Salem Media Group Inc (SALM) 2004 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Salem Communications 2004 first quarter teleconference call.

Copies of the earnings release have been sent to you for your information and reference during this call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today.

At this time I will turn the conference over to Mr. Evan Masyr.

Please go ahead.

Thank you.

Good morning and thank you for joining us today for Salem Communications' conference call regarding our first quarter 2004 earnings.

As a reminder, if you get disconnected at any time you can dial in to 973-582-2734 or listen from our website at www.salem.cc.

We will begin in just a moment with opening comments from our President and CEO, Edward Atsinger, and Executive Vice President and CFO, David Evans.

After their opening comments our 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.

Actual results may differ materially from those anticipated as a result of certain risks and uncertainties, including but not limited to -- market acceptance of recently launched music formats; competition in the radio broadcasts, Internet and publishing industries; and from new technologies, adverse economic conditions and other risks and uncertainties detailed from time to time in Salem's reports on Forms 10-K, 10-Q, 8-K, and other filings made with the Securities and Exchange Commission.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Salem undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events.

This conference call also contains non-GAAP financial measures within the meaning of Regulation G, including station operating income and EBITDA.

In conformity with regulation G, information required to accompany the disclosure of non-GAAP financial measures, including a reconciliation of such non-GAAP financial measures included in this conference call to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles, is available on the investor relations portion of the Company's website at www.salem.cc, as part of the current report on Form 8-K and earnings release issued by Salem earlier today.

I will now turn the conference call over to Mr. Edward Atsinger.

Good morning everyone.

Thank you for joining us for today's conference call.

I'm pleased to report that Salem is having a strong start to 2004 in many areas -- on the acquisition front, in the rollout of our new news/talk initiatives, the continued growth of listenership, revenue and profit at our contemporary Christian music stations, and most importantly a strong quarter of double-digit revenue and station operating income growth.

Before focusing on the numbers, let me update you on some of our key strategic initiatives.

First, on the acquisition front we announced transactions during the quarter to add AM stations in Atlanta and Detroit, and have a pending transaction in Honolulu.

Atlanta and Honolulu are what we call tuck-in acquisitions.

The Hawaii acquisition also facilitates our ability to upgrade the nighttime signal of one of our San Diego radio stations.

Salem already has the third-largest presence in top 25 markets, third only to Clear Channel and Infiniti.

With these acquisitions Salem will have a presence in 23 of the top 25 markets, with a total of 60 stations in those top 25 markets.

The Detroit acquisition will also make Salem one of only four broadcasters who have a presence in every one of the top 10 markets.

Five years ago when we went public we owned 46 radio stations.

We now have 95 radio stations.

The stations we have acquired since then are delivering attractive returns, strong cash flows as a multiple of their purchase price and they're continuing to achieve strong revenue and profit growth as we drive them to maturity.

As our recent acquisitions in Atlanta, Detroit and Honolulu demonstrate, we continue to see attractive opportunities to add additional stations to our portfolio, both in terms of rounding out existing clusters and in terms of entering new markets.

We reported during our last conference call at the end of February that a key focus for 2004 is the expansion of our news/talk platform by adding additional stations and through development of further programming, particularly network programming.

Three weeks ago, on April 5th, we launched our news/talk format in Dallas, Philadelphia and Baltimore.

On that same date, April 5th, we debuted a new East Coast morning drive syndicated program, Bill Bennett's "Morning in America".

As the title suggests this program is hosted by Bill Bennett, former Secretary of Education under Ronald Reagan, former Drugs Czar under George Bush Sr., a best-selling author and frequent national radio and TV commentator.

While it's still early, our initial results have exceeded our expectations.

At the stations in Dallas, Philadelphia and Baltimore listener response is positive, advertisers are receptive to the new format and revenue is ahead of plan.

The syndication rollout of the Bill Bennett program, "Morning in America" is regressing well also.

The program launched on April 5th with 53 affiliates, a number that has now increased to 74 affiliates, including 6 stations in 6 of the top 10 markets and 14 of the top 20 markets.

Let me now discuss our excellent first quarter 2004 results.

Salem achieved another strong quarter of double-digit revenue and station operating income growth which substantially exceeded the performance of the radio industry as a whole.

This reflects the strength of our business model, the continued accelerated growth at our startup and developing stations, complemented by the stability of our block programming business.

For the first quarter of 2004 we generated net broadcasting revenue of $43.2 million, an increase of 11.5 percent from the same quarter last year.

Station operating income was $15.6 million, an increase of 26.2 percent from last year.

On a same station basis net broadcasting revenue for the quarter grew 10 percent to $42.6 million and same station operating income grew 27.3 percent to $15.7 million.

Of particular significance is the strong operating leverage that we are achieving.

Our SOI margin improved from 32 percent to 36.2 percent, a result of robust revenue growth and careful cost management.

Once again, we expect these results to be among the best in the radio industry.

Our second quarter guidance released earlier today demonstrates that these growth trends are continuing, and we believe we have reason to be optimistic about the remainder of 2004.

I would like to focus on two principal reasons for this strong growth.

First, our stable block programming revenues provide us with steady growth and predictability.

We have previously announced that we expect block programming revenues to increase five percent in 2004, since substantially all of this revenue increase drops to the bottom line, since no sales commissions are paid on this revenue.

This compares quite favorably with analyst forecasts of mid-single digit revenue growth for the industry.

When considered over an entire economic cycle, block programming has matched the growth rate of radio advertising revenues, yet with measurably less volatility.

In effect, the same growth prospect, but with noticeably less risk.

Second, and more significantly, we continue to focus on the growth of our startup and early development stage stations.

Our 95 station portfolio consists of 3 pending acquisitions, 11 stations in a start stage, 32 stations in an early development stage, 34 stations in a developed but with upside with upside stage and 15 stations which we consider to be mature.

We believe that almost 50 percent of our portfolio has significant upside potential, and we continue to make real progress in moving our stations up the development curve.

In the first quarter of 2004 our 11 startup stations had $300,000 of startup losses, which, by the way, related primarily to our recently acquired four station cluster in Jacksonville.

This compares to $600,000 of losses from 12 startup stations in the first quarter of 2003.

The fastest-growing segment of our portfolio is our music stations.

We continue to see increasing revenue, substantial profit growth and improved ratings.

The music stations acquired since 2000 generated revenue of $8.9 million for the quarter, an increase of 19.9 percent from the same quarter last year.

These stations generated operating income of $2.8 million in the first quarter of 2004 compared to $1.8 million in the first quarter of 2003, an increase of 57 percent.

From a ratings standpoint we see strong ratings growth in our female 25 to 54 target demographic.

Our 15 CCM stations improved their ratings from an average of 2.6 in the fall 2002 ratings book to an average of 3.2 in the fall 2003 ratings book, an improvement of 23 percent.

This 23 percent increase in listenership positions us very favorably to continue growth in revenue and profit in 2004.

The continued growth of our contemporary Christian music stations, combined with our roster of startup and developing stations, our news/talk initiatives, all underpinned by our predictable block programming business, places Salem in a strong position to continue to deliver robust growth in revenue and in profits.

Before turning the call over to our CFO, David Evans, let me finish by commenting on our announcement this morning of a follow on equity offering.

Some of you may have observed that this morning we announced our intention to sell shares of our Class A common stock pursuant to a shelf registration statement on file with the SEC.

As you know, this means that we're now in a quiet period of a registered offering, so we're limited to what we can and cannot say about this offering.

I can tell you that the size of the planned offering will consist of 2,325,000 Class A shares by the company and 775,000 Class A shares by trusts, beneficially owned by me and Stuart W. Epperson, our Chairman, as well as 400,000 additional Class A shares covered by an underwriters over-allotment option.

The Company intends to use the proceeds of the sale for general corporate purposes, which may include the redemption of up to $52.5 million of our 9 percent senior subordinated notes due in 2011.

The transaction will be co-managed by Credit Suisse First Boston and Deutsche Bank Securities.

If you would like additional information about the offering, it is best that you obtain a copy of the prospectus and the prospectus supplement, which can be obtained by contacting any of the banks participating in this offering at the addresses indicated in the press release.

I will now turn the call over to David Evans, our Chief Financial Officer, for a more detailed discussion of our Q1 2004 results and to provide you with guidance for Q2 2004.

David?

Our results for the first quarter of 2004 were issued in a press release earlier today and are available on the investor relations portion of our website.

I will briefly review these results on an actual and same station basis.

In addition, I will provide guidance for the second quarter of 2004.

Net broadcasting revenue for the first quarter increased 11.5 percent to 43.2 million and our station operating income increased 26.1 percent to 15.6 million.

Station operating income margin increased to 36.2 percent in the first quarter from 32 percent in the comparable quarter a year ago.

This margin improvement is due to the growth in our startup and developing stations.

The startup and developmental radio stations, which represent approximately 40 percent of our portfolio, were originally purchased for a total of approximately $185 million.

For the last 12 months they have contributed approximately 4 million of station operating income, obviously well less than at maturity.

Assuming a 15 multiple, this would imply hidden asset value of approximately $125 million.

In terms of operating leverage our 11.5 percent revenue increase was achieved with a 4.6 percent increase in broadcasting operating expense.

In other words, revenue increased by 4.5 million and station operating income increased by 3.2 million year-over-year, a 71 percent incremental operating margin.

On a same station basis net broadcasting revenue and station operating income increased 10 percent and 27.3 percent respectively from the same quarter of last year.

As Ed mentioned, our music stations continue to grow at an impressive rate, generating on average a 19.9 percent revenue increase over first quarter last year.

Our remaining radio station portfolio contributed an eight percent same station revenue increase.

Within the same station increases our remaining portfolio is 8 percent.

There was a 6 percent increase in our block programming revenue, and an 8 percent increase in our network revenue for the quarter as compared to the first quarter of 2003.

Overall spot revenue increased 6 percent with a 58 percent increase in our national spot revenue, a 2 percent increase and our local spot revenue and infomercial revenue increased 41 percent.

The significant increase in national spot and infomercial revenue meant we had less inventory available for local spot business.

Eighty-five of ninety-two stations and ninety-nine percent of our net broadcasting revenue are included in our same station numbers.

Regarding our balance sheet, as of March 31, 2004 we had net debt of 320.9 million and were in compliance with all covenants.

We currently have a last 12 months financial statement leverage ratio of 6.8.

Our bank leverage ratio was 6.3 as of March 31 versus a compliance covenant of 7.25.

Our bond leverage ratio was 5.6 as of March 31 versus and incurrence covenant of 7.

Finally, for the second quarter of 2004 Salem is projecting net broadcasting revenue of between 47 and 47.5 million.

Net income for the second quarter of 2004 is projected to be between 11 cents and 13 cents per share.

We are projecting station operating income of between 17.5 and 18 million for the second quarter of 2004.

The second quarter 2004 guidance reflects the following factors -- startup losses associated with the recently acquired radio stations in the Jacksonville, Florida market and the launch of Bill Bennett's "Morning in America"; costs associated with the introduction of news/talk programming on our stations in Dallas, Philadelphia and Baltimore; continued growth from our underdeveloped radio stations, particularly our music stations; and finally, projected same station revenue growth of approximately 10 percent and overall revenue growth in the low double-digits for April 2004.

Our second quarter 2004 revenue guidance is based upon our assumption of high-single-digit same station and overall revenue growth for the quarter.

This concludes our opening comments.

At this time Ed and I would like to open the floor for questions.

Thank you operator

(OPERATOR INSTRUCTIONS) Jonathan Jacoby, Banc of America Securities.

Nice quarter.

Just four questions here.

One is it seems that you're just taking the unhedged portion of your nine notes.

Did you have any strategy about taking out a tender for the rest?

And you may not be able to answer this.

I understand that.

Second is a housekeeping question.

If you could go over your percentage of revenues from block music, Christian teaching talk, that would be helpful.

Third, was there a new sort of increased focus on infomercials?

They are up dramatically.

It seems to me beforehand you guys were sort of shying away from the infomercial.

And last question is color on current trends for May.

Can you just repeat your second questions, Jonathan, about the block music?

That was just housekeeping.

Percentage of revenues for your company from block music, Christian teaching talk and (indiscernible) news/talk.

To answer your first question, as stated in the press release, assuming we get the appropriate approvals from our bank group, it is our intention just to do the equity claw back on the 52.5 million of 9 percent notes, so no suggestion of a tender.

In terms of the infomercials, it does sound like quite a large percent increase, but it's off a relatively low base.

So I would just described that as part and parcel of the tactical business decisions that we make on a day-to-day basis at our radio stations.

Ed, do you want to talk on current trends, April, May, June, how you see --?

Jonathan, I would say, beginning with regards to the infomercial question, I think it also reflects the recovery of -- that kind of business is more sensitive to business cycles, and I think it does suggest at least an increase, a pick up generally in economic activity.

All I would say about the trends, what we seem to see is that last year for most of 2003 as we reviewed pacing every week we would have projections of booked and projected business.

During the month we would make goals, but we would see erosion week-to-week.

A little bit of erosion it seemed was the pattern for most of 2003.

I think that we've seen a change in first quarter 2004 -- perhaps fourth quarter 2003 as well -- where rather than seeing a bit of erosion we're actually seeing a bit of acceleration.

Again, that would suggest that the recovery is kicking in.

And I think it does give us some basis for optimism as we look at the rest of 2004.

In terms of your question regarding revenue breakdown, the music stations contributed 8.9 million of revenue in the quarter out of a total of 43.2 million.

In terms of block programming, block programming amounted to 36 percent of our total revenues.

Advertising -- so spot, both local and national -- accounted for a total of 51 percent of our revenues; infomercials, just under 5 percent; network revenue just under 7 percent.

I think that answers some.

Yes.

Thank you so much.

Victor Miller, Bear Stearns.

Two questions.

First of all, most radio companies' national general market advertising represents about 20 percent of a typical radio station's revenue.

What percentage of your business is national general market?

And what do you expect from whatever base that is?

And what is your total national percentage when you include affinity groups?

Secondly, in 2003-2004 you had about the same number of stations in the 29 percent or less margin --- about 46 in 2003; 43 in 2004, averaging about 8 percent margin overall.

Is there any base of your stations that you feel can not achieve a certain level of broadcast cash flow above, let's say, 40 percent because of the formats, because of signals, because they're a.m. teaching talk?

Is there any reason why that base should never reach those types of margins?

In terms of national spot revenue, as I mentioned advertising revenue represents 51 percent of our total revenues in the first quarter.

Of that 51 percent 14 percent of our advertising revenue came from national spots, of which the vast majority was generated by our own rep firm, as opposed to outside general market rep firms.

In addition, our network business accounted for about seven percent of our total revenues.

Are you going to be moving to outside rep firms?

In other words, what is your general market outlook?

We only use general market rep firms at our Fish music stations, so in Dallas and in Cleveland.

We've recently added a rep firm in Atlanta.

Those are the only markets where we use a general market rep firm.

In both cases those revenues were up -- I don't have a precise percentage in front of me -- probably a similar percentage to the overall growth of the music stations, so in the 20 percent area.

Victor, we very well may expand our use of general market rep firms as they are available in additional Fish markets.

And we will also review in the future expanding the use of general market rep firms for our news/talk stations.

We currently have agreements with the general market rep firms we do use to carve out the affinity portion of our own rep firms, so it actually works pretty well for us where we get the affinity business through our rep firm, define that business pretty clearly so there's no conflict, and general market business comes through the general market firm.

And there is an opportunity there to expand our involvement with general market firms.

In some cases they're not available or in some cases they have to be created.

That's a dialogue that we continue to have.

And I would expect to see expansion of our use of general market firms, both for the Fish format and in the future as we put more muscle behind the news/talk stations, I believe we will see some use there as well.

With regard to your second question about the maturation of radio stations and whether there are any stations that we would not expect to reach a 40 percent margin, I think the only markets that I would draw attention to would be the smaller markets that are outside of the top 50.

We have a stand-alone station in Oxnard.

That market is probably market 125, 126.

We have a stand-alone station in Columbus.

That also is a pretty small market.

We have three stations in Colorado Springs.

I think that is market 96.

Because they're smaller markets you can't drive the same kind of overall returns or the same overall margins.

So in those three cases I think our target would be to achieve margins in the 30 to 40 percent arena.

Although, Victor, I would add that in Colorado Springs we fully expect to reach the normal margins in that market because of the quality of the cluster and the fact that all three strategic formats are now in-place there.

I would perhaps add, although I'm not sure that I'm prepared to resign myself to it, that I think David is right with Oxnard and Columbus.

The Hawaii market is always a very competitive market, and it may be a little more challenging there to get some of the robust margins you get in other markets.

But we're building a very strong cluster there, and I do expect to develop respectable margins in that market with time.

Thank you very much.

James Marsh, SG Cowen.

Two quick questions here; one related to the Bill Bennett rollout.

Ed, could you give us a sense for how many affiliates you think you need?

What are your target number of affiliates?

And then if you could flush out how many Salem stations are represented in that 74 that you mentioned you currently have?

Secondly, just to follow up on Honolulu, could you elaborate a little bit on the new station acquisition and what that does for your market position?

With regards to the Bennett rollout, obviously I'm very pleased that as of last week -- I haven't gotten the latest affiliate count that we're at -- that we were at 74.

I can tell you that our target -- this is always ambitious; we always set ambitious targets -- that we would like to have 100 affiliates by the end of the second quarter.

Clearly we will get there sometime this year, but that's a target that we're shooting for.

In terms of how to answer your question accurately, I think in terms of syndication, critical mass it's not just the number of stations, it's also the size of the markets and the stations that you're affiliated with.

That's why I commented in my opening remarks that we penetrated top 10 and top 20 markets already.

That's very encouraging.

I think that virtually all 16 of our stations are clearing the program or most of it.

I think in Sacramento because we have a morning show that starts at 5 AM we clear two of the three hours.

I think that's the only exception.

But I think that we in some respects consider it to be profitable almost at startup in the sense that you recognize that it gives us the ability to rollout our format as we have in Dallas, Philadelphia and Baltimore by leveraging in those markets this talent for morning drive.

If we were to develop local talent for morning drive in those markets the cost would be significant.

So when you look at the value to us, not only do you look at the value of achieving critical mass of affiliates for purposes of profitability for that specific program, but there's also a very substantial benefit to us as we use this very attractive program.

We're very bullish on it having listened to it in the first few weeks.

There's a great advantage for us to be able to leverage that in terms of cost savings and ease of rollout with credible programming in the markets that we continue to expand in.

In terms of Honolulu, I have to tell you that a driving motivation for acquiring the station that was a relatively modest investment was that we can achieve very substantial improvement in our nighttime coverage for KCBQ in San Diego, and that reason alone would have justified the expenditure on that acquisition.

It gives us another station.

It provides us some other flexibility that we hope to develop that I am not really in a position to get into a lot of detail on.

I think the purchase price was $500,000 on the station, and we will be able to recover that, both in terms of the benefit in San Diego and in terms of leveraging an additional usable radio station in the Honolulu market.

The incremental cost of operating this additional station is very, very small.

We will just roll it in on our existing platform, and we will basically not expand much to expand another complementary format.

So you will just simulcast that San Diego station?

Is that what you're going to do?

No.

It doesn't have anything to do with simulcast.

It happens to the co-channeled to San Diego.

San Diego is on 1170, and so is the station that we acquired.

We're preparing, and may have already filed, an application to change that frequency to 1180, and by changing it to 1180 it relieves protection requirements of the San Diego station which allows a very substantial expansion of the nighttime San Diego station, and in terms of audience increase it's very dramatic.

So as I said, that benefit from this acquisition alone justifies the expenditure we made, which was $500,000.

We will still have the radio station.

We will still get additional benefit out of the radio station.

And so it doesn't have anything to do with simulcasting San Diego programming.

It is co-channeled to San Diego.

We're changing that.

That allows significant a expansion of the San Diego nighttime signal.

Excellent.

Thanks Ed.

Paul Sweeney, Credit Suisse First Boston.

Just a couple of questions.

First, Ed, on those news/talk stations which is a new and growing format for you guys, could you just talk about the economics of launching a news/talk station and how you kind of see the timing before you break even?

And number two on that subject, you've launched in a couple of big markets so far recently.

How many more markets do you anticipate doing perhaps in the '04-'05 timeframe?

Number two, on your Fish stations, the music stations, we saw again in the first quarter a pretty strong year-over-year improvement in the operating margin.

Can those stations hit -- approximately a 50 percent margin would be typically you're seeing in some of these large market FM music stations.

Is that a similar type margin that you guys can achieve there?

I can comment on the second question, but I'm going to let David take that in a minute.

With regard to the news/talk stations, we can approach the rollout of these formats in a number of ways.

We can do it depending upon the size of the market and the circumstances.

For example, Colorado Springs, earlier 2003 we acquired an AM station in that market.

We already had 200,000 watt Class C FMs.

We were doing our teaching talk format on one and we were doing the Fish format on the other.

We had been trying for five years to find an AM station that we could roll into that cluster so that we could do our news/talk format.

We finally found one.

It's a very good one.

We were fortunate to be able to get it.

Our investment is $1.5 million.

We acquired the real estate that was associated with it for that same price, which means that if we use our syndicated product -- which in fact is what we are doing -- we role that format out -- now, we have got 15 hours a day with the Bennett program; we have 15 hours a day of syndicated talk programming covering every day part except the overnight, and by taking that programming, utilizing it as the principal format focus of that Colorado Springs station, the costs of the startup are extremely small.

Literally you've got a little bit of property tax, you've got some power bills, you've got a phone line to get your programming out, the transmitter, you've got a little maintenance, a little insurance.

It really is very small.

So you become cash flow positive very quickly, which is what we had done there.

Now I can get more aggressive.

If it were a bigger market, and depending upon other circumstances, I might want to invest in promotion -- startup promotion.

I might want to develop a separate sales force.

In that case I have not.

We're using the same sales force to sell that property as the other two because of the size of the market.

And in terms of the cost of a promotional budget it's far less in a smaller market.

So, Paul, it varies market by market.

Dallas, Philadelphia and Baltimore are bigger opportunities.

We are rolling those out with more promotional dollars and there is more expenditure for support services such as news and information that we have not had to do in Colorado Springs because in Colorado Springs we already had the two FMs that formed a much stronger cluster to roll it out on.

So it varies.

I can't give you a simple cookie cutter answer, but we do have the ability to roll it out very inexpensively.

We have the ability to make them cash flow positive relatively quickly.

And then if in a larger market we want to put more muscle behind it and really focus on it, which in many cases we will because it's justified, then we will begin to turn it up incrementally as our time and energy and focus allow us to do that.

In the cases of Dallas and Philadelphia, in both those situations we did invest in upfront marketing and promotion.

What I think we would expect to see on those stations is a quarter of losses; we then reach break even, and then after about six months they would be profitable and growing profitability every quarter.

In the case of Colorado Springs that Ed mentioned or Boston that we acquired last year, in both those cases we were immediately profitable because we were less aggressive about upfront marketing and promotion.

Vis-a-vis the music stations, I think our target for the music stations as a whole would be somewhere between 40 and 50 percent margins, say 45 percent.

The most mature of our Fish stations in KLTY in Dallas.

That market this quarter achieved a 51 percent station operating income margin.

Our next closest behind that is Orange County that had a 45 percent margin.

Those are, I think, the most mature of the Fish stations.

The other Fishes are all in a development stage, whereas those two are at this point -- they're not mature, but they're getting quite close.

Thanks very much.

Lee Westerfield, Harris Nesbitt.

Good morning.

Two questions, if I may.

The first one picking up on the thread of the San Diego upgrades, can you update us on the progress in Chicago and Atlanta where I recall that you were upgrading two stations presently?

Remind us of both the audience reach, as well as CapEx that will go into those project this year.

And the second question actually turns toward some complementary businesses, the Web-based businesses.

Can you detail what you did in terms of revenue in the quarter, ambitions towards break even in that segment?

And then relatedly, what, if any economic value, comes out of your strategic deal with Canterra?

With regards to the San Diego upgrade, yes.

In Chicago we have a construction permit to increase the nighttime from 5,000 watts to 50,000, so the station becomes 50,000 day and night.

That project is underway.

We have all of the entitlements, and we're under construction even as we speak.

We would hope to get close to completing that and being able to apply for program test authority (ph) in the fall of fourth quarter this year.

With regard to Atlanta, we have also a construction permit.

We also have entitlements.

And we are well underway in construction, which basically gave us the right to increase the tower in Atlanta by about 700 -- a little more than 700 feet, which is a very significant upgrade.

It also allows us to install state-of-the-art equipment that we think will perform better.

I'm not quite sure what the status is -- we have a partner that wants to take advantage, by the way, of that improvement so that we are able to recover a substantial amount of our costs to net investment.

As I say, it's underway and we would anticipate being complete sometime toward the end of this year in the Atlanta FM upgrade.

In terms of the CapEx on those two projects, it's a total of $8 million, approximately $4 million for each project.

And we would expect all of that to be incurred this year.

In terms of our Internet and publishing business, our non-broadcast media segment had revenues of just over 1.9 million in the first quarter.

There was a loss of 216,000.

That really is due to some seasonality factors that impacts both the publishing and Internet business.

And in fact, if you look at our guidance for second quarter you will see profitability for that segment.

I think in terms of how we look at those businesses, the Internet business is for us very, very much a gross business as the Internet continues to expand and mature.

And we would expect to see strong growth in both revenue and profitability from that business.

The publishing business is much more of a mature business.

It is a low margin business, and we would expect to make modest profit from that business.

But I would add, Lee, on the publishing business, again, you pointed out they're complementary and we are able to leverage that publishing platform in a lot of very creative ways that have helped us with the radio station portfolio.

We currently are producing magazines for our teaching talk stations called "Faith Talk".

They are very professionally done because we have that infrastructure.

We are doing the same thing with our Fish formats.

So we're able to taking the national content that we've developed for, say, CCM Magazine, incorporate it into a local private-labeled, say KLTY and CCM Presents.

It's been very effective in generating local revenue and we also generate some national revenue.

Furthermore, there are occasions now where we have accounts, national accounts, that are interested in developing their own magazine as complement to what they do.

And in those cases we are able to do that as part of a broader advertising package.

And again, the complementary nature of these businesses is very real and very helpful.

David Bank, RBC Capital Markets.

Two quick ones.

The first, it seems to me as if your expense growth performance was slightly better than the original guidance you gave about two months ago.

I realize that you updated guidance on the revenue side, but not on the expense side.

I was wondering if you could talk about any changes in the expense side you might have seen during the quarter.

Specifically where there any push-forwards of expenses from the format flips, stations launches and Bill Bennett launch from 1Q '04 to 2Q '04 versus what you were thinking two months ago when you announce the format flips and the Bennett launch?

And the second question is can you talk about some of the other major radio groups that are carrying Bill Bennett on at least one of their stations and maybe give some indicative markets?

If you look at the Q1 expenses, there were two key items that I would mention in terms of why the expenses ran a little lower than we originally guided to.

The first item is we had planned on carrying out a billboard campaign at KRLA in Los Angeles in the first quarter.

That campaign we launched, I believe, March.

We had originally anticipated January.

So some of that campaign is running into the second quarter, whereas originally we had it planned for the first quarter.

The timing will better work with the spring book.

The second reason was that our bad debt expense ran slightly under budget, so we had a favorable variance in that area in the first quarter.

With regard to your question, David, about other groups taking the Bennett program, I'd be happy to provide you with more specific detail if you want to follow up with us because I don't have that with me.

I can tell you there clearly are other major groups that have picked it up.

One of the advantages -- and you will see more of that, and the reason that we will see more of it as we develop the affiliate list is that, first of all, with regard to West Coast stations and Mountain Time stations, of course the program West Coast 3 AM to 6 AM, and so there is a need for programming in that day part and it's a relatively easy thing to get some affiliates there.

In Los Angeles, San Francisco, San Diego 5 AM to 6 AM is drive time and you've got more cars on the freeways in those cities than you have in many cities that are sizable.

So that's important inventory for us.

I can tell you that I believe in San Francisco I think we've signed a Clear Channel affiliate in that market.

Before I get too detail I need to clarify that.

The other reason why I expect to see a number of the other groups pick that program up is because every major syndicator has been trying to find talent to fill that 6 AM to 9 AM East Coast drive time slot.

The only syndicated product really of substance that is out there has been Don Imus program, and we have already exceeded the number of affiliates that program has without even being in the business for 30 days.

There is a vacuum.

We have found a talent that fills that vacuum we think very nicely with a Washington-based program, which is where think it ought to be based, heavily news-oriented and public affairs and public policy oriented.

That's the place to originate it.

There's no one that has got a better rolodex and better context in that market than Bill Bennett, and there's no one that is more articulate and knowledgeable, who can speak with authority on those issues.

This is why the program is doing very well, and we're very optimistic that we will have broad syndication of that program across all major groups.

Terrific.

Jim Goss, Barrington Research.

A couple of things.

One, I was wondering if the success you've been experiencing in the music and talk formats recently have begun to improve the amount of choice or the price you're willing to pay or able to pay for certain acquisitions, which therefore enhances the ability to make some acquisitions going forward.

And I'm wondering also if there should be any acquisition activity enabled or envisioned by the financing that your undertaking right now.

I think that clearly the success does mean that we can -- and as we continue to develop this success it does continue to inform us as to what is an appropriate multiple to pay for properties.

We do do a due diligence as we approach acquisitions.

We have our own internal models that we apply in terms of what we would like to see happen.

And there's no question that as we're able to take these stations to high levels of profitability and sustain that, that it's going to justify a more aggressive approach to acquisitions.

In terms of the offering obviously we said general corporate purposes, and you can assume that that includes general corporate purposes, which acquisitions would not be excluded.

But I really would rather not comment on that since we, as I said, are in a quiet period as to that offering.

One other thing I might ask.

You indicated Dallas and Orange County continue to be the best successes you have had in music.

Are there any specific markets that you think are the next ones likely to break out?

Yes.

First of all, we like Dallas as a prototype because it's been in the format longer than any other station in our portfolio.

Remember, when we acquired it it had been in the format for better than a decade under other ownership.

We were able to take it to new levels, but it had the momentum.

And we think that that success can be translated to these newly acquired stations, or acquired more recently, i.e. (ph) the real challenge here.

I think it's something that investors need to keep their eye on, is can we translate the success of these more mature stations to these other markets.

We clearly believe the answer is yes.

I would look at Atlanta.

I think you'll see a very nice pattern developing.

I would look at Cleveland.

I would look at Portland.

I would look at Sacramento.

These have all come on a little bit later.

And then I would look at the others.

They are all falling -- you've got smaller markets like Colorado Springs that is doing very nicely.

But I think in terms of chronology, the logical place to look is Atlanta, and then I would look at Cleveland and Portland, and then I would focus on the others that I've mentioned.

Lastly, if I might, the indecency issue has been raised as something that would be a benefit to Salem.

Are you actually seeing more than just a general aura that this is good for you?

Or are there any hard fact ways where you're experiencing that positive?

We may have mentioned in our last earnings call, we got a similar question.

We are in the process of trademarking the position statement, "Safe for the Whole Family".

We have tested that.

It tests very well.

We thought it originally, gee, is that an appropriate position statement we like?

Who wants safe?

We want to be challenging.

But the fact of the matter is when it's a soccer mom and it's her kids, she wants programming that she's comfortable will not subvert her personal values and that she won't have to be embarrassed about.

So it's been a very important positioning statement for us.

I think what is has underscored for a lot of people -- investors, advertisers -- is the fact that there is a very significant appetite out there for programming that represents an alternative that will not be an offense to parents and to people's values.

I think we've seen in both ways.

First of all, "The Passion of the Christ" is a phenomenon of again underscoring the fact there is a very large audience that is interested in the kind of programming we provide.

That's is a positive vein.

If you look at it negatively, of course the outcry against the programming that clearly has been offensive underscores again the positioning of the programming that we have embraced.

And I think the biggest thing, Jim, is the fact that both advertisers and investors are beginning to recognize what we've been saying for a long time -- the audience that is seeking this kind of alternative is large and it's growing.

Thank you Ed.

(OPERATOR INSTRUCTIONS) Bishop Cheen, Wachovia.

You, as usual, have answered so much of this.

Let me just focus on two areas.

One, if you look at last year your strong quarters were Q2 and Q4.

And again, you've talked about the timing of expenses.

And certainly the acquisitions and developing some more startups I'm sure comes into play.

Do you anticipate this year will repeat the pattern and you will see -- here we have had Q1 be exceptionally strong, Q2 up against a strong comp and some higher expenses for the program launches that you've talked about.

Do you anticipate a stronger Q3 or a stronger Q4 this year?

I think if I were to compare Q2, Q3, Q4, the toughest comp is certainly Q4, then Q2, and then Q3, in that order.

We don't focus too much on which quarter has got the toughest comp; we focus on doing the best job we can this quarter, next quarter, the quarter after and just driving the best operating results that we can achieve.

But in ranking order that's how I think I would classify the three upcoming quarters.

That is helpful.

Second, can you refresh our memory -- in terms of the startup covenants, when do they strip away in your bank facility and in your bonds?

In the bonds there are no startup covenants.

In the bank facility there are two adjustments that we're allowed to make for startup radio stations.

The first is that we can add back and adjust the debt balance for half the cost of any startup acquired radio station up to a cap of $45 million for a period and 18 months from date of acquisition.

If it involves a reformat.

If it's a reformat.

We can also add back all startup losses to the operating cash flow number, again for a period of 18 months.

So it's not a hard deadline strip away; it is really pertaining to each acquisition?

It pertains to each individual acquisition, and is specific as to that acquisition on the date that that acquisition takes place.

Last question, digital upgrades.

Have you laid out a schedule for doing any kind of digital retrofit to your stations?

And if so, is it kind of a top-down major market music stations first?

We haven't laid out a specific timetable.

We continue to monitor this very closely.

We continue to be informed by our engineering people as to the progress that is being made in terms of the IBOC ubiquity initiatives (ph).

And I would think, though I can't give you any specific answer, I would think your last comment is probably the likely approach that we will take.

It is something we're continuing to look at.

And we may be able to provide more specific guidance in the future on that as we get a little closer to it.

Thank you Ed.

Thank you David.

Victor Miller, Bear Stearns.

Thanks for letting me ask another one.

The first quarter you reported 11.6 percent growth; second quarter it looks like the guidance would be low 8 to mid-9s for the guidance versus reported last year, April double-digit.

Are you taking the same kind of strategy that you did in terms of first quarter in terms of how you see guidance?

Or do you expect there to be any deceleration?

Secondly, there's going to be some 273 FM licenses and some other radio licenses are going to be auctioned off, I believe in the November timeframe.

Are there any markets where you might be able to pick up some stations there given what you would want to do?

In terms of the second quarter guidance, there are a couple of factors that I would mention.

First of all, we reformatted from Christian teaching/talk to news/talk on April 5th in Dallas, Philadelphia and Baltimore, which means that we turned off the old Christian teaching/talk revenue streams and a combination of advertising block and are starting afresh with new advertising revenue streams.

You can see the impact of that in the guidance we've given.

So if you compare the Q2 numbers versus Q1 you can see the impact of that change.

Yes, there's a modest short-term determine.

We think in the medium and long term those new news/talk formats will be significantly more profitable than the old Christian teaching/talk formats.

The other factor that's in there is visibility remains not what it was two years ago, three years ago.

And there's a lot of business still to be written for May and June, and we have to get that done.

We have to get that executed.

So we bear that in mind when we set our guidance.

Among the new FCC process for some further FMs, I will let Ed tackle that matter.

Let me say, Victor, on the first question also that just so there's no misunderstanding, in the markets David mentioned -- Dallas, Philadelphia and Baltimore -- in each of those cases there is no retreat from the Christian teaching/talk format because that continues to be a very viable format for us.

But in each of those cases these were second stations primarily acquired when we bought out competitors that were in the space, and we found in these markets that we could consolidate the format on one of the stronger of the stations in some cases that allowed us to actually keep most of the revenue, upgrade the programming so that we were primarily programming first line and not so many maybe second-tier programs.

So it improved the teaching/talk presence, and it should not be interpreted in anyway as a retreat from that format.

That continues to be very viable and robust and foundational for us.

Most of these auctions that you referred to are in really small markets, the overwhelming majority of them.

There are not many licenses that will be auctioned that wouldn't be markets that we would be particularly interested in.

But I have seen in the past that whenever this type of thing happens it always ends up putting additional inventory on the market.

The people that prevail in the auctions are those that were parties to the auction, and therefore you have to be a party to participate.

In some cases there are ways that you can be sort of a white knight -- you can come in in some instances.

But for the most part you have to be a party to participate.

Many of them who acquire the properties may not have the intention to be operators long-term, particularly if they are stand alone.

So inevitably they do result in additional inventory which we would welcome, particularly in markets that we may operate in.

So at this point there's no specific targeted market that we're following, but we will keep an eye on them, and as opportunities arise that we think would make sense and be accretive to shareholders we certainly will be there and will view them.

Thank you.

At this time we are showing no further audio questions.

I would like to turn the floor back over to Evan for any further comments.

We would just thank all of the participants in the call, and I think that will conclude the call.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.