Salem Media Group Inc (SALM) 2004 Q3 法說會逐字稿

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

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

At this time all participants are in a listen-only mode.

We will be conducting a question and answer session later on in the conference.

At that time, if you have a question you will need to press the "star one" on your push button phone.

This conference is being recorded today.

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

Please go ahead, sir.

Good afternoon and thank you for joining us today for Salem Communications' conference call regarding our third 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'll 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, 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 relates 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 with the Securities & Exchange Commission.

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

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 website on www.salem.cc as part of the current report on Form 8-K and earnings releases issued by Salem earlier today.

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

Good afternoon, everyone.

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

Given the distractions of the last couple of days, we're particularly appreciative of your participation.

Let me begin by reporting that Salem continues to have a successful 2004.

Accomplishments in the third quarter of 2004 that we will highlight today include a strong quarter of double digit revenue and station operating income growth, continued growth at our contemporary Christian music stations, progress with the implementation of our news/talk activity and significant radio station acquisition activity, in particular a major radio exchange, radio station exchange with Univision Communications.

Let me discuss our excellent third quarter 2004 results first.

Salem achieved another strong quarter of double-digit revenue and station operating income growth.

This performance is a result of the continued accelerated growth at our startup and developing stations, particularly our contemporary Christian music and news/talk business.

Very strong growth in our national spot business and the steady growth of our block programming business.

For the third quarter of 2004, we generated net broadcasting revenue of $47.3 million, an increase of 11% from the same quarter last year.

Station operating income was $18.3 million, an increase of 18.8%.

On a same station basis, net broadcasting revenue for the quarter grew 10.6% to $45.1 million and same station operating income grew 22.6% to $18.2 million.

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

As measured by the Radio Advertising Bureau, industry revenues were essentially flat for the third quarter.

Therefore, Salem will have outperformed the industry by approximately a thousand basis points.

These growth trends continue as reflected in our fourth quarter guidance, which we released earlier today, and we're optimistic about the fourth quarter of 2004.

The reasons for this strong growth are primarily twofold.

First, our predictable block programming revenues representing 32.6% of Salem's broadcasting revenues grew by a robust 6.7% on a same station basis in the third quarter, once again steady and consistent growth.

Second, and equally significant, we continue our focus on the growth of our startup and early development stage stations.

Our 103-station portfolio includes 5 pending acquisitions, 21 stations in a startup stage, as well as 32 stations in an early development stage.

We believe that these 58 stations, approximately 55% of our portfolio, have significant upside potential and we continue to make progress in moving our stations up the development curve.

Our ability to take underdeveloped properties to maturity is demonstrated by the strong operating leverage we are generating.

Our SOI margin improved to 38.7% from 36.2% in the third quarter of last year.

A result of both robust revenue growth and careful cost management and these elements continue to be an important management focus.

The fastest growing segment of our business in the third quarter was our contemporary Christian music stations.

The ratings for these CCM stations continue to improve in all demographics, but particularly in our core target demographic of females 25 to 54.

Our 14 CCM stations improved their ratings from an average 2 share of adults 12-plus in the summer of 2003 ratings book to a 2.4 share adults 12-plus in the summer 2004 ratings book, representing an improvement of 20%.

This 20% increase in listenership positions us favorably for continued growth in revenue and profit in 2005.

We have also recently commenced expanded marketing campaigns in Dallas, Atlanta and Portland to coincide with the important, fall Arbitron ratings period.

Although, this investment modestly reduces our station operating income guidance for Q4, 2004, we believe this is a prudent investment that will favorably impact ratings, revenue and profit in 2005.

Now, this listenership growth is resulting in continued revenue and profit growth.

Our CCM stations acquired since 2000, generated revenue of $10.7 million for the quarter, an increase of 16.5% for the same quarter last year.

These stations generated station-operating income of $4.3 million in the third quarter of 2004 compared with $3.2 million in the third quarter of 2003, an increase of 36%.

Operationally, we also continue to focus on the expansion of our news/talk platform in terms of acquiring additional news/talk stations, improving listenership and ratings to the existing stations, and growing revenues and profit.

We are making good progress in each of these areas.

On the content front, last April we launched and announced and a new East Coast morning drive syndicated program called Bill Bennett's "Morning in America" hosted by Bill Bennett, the former secretary of education under Ronald Reagan, and former Drug Tsar under George Bush senior, and also a regular guest on numerous radio and TV talk shows.

Our initial expectation was to bring on 100 affiliates by the end of 2004.

In September, we signed our 100th affiliate making Bennett 's "Morning in America" one of the fastest growing programs in National Radio today.

As of today, we now have 104 affiliates including stations in six of the top 10 markets.

Programming quality and affiliate satisfaction continue to exceed expectations, and we are pleased with the development of the program.

On the listenership and the rating front, we are receiving favorable qualitative feedback in response from listeners.

On the owned and operated station side of our news/talk activity, we are generally quite satisfied with the programming options that are now available to us in the markets where we are currently offering this news/talk format.

Between the 15 hours of daily talk programming that Salem syndicates itself, plus the relationships we have with other syndicators for additional compatible programming, we now feel that we are able to provide a consistently outstanding program product throughout the broadcast day.

Consequently, we began stepping up an increasingly more aggressive marketing effort at selected stations.

We are, as a result, beginning to see some significant growth in listenership in these markets for the broad category, for example, of adults-12 plus, our news/talk ratings have improved by approximately 40% from the summer of 2003 to the summer of 2004.

But particularly, we're encouraged by our ratings performance in markets like Minneapolis where our adults 12-plus ratings are 1.6 share, up 60% from the summer of 2003, and in Denver, where in the summer of 2004, we set a new ratings high, with 1.9 share adults 12-plus.

This is up from 0.8 share in the summer of 2003.

This listenership growth is leading to revenue growth at our news/talk stations, which this quarter was up 15% on a same station basis from the corresponding quarter last year.

Finally, as a result of recent acquisitions, exchanges and format changes, we have added over the past 12 months news/talk formats on stations in Dallas, San Francisco, Philadelphia, Boston, Detroit, Atlanta, Baltimore, Chicago, Houston, Miami and Cleveland, which are all top 25 markets.

With this expansion, we will now have 26 news/talk stations compared to just 15 a year ago.

We believe that we will see similar listenership and ratings success in these new markets, and that we will be able to translate the substantial growth into revenues and profits.

With regard to acquisitions, during the third quarter, we completed the acquisition of an AM station in Detroit, two FM stations in Honolulu as well as the acquisition of Christianjobs.com, a faith based Internet job search business, which integrates nicely with our faith based web businesses.

Closing on the Detroit acquisition is a milestone, because Salem is now one only of four radio broadcasters in the United States with a presence in every one of the top 10 markets in the country, the others being Clear Channel, Viacom Infinity and ABC.

This is a significant -- this is significant because more than 30% of the US population lives in top 10 markets.

These markets generate about 40% of U.S. radio revenues, and are regarded by many as the most sought after markets in the radio industry.

In Honolulu, the acquisition we completed in the third quarter combined with the Honolulu station exchange with Cox Radio, which we recently announced, gives us a 7-station Honolulu cluster.

We have been looking for ways to improve our performance in Honolulu, and we believe these transactions combined with the resulting sales, marketing and cost efficiencies will achieve exactly that.

We've also over the last 90 days announced further acquisitions in Cleveland, Miami, Portland and Omaha.

Finally on the acquisition front, I would like to talk about the radio station exchange we recently announced with Univision Communications.

We believe this exchange significantly enhances our long-term cash flow prospects.

In this transaction, we will exchange two radio stations, WZFS-FM in Des Plaines Chicago, and WSFP-FM in San Rafael, San Francisco, for four radio stations, WIND-AM in Chicago, KOBT-FM in Houston, KOSL-FM in Sacramento, and KHCK-AM in Dallas.

This station swap represent the unique opportunity to expand our presence in four attractive major markets, offers an opportunity to significantly improve the returns from two stations, which have been under-performing, and enhances our news/talk offerings while benefiting our network business by providing strong anchor affiliates in Chicago, the number three market, and Houston, the number seven market.

The two stations we are giving up were expected to generate station-operating income in 2004 of approximately $500,000.

In return, we are obtaining four stations that we value at approximately $115 million.

As I'm sure, you can tell from our discussion, we are very bullish about the impact of this transaction on our future growth.

Including all of our announced transactions, we now have a presence in 24 of the top 25 markets more than any other broadcaster except Clear Channel.

As is demonstrated by this acquisition activity, we continue to find interesting opportunities to add further radio stations to our portfolio, both for tuck-ins to existing clusters as well as entry into additional top 50 markets.

So in conclusion, the continued growth of our contemporary Christian music stations combined with our roster of startup and development stations and our news/talk initiatives, all underpinned by our predictable block programming business, positions Salem favorably to continue to deliver robust growth in revenue and profits for the balance of year, as well as 2005, and beyond as we target this very special audience interested in religious and family themes programming.

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

Thank you, Ed.

Good afternoon, everyone.

Thank you for joining us.

The results for the third quarter 2004 were issued in a release earlier today and are available on the investor relations portion of the website.

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

In addition, I will provide guidance for the fourth quarter and full year of 2004.

Net broadcasting revenue for third quarter increased 11% to 47.3 million and our station operating income increased 18.8% to 18.3 million.

Net income for the quarter totaled 2.6 million or $0.10 per diluted share, compared with net income of 1.5 million or $0.06 per diluted share for the same period last year.

Third quarter 2004 net income includes a loss, net of tax on disposal of assets, of 1.9 million or $0.07 loss per share.

This non-cash charge is due to the write-off of certain property, plants and equipment no longer being used or owned by the company, which was identified by a physical inventory audit performed during the quarter.

Station operating income margin increased to 38.7% in the third quarter from 32.6% from the comparable quarter a year ago.

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

These startup and developmental radio stations were originally purchased for a total of approximately 195 million.

For the last 12 months, they have contributed approximately 3.5 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 11% net broadcasting revenue increase was achieved with a 6.6% increase in broadcasting operating expense.

In other words, comparing third quarter '04 to third quarter '03, net broadcasting revenue increased by 4.7 million and station operating income increased by 2.9 million year-over-year, a 61.7% incremental operating margin.

On a same station basis, net broadcasting revenue and station operating income increased 10.6% and 22.6% respectively.

As Ed mentioned, our music stations continue to grow at a very fast rate, generating a 16.5% revenue increase over third quarter last year.

Our remaining radio station portfolio contributed an 8.9% same station revenue increase.

Within the same station increases of this remaining portfolio, there was a 6.7% increase in our block programming revenue and a 15% increase in our network revenue for the quarter.

Spot advertising revenue increased 9.2%, with a 26.8% increase in our national spot revenue and a 7% increase in our local spot revenue. 79 of our 98 stations and approximately 95% of our net broadcasting revenue are included in our same station numbers.

Regarding our balance sheet, as of September 30, 2004, we had net debt of 274 million and were in compliance with all of our bank and bond covenants.

Our bank leverage ratio was 4.6 as of September 30, 2004 versus a compliance covenant of 7.25.

Our bond leverage ratio was 5.0 as of the same date versus an incurrence covenant of 7.0.

As of September 30, 2004, we had a financial statement leverage ratio on a last 12 months basis of 5.2, compared to 5.6 the end of the second quarter.

Finally, for the fourth quarter of 2004, we are projecting net broadcasting revenue of between 48.5 and 49 million.

Net income for the fourth quarter of 2004 is projected to be between $0.13 and $0.15 per diluted share.

We are projecting station operating income of between 18 million and 18.5 million for the fourth quarter of 2004.

This fourth quarter 2004 guidance reflects the following factors.

Startup costs of approximately 700,000 associated with recently acquired stations in a number of major markets that Ed listed, as well as the launch of our new national morning program, Bill Bennett 's "Morning in America".

Costs of approximately 300,000 associated with the introduction of news/talk programming on our stations in Philadelphia, Dallas, Baltimore, San Francisco, and San Antonio.

Additional marketing investment of approximately 600,000 at our CCM stations in Atlanta, Dallas, Portland, and Cleveland.

In addition, this guidance reflects the sale of WZFS-FM in Chicago and KSFT-FM in San Francisco to Univision.

We expect to see continued growth from Salem's underdeveloped radio stations, particularly our contemporary Christian music radio stations.

Fourth quarter 2004 revenue growth is expected to be in the mid to high single digits and same station revenue growth is expected to be in the high single digits.

Fourth quarter 2004 overall SOI growth is expected to be in the low single digits and same station SOI growth is expected to be in the low double-digits.

One final housekeeping matter before we open the floor for questions.

When you see our 10-Q, you will see our Board of Directors has recently authorized a share repurchase program of up to $25 million.

This provides the company with the flexibility to make opportunistic buybacks of our shares.

However, at this time our priority is to utilize our free cash flow to enhance the station portfolio through further acquisitions and to reduce debts.

We believe it is prudent to have a buyback program in place as our free cash flow continues to grow over the long-term.

But we do not expect to buy back any shares at this time.

This concludes our opening comments.

We would like to open the floor for questions.

Thank you, sir.

The floor is now open for questions.

If you do have a question, please press "star" "one" on your touch-tone phone.

If at any point your questions have been answered, you may remove yourself from the queue by pressing the "pound" key.

We do ask when you pose your question that you please pickup the handset to provide optimum sound quality.

Once again ladies and gentlemen that is "star" "one" to ask a question.

Our first question comes from Drew Marcus from Deutsche Bank.

Good afternoon.

Good morning.

Just a first question -- couple of questions.

First, did you get political revenue in the last month?

Second, the, with regard to the overall sector, this seems like the overall sector is gaining just general popularity within American culture at this point, whether it be the Passion of the Christ movie only this year or one could argue with the results of the election yesterday.

So that's comment if you are just seeing, with regard to the industry, anecdotal evidence or anything you can provide us on the growth of the overall sector?

Let me take the first question and I'll turn the second question to Ed in terms of political revenue.

We are still tabulating some of the local numbers, but I would say we booked about $0.5 million of revenue on our Salem stations during the month of October.

Our rep firm SMR placed an additional 0.5 million on non-Salem stations on which we'd earn a 20% representation fee.

So between the two, I would expect to see a benefit in October of approximately $600,000.

I presume we didn't get much in September or before that?

Yes.

In total, October represented about half of our political revenue.

We were booking political revenue as early as April.

And the April to September period, we probably booked around about the same amount of money as we booked in the month of October.

Drew, with regard to your second question, clearly we identified the audience out there that you might say is value-oriented.

That is the audience that we attempt to superserve.

And all of our formats in one-way or another in complementary ways is target this audience.

We noted it's a significant audience.

We think it's a -- in many respects it's a growing audience for us because we have really tapped into a distinct minority of that audience.

There's much more available that we want to introduce both in markets that we already operate in and in new markets as we see acquisition opportunities.

But you know; if you use one barometer, just say church attendance.

Church attendance in this country has been pretty consistent for the last 40 years at right about 40% of the population says that on a regular basis, typically a weekly basis they are involved in a church of some kind and that's would be one good way to define the audience.

You can see that it is significant.

When it's moved, as it was with the movie the Passion of the Christ, great support for that because there is an audience with an appetite for this kind of product.

We have trademarked or at least in the process of trade marketing our positioning statement "safe for the whole family".

There is a great desire not only for positive values but also for a safe environment.

And so what we offer our audience is both a reinforcement of the values and worldview that they hold, but we also provide an environment that is safe in terms of not in ways -- not offending that, those values in ways that are irresponsible and so clearly we are marketing to that segment.

I think you saw with lots of the discussion last night the scope and impact that this audience has on this culture.

And known it for a long time, and it is the core of the community that we superserve.

Thank you.

Thank you.

Our next question is coming from Victor Miller of Bear Stearns.

Good afternoon.

Two questions.

First of all, could you talk about the -- how you look at the economics of your swap?

How do you value the different pieces of the swap, cash flow, trade off, etcetera, how you look at that part?

And secondly, Ed, with all the controversies over 529s and how divisive the political conversations were, is there any threat, you think, to see the fairness doctrine return to broadcast?

And what kind of impact would that have on - the conservative talk shows that you put on, if any?

Thanks.

Let me deal with the second part of the question.

And maybe conceptually, I'll deal a little bit with the first part of it.

If David, wants to take a shot at it, he can do that.

There is always a threat, there's always a certain mentality out there that believes that there is a government elite that ought to regulate content.

It's really in our view contrary to really what this country is all about.

Free speech, even when we don't like the speech, is a value that is just consistent with the American philosophy.

But there are always some out there that somehow think they ought to regulate.

Now, we have seen quite a bit of action in terms of content regulation on the indecency front, where legislation has been pending and where undoubtedly, we will see some increases there.

Of course, the FCC has enforced those I think, with a pretty balanced hand over the years.

I don't really think that there is any mandate for a fairness doctrine type of legislation or rule to come back.

Frankly, if you look at the situation that existed when that rule was initially enacted in the 50s to 60s, it was a different universe.

You had three networks, a very limited media offering.

With the explosion of media, with 100-plus channels of video, with the Internet, with the expanded radio, with satellite, with all of the services available, I just don't think that there a case can be made for content regulation.

And I think that you would see a broad coalition of, across a wide ideological spectrum to oppose anything.

So Victor, no, I don't' read out - we're always internally vigilant, we need to be.

We've been outspoken on that but I don't really see any impending threat.

With regard to how, we value this transaction, of course that is -- we have stated that we think the assets, a case is made for the assets being worth I think, around $110 million, $115 million.

When we look at it, of course, we have to consider a lot of factors.

We have to ask ourselves, if we were to sell these assets -- and we're not sellers.

Generally, we're expanding, we're not -- we're building a company and we want to broaden our clusters.

So selling assets, even when we want to raise capital, unless it's non-strategic assets generally is not a good idea.

Particularly, when you consider the tax implications and what cash flow would be left.

When we see an opportunity, however, where we can significantly improve our performance, and we believe that is exactly what this transaction does for us.

We think, it was a win-win for both companies.

We think, it strategically fits nicely with what Univision is doing in the two markets in which they got assets from us and all four of the markets that we got assets from them.

It allows us, to -- we think to position ourselves much better to exploit growth opportunities in a better fashion, even in Chicago with the opportunity that WIND presents, as opposed to what we were doing in Chicago with our WZFS station.

So from a strategic point of view, we said in our release that the revenue we have budgeted for those two stations for '04 was $500,000.

We will have some startup costs and it will take a little while to get started in most of these markets, but not very long and not very much in terms of money.

Chicago, perhaps a bit more, not so much in the other markets.

And we think the upside potential going forward even in 2005, certainly in 2006, 2007 is very significant, much more significant than if we remained with the status quo.

Now, David wants to comment further on value, I'll let him do that.

Yes, I guess I'll dig a little bit deeper into some of the specifics of the numbers.

We looked at it and evaluated the swap really in two fundamental ways.

First of all, what do we think, we are giving up in terms of asset value and what do we think we're getting?

And second and probably more importantly, what are we giving up in cash flow and what do we think, we'll get in cash flow, once we've built these new stations to maturity?

And in terms of the asset value side of it, I think we regard the swap as pretty much a straight across swap.

We think with the value, we gave up and the value we got, are approximately equal.

We put a value on our FM property in Chicago of probably 90 to $100 million.

We put a value on the San Rafael property of probably somewhere between $15 million and $20 million.

Looking at, what we think we got, we probably put a value on the AM in Chicago of somewhere between 45 million and 55 million.

Obviously, it depends how well the station performs.

The Houston FM, probably somewhere in the 30 to $40 million range.

I think, there are some precedents for that in the market for the signal quality that we're acquiring.

Sacramento, I think, Univision bought that station not too long ago for, if I recall, 22 million, $23 million.

Dallas, that's a small AM property.

We probably put a value of about $5 million on that.

So, as you add all of that up, we put a value on the overall transaction of about 110 or $115 million.

That was very helpful.

Thank you.

In terms of cash flow, 2004, the two properties we're giving up, if we kept them for the whole year, would have had about 3 million in revenue.

And about $0.5 million in profits.

Both stations, we had owned for three to four years.

So we pretty much knew what the stations were capable of in terms of cash flow.

Obviously, we continued to see some growth upside there.

But when we examined the cash flow potential of the properties we're acquiring, we think, it's significantly greater once, we've built those stations to maturity.

So I guess, in conclusion, what we saw was a swap with basically equal asset values, but significantly enhanced cash flow potential for what we wanted to do with those radio stations .

OK?

Thank you.

Our next question is coming from Jonathan Jacoby of Banc of America.

Good afternoon.

Two questions.

One, you gave fourth quarter revenue guidance for same station growth in high single digits.

Can you give us, some color how the quarter has started?

The second question, on the expense side of things, with these -- just to get sort of a normalized pattern, where we start looking out to 2005 and beyond, the 700,000 in startup costs, is that a one quarter or does that continue also, -- you know, how much of that is Bill Bennett, since he did start in April?

And then secondly in the expenses, is this a one-time promotion on the contemporary Christian music for those four markets or again is this something, we should start raising in our models, as we look to '05?

Hi.

And since how the quarter started it's a little difficult to read that because of the political impact on October.

So October looks very strong, but there's political money in there that won't be there for November and December.

And at this point, we're remaining pretty cautious on how November and December turn out.

I think, there was a lot of uncertainty around as to which party would be in power following the election.

And we still have work to do to ensure that we bring in Q4 and we have a successful November and December.

So I'm not sure, I can really give you a firm read, as to how October looks compared to November and December.

In terms of the startup costs, we've got startup costs on the recent acquisitions of probably about $700,000, and we've got costs associated with our reformats this quarter of about 300,000.

Both those numbers will steadily reduce over the next 12 to 18 months, as we build and grow those radio stations .

We expect the new ones to turn profitable probably in about six months and be profitable after that.

For the reformats, we would expect to see positive numbers, compared to what we were doing in those formats, also probably in about six to nine months.

So you should probably layer in something for the next two to three quarters, but with numbers that are gradually reducing.

In terms of the Fish marketing costs, we're going to invest some additional marketing dollars in for the full Arbitron book in Dallas, Atlanta, Portland and Cleveland.

I think, I would look at that, at this point, as a one-time cost.

It may well be that we'll come back next fall and do something similar.

But we tend to look at our marketing costs as discretionary activities.

And we think, at this point in time, it's worth trying to push our ratings to the next level by investing a little bit more heavily in the marketing on those stations.

I don't know, if you want to add any comments on that, Ed?

I think, that's probably a pretty good summary of what I would say.

Thank you.

Thank you.

Our next question is from Paul Sweeney of Credit Suisse First Boston.

Thanks very much.

Good evening.

Couple of questions.

First, David, just following up a little bit on the expenses.

It sounds like the very strong kind of operating leverage, you achieved here in the third quarter, we won't necessarily see that to the same degree over the next several quarters.

Is that, how you're seeing things, given some of the expense you just eliminated?

And then second, Ed, in terms of these new news talk stations, I know, your cost of programming obviously is very low given that you're a syndicated product.

So the question is and you have been very aggressive in expanding the footprint in those stations.

How far down market do you think you can go, I know, you've got such a large market focused now but how down market, how mid-sized or smaller markets, can you go with this news/talk format?

Thanks.

I'll let David answer the first question, and I'll pick up the second one.

I think in terms of operating leverage on a same station basis, I think, you'll continue to see us delivering strong operating leverage.

That may be muted a little bit in Q4 because of this Fish marketing spends.

But we continue to have a strong focus on ensuring that our revenues exceed our expenses.

Our revenue growth exceeds our expense growth in percentage terms on all of our same station properties.

I guess, the twist to this quarter is because we've done, quite a few recent acquisitions over the last six to nine months, particularly in big markets, top 25 markets, that layers in a new element, which is all of the recently acquired properties.

So, coming online this quarter, for example, we have the four properties that we're acquiring from Univision.

We have had Cleveland go online.

We have had Detroit go online, and we have had a news talk station Atlanta go online in the third quarter.

So, I think, what you are seeing is the impact of stepped up acquisition activity, but once we burn our way through that, you'll see those stations also generating positive operating leverage, just like all the existing stations.

And Paul, I would add to that that as you know, you made the comment about our cost of programming.

It is less expensive for us to roll out this format and to get to profitability, we normally get there a little bit quicker than we would, say, with the Fish format which requires more commitment to promotion, more commitment to research, and even higher talent costs, obviously.

So, we do have sort of expenses.

David mentioned burning through it.

But we burn through it quicker and we get to profitability with those quicker.

It's a pretty accretive approach most of the time.

Now, with regard to how far down we can go in markets, our focus has been really on the top, I would say top 35.

But we've gone beyond that and we can go beyond that.

But if we do go even beyond the top 50 markets, there usually has to be a story.

For example, in Colorado Springs, we were sitting in Colorado Springs with two Class C FMs, one doing Christian teach and talk and the other one doing contemporary Christian music.

Layering a third AM station in to do our conservative talk was a sort of a no brainer.

We could leverage off the talent we had.

We could do it very cost effectively.

And because that we are in that market, because that market is very important to the conservative Christian community, it's a very high percentage of its population is involved in nonprofit religious activity.

I think there's probably something like 100 evangelical Christian organizations headquartered there.

It's a particularly unique market, sort of call it the New Jerusalem of the evangelical Christian movement.

Therefore, a very important market for us with a very high percentage of population that would be interested and that we also When you consider all of the employees and staff and volunteers that re associated with those organization.

So in that case we want particularly deeper, but the market had a story not only in fact that it's a unique market suitable to all our product but also because of the fact that we were there because of that market with other assets, and it was a natural thing to roll that in.

There will be other cases like that.

We've recently announced the acquisition of a station in Omaha.

That's a little bit further out but a very responsive market, it's a pure heartland market.

I mean, you saw a lot of that last night.

A lot of talking about the heartland and the middle of the country and the red states.

Well, Omaha, Nebraska is, represents those Midwestern values that are very consistent with the worldview that underpins the kind of programming that we offer.

So, from that point of view, we can go deeper where there's a story.

The focus is going to continue to be on the top 25 markets.

But of the 26 stations that we have, I think, the overwhelming majority, if you look at them are in top, within the 35 markets.

Great.

Thank you.

Thank you our next question is from Lee Westerfield of Harris Nesbitt.

Thanks, gentlemen.

Good evening.

Three questions from me.

First, I want to make sure I got the details correct on this one.

I believe Ed, you said a moment earlier that you're -- there would be a special promotions for the Fish stations would run about $600,000 here into the fall book and that that would be targeted to Dallas, Portland, Cleveland and Atlanta.

I wanted to make sure I got that detail correct?

That's accurate.

Excellent.

The second question is, today -- when do you start your block programming renewals and what fraction do you expect to be replacing with new rough justice terms, with new ministries as opposed to continuations?

And the third question is, Ed, this is interesting.

And today the FCC's new licensing of FCC license auctions were being conducted.

And I didn't see Salem in the participation.

I wonder, if you would, because you're a keen observer of this, tell me whether I'm wrong or whether you were thinking something strategically different to avoid the license auctions?

Well, let's see.

The first question David answered.

And the second question on block program renewals, Lee, I expect the block program renewals to look pretty consistent with what it has historically.

We've said over the years that we look for a range between 5 and -- 5%, pretty typically to 7% depending on the state of the economy.

We will be in that range.

We maybe a little on the low side of that, in other words, I think, we'll be closer to the 5 than the 7.

But it's a little early.

We have begun the process.

And we usually get the process completed by the end of the year.

And we have initiated it.

And we will, we'll have more input on that, as we get a little further into the process.

But there's no reason to think that this year is going to be any more difficult than the last couple of years.

In fact, I would expect that with the economy improving that we will see probably a little easier time and we might be able to push that renewal rate a little higher.

I don't think that we will see, also in that regard, any large cancellation rate.

You know, normally the renewals on existing programs is very high, typically above 90%.

When we get aggressive with rates, particularly if we have some new programs that we want to accommodate, we sometimes will be a little bit more aggressive to create avails in certain markets.

I don't really see any change in that regard.

I think, it will be pretty consistent with what we've seen historically.

One of the reasons with regard to your third question...

Sorry, could I quickly interject on this one?

On the third quarter you have generated 6.7% growth in your block programming revenue.

David, that seems like an acceleration over the first half of the year.

I wonder, if you -- there was a easy explanation for that?

There is always a little bit of up and down in the number.

It's normally created by local program.

Our block programs, probably about two-thirds of that revenue is from national block programmers, about a third is local.

And there's always a little bit more volatility in the local block programming.

So, I think what you see in Q3 is just the local performing a little better.

And I apologize.

The third question was regarding the current FM license auctions.

Yes.

And I was going to say no, you didn't see us there because the FCC guidelines give companies or individuals with no media ties a distinct advantage.

I think they get a substantial discount, 25 or 30% discount as opposed to anybody that is exist -- that has existing media.

That's quite -- that's reason number one that we would not directly compete.

And reason number two is that, frankly, there were not very many stations in that mix that we were interested in it.

If you look at them, they're really very small markets for the most part.

Spectrum that is, sort of, leftover.

And there are a few situations that get kind of interesting.

I think what typically what happens when those things are auctions, a good percentage of those people that acquire them want to turn and flip them.

And so there maybe some secondary activity that would follow if there was a market that we had some interest in and it came on the market as a result of the successful bidder acquiring it and then deciding to turn it, which I would expect we would see.

That typically happens.

But those are the two reasons we are not are there.

One, we do not qualify for the discount.

So, we are at a disadvantage.

Two, most of the markets are simply not markets we would be interested in.

Gentlemen, thank you very much.

Thank you.

Our next question is coming from Stuart Kagel of SunTrust Robinson Humphrey.

Good afternoon.

Two questions.

One, as I look at the buckets, can you talk about what's going on at your higher margin stations.

Looks like you increased margins over 16% despite having four stations drop out, which would imply something like a 55% increase in average revenues for station in that bucket and something like that 59% increase in station operating income.

And than I have a follow-up.

All stations that dropped from mature down to the developed category or out of the plus 50%, down into the -- 30 to 50% bucket were the stations that we reformatted to news/talk earlier in the year.

And in several markets, we had two Christian teaching talk stations, if you like, an A station and B station.

And although those second stations were mature and profitable, we felt that there was a bigger opportunity available to us by reformatting them to news/talk.

And by doing that, of course, they are no longer mature.

They have to start as a launch station again.

So, we did that with news/talk in Atlanta.

We did it in Dallas with KSKY.

We did it in San Francisco and in Philadelphia.

So, those are the four stations that you see moving out of that mature category and in fact where they've actually moved down into the under developed category.

So, if you were to put that that one change to one side, there is continued improvement in the revenue dollars that our stations are creating in each bucket.

And we continue to see consistent improvement in the margins that the stations are generating.

But this quarter, because of those reformats, there's a little less movement than perhaps you have seen in the past.

I guess, my question, though, is, did you have stations that had topline growth in excess of 50%, near 50% or greater margin bucket?

No.

You know, the revenues for the stations in that bucket are going from 13.9 to 16.2.

The four stations that came out had relatively low revenue.

So, you've got some big stations in there.

For example, New York and Dallas and Los Angeles that are primary contributors in that 50% plus bucket.

Those stations continue to perform very well.

But the four stations that came out were smaller radio stations.

So, you can't just divide the numbers by 16 or by 12 and calculate a revenue or SOI per station because the stations have got quite different sizes.

Does that make sense?

It does.

And then I guess as a follow-up, you obviously significantly outperformed the industry on national.

And I'm trying to understand if it's a function of having different advertisers or if there's a case that can be made that the return on investing from advertising your stations is just significantly higher than that of the general radio market?

We continue to build critical mass.

I mean, our -- first of all, our network business, which -- when you talk about national, I think of it two ways.

I think of network and I also think in terms of -- what we call national spot business.

Our own rep firm SRR, reps all of our stations as to affinity accounts.

That is accounts that are particularly interested in the strategic audience that we've targeted.

They are willing to pay a premium.

As we build the company we continue to get critical mass.

The longer these stations exist, the larger the audience they have.

And we are just seeing the growth in the ability of these stations to get results.

There are surprising number of what we call direct response advertisers.

And the interesting thing is, we don't -- our SRR doesn't sell a lot of national spot business to individual stations on a cost per thousand basis.

They sell some.

But when you are selling an affinity product, you get much better price -- much better pricing than cost per thousand pricing would give you because this is a unique audience that advertisers, particular advertisers specifically target.

They are willing to pay a premium.

They get good results.

And when it's a direct response business, you know they get good results because if they don't get response, and direct response business they don't renew.

So, it produces further.

We are able to drive rates as well -- as fill inventory.

Business is just, I think, reflecting the growth of our company, the improved expertise, the critical mass of assets that target this audience.

The cross-pollination of the various strategic formats.

All of it is working together to drive that national spot business and the improved economic climate certainly has helped as well.

OK.

Thank you.

OK.

Thank you.

Our next question is coming from David Bank, RBC Capital Markets.

Thanks, good afternoon.

Good afternoon.

You guys obviously had some pretty good visibility into revenue given the guidance, you know, and where you wound up in the third quarter.

But you really outperformed on the operating leverage side.

So, I guess, my question is, what do you think happened, transpired differently in the quarter than you might have expected in terms of that operating leverage?

And is there a little bit of a dose of that kind of conservatism in approaching the fourth quarter as well because coming off such -- it's not just the strong operating leverage.

It's the fact that the operating leverage was so strong given the guidance of operating leverage.

How much conservatism is being built in there?

Well, I think when we give guidance we try to provide -- our goal is to provide numbers that we feel confident that we can deliver.

And given there's a bunch of business for November and December that still needs to be booked, there's some uncertainty attached to that.

So, we've tried to provide Q4 revenue guidance that we are confident about.

And if business in November and December does well, then we might be able to beat that guidance.

But at this point I'm comfortable with the guidance that we've given.

In terms of the expense side of things, we did perform well in Q3 in terms of controlling operating costs.

We spent a little less money than we thought we would on the marketing and promotion front, and in terms of bad debt, we had a very strong quarter.

Our receivable aging showed improvement over the course of the quarter.

We had strong cash collections and we were very pleased with our performance in that area.

So, those were the two key cost variance items in Q3.

The receivable aging and what's the other thing?

We spent a little less marketing money in Q3 than we originally projected.

OK.

Those were the two items that in our variance analysis of Q3 actual costs to Q3 forecast, those were the two items that stood out as having favorable variances that helped us on the cost front.

Got it.

OK.

Well, thank you.

Thank you.

Once again, ladies and gentlemen, to ask a question please press "star" "one" on your touch-tone phone at this time.

Our next question is coming from Grant Jordan of Wachovia Securities.

Good evening.

Are there any other CCM stations in your portfolio that are like Chicago that are significantly under-performing?

And my second question is how much are left on the pending acquisitions and what are the timing of those payments?

And then finally, how much is available on your revolver?

Thank you.

I might take a shot at the first part of your question and let David speak to the second two parts, part two and part three.

I think that if you want to examine our portfolio for Fish stations that are under-performing, one of the things you've got to look for, you've got to look at the property relative to the market.

We have some Fish stations that we pay substantially less money for, that in terms of their coverage of a particular market would not be, let's say, comparable to a Dallas or Atlanta or markets like that.

For example, Sacramento, we didn't pay a great deal for the signal.

It's a pretty decent signal.

It covers about 75% of the Arbitron diary placement in the market, which makes it competitive but puts it at a little bit of a disadvantage.

So that it will always perform a little less than say other stations in other Fish markets, but then again you have to look at the investment.

The investment is substantially less.

And I think, if you do an analysis, much of what determines the way stations perform will relate to how well the property, the signal covers the market that it's in.

And what its competitive advantages are vis-à-vis that.

You -- it may be, it may be a station, for example, in Los Angeles, we're in the Southern California market, but we're in Anaheim with a Class A FM, which is a 6 kilowatt -- 6,000-watt station that's designed primarily for the greater Orange County area.

Now it has significant listenership in other parts of Los Angeles County, but it will be at a distinct disadvantage vis-à-vis, the Los Angeles based stations, but then we didn't pay a Los Angeles based price for it.

So, it's relative in that regard.

But, if we can swap a property like that in a market like -- any market, large market and come out with a property that we think would put us in a better position to exploit that given market, then that would be part of what would motivate us.

So, I may be giving you more information than you're asking for, but I hope that's helpful.

Yes, at this point in time, there are no stations that we would categorize in the situation of The Fish in Chicago or The Fish in San Francisco.

We initiated the transaction with Univision.

We had identified that Chicago and San Francisco were not generating the type of cash flows that we wanted.

And we determined that we were going to do something about that.

And the result of our work and effort in terms of addressing that is the transaction, which you see with Univision, which we're very, very pleased about.

And I don't think there's anything at this point in time, where we have a station that is under-performing, that is a problem like Chicago or San Francisco.

So, that is I think, in our opinion an isolated situation.

Having said that, we are in the portfolio management business.

We have a portfolio of 103 radio stations and we are constantly examining the performance of each one of those radio stations to ensure that we're satisfied with the performance, that it is delivering the kind of growth that we're looking for.

And if in the future, we happen to have an under-performing radio station that comes to our attention, we will work just diligently to address that and do something about it.

In terms of pending acquisitions, we currently have four pending acquisitions, AMs in Cleveland and Miami, and FM in Astoria, Oregon just outside of the Portland market and an FM in Omaha, Nebraska.

The combined purchase price for those four properties is $36 million.

I would expect all four transactions to close in the first quarter of 2005.

We also have two pending exchanges.

We have the Univision exchange that is pending and we have an exchange with Cox Radio that is pending.

Again in both of those cases, I think, they will close in Q1, 2005.

In the case of the Univision deal, those stations have already; we've already begun operating the exchange stations as have Univision.

We've begun LMAs on those properties on November 1.

From an economic standpoint, we're already operating those stations.

But in terms of pending acquisitions, that's a total of $36 million.

In terms of how does that impact our revolver capacity, we have a $75 million revolver.

As of September 30, we had drawn 10 million on that revolver.

So capacity of $65 million.

So that 65 less the 36, will leave remaining capacity of about $29 million.

OK?

Great.

Thank you.

Thank you.

Our next question is a follow-up coming from Lee Westerfield of Harris Nesbitt.

Yes.

Thanks again.

Just real briefly on the CCM ratings, the women 25 to 54.

You mentioned the 25 to 54 ratings on average were up 20%.

Can you break that apart for Dallas and for Atlanta, were they up more or less than that during the quarter?

And similarly, CCM revenues were up 16.5% in the quarter.

How did Dallas and Atlanta compare against that revenue growth?

I don't have those rating numbers in front of me.

That 20% improvement comparison that we mentioned was actually the adult 12-plus number and was a comparison of summer 2003 to summer of 2004.

If you want to dig a little deeper into those ratings, if you go to RR online.com and go to the ratings tab in that website, you will be able to see the adults 12-plus ratings for all of our radio stations.

In terms of the contemporary Christian music revenue growth, that was 16.5% for the quarter.

Top performers in terms of that 16.5% would be Portland.

We had some very nice growth in Portland, as well as, in Dallas.

Dallas was up 24%.

Portland was up 32%.

And all of those stations achieved 10% plus growth with the exception of Chicago.

And Chicago is obviously part of the Univision exchange.

Thanks again.

OK.

There are no further questions.

I would like to turn the floor back over to management for any closing comments.

Thank you, operator.

And thank all of you for participating.

We will look forward to visiting with you again, when we get to our next earnings call.

With that, we'll conclude the call.

Thank you very much.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines, at this time and have a great evening.

Thank you.