Salem Media Group Inc (SALM) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

My name is Markita and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Salem Communications third quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to your host, Eric Jones.

Sir, you may begin your conference.

Thank you.

Good morning or good afternoon, whichever the case may be.

And thank you for joining us for Salem Communications third quarter 2005 conference call.

As a reminder, if you get disconnected at anytime you can dial into (973)582-2734, or listen from our website at www.salem.cc

We will begin in just a minute with opening comments from our President and CEO, Edward Atsinger III;

EVP Business Development and CFO, David Evans; and VP of Accounting and Finance, Evan Masyr.

After their opening comments, our conference call operator will come back on the line to instruct you on how to submit questions.

Please be advised that statements made on this call that relate to future plans, events, financial results, prospects or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

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

Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the dates 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, EBITDA and adjusted EBITDA.

In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures, including our reconciliation of such non-GAAP financial measures included in this conference call to the most directly comparable financial measure prepared in accordance with generally accepted accounting principals, is available on the Investor Relations portion of the company's website as part of the current report on form 8(K), and earnings release issued by Salem earlier today.

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

Thank you, Eric.

Welcome to those of you joining the call and thank you for joining us.

During the third quarter, we continued to fulfill our business purpose of super-serving the large and growing audience interested in Christian and family-themed content through our radio, Internet and publishing platforms.

Of particular note, our radio stations achieved 6% same station revenue growth and 8% same station operating income growth.

These rates once again compare favorably to the industry's overall revenue growth.

According to Raid Advertising Bureau, radio industry revenue rose 1% in the third quarter of 2005, compared to the same period in 2004.

So same station -- our same station net broadcasting revenue growth outperformed that of the industry in this quarter by approximately 500 basis points.

Let me provide more detail about our third quarter performance.

And I would like to do it by discussing it in the context of five strategic initiatives which we have focused on, each of which has contributed to the quarter's performance and each of which offer opportunity for continued growth.

Four of these initiatives relate to our Radio business and one relates to our Internet business.

Let me begin with our first strategic initiative, which is to develop to maturity our CCM stations by discussing the contribution of this format in this quarter's performance and take a look at the upside afforded in this area.

Our CCM stations, promoted in most markets as The Fish, are branded safe for the whole family because of our commitment to providing radio program that is appealing, entertaining and yet consistent with core values of our core audience.

Stations in this format contributed 23% of our total net broadcasting revenue for the quarter.

Our Fish stations achieved 3% same station revenue growth in Q3.

Now if you exclude KLTY in Dallas, which had a 4% decrease in revenue for the quarter, due to our inventory reduction strategy which we've discussed in prior calls and subject to presentations, our Fish stations achieved, with that exclusion, an 8% same station revenue growth in Q3.

Our Fish stations in Atlanta, Los Angeles, Milwaukee, Nashville and Portland all achieved strong revenue growth in the quarter.

Total Fish station profitability decreased to $4.1 million in Q3 '05 from $4.2 million in Q3 '04.

This slight decrease was principally again due to our inventory reduction strategy at KLTY.

If you exclude KLTY, Fish profitability increased by 8% in the quarter.

The reduced commercial load and increase in music played at KLTY, by the way, has contributed to increased listenership, and will drive long-term profitability.

In its target demographic, females 25 to 54, each of Arbitron's last three books, ending with the summer of 2005 book, KLTY ranked in the top three in the Dallas market in this demographic based on average quarter hour share.

KLTY tied for the number one rank in the spring book and ranked number two in the recent summer book, again, in this target demographic.

Our goal all along has been to keep KLTY in the top five in the target demographic.

We are confident that increased listenership will translate into future revenue and profit growth.

And in spite of the fact that KLTY had a slight decrease in revenue, we believe KLTY will achieve profit growth for 2005 as a whole.

As you know, KLTY in Dallas continues to be a market-leading, highly profitable franchise.

Replicating the performance of KLTY and our KBIQ in Colorado Springs, two stations which are mature in this format at our other Fish stations, is the key focus.

The stations we think best position to achieve performance similar to KLTY's, measured by ratings and power ratios, are other Fish stations that enjoy full market signals;

Atlanta, particularly Portland, Cleveland, Sacramento, Jacksonville and Honolulu.

The 2004 for book average persons -- 12 plus average quarter hour share rating for these stations, as a group, was approximately 2.5 share -- that's 12 plus, with a power ratio of approximately 0.8.

KLTY on the other hand, the franchise we are working to replicate, achieved a comparable 3.2 share, 12 plus, and a comparable power ratio of 1.4.

If we take these stations to that type of performance, which of course is our goa,l this combination represents 28% ratings upside and a 67% power ratio upside and that's a focus that we continue to pursue.

And that strategy appears to be making good progress.

Our second initiative is to rapidly grow to maturity our News Talk stations, which continue to develop as an important growth vehicle for Salem.

We have 33 News Talk stations serving eight of the top ten and 19 of the top 25 markets.

Stations in this format contributed 14% of our total net broadcasting revenue for the quarter and achieved the 24% increase in net broadcasting revenue compared to the same quarter last year.

This revenue growth is due to, in part, to the fact that we have more than doubled the number of our stations in this format since the beginning of 2004.

But organic growth was also a significant factor, evidenced by a 15% increase in same station net broadcasting revenue.

Our News Talk format continues to see ratings and listenership improvement, which positions us favorably for continued revenue and profit growth.

As an example, our News Talk Station Chicago launched at the end of last year has steadily gained share.

Our Sacramento News Talk station has been growing its rating this year, achieved a 1.4 average quarter hour share adults 12 plus in the recent summer book, programming improvements coupled with a more aggressive marketing and promotional effort has led to an overall listenership increase on the same station basis of about a 10% over the past year.

Our third initiative is to continue to nurture the steady consistent growth of our Christian Teaching Talk formatted stations.

These stations continue with a history of stable consistent performance, growing same station revenue by 5% in the quarter.

Stations in this format contributed 51% of our total net broadcasting revenues, so it's a significant component of our business.

An important and unique feature, of course, of Christian Teaching Talk stations is that underlying stable block revenue that performs in good times, in bad times and if you look back over the last five, six, seven even ten years, it's been rock solid in its stable performance.

That business contributes to -- that block programming business represents 27% of our total net broadcast revenue.

The fourth initiative on the radio side, is to grow our national advertising businesses.

This consists of two principal components, national spot buys generated by our own internal rep firm, S Salem Radio Reps, and our network component.

In contrast to the overall radio industry, we delivered strong national revenue growth during the quarter.

Salem's same station national spot advertising and network revenue grew 7% to $7.3 million for the quarter, up from $6.8 million last year.

We achieved this growth despite $300,000 of national political revenue in Q3 '04 that was totally absent in Q3 '05.

If you exclude the political advertising, our core and national advertising business increased 12%, continuing the upward trends of our national advertising business.

We are confident in our ability to continue to expand our national business for two reasons.

First, the critical mass that we have achieved with this platform means that this platform has become the most efficient way for national advertisers to target the audience interested in Christian and family-themed programming.

And secondly, there continues to be a growing recognition among advertisers -- advertising agencies, particularly, of the significance of the size and buying power of the Christian audience and its importance for their clients.

Our fifth and final initiative that I want to discuss is to expand our Internet business.

Nothing is a greater challenge or greater opportunity for us, particularly, than the challenge to integrate our old media platform with our new media platform.

With more than 40 million page views and 3 million unique visitors each month to our websites, we are already the leading Christian content provider on the Internet.

During the quarter, Salem Web Network, our Internet business, further strengthened this position with a 21% increase in page views compared to Q3 2004.

One way we did this was by using unsold station inventory to promote three of our Christian content websites, which proved to be highly-successful.

By the way, we have never really done this in the past.

We plan to continue to -- continue this use of our radio platform to build our Internet traffic.

Salem Web Network grew its revenue by 22% to $1.7 million during the quarter and generated a $250,000 profit.

So with a solid and profitable foundation established for Internet business we see a number of opportunities for expansion.

With a rapid growth and success of new media such as the Internet, I-Pods and other developing technology, its become increase single important, as I said, for traditional media to embrace and integrate these emerging media opportunities.

We think that our Company is uniquely positioned to take advantage of these opportunities.

The Internet tends to be much more a narrow casting -- much more about community -building on the Web.

And as a targeted niche broadcaster, of course that's what we do.

All of our formats are synergistic, all of our formats target on super-serving this audience.

It's a natural extension for us to build community on the Web and use it as a dynamic interaction and interface with our old media platform.

So if old media declines in audience in terms of times spent listening, in terms of overall cum; but the new media increases accordingly or even more, we think -- while it's a challenge, it represents a great dynamic opportunity for us to get that interactivity and that synergy that comes with multiple-media platforms.

To give additional priority to our Internet strategy we've expanded David Evans' role to include responsibility for new business development and also the oversight of our Internet and Publishing businesses.

Media companies that serve a specific niche audience like Salem, as I said, which super-serves the Christian and family-themed audiences are particularly well-positioned to integrate new media opportunities with our traditional media platforms.

As the leading provider of Christian and family-themed content both on radio and on the Internet, and increasingly now with our Publishing platform, we are uniquely positioned to leverage theses opportunities -- to integrate new media with old media.

Let's now turn our attention to acquisition activity.

We continue to find opportunities, though smaller and at a slower pace, to strengthen our radio station portfolio.

I would like talk about two recent acquisitions in the Orlando market and Detroit.

In Orlando, we are acquiring three stations, forming a station cluster in one of the nations's fastest growing markets.

We are acquiring one of these stations without using cash by exchanging a nonstrategic surplus AM station in Dallas that we acquired as part of a multi-station swap last year.

We plan to do our News Talk format on that station.

The other two stations that we are acquiring from a different buyer in Orlando, will be purchased for $10.7 million.

They also include some significant real estate assets.

Typically, when we acquire stations we have to reformat them.

In this case, these two stations have been operating in a Christian Teaching Talk format for many years -- are the dominant format in that market.

And since we plan to keep them in this format, the transaction should be immediately accretive for Salem.

In Detroit, we've also contracted to acquire a station with a full market full-time signal that is already in a Christian Teaching Talk format by -- here again, by exchanging two smaller stations we own in Cincinnati and paying an additional premium of $6.7 million.

The Detroit acquisition, which should also be immediately accretive, gives us a two-station cluster in Detroit, providing improved market presence and important operating efficiencies.

These transaction are very good moves for Salem, as they give us established Christian Teaching Talk franchises -- well established for many years in two large important markets.

We also recently announced the acquisition of the Singing News magazine.

We've agreed to acquire the magazine and related Internet sites, which are already a successful and profitable business, for $4.5 million.

We expect that this transaction, too, will be immediately accretive.

The magazine, which for 35 years has been the printed voice of southern gospel music, is a great compliment to Salem's other publications, including Homecoming magazine and CCM magazine.

Again, we are acquiring an established and successful market-leading business serving our target audience.

I think that the characteristics of all of these acquisitions this quarter have been particularly gratifying to us, since for a change, we've acquired assets that are in format, that have established cash flow and we haven't had to go through the challenge we normally do of reformatting and waiting for a period of turnaround.

But we have done that in many cases.

We continue to do it and so finally, when we examine our radio station portfolio, approximately half of our stations, including most of our News Talk stations and many of our CCM stations, are in a start-up or early development stage.

We are focused on taking each of these underdeveloped stations, as I said earlier, to maturity.

Specifically focusing on our CCM and News Talk stations, where we believe opportunity for growth is the greatest.

Our block programming business continues its stable and consistent growth.

And we expect our national advertising business to increasingly benefit from the recognition by advertisers of the value of our unique audience.

We are aggressively pursuing opportunities to integrate our traditional media platform with rapidly growing new media opportunities.

And with that, I will turn the call over to Evan Masyr, Vice President for Accounting and Finance, who will give you a little more detailed discussion of our third quarter 2005 results.

Evan?

Thank you, Ed.

Our results for the third quarter of 2005 were issued in a press release earlier today, and are available on the Investor Relations portion of our website.

I will briefly review these results.

Net broadcasting revenue for the third quarter increased 8% to $51.2 million, and SOI increased 8% to $19.8 million.

On a same station basis, net broadcasting revenue grew 6% and SOI grew 8%.

In terms of operating leverage, our 6% same station revenue increase was achieved with a 5% increase in same station broadcasting operating expense.

In other words, same station revenue increased by $2.7 million and station operating income increased by $1.4 million, a 52% incremental operating margin.

Let me also provide some detail on same station growth rates by revenue type.

Our same station block programming revenue grew 8% for the quarter.

Our local advertising revenue increased by 5% on a same station basis.

And our national advertising revenue, including spot and network revenue, was up 7% on a same station basis.

Included in our same station numbers, is broad casting revenue from 75 of our 105 radio stations and our network, representing 87% of our net broadcasting revenue.

Regarding our balance sheet as of September 30, 2005, we had net debt of $310 million and were in compliance with all covenants.

Our bank leverage ratio was 4.97 as of September 30, versus a compliance covenant of 6.75.

And our bond leverage ratio was 5.43, versus a compliance of 7.0.

We have continued to repurchase shares of our common stock.

As of October 31st, we had repurchased approximately 640,000 shares for $11.5 million.

Our board has authorized share repurchases up to $25 million.

I would now like to turn the call over to David Evans for a more detailed discussion of our fourth quarter 2005 guidance.

Thank you, Evan.

Good afternoon, everyone.

Before discussing the fourth quarter 2005 guidance, I would briefly like to talk about fourth quarter of 2004.

On prior calls we have been asked by analysts about our base of same station revenue and SOI for the upcoming quarter.

And I would like to provide these details.

First, in terms of station numbers, our same station numbers for Q4 2005 would include 93 stations.

And our non-same station numbers would include 12 stations, all of which were acquired over the past year.

In terms of dollars, our fourth quarter 2004 net broadcasting revenue per our financial statements were $49.3 million in total.

Of this, $100,000 related to stations acquired over the past year and $500,000 related to stations that we have sold over the past year; leaving a same station net forecasting revenue base for fourth quarter 2004 of $48.7 million.

In terms of SOI, our fourth quarter 2004 SOI total was $18.8 million, this included $200,000 of losses related to stations acquired over the last year, and $100,000 of losses from stations that we have sold over the last year, providing a same station SOI base for the fourth quarter of 2004 of $19.1 million.

Now let me turn to the fourth quarter of 2005.

We are projecting net broadcasting revenue to be between $51.5 and $52 million, reflecting mid single-digit growth compared to fourth quarter 2004.

We are projecting SOI to be between $19.2 and $19.7 million, reflecting low to mid single-digit growth.

We are projecting net income per diluted share to be between $0.11 and $0.13.

This fourth quarter 2005 outlook reflects the following; same station net broadcasting revenue growth in the low single digits, compared to fourth quarter 2004; same station SOI, approximately even with fourth quarter 2004; the absence of political advertising revenue in fourth quarter 2005, compared to $1 million of political advertising revenue in fourth quarter 2004.

Excluding this political advertising revenue, same station net broadcasting revenue growth would have been in the low to mid single digits and same station SOI growth would have been in the mid single digits.

So political is having an impact on is this quarter.

Also included in our assumptions; reduced inventory loads at KLTY, our CCM station in Dallas; continued growth from Salem's underdeveloped radio stations, particularly our News Talk stations; start-up costs associated with recently acquired stations in the Chicago, Cleveland, Detroit, Honolulu, Houston, Miami, Omaha, Orlando, Sacramento and Tampa markets; and finally the impact of recent acquisition, exchange and divestiture transactions.

That concludes our prepared remarks.

So with that, we would like to open the floor for questions, please, Markita.

[OPERATOR INSTRUCTIONS].

Our first question comes from Victor Miller of Bear Stearns.

Good afternoon from New York.

Good morning to you there.

Thank you.

Two questions.

First of all, can you talk about -- you had same station growth about 7.8% in the third quarter and that's deccelerating even with political adjustments of low to mid single digits.

Are you running into a situation where some ad categories are giving away or is it just the tough comps you have from the double-digit growth you had the previous year?

And secondly, if you look at the little table you provide on your SOI margin composition, 54% of your stations were 29% margins or lower.

This year it's about 61%.

So you have actually more stations migrating into that part of the bucket.

They generate basically the same amount of revenue that they did a year ago but they actually generate even less cash flow than they did a year ago, despite having 11 -- I mean, about 11 more stations in that bucket this year than there was last year.

Could you talk about what's happening in that part of your business and just give some clarification there?

Thanks.

In terms of the -- your first question about the same station numbers, our same station revenue growth was relatively consistent from Q2 to Q3.

We did see a modest uptick in our broadcast operating expenses between Q2 and Q3.

And as a result, same station SOI increase was slightly lower in Q3 than in Q2.

So a modest reduction in operating leverage.

I see that as a one-quarter issue and I think we will work through that.

Looking at that point in relation to Q4, we have slightly different seasonality trends in each of our formats.

There is relatively little seasonality in our Christian Teaching Talk format because of our block programming business.

However, on the music front, Q4 is a very important quarter.

And in that case, because of our KLTY inventory reduction strategy, that station has a slightly larger overall impact on our numbers in Q4 than in any other quarter.

So I think that explains the underlying trends in our same station portfolio, absent of course, the political consideration that we have already discussed.

In terms of the SOI margin composition analysis and where our stations fall in terms of operating margins -- the good news in that area is that the number of stations that had a 50% plus operating margin has increased from 12 to 17.

We are obviously pleased about that.

Moving up were stations in San Francisco, Pittsburgh and Houston, so we are pleased about that.

One negative, our cluster in Louisville moved from being slightly above 30% to slightly below 30%.

And we expect that station to bounce back up into the plus 30% category quite rapidly.

It had a soft summer but we're focused on it and it will be addressed.

In the below 29% category, the most significant change is that we have acquired 12 radio stations over the past year, all of which moved in.

And obviously they begin and there's less than 0% category and have to move their way up.

So those were the key changes in portfolio composition, Q3 '05 compared to Q3 '04.

Thanks very much, David.

Thank you, Ed.

Our next question comes from James Dix of Deutsche Bank.

Good morning, gentlemen.

A couple of questions.

First, in terms of the start-up costs which you are modeling for -- or you are incorporating into your guidance for 4Q, if you could detail the rough magnitude of those?

And how you see those costs rolling forward as we go into next year?

Just what's the progression going to be for that chunk of start-up costs so we can understand that for modeling purposes.

Then secondly, are there any particular categories which are coming on to News Talk quicker than you expected or any which are lagging?

Want to try to understand where the category growth is coming from for that initiative.

And that's it.

When you say categories, I presume you mean advertising categories.

Exactly.

Yes.

Okay.

In terms of those News Talk stations, they have two principal sources of revenue.

During the week, the predominant source of revenue is spot advertising.

Over the weekend, the predominant source of revenue is selling local programs and, to some extent, infomercials.

So there are two different pools of revenue as we develop our News Talk stations.

What we have found is that the selling of the programs over the weekend has in fact moved rafter faster as we launched those stations than we originally anticipated.

And is taking slightly longer to build the local spot advertising because we first have to deliver ratings.

So the the most -- the largest trend we see on those stations is strong growth in local programming revenue.

In terms of advertising categories -- very diversified.

Nothing specific is jumping out to us at this point, in terms of overall trends.

That's principally because, in a lot of those stations we don't have prior year numbers, so not much to compare against.

And are those stations generally in line with the radio industry in terms of the local/national split of revenue, kind of 80, 20?

No, those stations at this point, are a lot more local-oriented in terms of their advertising mix.

Because they don't have ratings, yet, I guess?

Yes.

I am going to say the split on those stations is probably 95/5, local advertising to national advertising.

That is a little bit shoot from the hip.

I don't have the number in front of me but my gut feel is that's where you see it right now.

And that national, by the way, James, is primarily what we generate with our internal rep firm.

They don't -- they have ratings.

It's just that the ratings haven't penetrated the level that we need to be able to tap into more of the cost per thousand business and more -- even local agency business becomes a little more available as you begin to breakthrough certain barriers.

And those are the targets that we are focusing on.

Okay.

In terms of your question about fourth quarter start-up losses, we expect to have between $1 million and $1.2 million of start-up losses in the fourth quarter of 2005.

That number is included in the guidance that we have given today.

In terms of how I see that moving and changing over the next year -- if there were no further acquisitions, I would expect to see that number gradually reduce to zero over the next 12 months.

And so in that case, a year from now, essentially we would be modeling based off the same station base that you have for this quarter?

And we would not be looking at any start-up losses as a drag to the overall growth profile of the stations on a cash flow side?

That would be our goal.

Great.

Thank you.

Our next question comes from Lee Westerfield of Harris Nesbitt.

Thank you and good day, gentlemen -- to everyone on the line.

Really -- actually two questions for me.

And the first, David, if I can get a better understanding -- the revenue-producing and maintenance CapEx levels -- the revenue production CapEx in the quarter looked a little bit above where, at least I had been expecting, so maybe I missed something over the last three months or so.

But is there a change that took place in terms of your outlays in any location that were noteworthy?

And also where, as you go into budgeting for 2006, should we be initially expecting your revenue-producing CapEx figures to be for the coming 12 months?

And the second question is -- and recognizing it's still about a month away or so, but the renewal periods for block programming have been very predictable in the past.

Should there be any change in temperature, at least, or in terms of demand or otherwise that you would anticipate coming up in the months ahead as you enter the renegotiation periods? -- the renewal periods, pardon me.

In terms of CapEx, there is only one change to -- or one material change to our CapEx numbers, which is we purchased some land in east Los Angeles that we are hopeful will facilitate an upgrade of our News Talk radio station in Los Angeles, KRL A and I am going to let Ed talk about that in some detail.

That's the only change.

And Ed will also talk about the status of our block programming renewals.

In terms of CapEx -- maintenance CapEx seems to run in the $7 to $8 million range every year.

The acquisition related income producing CapEx is very much case by case.

If you look at the narrative in our press release, we have identified the key projects that form that acquisition related income producing CapEx.

Most of which are upgrade related.

Some of which is the purchase of studios as opposed to leasing.

As I look ahead, there will continue to be projects like that.

I don't think there will be anything on the scale of this KRLA project.

But they are dependent upon receiving appropriate FCC approval.

And I'm going to assume that there are $5 to $7million of such projects for next year.

But let me hand over to Ed and he can talk about what we are going to try and achieve at KRLA in Los Angeles and then talk about block programming renewals.

Lee, we have purchased a very large track of land, it's actually in the San Gabriel Valley.

It's a 78-acre parcel of open lands surrounded by residential development.

We think it's a very attractive parcel.

And we think it's immediately marketable should we decide that, for whatever reason, we are frustrated in what we are attempting to do.

We are very optimistic based upon the due diligence that's been done.

We agreed to pay $8.5 million for this piece of land.

Our intent is to use it to facilitate the filing of an application which will, by the way be filed very shortly, proposing a significant increase in our nighttime coverage for our Los Angeles AM.

Currently, at the current sight at night -- the current site that we use for both day and night, the daytime coverage is quite good, 13 million people within the range of an interference-free signal.

At night, however, that drops to about 7.2 million people.

This site will allow us to increase power from 3,000 watts to 37,000 watts and it takes our interference-free coverage from 7.2 million to 11 million.

It not only expands therefore in a substantial way the effectiveness of that facility at night, but it also makes it is much louder within the area that it also covers.

So it's penetrating power is improved.

And it would be a very significant enhancement to the asset value of that property.

The other thing that's attractive to us about this, what we would call an income-producing investment or CapEx expenditure, as you used that phrase, is the fact that it's 78 acres, much larger than we need and much of that property can be spun-off for adjacent residential development and we can recover a good bit of the investment.

But were we not able to do that, we fully believe that we can justify this investment in terms of the impact it will have on our ability to garner better ratings and to increase revenue with that property.

So that is a unique situation and a large one, larger than we normally get involved in.

But we are very -- feel very good about the fact that we are able to even find this parcel.

We looked for two or three years.

This has been an ongoing process.

And we were delighted that we were able to get it into escrow.

The numbers again, did you say 78 acres at $8.2 million?

That's right.

$8.5 million.

I wish my neighborhood was like that.

It's in the west Covina area of San Gabriel Valley.

It's surrounded by a fairly good middle, upper middle class residential development.

So the zoning is consistent with what we need to develop it for our transmitter sight with the conditional use permit, which is what we are pursuing.

And as I say, the peripheral land can be further developed into single-family lots and still leave a big open space area that we think the neighbors basically like because it will -- it would be less dense in terms of population development and developed in a way that is environmentally sensitive.

With regard to the block programming, we feel pretty good about the way things have begun.

We do not see anything, going into this renewal phase -- and anything that would suggest any dark cloud at all.

I feel a bit more optimistic about the environment this year than probably we have over the last couple of years.

And I would be quite surprised if we don't achieve -- certainly block program renewals at rates no less than what we've done in the last couple of years and there is a possibility that we will do a little bit better.

But there is certainly no red flags or indications that we won't.

And on the contrary, I think the environment is a little more positive right now than it probably has been the last couple of years.

We look forward to it.

Gentlemen, thank you very much.

Thank you.

Our next question comes from Jonathan Jacoby of Banc of America Securities.

Good afternoon or good morning.

A few questions here.

The first, when you look out going forward with where your leverage is, what type of other acquisitions would you be looking at?

And perhaps, where do you think there's some holes?

Second question is, if I look at even ex Dallas in the Contemporary Christian Music portfolio of stations and their growth, we've seen a sequential decline from the first quarter -- I believe the first quarter was up about 16%, 2Q was about 10% excluding Dallas, Q3 was 8%; is there something that we are starting to reach maturity to this?

I know you mentioned the power ratio opportunity but how should we look at this business going forward?

Last question, following up on Victor's question in terms of the margin bucket, if you just look at it, you really have five stations that fell down from the 30% to 49% bucket, at least it appears.

You mentioned Louisville, I'm curious what the other four are and how we should expect that, on a going-forward basis, starting with the fourth quarter?

Thanks.

Just answering that question -- the final question first, Louisville is actually a four station -- Louisville is four of the five stations.

The remaining station -- the name eludes me -- but it fell from 31% to 29%, so it was an immaterial movement.

The answer to that question is it's a four station Louisville cluster.

In terms of acquisition plans, Ed, you want to talk about that?

Well, if you look at what we've done, Jonathan, the last -- the things that we've announced related to the activity this quarter.

The very positive news, from our point of view, is we were able to acquire, both on the radio side and in terms of -- in terms of publishing assets, we were able to acquire properties that were already in format with a positive cash flow that don't put a drag on going-forward at all.

So that start-up costs and development are going to be -- there will be some start-up costs associated with some of them -- simply because some of them -- in the negotiation process you buy a property, and the price you pay may be somewhat under market value, but what is not necessarily obvious to the casual observer is the fact that you may have to make an additional CapEx investment to bring it up to snuff.

And that would -- there probably is a CapEx investment in the future for Detroit, for example, that will add -- could well add $1 million to the cost of that property over the next year.

But that will be a CapEx.

And when you analyse what we acquired in that market, based upon what we know of the cost of properties in that market, we think we have a property well under market value.

So that the additional investment will not be -- will not really be an investment in that market that exceeds what we think it's worth.

But acquiring assets that are in format -- The nice thing about Detroit and Orlando, for example, are in a Christian Teaching Talk format, which is that stable, consistent programming.

And when we can get a franchise that's been in the format for many, many years we are always delighted.

Because it becomes a foundational platform upon which we can layer additional activity in that market.

In the case of Detroit, we already had our talk station.

We badly needed a second station to achieve operating efficiencies.

So going forward with acquisitions, we are much more focused on trying to get assets that are cash flow positive already, that are established businesses wherever we can.

We are being much more careful about acquisitions.

We may acquire some properties if they round out a cluster.

And we will -- if we go into new markets it will be, first and foremost, looking for established franchises that are already in format, or at least one of our formats, to minimize these additional start-up costs that we've had over the last couple of years.

We were trying to build a critical mass on the News Talk side and that was the biggest factor in the last 15, 16 months.

And in most cases we had to reformat those stations.

You will probably see some additional Internet activity as David focuses on these new responsibilities.

The good news there is that almost -- we simply don't buy Internet assets that are not already targeting our audience that already have business cash flow page views where we see an immediately accretive acquisition.

And that has been consistent with what we've done on the Internet side.

That would probably be the short and long answer to your question.

Great.

If you could just -- the second question was on the Contemporary Christian Music seems to be showing the sequential slowdown all year.

If you can give us some more color -- ?

The only thing I will say there and I will let David round it out -- remember the inventory reduction regimen was put in place after the first quarter.

So we implemented it beginning in April.

But I'm looking ex Dallas.

So first quarter I believe was 16%, 2Q was 10% ex Dallas, Q3 is 8%.

Just trying to get a sense as to how we should look at that business.

Yes, excluding Dallas, when we exam the rest of the Fish stations, they continue to develop in their maturity.

And, yes, that percentage increase in their revenues gets a little lower every year because you are building off of a larger base of revenue.

So I think -- what I would expect from those stations in '06 compared to '05, is a similar rate of dollar revenue growth -- '06 to '05, compared to '05 to '04; but because you are building off of a larger base of revenue that percentage gets a little lower every year as those stations build towards maturity.

But as a whole, those stations still have some good upside to reach maturity and we are focused on achieving that.

So certainly expect a faster growth rate than the overall radio industry.

And I would focus also on my comments where I would focus on growth in audience and growth in power ratio.

We are trying to bring the other markets that is much -- Dallas has been in the format, as has Colorado Springs, those are the two mature stations that we have.

Dallas has been in the format now about 15, 16 years.

Most of the others have entered it since the fall of 2000, 2001, 2002.

So they have a ways to go.

Maturity -- really, you ought to look at them and evaluate them in terms of their movement towards the audience share that Dallas has achieved and also the power ratio.

Thank you.

Thank you.

Our next question comes from David Bank of RBC Capital Markets.

Thank you.

Good morning.

Good morning.

Two questions.

The first is, David, are you assuming any sort of displacement rate on the political revenue?

Are you assuming anything would have run?

Or are you just stripping out the $1 million, and assuming nothing would have run a year ago?

And the second question is, I guess for Ed, in the discussion of the maturity and the upside -- the maturing process -- development process and the potential upside of the other non-KLTY Fish stations.

We're basically modeling the goals after what's been achieved at KLTY.

But you've underdone this massive spot load reduction at KLTY, which has caused a certain amount of disruption.

So here in these ratings gains and power ratio gains, is there going to be some spot load reduction openly on those other stations?

And can you achieve the same success without similar spot loads?

Let me deal with your second question first and I will let David maybe address the first one.

Although I would say with regard to the first one, I don't think that -- in most cases, we weren't sold out.

It wasn't an inventory squeeze, as much as it was simply an opportunity to accommodate more demand with the inventory that was available.

But with regard to your maturity question, first of all, as I just commented, Dallas has been in the format for nearly 16, 17 years.

When we acquired it, it had been in the format for a dozen years and the company we acquired the station from was running a much higher inventory load than we currently are.

We reduced it in the fall of 2000 when we acquired it from very high levels.

I'm trying to recall -- but I mean they were pushing --

When we acquired the station in 2000, it was run seventeen to eighteen minutes of inventory.

We did --

Or units of inventory, I think.

I think it was minutes.

We immediately reduced that inventory to the 13 to 14-minute range.

Last March we reduced KLTY to the 11 to 12-minute range, which is pretty much virtually identical to where we run all of our other Fish stations.

So that would imply that you don't really need to cut spot loads any more?

No, because we haven't gotten there with them.

They are younger.

They are not with the audience share, the power ratio is not there, the audience share is not there because they haven't achieved that listenership level.

So we don't have the problem.

When we get there -- we've been able to approach it the right way.

We see no need for any inventory reduction campaigns at any of the other Fish stations.

And there have been no conversations along those lines.

The only other thing I would say about these other stations and this maturing process -- with audience share it's always two steps forward, one step back.

You never go straight up.

Book-to-book, quarter-to-quarter with Arbitron, you have to look at four book averages.

And you are always going -- you have a book that maybe is a bad book.

You get a statistical blip.

You get a placement with Arbitron diaries that is less favorable.

It's just the way it goes.

So you don't see straight line quarter-to-quarter all the time.

You will make some progress and then you will step back but you will look at a four book trend.

And when you look at the four book trend year-to-year, the progress continues to be very stable.

Again I have said Atlanta, I think because it's been in the format the longest -- Atlanta, Portland and Cleveland, those markets, particularly the ones I launched -- Atlanta is first and then the others would kind of fall behind it.

In terms of your political question -- in terms of the numbers we have given in the press release, we simply pulled out the political dollars that were earned a year ago.

And didn't make any attempt to try and calculate if those political dollars hadn't run, would anything have run in their place.

As Ed said, we think in most cases, there was available inventory to run those spots.

So there was no cannibalization of other revenues a year ago.

It was a simple add-on opportunity.

Okay.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Bishop Cheen of Wachovia.

Good afternoon Ed, David and Evan.

David, congratulations to you.

Let me throw the first question to you on business development.

Salem is a pretty well branded radio company.

Have you considered extending the brand into the music business?

We certainly do talk about the music business because of our significant CCM presence.

But we have not specifically talked about getting into the record label or music publishing business.

In both those areas, the Christian music industry is already very well consolidated.

The principal players are EMI and Warner.

And I very much doubt that they would have any interest in selling those assets.

So I would say it's quite unlikely that you will see us look at that area, simply because it's already consolidated.

The principal assignment that Ed has outlined for me, at this point, is to focus on new media opportunities, specifically in the Internet arena.

And I intend to be quite prioritized about how I look at new business development.

So if there's one area to look out for, it is the Internet area.

Good answer.

To the balance sheet -- I think we still have the same $150 million facility in place.

Is that correct?

Credit facility.

Yes, the credit facility -- we have $125 million term loan.

We have a $75 million revolver that is virtually unused.

And we have an option to draw an additional $100 dollars as either term loan or revolver.

Okay.

And the maturity on this facility, if you would refresh my memory?

Maturity is about five or six years out in the future.

We recently -- we did an amendment of the facility in July.

At that time, we entered into an additional $50 million term loan.

We used that term loan to pay down our revolver to zero.

So we have a virtually unused revolver at this time.

And at the same time, that's where we also added the option to draw a further $100 million.

And the purpose of that was -- we have some 9% high yield notes callable July 1, '06.

Those notes have a 9% interest rate.

And they can be very favorably refinanced and we intended to that.

You just took care of my next question.

Thank you, David.

Thank you.

Our next question is from Jim Goss of Barrington Research.

Thank you.

I was wondering if you could deal specifically with the News Talk format stations?

Where do you feel you are in the development of these stations as a group?

And could you discuss the parallel growth of Salem Radio Network and the interplay between the two?

And then finally whether the upcoming election year will provide a favorable impact on these trends?

We have, for the most part with the few exceptions, tried to develop the News Talk stations with almost 100% syndicated product.

The majority of that product being product that we own through Salem Radio Network then we syndicate to our own stations as well others.

It allows us to very cost-effectively roll-out a News Talk format.

We commented -- we had a number of acquisitions in the last 16 months or so, since the beginning of 2004.

When you are trying to establish a presence in top 50 and most of the top 50 markets to get critical mass with this format, it was important to us to take advantage of opportunities and get out there and have a presence in all -- as many of those top 50 markets as we could establish.

To do that cost-effectively, if you can go in with syndicated product it doesn't cost you anything.

And if it's your own syndicated product it's obviously even more attractive.

And that is the case.

We syndicate Bill Bennett's Morning in America ,as you know, from six to nine, east coast time;

Mike Gallagher from nine to noon;

Dennis Prager, noon to three;

Michael Medved, three to six; and Hugh Hewitt, six to nine; all east coast time.

So we can, using entirely our own product -- a syndicated product, we can roll-out a new format very inexpensively.

We have also rely on other syndicators.

We use Laura Ingram in many of our markets, who works very well and tends to be synergistic with the talk focus and emphasis that these stations have marked out.

But there are some limitations when you do that.

So in terms of growth -- we have said that our goal is a two share, 12 plus, which gets us in the target demographic to a higher share.

The target demographic for most of these are adults, 35 to 64, with probably a little more of an emphasis on male, 35, 64.

Once you breakthrough the 12 plus barrier consistently you are going to be in key demographic, depending upon the market, probably 3 to 3.5.

And that makes it -- that's our target in terms of revenue.

Because then you really have more access to local cost per thousand business.

You are less dependent upon direct response business.

And so when we measure progress with those stations ,we always measure it in terms of how they're moving along on that scale of getting to that consistent two share, 12 plus.

Many of them are knocking on the door.

Some have been there.

But as I said a minute ago about the music format, it's never straight line.

It's two steps forward, one step back.

You commented on the election -- how will the upcoming election impact?

Well certainly the 2004 election -- it impacted them dramatically and we saw some dramatic increases in the second and third quarter of 2004.

Now there was a little bit of listener fatigue after that very intense lengthy campaign.

And we saw then a little backing off on the News Talk format, not just on ours, but across the board with other News Talk.

I suspect as the political arena heats up, the interest level comes back.

It is to some extent related to the intensity of the campaign.

And we've got this bi-year election coming up a year from now.

Then of course two years later, we will have the next general election.

And each of those events does stimulate interest.

Now the thing that seems to be driving it right now are all this activity with the Supreme Court has been a lot of fodder for talk.

And we think that probably you will see a little bit of response on audience shares when the next book comes out measuring the fall of '05.

You can do the work.

You can do-it-yourself, Jim.

You can get Arbitron, it's available.

Track our markets and look at a two, three, four book trend and you can see which ones are making progress.

And we feel pretty good about most all of them.

As a whole, I think we would describe that status as being in an early development stage.

There are a number that we purchased over the last year that are start-ups.

There are further groups that we purchased over the last two years that are in the early development stage.

The most developed are probably, I am going to say, Denver and Minneapolis.

And even those stations we see good upside still available to us before they reach maturity.

So as a group as a whole, I think I would use the word early development, in terms of the overall status.

And we see substantial growth opportunity.

Just to round out a little bit more on that question about the interaction between the two -- look, the strategy here, a two share, that doesn't exhaust our ambitions for these stations.

But we will do very well with this business model, which is a very low-cost model, because we are using syndicated product.

When you begin to get there consistently, the strategy in certain markets particularly Los Angeles, Chicago, those markets, will begin to develop drive time local involvement.

That costs a little bit more, that can takes them up to double that audience share and then they become a different kind of franchise.

They have a short-term or intermediate strategy and a longer-term strategy.

But the short-term or intermediate strategy works quite well with the two share goal, 12 plus, because the cost is very low.

And then we have the other benefit on the network side, that you mentioned.

And because we syndicate these personalities and spread the cost of them overall of this platform, as we add stations, we pick up this talent and we don't have any incremental cost -- it benefits us in that way.

We mentioned that our international business keeps growing.

And obviously, as we get traction and we add stations, they get additional inventory because they are sydicating that product.

So there is a dynamic interaction between the two and they will grow together.

Are you going to carve out the profitability of the radio network itself at some point?

Right now, I think the revenues are included in the net broadcasting revenues, along with the radio group.

If you go to the SOI margin composition analysis on the second page of the press release and you look at the line called Other, that Other line is principally Salem Radio Network.

So you can actually break out Salem Radio Network by going to that detailed analysis.

But we will not break it out on the face of the income statement because we consider it one segment that is combined with our radio station business.

But the detail is there if you go to the second page of the press release.

Thanks.

Our next question is from Bobby Melnick of Terrier.

I'd like to ask Ed a 30,000-foot altitude look down at the industry.

Within the context of the fact that Salem, like a lot of media stocks, has not been a good performing stock since you've been a public entity.

And we can debate as to whether Salem has done better or worse, but your stock is down from your IPO from from six, seven years ago.

And part of that, I think, and many of the sell-side people on the line would probably confirm has to do with the fact that the business looks a lot different today from what it did six years ago in terms of its growth rate.

And we can again argue as to the viability of radio vis-a-vis some of the new entrants, whether it's iPod or simulcast or satellite or what have you.

But the fact of the matter is the industry is not, and I don't think anyone is expecting the growth rates to return.

And even in a business that has gone from above-average growth to maturing to mature to now where the industry is growing at below-GDP rates and it's certainly a mature business, Salem continues to do very well.

And as you said in this call, it's outperforming the industry by ridiculously high numbers -- 500 bips in this particular quarter.

The question then is, within the context of some of the developments that have happened among your publicly-traded peers, acquisitions and divestitures at very attractive prices of assets, return of capital to shareholders in terms of very, very large share repurchases, as well as sizeable dividends and increasing dividends.

I'm wondering, Ed, as the principal owner, principal fiduciary and principal backstop for us as owners whether this represents business as usual for Salem.

Or whether you are frustrated to the point of doing something to adjust the current valuation of Salem.

Which if you adjust for stick properties and under performing properties continues to trade at multiples that -- I haven't done out in today's numbers, but are between nine and ten in an industry in which private transactions of comparable assets go for 40% to 60% higher than that.

Thank you.

Well, Bobby, I will try to be responsive.

First of all, you made the comment that we haven't performed well as a stock since going public.

I would mention that a year ago, in April of '04, we did a follow-on offering to improve balance sheet and reduce leverage.

And that offering went out at 18.4 -- an 18.4 multiple of forward EBITDA, I would say that was pretty good performance.

Now the fact of the matter is, we continue to perform since then.

But as you pointed out, suddenly some things began to develop in the industry generally that discouraged investors and seemed to reduce the multiples overall.

So you can swim real fast but if the current is going a little faster downstream and you are going up -- obviously you may be outswimming the rest of the swimmers but you may not be making progress in terms of multiples.

And I think you're right, that investors have looked at developments on the technological side, starting with satellite radio and the very significant promotional material that they ruled out trying to get traction for that business, the development of iPod, the new possibilities for wireless Internet.

I would say this to you; we think that we are positioned where we need to be.

What we particularly like about this challenging new environment --and it is challenging.

Let's assume that the pundits are right, that old media radio is peaked and that radio generally will begin to lose a little audience every year.

Maybe there is a slow erosion to other media over the next 10, 15 years to 2%, 3% a year.

That could well be, but where are they losing that audience to?

They are losing it to new media and primarily Internet-related media.

Satellite radio, yes, and we are there.

And we've been there and we continue to see growth -- some growth there and in that part of our business, so that will contribute to what we do.

But because we are a niche broadcaster -- because we are focused on super-serving the audience interested in Christian and family-themed content ,we are better positioned to deal with this challenge and say, yes, it's a challenge and what an opportunity?

Because online, new media is much more narrowcast, as I said earlier, it's much more about building community.

It's much more about common interests.

We are uniquely positioned to exploit new media and we are doing that.

We have a well-established business.

We have a well-established business, we make money with our business.

You will remember, Bobby, if you were with us in '99 when we went public, there were a dozen Internet competitors out there when we went.

And we had some red ink and our expense side got out of control in '99, 2000.

The market punished us for that.

We made some corrections and we learned from that.

Today we are the only one of those dozen companies left standing.

We mentioned that we made a $0.25 million dollars.

We will do better in the coming year.

It's a firm foundation that allows us now to take it forward.

And if I can transfer my community from old media to new and have dynamic interaction between the two, I like that a lot.

I think we are positioned as a public company right where we need to be.

We need access to the capital markets that are available to us when opportunities come.

The nice thing about these Internet opportunities, as I mentioned, is that they are accretive because we don't buy start-ups.

We only buy online assets that target our audience and for whom we are able to roll those assets on to our platform, and have cost synergies right out of the chute.

That's what we've done with recent acquisitions of Crosswalk.com.

It's what we did with Christianjobs.com.

You will see those kinds of acquisitions that give us critical mass -- additional critical mass, accretive right away.

And allow us, as we mentioned earlier, for the first time we began to promote some of these Internet assets using the old media platform.

We haven't done it because we wanted to get them right.

We wanted to get them sticking.

We wanted them to make it on their own.

But now we are employing -- increasingly employing strategies to use our old media platform, drive our communities to those websites to grow those websites and then use the websites to reinforce the old media platform by owning content, which we do.

I mentioned all of the syndicated programmers that we own, 15 hours a day on the News Talk side, and much other content through Salem Radio Network.

We currently have about 1900 affiliates taking programming from us.

By controlling content, again, focused on this community.

It's all synergistic, it's super-serving this community, controlling content, controlling a broad distribution of platform.

I think we are well-positioned to continue to grow this Company.

That's our strategy.

That's our goal.

And that's what we think we've been doing.

That's a long answer -- a bit long-winded but I think it represents our best analysis and strategy going forward.

Helpful.

Thank you.

Our final question comes from Victor Miller of Bear Stearns.

Thanks.

We actually had a question on ratings but you answered it rather extensively, so thank you very much.

There appear to be no further questions.

Well, operator, thank you.

Thank all of you for joining the call.

We look forward to visiting with you again on our next call.

This does conclude today's teleconference.