Salem Media Group Inc (SALM) 2007 Q1 法說會逐字稿

My name is Barbara, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Salem Communications' first quarter 2007 earnings 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's now my pleasure to turn the floor over to your host, Mr.

Eric Jones.

Sir, you may begin your conference.

Thank you.

Welcome and thank you for joining us today for Salem Communications' first quarter 2007 earnings call.

As a reminder, if you get disconnected at any time you can dial into 973-935-8511 or listen from our website at Salem.CC.

We'll begin in just a moment with opening comments from our President and CEO, Edward Atsinger and Vice President 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.

David Evans our Executive Vice President of Business Development and CFO will participate in the question and answer portion of our call.

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 format, 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 Forms 10-K, 10-Q, 8-K and other filings filed with or furnished to 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, 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, adjusted EBITDA or end adjusted EBITDA.

In conforming 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 with the most directly comparable financial measures prepared in accordance with generally accepted accounting principals is available on the Investor Relations portion of the Company's website, Salem.CC, as part of the current report on Form 8-K and earnings release issued by Salem earlier today.

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

Thank you, Eric, and thank you all for joining us for our Q1 2007 earnings call.

Let me begin my comments with a summary of our overall revenue growth, and take a look at how that's stacked up with the guidance we provided during Q4--during our Q4 earnings call, and then I'd like to review the results more specifically by looking at the radio performance in terms of each of our three strategic formats.

I will comment then briefly on non-broadcast business and then I'll turn the call over to Evan Masyr for more specific financial detail.

Overall we achieved an 8% increase in revenue, which was comprised of a 3% increase in net broadcasting revenue, and a 74% increase in non-broadcasting revenue--I'm sorry I meant to say a 3% increase in net broadcasting revenue and a 74% increase in non-broadcast revenue.

On the broadcast side on a same station basis, our net broadcasting revenue increased 4% and station operating income increased 3%.

While overall net broadcasting revenue was in line with the guidance we've provided, station operating income exceeded the high end of guidance by $1.3 million ending at $18 million, which represented a 5% increase over Q1 2006.

This better than predicted SOI performance was primarily the result of lower than anticipated broadcast operating expenses.

The largest component of these reduced expenses related to lower than budgeted payroll costs arising primarily from a number of vacant positions at several of our stations' local sales departments.

So while this was positive in terms of lower than expected expenses for Q1, it will have somewhat of a negative impact on our local advertising revenue growth, particularly Q2 until those positions are all filled.

Let's take a look at each of the strategic formats in terms of their contribution to Q1 performance.

We have 45 stations programming Christian teaching and talk, and these stations contributed 48% of our total revenue.

Net broadcasting revenue for these stations increased 6% overall while advertising revenue decreased 3% and block programming revenue increased 10%.

The reformat and relaunch of our Miami station as a Christian teaching talk station in January contributed to the block programming growth.

Block programming contributed 60% of revenue on our Christian teaching talk stations and represents 28% of our total revenue and obviously continues to be an important underlying factor in our overall performance.

Our 13 Contemporary Christian Music stations have revenue growth of 4% for the quarter and contributed 19% of our total revenue.

KLTY in Dallas, our flagship CCM station contributed most of the revenue growth by increasing its revenue by 12% as the other CCM stations, excluding KLTY had flat revenue growth for the quarter.

Our success in Dallas was offset by weakness in national spot advertising, but local advertising increased in all markets except for Cleveland.

A significant CCM ratings highlight is that in the just released Winter 2006 Arbitron, KLTY achieved a number one ranking in not only its target demographic of females 25-54, but also for the first time achieved a number one ranking in the broader demographic of adults 25-54.

We're pleased with that achievement.

At our 30 news talk stations, net broadcast revenues increased 4% on a same station basis and contributed 13% of total revenue.

I didn't comment on same station numbers for the other two formats primarily because the overall numbers in same station are very close.

Revenue growth was slower than we would have liked on the news talk stations, primarily due to the vacant sales positions that I mentioned a minute ago.

We are addressing that staffing situation and are making progress, and we continue to make the necessary marketing and programming investments in order to grow our audience share for this format.

During the quarter, we increased by $400,000, our marketing expenditures in markets, which included Chicago, Denver, Los Angeles, Louisville, and Phoenix.

We've also added and are developing known local programming talent in selected markets and launched the newly syndicated Dennis Miller Show on 10 of our stations including Los Angeles and Chicago.

We believe the increased investment in programming and marketing is appropriate this time to continue to drive the news talk stations to higher levels of profitability.

Lastly, with regard to our radio assets, we did close on the sale of our sports talk station in Cleveland, WKNR, for a sales price of $7 million, we had commented on that our last call.

We continue to review our underperforming stations, particularly those in non-strategic formats to determine if additional sales might be justified in a better way to monetize these assets, but we will approach this assignment in a very deliberate manner so that we can be sure to maximize sales prices and ultimately shareholder value, and we will certainly keep you updated on any developments in that area.

Our non-broadcast business enjoyed a strong quarter of growth driven by both internet and publishing acquisitions and organic growth, particularly at our Christian internet businesses, Salem Web Network.

For the quarter, non-broadcast revenue increased 74% to $5.7 million or 10% of total revenue, and non-broadcast operating income increased to $400,000 compared to a loss of $200,000 for the same quarter last year, which represents obviously a swing of $600,000.

Our Christian content websites increased average monthly page views by 21% in Q1 '07 compared to Q1 '06 to an average of 70 million page views per month.

Our conservative opinion website TownHall.com, which we acquired in May of 2006 grew monthly page views to an average of 34 million for the quarter from a base of 12 million at the time of acquisition.

In total, page views increased 80% to 104 million across our entire network.

We expect this page view growth to translate into future revenue and profit growth.

For the quarter, our internet business increased revenue 45% to $3.1 million and increased profit to $500,000 from $100,000.

Our prospects for continued growth of our internet businesses are good.

I'll now turn the call over to Evan Masyr for an additional discussion of our first quarter 2007 results and he will also provide second quarter 2007 guidance.

Thank you, Ed.

Our results for the first quarter of 2007 were issued in a press release earlier today and are available on the Investor Relations portion of our website.

I will briefly comment on our results.

Total revenue for the first quarter increased 8% to $56.1 million and adjusted EBITDA increased 14% to $13.2 million.

Net broadcasting revenue grew 3% to $50.4 million, and station operating income increased 5% to $18 million.

Our revenue growth was negatively impacted by the sale of our Cleveland sports talk station, which we stopped operating on December 1, 2006.

This station had first quarter 2006 revenue of $0.6 million with no revenue in the first quarter of 2007.

As previously mentioned by Ed, on a same station basis, our net broadcasting revenue grew 4% and station operating income increased 3%.

Let me provide some detail by revenue type comparing first quarter 2007 results to the first quarter of 2006.

Salem station block programming revenue grew 8% to $18.2 million.

Same station local advertising revenue was flat at $20.7 million.

Same station national advertising revenue, which includes spot and network revenue grew 1% to $7.3 million.

Other revenue, which includes infomercials increased by 7% on a same station basis to $3.2 million.

Our same station results, include broadcasting revenue from 92 of our radio stations and our network.

This represents 98% of our net broadcasting revenue.

Within our portfolio of stations, our start-up and early development stage stations, which were originally purchased for a total of approximately $228 million generated SOI of $1.9 million for the 12 month period ended March 31, 2007.

Let me now comment on our balance sheet.

As of March 31, 2007, we had net debt outstanding of $348.5 million, including $8.5 million outstanding on our $75 million revolver.

We were in compliance with the covenants of our credit facilities and our bond indentures.

Our leverage ratio was 5.61 versus a compliance covenant of 6.75, and our bond leverage ratio was 5.46 versus a compliance covenant of 7.

Looking to our second quarter, we are projecting total revenue to be between $58.7 million and $59.2 million compared to second quarter 2006 total revenue of $58.1 million.

Adjusted EBITDA to be between $12.8 million and $13.3 million compared to second quarter 2006 adjusted EBITDA of $15.8 million, and net income per diluted share to be approximately $0.04.

Our second quarter 2007 outlook reflects the following: Same station net broadcasting revenue to be between $51.9 million and $52.4 million compared to $52 million in the second quarter of 2006.

Non-broadcast revenue increasing to approximately $6 million from $4.7 million in the second quarter of the prior year.

Same station SOI declining to between $18 to $18.5 million from a base of $20 million in the second quarter of 2006.

Non-cash compensation expense of $800,000 compared to second quarter 2006 non-cash compensation expense of $1.3 million, increased marketing and programming costs of approximately $0.9 million on our news talk stations in Chicago, Denver, Los Angeles, Louisville, and Phoenix, and on our Contemporary Christian Music stations in Atlanta and Dallas.

Continued growth from our core block programming business in our underdeveloped radio stations, particularly our news talk stations.

Ongoing softness in the radio advertising market and the impact of recent acquisition and divestiture transactions.

This concludes our prepared remarks, we would now like to open the call for questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS)

Thank you, our first--thank you our first question is coming from Victor Miller from Bear Stearns.

Good afternoon.

Good afternoon.

It penciled in that you obviously said that you were down 1.6% in advertising revenue.

If you let's say block programming kept the similar pace, maybe up 7.5% in the second quarter.

Suggest that the core advertising's probably down about 5%.

If you could talk about what you're seeing in terms of what's driving the advertising change there.

Secondly, obviously the expense growth is about 8.5% penciled in for second quarter versus 7.5% for first quarter, yet obviously the revenue is going to be almost 600 basis points or lower.

Maybe you could just talk about the dynamic that's driving that with more granularity.

Thanks very much.

In terms of the advertising revenue side, Victor.

On a same station basis, local advertising revenue was flat Q1 '07 compared to Q1 '06.

National advertising grew 1%.

So I'm a little unclear where you get the number minus 5.

Same station basis, local advertising was flat.

Well, that's my guess for second quarter.

In other words, if you only have 1.6% for total revenue growth and block programming grows at a similar rate and that implies the core growth--

Okay, yes.

Second quarter, two dynamics in advertising revenue.

The first dynamic is as Ed mentioned, we've got a number of vacancies in our local sales departments in some important markets that we're working hard to fill.

Although that gave us a favorable expense position in Q1, having those positions vacant is handicapping our Q2 advertising revenue performance on the local side.

That is the Salem specific factor.

Overlying that or underlying that is just the overall softness in radio advertising that you're hearing from our various radio broadcasting peers as they report.

So I think those are the two factors that are standing out, and then the third element is as Evan mentions, we sold our sports station in Cleveland during the first quarter.

So Q2 '06 has got revenues in there for that station.

Q2 '07 obviously not in there.

I think those are the three.

(Inaudible) Q2 '07, I mean '06?

Q2 '06, I would think that station's revenues were about $700,000 to $800,000.

So those are the three primary factors.

So on the revenue--and then that obviously impacts the expenses too because you expect at that point that some of those local salespeople would be coming back into the equation second quarter.

That's why expenses are a bit higher?

Yes, expenses are higher in Q2 for three reasons.

Number one, just underlying inflationary-type growth.

That's probably in the 3% arena compared to prior year.

Number two, new salespeople coming onstream where we'll have the expense in Q2, but there's obviously a lead time before they are revenue and profit generating.

So you probably don't see the benefit of that until Q3 and Q4.

Third factor is increased marketing and programming expense compared to last year, particularly on our news talk stations and to a lesser degree on a couple of our music stations.

Thank you.

Thank you.

Our next question is coming from James Dix from Deutsche Bank.

Good afternoon, gentlemen.

Just a couple questions.

First, if you could provide a little bit more detail on where you're seeing the changes in growth by format in 2Q versus 1Q.

I think you gave some pretty good color on some of those specific items to Salem including sales.

Is that affecting certain formats more than others, or are there other trends affecting certain formats more than others in second quarter versus first?

And then second, on KLTY, is the gap between KLTY's performance and the rest of the Christian music stations increasing, and if so, does that indicate at all to you that KLTY is somewhat of an outlier or do you still believe that station's a good template for the rest of the stations in the group?

My last one, it's just on the block programming.

How should we be thinking of that going forward?

You've got around 5% on your renewals, I believe, for the year, you've added Miami so your 8% growth in the first quarter was very good.

Should we be assuming that, I think--and Victor was assuming like 7%, is that a good assumption going forward for the rest of the year?

Let me, James, let me try to deal with question two and three and I'll let David and Evan deal with the first question.

With regard to KLTY, the gap is not widening if you look in terms of audience share.

There's a bit of widening in terms of revenue.

As we've mentioned--as I mentioned in my comments, KLTY for the first time achieved not only number one in female 25-54, but number one in adults 25-54.

So that franchise continues just to do very well.

There are always certain dynamics at work in each of these markets.

To answer your question, is this an outlier?

No, I don't think so at all.

There are competitive factors in some of the other markets that make the hill a little more challenging at times and none of them have the longevity and the format that KLTY has in Dallas.

You can certainly point to a number of other major markets with other operators that operate CCM stations that are achieving KLTY types of results.

I certainly don't think that it's a--an aberration, I think the other stations can achieve it.

You do you have to have certain dynamics, you have to have a good competitive signal in a good market, and we have a number of those and we see--we're encouraged by the continued progress we make both in getting the product better and in terms of marketing and promoting it.

With regard to the block programming, the conversion of the Miami station to Christian teaching talk in Q1 certainly did impact it.

The impact of that station on the additional quarters of '07 certainly will be there whether it's 7% I can't say for sure.

Detroit was also somewhat of a factor.

We acquired a second station in Detroit which was Christian teaching talk.

We were stand-alone with a news talk there prior to that, and that will have some impact.

It is possible that the 7% is in the ballpark of what we should expect to see there.

In spite of the fact that we got a 5% increase on renewals.

Sometimes when we don't get a particular organization to renew, it creates an avail and we're often able to monetize that at a higher rate with a--with a program that's been waiting to go, but we simply haven't had the avails, but I think the 7% is probably a reasonable expectation.

With regard to your first question, I don't know David or Evan?

Yes, on the first question, comparing format growth rates Q1 '07 to Q2 '07, it's the two talk formats, Christian teaching talk and news talk where we've got more of these vacant sales positions that we're pushing to fill.

So when we reach the end of the quarter and report our numbers, I think music will probably be our fastest grower in the second quarter and you're going to see the two talk formats a little less than that because of these sales positions.

Does that answer your question, James?

Okay, next question.

Thank you our next question is coming from Bishop Cheen from Wachovia.

Hi, Ed, David, Evan thank you for taking the call.

You are adding to your non-broadcast assets and they're growing like topsy, of course, not a shock.

Going forward, how much expansion do you think is possible?

Where would you like to focus on the non-broadcast assets if you could round out the vision of what you see there and any of the synergies that you think--you've learned that it will add to your core platform?

If you examine the growth in non-broadcast revenue and you split it between acquisition-related growth and organic growth, the organic growth in our internet business I'd estimate it around 20%--15% to 20%.

The organic growth in our magazine publishing business is low single digits.

Between Q1 '06 and Q1 '07, we made a number of acquisitions that drive the overall growth rate rather higher on the conservative opinion front on the websites.

We purchased TownHall.com in the second quarter of last year.

We purchased two magazines Singing News and Preaching magazine within our magazine publishing business.

And we purchased Xulon Press, which is a Christian content print on demand book publisher.

We will anniversary those acquisition dates during Q2 so when you get to see the Q3 numbers, at that point you'll begin to see underlying organic growth again.

We continue to see a number of good opportunities on the internet front and continue to look into expand there.

We're particularly interested in some of the synergies between our radio business and our internet business.

We've been pretty active over the last year or so promoting our various websites on our radio stations, that's been very effective in terms of generating page view growth and revenue growth on the internet side and all of that's been done with unsold inventory.

So very effective for us.

We're now using our internet content assets and functionality to improve our radio station websites, which in turn will allow us to grow local internet advertising revenues and we're also now beginning to use the internet to promote our local radio stations.

So really trying to make it a two way street of cross promotion from radio to internet and then hopefully back.

I don't know if you want to add anything to that, Ed.

Well, Bishop, I would simply say that if you want a real concrete number to look at that I think represents a bullishness on our part, we acquired Town Hall, I just repeated the numbers, but just to underscore it, we acquired Town Hall in May of '06 with 12 million average page views at the time.

I think it was the third largest website the political social--public policy conservative website.

By February that number had gotten to about 35 million page views, and that was driven primarily by using our radio platform.

So we like the idea of being able to use the radio assets to drive page views on these internet assets, but we've got to acquire some of the internet assets before we can use the radio to drive them, and so the Town Hall acquisition was very timely, and as David said that will move into--pretty soon it will move into third quarter, into a same store comparison.

But I think that does suggest that there's a very good opportunity for organic growth by using the entire platform to drive the internet growth and vice versa use the internet then to come back and promote the radio, and there is a pretty direct correlation between page view growth and total page views and revenue.

There's a bit of a lag like there is in any kind of advertising, but the correlation's a little tighter on the internet side with page views because everything's measured so specifically that you can pretty much estimate where your revenue is.

So we're very encouraged by that particular part of it.

That's very good color.

Just quickly, can you tell me what your capacity is on your credit facility going forward at this time?

We have $75 million on our revolver.

We have 8.5 million of it drawn.

With our leverage taken into account, we could probably borrow just north of $60 million.

I show 60 true availability?

Correct.

Okay.

Great.

Thank you, gentlemen.

Thank you.

Our next question is coming from Jim Goss from Barrington Research.

Thank you, and good afternoon.

I was interested in more detail on the vacant sales positions you were discussing.

I'm sort of curious, how many positions you're talking about?

How did it develop, and how long a tail might it be?

It seems that it had a positive effect on the first quarter earnings, but it's going to come out of the second quarter and possibly longer.

So that's one thing I'd like you to talk about if you could.

I can't give you specific numbers.

I can--Evan may be able to drill down a little bit more on it.

We've looked at in terms of revenue savings, it's a little bit of an odd way to look at it, but it probably represented $500,000 to $750,000 on the expense side on savings representing savings.

In terms of the total number of positions, I'm not sure.

I know that New York some of these key markets New York and L.A.

are markets that have vacancies, and I think if we look at the whole group, all of our 100 stations, we probably have something approaching 70 or so positions that we'd like to fill.

This is always an ongoing challenge.

There's no time in our business when we don't have a certain number of vacancies.

But 70-75 is I think where we are right now plus or minus 10%, and I would say that that's about--that's about 25 or 30 positions more vacancies more than we would normally have, and in particular, New York, L.A.

are two markets where the seller impact of course has more bang for the buck, if you might say because of the fact that it's such a big markets with each seller carrying a higher dollar amount.

Okay, a couple of other areas.

I was wondering if you could give an update on the programming (technical difficulties) in the several news talk (technical difficulties) how soon you might extend that if it is going well?

And separately, some news talk stations in certain markets are (technical difficulties) in the respective markets (technical difficulties) potential with any of your stations as you see them as you've achieved with KLTY in the music space?

Well, Jim, you broke up there several times so we got only about half your question.

I think--I guess we're having a few technical difficulties on this end.

Okay.

I missed the key parts of that question.

Okay.

The one related to the programming update with the morning shows and the news talk stations, and the other related to the potential you might see with the news talk stations in their respective markets in that certain markets news talk tends to occupy some of the top rungs in the ratings leadership, and I was wondering if you have that potential as you see it with any of your stations as you have done with KLTY in the music space?

Well, with regard to the local shows that we've invested in.

We've invested in Chicago specifically in terms of the local morning show.

Some of the other markets, it's been other day parts, and we're pleased with the progress there.

To establish and bond with an audience, it takes a while.

I think we've had this morning local show on less than six months.

It wouldn't surprise me if it doesn't take 18 months or so before you really begin to get some--that bonding that results in a--in an increased audience share as measured by Arbitron, but based upon our preliminary evaluations on the job they're doing, we're pleased with it.

The salespeople are able to sell it.

The other benefits that you get from local talent, particularly morning drive talent is that they can promote in the market and they can get involved with advertisers.

So it helps the bottom line in a lot of ways before you see the audience grow--growth that you're looking for.

And so we're--we remain cautiously optimistic.

We think it was a good decision in Chicago.

We're--we will selectively look at other morning slots as local talent emerges that we think makes sense.

As far as the potential, we've been very modest in what we've wanted to do with these stations because we rely primarily on syndicated product which is inexpensive to us.

In most cases it costs us nothing because we syndicate the talkers that we are putting on these stations, so our cost basis is quite low in terms of talent.

The bigger expense is, of course, promotion, you still have to promote it and you have to develop an audience.

We've always remained pretty modest in our expectations.

We've said that typically in a top ten market, our target is to achieve a 2 share 12 plus and to do it incrementally, to get to the 1 share, it's harder to get to a 1 share consistently than it is to get to a 2 share in our opinion, so we want to move from a 1 share to a 1.5 share to a 2 share, try to maintain at that level, and that represents the first level of success for us with a low-cost basis.

We can do quite well at that level and incrementally better than we're going now, and we're seeing progress along the line here, and we just got the Winter book in Louisville, we were very pleased with the 2.1 share 12 plus there.

That station's on its way and there are several others that are making progress.

Honolulu 1.5 share.

So it's two steps forward, one step back with these formats.

Everybody--it's a competitive area.

You've got in every market you have competition that you have to deal with, but I feel that we do have potential with these to certainly achieve the modest goals that we've set and then from there we will go to the next level in 4 or 5 share in some of these markets is where the franchise leaders are, and that certainly would be the target that we would go for.

If we can get there, the incremental upside is huge, but we're modest in our targeting, get us a 2 share consistently 4 book average, and you will see that we will produce some very good revenue results.

All right, thanks very much.

Thank you.

At this time, I would like to turn the floor back to Mr.

Ed Atsinger.

All right.

Well, thank you, everyone for joining us and we'll look forward to visiting with you again for our next quarterly earnings call.

This concludes today's conference call.

You may now disconnect.