Salem Media Group Inc (SALM) 2004 Q2 法說會逐字稿

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

Copies of the earnings release have been sent to you for your information and reference during this call.

At this time, all participants have been placed on a listen-only mode.

We will be conducting a question and answer session later on in the conference. (OPERATOR INSTRUCTIONS).

The conference is being recorded today.

At this time, I would like to turn the call over to Mr. Evan Masyr.

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

As a reminder, if you get disconnected at any time, you can dial into 973-582-2734 or listen from our Web site at www.Salem.cc.

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

After their opening comments (technical difficulty) 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 lead 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 broadcast, 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 to 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 -- specifically, 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 Web site at www.Salem.cc (technical difficulty) as part of the current report on form 8-K, and earnings release issued by Salem earlier today.

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

Thank you Evan.

Good afternoon everyone.

And thank you for joining us on today's conference call.

I'm pleased to report that Salem continues to have a successful 2004.

Accomplishments in the second quarter 2004 that we will highlight today include a strong quarter of double-digit revenue and Station Operating Income growth, the successful completion of a 3.1 million share follow-on equity offering, the announcement of 3 radio station acquisitions, continued growth of our contemporary Christian music stations and progress with the implementation of our news talk initiatives.

So before focusing on the numbers, let me update you on some of the larger developments at Salem this quarter.

In May, Salem successfully completed a follow-on equity offering at $30 per share.

The offering comprised 3.1 million shares of Salem's Class A common stock, of which the Company sold 2,325,000 shares.

And 775,000 shares were sold by trusts beneficially owned by Stuart W. Epperson, our Chairman, and by me.

The offering achieved three principal goals for Salem.

First, we strengthened our balance sheet by using a portion of the net proceeds from the offering to redeem $55.6 million of our 9 percent senior subordinated notes due 2011.

Second, by improving our leverage ratios, we have created additional acquisition capacity.

And third, we have substantially increased our share float, which provides greater liquidity for our shareholders.

During the quarter, we have also been active on the acquisition front, completing the acquisition of AM stations in Atlanta and Honolulu, and the acquisition of ChristianJobs.com, a faith-based Internet job search business.

Additionally, we have pending acquisitions of AM radio stations in Detroit and Cleveland, and 2 FM radio stations in Honolulu.

With these acquisitions, we will have a presence in every one of the top 10 markets and 23 of the top 25 markets.

As is clear from this activity, we continue to find interesting opportunities to add additional radio stations to our portfolio, both talk-ins to existing clusters as well as in further top 50 markets.

Operationally, a key initiative for 2004 is the expansion of our news talk platform in several ways.

First, we're adding new content.

We're improving listenership and ratings.

We're growing revenues and profits as well as acquiring additional news talk stations.

We're making good progress in each of these areas.

On the content front, on April 5 we launched a new East Coast morning drive syndicated program -- Bill Bennett's Morning in America, hosted by Bill Bennett, the former Secretary of Education under Ronald Reagan, the former drug czar under George Bush senior and also a regular guest on numerous radio and TV talk shows.

Our initial results are in line with our expectations.

The syndication rollout is progressing very well.

The program launched on April 5 with 53 affiliates, a number that has now increased 83 affiliates, including stations in several 7 of the top 10 markets and 21 of the top 50 markets.

Our goal is to exceed 100 affiliates by the end of the year.

Programming quality and affiliate satisfaction continue to exceed our expectations.

On the listenership and ratings front, we are achieving favorable quality feedback and response from listeners.

Over the last 12 months, we will begin to see the ratings impact of the Bennett program.

On the stations side of our news talk initiatives, with the addition of Bill Bennett to our existing programming lineup we have our product much closer to where we want it now.

And we're beginning to roll out a modest marketing effort at selected stations.

We are, as a result, beginning to see some interesting growth in listenership and ratings.

In Denver, for example, ratings have doubled over the past year to a 1.7 share -- adults 12 plus.

In Minneapolis, they were up 60 percent to 1.6 share -- 12 plus.

Most recently, at KRLA in Los Angeles ratings have doubled to 1.4 share in the spring 2004 ratings book.

We are encouraged by this ratings growth, both in terms of what it means for our financial performance in these markets as well as in terms of the opportunity represented by achieving similar improvements in our other news talk markets.

Finally, as a result of recent acquisitions and format launches, we have added, over the past 12-months, news talk stations in San Francisco, Philadelphia, Boston, Detroit, Atlanta, Baltimore, and Cleveland, which are all top 25 markets.

We believe that we will see similar listenership and ratings success in these new markets and translate this into substantial revenues and profits.

Let me now discuss our excellent second quarter 2004 financial results.

I'm pleased to report that Salem achieved another very strong quarter of double-digit revenue and Station Operating Income growth, which substantially exceeds the performance of the radio industry as a whole.

This performance is a result of continued accelerated growth of our start-up and developing stations, particularly our contemporary Christian music stations; very strong growth in our national spot business; and the steady growth of our block programming business.

For the second quarter of 2004, we generated net broadcasting revenues of $47.8 million, an increase of 10.1 percent from the same quarter last year.

Station Operating Income was $18.9 million, an increase of 18.9 percent.

On a same station basis, net broadcasting revenues for the quarter grew 9.4 percent to $46.7 million.

And same Station Operating Income grew 23.4 percent to $19.1 million.

Particular significance within these numbers is the strong operating leverage we are generating.

Our overall SOI margin improved to 39.6 percent from 36.7 percent in the second quarter of last year, a result of both robust revenue growth and careful cost management.

We expect these results to once again be among the best in the radio industry.

As measured by the radio advertising board, industry revenues grew by 2 percent for the second quarter.

Therefore Salem will have out-performed the industry as a whole by approximately 700 basis points.

Looking ahead, these growth trends have continued in our third quarter guidance, which we released earlier today.

And we are optimistic about the second half of 2004.

The reasons for this strong growth are twofold.

First, our predictable block programming revenues, representing 32 percent of sales broadcasting revenues, grew by 6 percent in the second quarter -- once again steady and consistent growth.

Second and more importantly, we continue our focus on the growth of our start-up and early development-stage stations.

Our 99-station portfolio consists of 5 pending acquisitions, 16 stations in a start-up stage, 27 stations in an early development stage, 32 stations in a developed with upside stage, and 19 stations which we consider to be fully mature.

We believe that approximately 45 percent of our portfolio has significant upside potential.

And we continue to make real progress in moving our stations up the development curve.

Looking at our music stations, we continue to see improving ratings and increasing revenue and profit growth.

The music stations acquired since 2000 generated revenue of $11.2 million for the quarter, an increase of 20.8 percent from the same quarter last year.

These stations generated operating income of $4.8 million in the second quarter of 2004, compared to $3.1 million in the second quarter 2003 -- an increase of 54.3 percent.

From a ratings standpoint, we continue to see strong progress in all demographics, particularly our core target demographic of females 25 to 54.

Our 15 CCM stations improved their ratings from an average of 2.7 percent in the winter 2003 ratings book to an average of 3.2 in the winter 2004 ratings book, an improvement of 18.5 percent.

This 18.5 percent increase in listenership positions us very favorably for continued growth in revenue and profit in 2004 and 2005.

Most recently, the spring 2004 ratings book our FISH station in Atlanta achieved its highest ever ratings, with 5.2 share females 25 to 54 ranking the station number 7 in the market in our demographic target.

The continued growth of our contemporary Christian music stations, combined with our roster of start-up and developing stations and our news talk initiatives, all underpinned by our predictable block programming business, positions Salem favorably to continue to deliver robust growth in revenues and in profits.

I will now turn the call over to David Evans, our CFO, for a more detailed discussion of our second quarter 2004 results and for discussion of guidance for the third quarter 2004.

Thank you Ed.

Good afternoon everyone.

Our results for the second quarter 2004 were issued in a press release earlier today and are available on the Investor Relations portion of our web site.

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

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

Net broadcasting revenue for the second quarter increased 10.1 percent to 47.8 million.

And our Station Operating Income increased 18.9 percent to 18.9 million.

Station Operating Income margin increased to 39.6 percent in the second quarter, from 36.7 percent in the comparable quarter a year ago.

This margin improvement is due to the growth of our start-up and developing stations.

These start-up and developmental radio stations were originally purchased for a total of approximately 185 million.

For the last 12 months, they've contributed approximately 4.5 million of Station Operating Income well less than they will contribute at maturity.

We believe we will see substantial growth from these stations as we drive them to maturity.

In terms of operating leverage, our 10.1 percent net broadcasting revenue increase was achieved with a 5 percent increase in broadcasting operating expense.

In other words, comparing second quarter '04 to second quarter '03, net broadcasting revenue increased by 4.4 million.

And Station Operating Income increased by 3 million year-over-year, a 68.7 percent incremental operating margin.

Turning to our same station numbers, net broadcasting revenue and SOI increased 9.4 percent and 23.4 percent respectively.

As Ed mentioned, our music stations continue to grow at a strong rate, generating a 21 percent revenue increase over second quarter last year.

Our remaining radio station portfolio -- our talk stations contributed a 6 percent same station revenue increase.

Within the same station increases of the 6 percent, there was a 6 percent increase in our block programming revenue and 2 percent increase in our network revenue for the quarter.

Spot revenue increased 7 percent, with a 41 percent increase in our national spot revenue and a 3 percent increase in our local spot revenue. 85 of our 94 radio stations and 98 percent of our net broadcasting revenue are included in our same station numbers.

Regarding our balance sheet, as of June 30, 2004 we had net debt of 271.5 million.

And we're in compliance with all of our bank and bond covenants.

Our bank leverage ratio was 4.9 as of June 30, 2004 versus a compliance covenant of 7.25.

Our bond leverage ratio was 5.1 as of the same date, versus an incurrence covenant of 7.0.

As of June 30, 2004 we had a financial statement leverage ratio of 5.4 compared to 6.8 at the end of the first quarter.

This improvement in leverage is a result of the following equity offering and redemption of a portion of our 9 percent senior subordinated notes.

Finally, for the third quarter of 2004 we're projecting net broadcasting revenue of between 46 million and 46.5 million.

We're projecting net income for the third quarter of between 10 cents and 12 cents per share.

And we are projecting Station Operating Income of between 16.5 and 17 million for the third quarter 2004.

This third quarter 2004 guidance reflects the following assumptions -- start-up losses associated with the recently acquired stations in Jacksonville, Boston, Atlanta, Cleveland and Honolulu, as well as the launch of our new national morning program, Bill Bennett's Morning in America.

The guidance also reflects costs associated with the introduction of new store programming on our stations in Philadelphia, Dallas, Baltimore and San Francisco; reflects continued growth from Salem's underdeveloped radio stations, particularly our contemporary Christian music stations.

The guidance also incorporates same station revenue growth of approximately 10 percent for July 2004.

And we're projecting third quarter 2004 same station or overall revenue growth in the high single digits, and third quarter 2004 overall SOI growth in the high single digits, and same station SOI growth in the low to mid teen double digits.

That concludes our opening comments.

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

(OPERATOR INSTRUCTIONS) Drew Marcus, Deutsche Bank.

Good afternoon gentleman.

This is actually James Dix stepping in for Drew.

I had a couple of questions on your growth initiative.

First, I think previously you indicated that for the full year your music stations could do something on the order of maybe 40 million in revenue, and maybe 10 million in SOI.

I wanted to know whether you still felt comfortable with that, or whether you thought perhaps given your strong second-quarter results you might be able to do better.

And second, just regarding your news talk initiatives and the additional stations you have added -- do have any sense as to kind of what the overall SOI loss attributable to those stations will be for 2004?

And then, finally, a couple of housekeeping items.

David, do you know what the third quarter '03 same station base is for revenue?

And Station Operating Income?

And, finally, just on EPS guidance -- I wanted to confirm that the weighted average shares would be around 26 million, corresponding to that 10 to 12 cent guidance.

Thanks.

I think in terms of the music stations we're comfortable with the number that we've previously provided.

So approximately 40 million -- I don't think at this point we would be changing that number for the year.

Your second question, James -- just the SOI loss, can you just repeat your question?

Yes, related to your news talk initiative that you started this year, do you have a sense as to what the overall SOI loss could be -- what the rough range of that could be for 2004 from that initiative?

I think in terms of a rough range -- I would say somewhere between $1 and $2 million.

That would include the Bennett launch.

Q3 2003 -- in terms of a same station base, I think you'll find that is one of the schedules to our press release.

We have provided a reconciliation of our same station numbers to our total numbers for Q2.

I think you'll find that Q3 would be reasonably similar to the Q2 comparisons.

And then in terms of the weighted average number of shares for this quarter, the weighted average number of shares is a blend because of the follow-on offering that took place at the beginning May.

For third quarter, I think it will be a weighted average number of shares of 26 million, which includes the full impact of the follow-on offering.

Victor Miller, Bear Stearns.

Good afternoon.

Thanks for taking the question.

Just on the cost a little bit, the same station cost for the second quarter -- only up 1.4 percent, but that drove 9.4 percent revenue growth.

Can you talk about how you're able to maintain a fairly low cost base and generating that type of revenue growth?

And then for the third quarter, it looks like your same station -- I'm sorry, reported expense growth guidance is somewhere around 8.5 percent range.

It looks like it was about 5 percent in second quarter.

Could you talk about why that is accelerating?

Does it really have to do with these start-up losses and the introduction of the news talk?

And then, I'm struck, Ed, by the fact that in July you actually said your same station revenue growth was 10 percent -- which it actually seems to accelerating, versus your 9.4 percent same station in first quarter.

Given what we've heard about July not being a particularly great month for radio, I'd like to see what you say in terms of what you saw in July versus others, and whether this gives you optimism for the rest of the year or the second half of the year.

Thanks.

In terms of the expense growth -- differences between Q2 and Q3, the 1 percent compared to the 8 percent -- a key factor is we have a number of new stations and/or reformatted stations that came online during Q2 and/or Q3 that, in terms of our total expenses, causing (sic) an increase in our overall expense numbers -- so for example, the recent acquisitions in Atlanta and Cleveland and Boston and markets like that, as well as the reformats that we did in Dallas and Philadelphia.

In terms of second quarter and the expense growth being only 1 percent, we were pretty tight in terms of what we spent on marketing, advertising and promotion.

I think we expect to spend a little bit more on that in Q3 versus Q2, particularly with the full book beginning in September.

So I think the differences you see relate to either A) new or reformatted stations, or B) the timing and size of specific marketing, advertising, promotional campaigns.

Victor, with regard to the second part of that question, I am not sure that I grasped your question.

Could you -- did you mention that we gave guidance the second quarter --

No, you said that your same station revenue growth in July was about 10 percent.

And that was even higher than your same station that you recorded in second quarter at 9.4 percent.

Given the fact that most people thought July was kind of a sluggish month for the radio business overall, I was struck by your out-performance there.

Could you talk a little bit about why you think you did so well on a relative basis?

And also, does this give you optimism that you're actually seeing acceleration as you start the second half, relative to the quarter you just left?

I'm not going to go so far as to say I'm seeing acceleration.

We're very optimistic about the way it is developing.

And July was just a good month for us.

There's 31 days in July.

And with block revenue, sometimes that impacts us a little differently than other broadcasters.

But it was a pretty robust month; the national spot was particularly strong.

We are cautiously optimistic that the rest of the quarter is going to perform along the lines of our guidance.

I really can't give you anything specific, Victor, other than a general optimism and a reasonably solid performance that we see so far.

I think we'd look at July and say that 10 percent increase is consistent with our performance for the first 6 months of 2004.

For the first quarter, we averaged 10 percent same station growth.

For the second quarter, we averaged 9.4.

So it's just continuing to make progress at our developmental radio stations that's driving this number.

And the progress we're making in the developmental stations is a result of growing listenership and our sales staff translating that into revenue growth, neither of which is dependent upon the strength or weakness of the economy and the strength and weakness of radio advertising.

Obviously, we would love to be working in a stronger radio advertising market.

But we continue to focus on our operational activity.

Jonathan Jacoby, Banc of America Securities.

This is Hooper Stevens for Jonathan.

Most of my questions have been answered on the expense and revenue front, but if you can talk a little bit about the music ratings that you have seen most recently, and the kind of strengths and weaknesses, particularly maybe Dallas --?

Thanks.

The overall trend is upward.

And we commented on comparing the second quarter '04 to second quarter of '03.

Remember the target demographic that were particularly interested in with the FISH formats is women 25 to 54.

If you take a look at Dallas, while I think the 12 plus numbers were down a tick, the 25 54 were actually up.

And I think we maintained our position as third overall in the market.

So that's just fine.

We are in business and doing quite well if we are in the top 10.

We ideally would like to be in the top 5.

So I suppose we would get concerned when we fall out of the top 5.

We would get more concerned if we fall out of the top 10.

But you know, there are variations in these books from quarter to quarter.

The overall trend is clearly moving in the right direction.

Colorado Springs' station as shown some very strong numbers.

Honolulu has ticked up 5.5 female 25 54.

Dallas-Fort Worth continues there -- I think it ticked up a little bit.

It's 5.5 share in that demographic.

Atlanta had the best book it's ever had.

It's a 5.2 share female 25 54.

Jacksonville is a solid 5.1.

Portland had a strong book at 4.5.

So I mean, I could go down the list.

And for the most part, you'll always have 1 or 2 that lag a little bit.

And book to book, because of the -- the sample in the surveys is always subject to some variation book to book.

But clearly, Hooper, the trend is in the right direction.

And we continue to see solid growth.

So I think if you look at the Dallas station as sort of the prototype, that is sort of the target performance that we hope to achieve from all of the stations as we take them to maturity.

Sure.

And the spending that you talked about, the increased marketing and promotional spending, that won't be anything out of the unusual compared to what you have done in the past for imported (ph) books?

No.

We do target our marketing and promotional spend towards either the spring book or the fall book, because they are the most significant in terms of impacting the advertising marketplace, but nothing particularly unusual.

We will be spending a little bit more on the news talk front.

And we will continue to spend for our fall marketing campaigns, but nothing revolutionary.

Paul Sweeney, Credit Suisse First Boston.

Thanks very much. 2 questions, please.

First, Ed, on the M&A front you guys continue to be fairly active with your acquisitions of AM stations.

And now that your leverage is -- you have some pretty decent room vis-a-vis your covenant.

Can you talk about what you priorities might be in terms of stations going forward?

Is it a continued rollout of AMs for your news talk?

Or will you be focusing perhaps a little bit more, now that you have a little more availability, to take a look at perhaps some of the higher priced FMs that maybe come available?

And then second, I noticed David that your growth CapEx ticked up a little bit to 12 million.

I wonder if you could just give us an accounting there -- where the extra money is going, number 1.

And then number 2, if you could just give us a status, maybe, of how some of those upgrade projects are going -- did they promise some pretty significant value creations?

I'm wondering in Chicago and Atlanta, for example, are they working out as planned?

Thanks.

With regard, Paul, to the first part, we have a stronger balance sheet.

We do have acquisition capacity.

We would like to proceed with strategic acquisitions.

And we intend to continue to pursue those.

We would like to do it, though, using internally generated cash flow and keeping the leverage ratio at what we think to be a little bit more of a conservative status than in the past.

We have acquired a few FMs.

You know, you've noted some of the AMs.

We've added a couple of FMs in Honolulu.

We'll close on those I think in a few days, maybe 10 days or so.

I think you will see additional focus on the AM front.

We think there is great potential upside for our Company on the news talk side.

First of all, remember that we not only -- when we acquire stations, own the distribution -- the platform, but we also have the content.

We now syndicate about 21 hours a day of talk products, so that we can roll those formats out on a very cost-effective basis.

And even where they don't achieve, initially, high ratings, they're almost always cash flow positive from almost day 1, and accretive, frankly, very shortly.

I've given some examples in the past.

Then when we put a little muscle behind those, we get the product mix right.

As I commented in my opening statement, we really feel comfortable with the product now.

We're beginning to test marketing efforts.

They're demonstrating some very good results.

And in major markets, when you see us to break through the real barrier -- the first big barrier we really need to break is get past the 1 share 12 plus.

It takes a critical mass to begin to get word-of-mouth buzz on the stations to take them to the next level.

It's actually a lot harder to get station to break through that he 12 plus 1 share barrier than it is to go to 2 shares.

And with L.A. moving to a 1.4 now, and Denver 1.7 and Minneapolis 1.6 -- these are all positioned very well for additional growth.

I actually see cash flow growth at the stations helping to fuel the expansion of the more expensive FM stations on the FISH side.

And the two will work together.

But I think you will see good cash flow growth coming out of the news talk side as it continues to on the FISH side.

And I think combined with those two developments, we will be able to fund significant acquisitions on the FM side to build out this FISH format in some of the more expensive markets.

Let me let David speculate a little bit on some of these other questions -- on the CapEx.

On the CapEx, the CapEx increase is one project and one project only.

We have -- we are in the process of purchasing an office building in Honolulu to house our radio stations there.

Up until now, we operated out of leased premises.

That lease is about to expire.

With the additional 2 stations that we're in the process of acquiring, we concluded it was better to own our own facility than pay rent to someone else.

So by making that purchase of an office building we will be able to eliminate rent expense come the beginning of next year.

In terms of the 2 upgrades in Atlanta, the FM in Atlanta, and the AM in Chicago -- in terms of progress on that, I think Ed you would probably be best to comment in terms of how they are progressing.

In terms of Atlanta, the FM upgrade that we reported I think on our last call that we had we received a construction permit from the FCC to take our tower up about approximately 750 feet higher.

And that also gives us an opportunity to improve the components and generally upgrade the performance.

And that is progressing very nicely.

We are about halfway through that project.

And we will complete it sometime before the end of the year, and get the full benefit of that.

We think that that could very well be worth -- if I were going to estimate it just in terms of additional coverage, expanded coverage in the Atlantic -- Atlanta market, as well as being louder in all of the area you already cover, it could be worth anywhere from 0.2 to 0.4 share, all other things being equal.

That's progressing nicely.

In Chicago, we have a construction permit to increase our nighttime power to 50,000 watts, so it matches our daytime power.

All of the entitlements have been secured.

We are progressing forward with the project.

And we are moving aggressively forward.

We hope to get that completed by -- well it would be ideal to get it completed before the end of the year before the weather gets real bad.

And we're trying to get most of the heavy construction done before the ground freezes.

And I think we will be successful.

So we're targeting the end of the year.

And yes, it does add, in our opinion, very substantial asset value to that property.

James Marsh, SG Cowen.

I had 2 quick questions.

One -- Ed, I was hoping you could elaborate a little bit more on your Internet strategy in light of your acquisition of Christian Jobs.

And secondly, just wondering if political -- do you have any increased expectations for political, with all the money being -- seem to be (sic) spent this year, in the back half of the year?

With regard to the Internet strategy, the acquisition of ChristianJobs.com is a natural for us.

It was a modest acquisition.

But it interfaces very nicely with our existing platform.

We currently have the most frequently visited, the largest traffic Christian web sites on the Internet, including -- when we aggregate our 2 primary locations together, OnePlace.com and Crosswalk.com.

So ChristianJobs.com is a natural for us.

It rolls an additional component onto that platform.

And we think that it will be a very accretive acquisition.

We will look for opportunities like that.

We're well established.

It's a profitable businesses.

It's growing in a very deliberate fashion, a prudent, deliberate fashion.

And we're very optimistic about what that will continue to contribute to our Company.

In terms of -- second part of your question James was --?

It related to political.

I am reluctant to speculate.

You never know with political.

It depends on how the race develops.

We have seen an awful lot of advertising going into these so-called battleground states, and less advertising going into states that seem to be less pivotal.

But whether that continues, who can say.

We have historically, generally seen a little bit of bulge over the political season.

I would be surprised if we don't see that.

But I think it's a bit risky to be predicting too much.

David, what do you think -- in terms of the likely impact on revenue for I guess the third quarter?

For the most part, we factored that in, I think.

I'm not sure we have factored in.

When these advertising orders come down from the various political organizations, they are almost always very late.

Literally they're placing orders for the following week or the week after that.

So, the political business is extremely difficult to project.

And in terms of our guidance, I think were staying pretty conservative on that front.

Having said that, if you were to look at our year-to-date political numbers compared to the last election 4 years ago, for actuals to date, we're tracking ahead of 4 years ago.

So, we're pleased with the business we have received, but not prepared to predict where it is going to go.

Lee Westerfield, Harris Nesbitt.

I have a question on networks and then a question on Kintera, and then finally on corporate expenses.

First, in your commentary you mentioned 2 percent growth at networks.

But can we refresh that?

Did you mean that excluded Bill Bennett, included Bill Bennett?

What did the 2 percent refer to?

Excluded Bill Bennett.

Bill Bennett -- once we've owned Bennett for a year, we will drop him into the network numbers.

We exclude him from same station right now.

That's clear.

Your relationship with Kintera as I recall that really is a cross-pollination, not a revenue generating source.

Can you update us with your -- or refresh our memories with your relationship with Kintera, and what it provides for, frankly, your customers on the block programming side?

It's a little early to really measure the full impact.

It is certainly a very good relationship.

It has benefits.

It's a win-win as far as we can tell.

It offers additional facilities for many of our block customers.

It's a little early to determine to what extent they're going to utilize it.

Kintera really seems to be particularly effective where the charity that employs it is dependent upon large numbers of people and proliferating networks of people associated with specific events.

We have a number of 501(c)3 -- that is, tax-exempt, religious charitable organizations that are of that nature -- but probably not as many in our mix as some of the other kinds of charities.

March of Dimes, the Heart Fund, Cancer Fund -- those types of things that do specific events seem to really benefit from Kintera.

We have yet -- we think that many of our customers will find it a very useful technology.

We're making it available to them.

It's just an additional service that is there.

In terms of any financial impact, it's little early for me to be able to provide anything more than that.

Finally, in the area of corporate expenses, goodness knows anybody including myself that has visited your corporate headquarters knows that you're not splurging.

Don't take this the wrong way.

They were up 4.5 percent in the quarter, which is fine.

But we're looking at the second half of the year -- you may have some incremental Sarbanes Oxley for '04 expenses, if I'm right, maybe for $0.5 million.

Could you give us a picture as to the corporate expense line in the second half of the year?

The only item that you've actually already referred to where there is a significant increase in expense over prior years is Sarbanes Oxley compliance.

There are 2 elements to the cost.

The first element is -- we have hired 2 people into an internal audit department, who are performing all of our internal Sarbanes Oxley compliance work.

I would estimate that the annual cost of that department would be somewhere between $125 and $140,000.

The second component is our audit firm, Ernst & Young, is required to do specific additional testing to confirm that we have complied with 404c.

I would expect the cost of that extra work for Ernst & Young will perform in year 1 or probably be -- I'm going to say $100 to $150,000.

I would expect that to drop in year 2 and beyond, because there is a bunch of setup work that will have to be performed in the first year.

That is really the only change in corporate overhead, where we're obviously trying to keep those Sarbanes Oxley costs as tight as we can.

But we are going to make absolutely sure that we are able to sign all of the 404c certifications that we are required to sign.

So we're not going to skimp.

But we're not to go overboard either.

Gentlemen, thank you very much for the details, too.

Jim Goss, Barrington Research.

Thank you.

I had a couple of questions, one related to the news talk area.

And I think you were getting into this a little bit earlier.

With the Bennett show, I'm wondering about the impact on station sampling and the economics.

Partly, is that getting some visibility, so that you are getting spillover ratings into some of the other programming?

And are you looking to try to establish, perhaps, an afternoon complement to the Bennett morning show to sort of lock in that progress in that area?

And then on the music side, given the success you have been having lately, are you having any tougher time finding FM acquisitions?

Or do you this as becoming a problem, since you can't fly under the radar so well and you're not going to be somebody, say another radio company, necessarily wants to toss an acquisition to because you're actually going to be a lot more competitive with them than you may have been at one time?

With regard to the talk side, the Bennett program has certainly helped.

And even in markets like Los Angeles, where it is aired from 3 AM to 6 AM, that last hour -- 5 to 6 -- is a stronger lead-in to the Laura Ingraham show, which we carry from 6 to 9 than what we had on prior.

And we're finding that's true in a number of other markets.

Certainly, we can use Bennett on the East Coast as our feature for morning drive.

But we use him in Mountain.

We use him in the Mountain zone.

And it's a stronger lead in.

It's little early for me to get specific in terms of quantifying the impact he may be having on ratings.

But we certainly are pleased with what we have seen in Los Angeles.

We are very pleased with the markets that I mentioned -- Minneapolis, Denver, Colorado Springs -- which is a relatively new station.

I think we've had it for maybe 6 months.

It pulled a 1 share up from -- I think it showed with a 0.6.

I think we got a 1 share, which was very good, a very quick start-up.

Bennett, of course, would be in that market from 4 to 7.

Then we have Laura Ingraham from 7 to 10, and then Dennis Prager and so on.

With regard to the afternoon drive, what we already feature -- as I said we have got 21 hours a day of syndicated talk.

We have product that Salem itself syndicates in addition to Bennett.

We've Dennis Prager out of Los Angeles.

He is syndicated from noon to 3 East Coast time, and doing very well for us, very strong in Los Angeles.

We have Michael Medved that that we syndicate.

And again he's -- in East Coast he would be from 3 to 6, which is your afternoon drive.

We had Hugh Hewitt from 6 to 9.

So we've got the afternoon covered very well.

And were very big on all of these personalities.

We have had them -- some of them are a little newer to the game than others.

But they're all performing very nicely and making progress.

Now, as we start putting a little muscle behind some of these stations, as we mentioned we were doing in terms of promotion, I think you'll see some impressive growth in their numbers, as we've already seen in both Los Angeles and these other markets with mentioned that I have mentioned.

And then that becomes an additional marketing story that we think will drive affiliates and increase our affiliates going forward.

In terms of FM acquisitions, it is more of a challenge.

I think what you have to do is you have to be prepared to go where the opportunity exists.

It doesn't always exists in your number 1, number 2, or number 3 target market.

So you may have to wait a little bit longer for the opportunity to get into -- to tuck one in into a top 10 market.

So you go to maybe a market 12.

Or maybe you find something in market 8 but you were really focusing on market 2, 3 or 4.

You simply have to go where the opportunities are.

And I think the interesting thing is that we continue to find opportunities.

Some of them are a bit pricey.

But you pass on those if your analysis doesn't pan out, unless the seller is willing to get a little more reasonable.

But I am relatively confident that we will continue to be able to grow on FM side to launch additional FISH formats.

We will move very deliberately, very strategically, and absorb these things as we are able to, keeping our leverage ratios within a reasonable range.

Jim, I am optimistic.

It is more difficult.

But it will continue to happen. (OPERATOR INSTRUCTIONS)

(OPERATOR INSTRUCTIONS) Bishop Cheen, Wachovia Securities.

Good evening gentlemen.

David, let me just ask you a couple of quick questions on the balance sheet.

You've managed it very well.

But can you just tell us, quantify it -- what is your capacity of your credit facility right now?

And what is the availability right now?

The credit facility right now, the facility has got a $75 million term loan which is fully funded.

There's a $75 million revolver, of which we have drawn, as of right now, about $5 million.

That 70 million is available.

And we have complete covenant flexibility to access it.

24.

It is looks like, just going off the press release, that there's something like $31, $32 million.

Some of them may already be closed, between the acquisition since March 31 and the ones completed since March or second quarter or the 17.2 million.

Roughly how much of what you have announced do you have coming up to close, and the timing of those payments --?

In terms of pending acquisitions, we have the 2 FM's in Honolulu, which is 3.7 million, that will close mid-August.

We have an AM in Cleveland.

That's with the FCC.

That probably won't close until the first quarter of next year.

That's 10 million.

And we have an AM in Detroit.

It's just under 5 million.

That will close either end of Q3 or beginning of Q4.

So, in total, just shy of 20 million of pending acquisitions.

That's more than enough capacity.

Granted everything does get more expensive as you fill in your markets, and you have certainly pared your leverage down, is there a range where you would be comfortable with your leverage going forward?

I think we would like to stay in the 5s.

Prior to the follow-on equity offering, we were 7ish terms of a debt-to-EBITDA, ratio.

With the follow-on equity offering, we're down to about 5.4.

If we can stay within the range of 5 to 6 and utilize the growth of cash flow and the free cash flow we generate, so, if you like, internally finance acquisitions, that would be ideal.

From a practical standpoint, it depends what acquisitions come along.

If there isn't very much, you probably see us pay down debt more.

If there are a bunch of acquisitions that look interesting and attractive, you will probably see us at the high end of that range.

But in an ideal world, if we could keep up a 5 in front of the leverage ratio number, I think we would probably feel pretty good about that.

Well, you certainly proved that going forward you compared the multiple benefit acquisitions come in 2 flavors these days -- steep and steeper.

Thank you David.

We have found that on the FM side -- I think your comment is accurate.

When FMs come up it tends to be, if you're not careful, an auction-type environment.

Obviously, if you're able to acquire without going through an auction that's more attractive.

On the AM side, we continue to find interesting acquisition opportunities, where the numbers work quite nicely.

Right.

With your development, I see tremendous change.

If you go out instead of 12 months 18 months, you go out to 24 months of your development.

And the multiple compresses dramatically.

The challenge is, in terms of our acquisitions, by necessity we tend to buy stick acquisitions.

And it will take 5 or 6 years to build start-up radio station to maturity.

So, when you're doing that, you can't look at your year 1 and year 2 cash flows as a guide to what you should pay.

You have to look out and say, what's this radio station going to look like year 3, year 4, year 5, and then use that to compute what's a reasonable price to pay to deliver an attractive return on investment.

That's the approach we take.

(OPERATOR INSTRUCTIONS) Victor Miller, Bear Stearns.

I just wanted to ask a follow-up.

I was looking at your station operating income margin composition analysis you do, noticing that a year ago 29 percent of your revenue is being generated by stations with 50 percent or greater SOI margin, this year almost 50 percent.

How should we look at this chart, in terms of what you'd be able to do in sustaining the level of growth that you have been able to accomplish to date, given the fact that now almost two-thirds of your Station Operating Income comes from these stations that are pretty mature relative to a year ago, where it was only 44 percent?

Thanks.

The charts are pretty interesting analysis.

We've been -- a year ago, we had 14 stations out of our portfolio of 85 that had 50 percent plus margins.

That has now moved to 19 stations.

So, we have been successful in getting a further 5 stations into that mature bucket.

And those 5 stations have pretty considerable revenues.

I think one of them would be KLTY in Dallas, that has now moved above 50 percent profit margin for the first time.

So, we have got some pretty big stations that probably moved into that maturity bucket and are there to stay.

Having said that, we continue to have 43 stations have a zero to 29 percent profit margin, and we think have got considerable upside.

So I think there is still very nice room for continued growth as we drive the rest of the stations to maturity.

Thank you.

That does conclude the question-and-answer portion of the teleconference.

I'd like to turn in the floor back over to management for any closing comments.

Thank you operator.

I thank everyone for joining us.

We will look forward to visiting with you again in about 3 months.

Thank you for your participation.

This does conclude this afternoon's teleconference.

You may disconnect lines at this time.

And have a great day.