed this, but the Dallas music station, KLTY, any update there?

I know that ratings have started to improve and maybe financial improvement would follow thereafter.

So I'm not sure if there's any update there, that would be great.

Well, the revenues -- the Nielsen ratings have stabilized and improved back to its old pattern.

We're encouraged with that.

The revenue decline in Q4 was the smallest in a long time.

I think it was a single-digit decline of about 7%.

So there's progress there.

We would hope that -- that operation, like many of our radio markets, has been impacted by dollars switching to digital.

And when that happens, there's a little bit more aggressive competition for the remaining dollars and that has a little bit of a depressing effect.

But it's stabilized in terms of ratings.

The revenue decline is the smallest decline it's had in about 6 or 7 quarters so it seems to be moving in the right direction.

Our next question is from Lisa Springer, Singular Research.

Could you remind us what kind of bump you saw from political ad spending in the last midterm, which, I guess, would have been 2014, and if you think this is going to be the same or it might be better in this year?

We saw about $3.25 million in the last midterms.

I'm not sure if we have an opinion yet on if it's going to be better or worse.

It really depends where some of the key races end up being.

We have no reason to think overall spending is going to be significantly different than overall political spending.

I mean, it should be a hotly contested midterm.

The House seems to be more in play with the special election that just played out in Pennsylvania.

The Republicans are more confident they will hold the Senate, but you've got a lot of competitive races and a lot at stake.

So we do expect that -- I'd be surprised if the spending is less than it was in the last midterm.

Okay.

And could you comment on the lineup for the Publishing group?

Are there going to be books coming out in tune with the midterm election that you're going to be able to leverage that?

Yes.

We do expect to have some titles kind of zeroed in, kind of focused on the midterm election.

They normally come along pretty late.

So the only one that I believe we've announced is a book by Sean Spicer, which we have -- which we're very optimistic about.

Okay.

So that would be more in the second half of the year?

Yes.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to turn the call back to Edward Atsinger for closing remarks.

Again, thanks to all of you for joining the call and we'll look forward to reporting our performance as we finish Q1 and have an earnings call for that time.

So thank you.

We'll talk to you soon.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.