Salem Media Group Inc (SALM) 2010 Q2 法說會逐字稿

Hello and welcome to the Salem Communications second quarter 2010 earnings conference call. Today's call is being recorded. I would now like to turn the call over to Mr. Evan Masyr, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Thank you all for joining us today for Salem Communications' second quarter 2010 earnings call. As a reminder if you get disconnected at any time you can dial into 719-457-0820 or listen from our website at www.salem.cc.

I am joined today by our Chief Executive Officer, Edward Atsinger, our Division President of Radio, David Santrella, and our Division President of Non-Broadcast Media, David Evans. We will begin in just a moment with our prepared remarks and once we are done, the 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 forms 10-K, 10-Q, 8-K and other filings filed with or furnished to the Securities and Exchange Commission.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Salem undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events. The 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 a reconciliation of such non-GAAP financial measures included in this conference call to the most directly comparable financial measure prepared in accordance with GAAP is available on the Investor Relations portion of the Company's website at www.salem.cc, as part of the current report on Form 8-K and earnings release issued today by Salem.

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

Thank you, Evan and thank all of you for joining us for this second quarter 2010 earnings call. Before Evan gets to the specifics in terms of results let me bring you up to date on some recent developments and touch on some of the highlights for Q2.

I guess the biggest highlight is the fact that for the first time in three years our total revenue and EBITDA were up. Revenue increased 5% while EBITDA was up 2%. If you analyze the specific months of the quarter, revenue in April was up 4%, while May and June were up 6%. Clearly an improving economy, an economy that's beginning to show some growth after a long recessionary period is contributing to an improved advertising market and that has certainly been a factor in this pickup, but another important factor was political advertising for the quarter primary elections in a number of key states.

We saw about $650,000 of revenue in the quarter compared with $100,000 last year and given the current political situation and landscape we would expect that the fourth quarter will also show a significant increase in political advertising over last year. We mentioned on a couple of the previous calls the declines that we recently experienced in our block programming business.

We discussed some of the steps were taking to address those declines, some of which were related to unique situations as much as they were to the economy. In fact, in several specific cases there were internal issues with organizations that had been long time customers. But we've been backfilling that space, we've been bringing new business online in that regard and we're seeing some real improvement there. The second quarter showed a slight decline in our programming business of 0.2%, but if you look at it on a month by month basis you see a steady improvement in that particular segment.

Block programming was down for example 2% in April, it was flat in May and it was up 2% in June and because of the nature of that programming it's stable -- once it starts a trends it tends to holds that trend and doesn't -- there's not a lot of volatility. We expect our block program revenue to show that kind of steady and consistent performance for the remainder of the year and the trends that we see in third quarter are indicating that is the case. Last quarter we talked about some of the markets where both ratings and transactional business are more important, particularly Dallas and Atlanta.

Both of those markets in recent quarters, actually for the last year and a half or two years, have been challenged in making the transition to a PPM Arbitron world as have many stations. As Arbitron has improved the performance of that methodology, we have seen a return to the more traditional audience shares that those stations used to enjoy with the old methodology.

That coupled with an improvement in transactional business has impacted those markets both in a very positive way in the second quarter specifically revenue at KLTY in Dallas was up 26% while the Dallas market as a whole was up only 10%.

In Atlanta we had a similar experience with a 28% increase in revenue at WFSH while the Atlanta market was only up 1%. More than half of our clusters -- I mean this growth was pretty broad based the across all our platform. More than half of our clusters experienced total revenue increases over the prior year for the quarter.

Once again, revenue from our national network syndication business and national spot showed nice gains for the quarter with revenue up 7% for our networks, and national spot was up 17%. Local spot revenue continues to lag national but it was also up 2% for the quarter.

Despite this encouraging second quarter growth in the economy and improvement in our numbers, we have seen a bit of a pause in third quarter and it appears that there's some deceleration in the overall growth in the early part of the third quarter.

July, for example, was flat, but I can say it looks like there will be continued growth in both August and September given the current trends. If those trends hold we would expect to see some growth in both of those months.

Given July's performance but, however, and the lack of visibility and the fact that it's a more volatile universe today we're going to be conservative with our growth estimates for the third quarter in our guidance which Evan will discuss in a few minutes.

Let me discuss some of our recent acquisition and disposition activity. On June 24 of 2010 we entered into an agreement to sell radio station KXMX AM in Los Angeles, California, for $12 million. We currently broker blocks of time on this station to foreign language programmers. We expect this transaction to close in the fourth quarter.

With respect to acquisitions, last week we closed on the previously announced acquisition of WWRC AM in Washington, D.C. for $3.1 million and in June our internet division acquired the websites GodTube.Com and Tangle.com for $2.5 million.

The addition of GodTube, the leading Christian video website, and Tangle, the leading Christian social network site and video website, will complement or existing portfolio of Christian content websites we think in a very nice way, which of course includes Crosswalk.com, BibleStudyTools.com, OnePlace.com, Christianity.com, ChristianJobs.com, ChurchStaffing.com and a variety of other websites that target that audience interested in Christian and family contents.

This is a good transaction for us, it gives us leadership in this position and helps us build this rapidly growing internet video space for Christian content. We actually began working on that transaction last October but at the time the folks at GodTube and Tangle felt their assets were worth more than we were willing to pay.

We made the judgment after an extended negotiation that they were not realistic in our view what they were worth and ultimately we think that we were vindicated because the terms of this acquisition were much more attractive for us and although they have lost some -- a little bit of traffic, but it's a good acquisition for us.

It nicely compliments what we're doing on our web businesses. Those businesses by the way during the first five months of 2010 before we acquired GodTube, those businesses GodTube and Tangle.com operated at -- had operating losses of about $1 million.

We expect that it will take us approximately a year to reach profitability on these websites. We expect a loss probably of about $500,000 for the balance of 2010. That -- those sites, that acquisition will turn profitable about the middle of next year.

With that comment I'll turn it over to Evan to give you some specifics on our second quarter results. Evan?

Great. Thank you, Ed. For the second quarter our total revenue increased 5% to $53.1 million, recurring operating expenses increased 6% to $43.1 million, and adjusted EBITDA increased 2% to $14.1 million. Net broadcast revenue increased 3% to $45.5 million and broadcast operating expenses increased 3% to $29 million. Resulting in an increase in station operating income of 4% to $16.5 million.

On a same station basis, net broadcast revenue increased 3% and station operating income increased 4%. These same station results include broadcast revenue from 89 of our radio stations in our network operations which represents 99 percent of our net broadcast revenue. I will now briefly update our same station performance by format. We have 39 of our radio stations programmed in our foundational Christian teaching and talk format and these stations contributed 44% of our broadcast revenue. Same station revenue on this format was down 3% for the quarter.

Revenue from our 11 contemporary Christian music stations increased 19% for the quarter on a same station basis and contributed 21% of our broadcast revenue. Our 22 news talk stations had a 3% increase in revenue for the quarter on a same station basis. Overall, these stations contributed 17% of our broadcast revenue. Revenue from our non-broadcast business increased 17% to $7.7 million and represents 14% of our total revenue. Our internet businesses' revenue increased 25% to $4.6 million while our publishing business increased 7% to $3.0 million.

Our non broadcast business operating income decreased 17% to $900,000. As of June 30, we had net debt outstanding of $304.4 million and we were in compliance with the covenants of our credit facility and bond indenture. The credit facility leverage ratio was 5.86 versus our compliance covenant of 7. On June 1, we completed the repurchase of $17.5 million of our senior secured second lien notes at a price of $1.03. This transaction resulted in a $1.1 million loss on the early retirement of debt including the $525,000 redemption fee and the write-off of [fund issue] costs and unamortized discounts.

For the third quarter of 2010 we are projecting total revenue to increase 1% to 3% over the third quarter of 2009 total revenue of $49.2 million and we are also projecting operating expenses to increase 3% to 6% as compared to the third quarter of 2009 operating expenses of $40.5 million. This concludes our prepared remarks and we would now like to open the call for any questions.

Thank you. (Operator Instructions). And our first question today will be from Bishop Cheen with Wells Fargo Securities. Please go ahead.

Good afternoon. This is Davis Avery calling in for Bishop. Just a quick question. Can you give us a breakdown of your long-term debt outstanding between the revolver and the bonds? I guess the book value.

Yes. We have $282,500,000 outstanding on the bonds and our bank is $26 million.

$26 million even?

$26 million even as of June 30.

Okay. And as you look at the back half of the year, generating free cash flow, would you guys be focused on just paying down that revolver balance or taking out more bonds? Because there's $12.5 million of availability under the $30 million, carveout, right? [Call it 103?]

Correct. We could take out another $12.5 million and what you will find out if you look a little bit deeper, the second quarter and fourth quarter our revolver balances will tend to go higher because that's when our interest payments are due on June 15 and December 15. So that $26 million was right after making a bond interest payment. We would expect that free cash flow to be used to pay that revolver balance down and we are still committed to de-leveraging. I'm not sure if we'll be able to take out the remaining $12.5 million for the $30 million in this first 12 month period, but we still are committed to de-leveraging.

Do you have a target leverage in mind as you pay down debt?

Well, I think -- I mean you could -- you can look at it in very fundamental terms. If these are seven years and we've got six and some years left if you want to de-lever over that period of time, so when you're faced with another refi you want to be sure you can refi, what would the target be. You could ask yourself that same question. I think certainly if your leverage were below four, four or below, you would probably be fairly well positioned. Between 3.5 and four, I think you would be well positioned so we look at those general parameters. We have to stay in touch with market trends but certainly we want to put ourselves in a position that we can efficiently refi debt when it becomes necessary to do so and we'll proceed with that kind of guidance and I think it suggests that somewhere around that four range would be reasonable.

Okay. Thank you for your time.

Okay. Thank you.

(Operator Instructions). We will move along to Conrad with trust Company of the west. Please go ahead.

Yes. Hi good afternoon, guys. Could you just talk about the radio station sales, is there a valuation on that you can talk about?

Are you talking about the one that we announced, KXMX?

Yes.

Yes. Well, we -- I think it's a decent multiple of cash flow, Evan. You've got the specifics. If you were going approach that --we feel pretty good about it. It's a non-strategic asset. It's in a format that is not one of our strategic formats. We're selling it to a long term partner that's been one of our broker accounts for many, many years and it's an attractive -- it's a reasonable multiple for us.

Okay. So I guess it's safe to say it won't have a significant impact on cash flow?

No. I mean it will be at worst neutral but probably somewhat better than that.

It's certainly a de-leveraging event for us.

Okay. And then just on your outlook. I thought it's a little -- I guess since you guys are guiding a little higher on revenues in the second quarter, just looking sequentially I guess it would suggest you're seeing some sort of slowdown in the third quarter whereas I think some of your peers have mentioned that pacings continue to be pretty strong. Just curious as to what -- maybe some more color on that.

Well, as I said, the revenue was flat in July.

Yes.

But the trends indicate it will be up both in August and September. We'll just have to see if those trends hold. So I mean we're seeing sort of the same thing. We are a bit reluctant to get too specific because visibility still is a problem given the state of the economy and, two, volatility is still a bit of a problem. So, I think many of our peers are a little more dependent upon national revenue and national transactional business has really come back quite strongly and I think they may be depending upon that and that may be a bigger component in their analysis than it is in ours.

Okay. So color wise you would say that the national is clearly stronger but local is lagging significantly from the national trends?

I think in that respect, the early indications, at least in July yes, would suggest what we reported in second quarter. We had growth in local, but it was 2% versus about a 6% or 5% or 6% in our -- or even more than that overall and a much higher growth in national.

Yes. Our -- just to give you a little bit more detail our national spot in Q2 was up 17% and local was up 2%. So we are certainly seeing a bigger recovery in the national side of things, but we get less national revenue than some of our peers.

And what's that -- do you know roughly what that breakdown is again, national versus local for you guys?

As far as on the spot (overlapping speakers.)

Well, remember -- remember, about half the revenue, something slightly less than half the revenue is from block which --

Right.

Which means that the spot portion of it is about half the pie. So, but right out of the chute, if you want to compare apples to apples, right out of the chute we're going to be dealing with about -- if it were a 5 0/50 split, which it isn't between national and local, you still would be -- have half the universe that our peers have.

To give you an idea of just relative split on a high level it's about -- when you look at total spot revenue, 80% local, 20% national.

Got it. Okay. Thank you, guys.

And moving along we will hear from Jared Golub with Marblegate. Please go head.

You guys actually answered most of my questions so I will drop out.

(Operator Instructions). We will take the next question, this will be from Mike O'Quinn with CareerBuilder.com. Please go ahead.

Can you hear me today?

Yes. We can hear you.

Okay. Great. How are you guys doing today?

Doing well. How are you.

Good. I'm doing all right. I had a couple of questions for you. One being your -- how do you plan on growing your revenue more, coming up here in quarter 3 and 4? That's the main question. I know that if you win -- in all sporting events really if you win quarter 3 and 4, you win the game.

Well, we're just pressing forward with the basic strategies that we apply to all the quarters and yes, it is true that -- actually the typically the second and fourth quarter have been the strongest for us. No real deviation. We press forward on all fronts with the particular formats that we have and profit centers that we have and hope that the economy continues to improve and that we can be beneficiaries of that improvement. But we are operating we think in a very efficient manner. We have come out of this downturn a leaner and more efficient organization. We've had some management reorganization. We think all of it is beginning to kick in and help to improve the profitability of the Company and we're optimistic that as we proceed we'll be able to enjoy the fruits of the improved efficiency and the new management talent we have.

Beautiful. That answers that question. And the dependence on ad revenue. Has that always been a strong dependence or has it always been more along the lines of other revenue driving?

Oh no. Ad revenue. Ad revenue has always been a major component of our business and continues to be.

Okay. And are you seeing any increased competition for audience or --

Nothing -- no. Nothing any different or materially different than in any given time in the past. It's pretty much the same competitive environment.

Okay. And my last question for you gentlemen is do you guys plan on instituting any social media platforms such as Facebook to drive more revenue for the Company coming up here in quarter 3 and 4?

Well, the acquisition that I announced, the GodTube.com and Tangle.com. Tangle.com is the largest social network among Christians on the web and so we hope to be able to take that a little further and to integrated into our total web business.

And like other radio companies right now we are of course using the social networking sites that exist to the betterment of our radio stations to set appointment listening and increase time spent listening to our radio stations.

Right. Because you guys can get some really good blogs going on and some -- and really tap into your listeners there and really see where you can put the revenue -- or where the revenue can come in coming up here in 2011. So I really appreciate your time, guys, and thanks for answering those questions for me.

All right.

Thank you, Michael.

Yep.

Okay. Moving along we will hear from Julie Gray with Columbia Management. Please go ahead.

Hello. Can you hear me?

Yes. Hi Julie how are you.

Hi good. How are you, Evan?

Doing great, thanks.

I was curious about your OpEx growth. It's been outpacing revenue growth for I believe it's the last quarter, this quarter and now you're guiding that way for third quarter. Can you talk about what's going on there and what you see kind of on a longer term out look for that?

Julie, there are a few key initiatives that we have had in 2010 that were not there in 2009 that are causing some of those increases in operational expenses. One was a new morning show that we launched in New York in January of 2010, the Curtis Sliwa show, so we have expenses associated with his program, his salary, his staff's salary and marketing of that program. That's one of our first initiatives that increased some expenses.

Secondly, we also have been spending more money on the non-broadcast side, spending a fair amount marketing our websites we feel were in a good position and that we want to maintain that position so we're spending money with folks like Google and Bing and to get further up in some of the search, and spending money on some search engine optimization. I don't know, David, if you want to add anything do that initiative on where we're spending more on the non-broadcast side.

Yes thank you, Evan. We have increased -- last year we cut our marketing spend on the internet front almost to zero so this year with an improving economy we want to try and grow share, grow page views, grow unique visitors and translate that into revenue so we have a much larger internet marketing budget than we had a year ago and we're beginning to see the fruits of that. I think in Q2 our internet revenues were up by about 25% so, pleased with the results of the marketing efforts and will continue probably at a similar level but with the revenue side continuing to grow to obviously generate an ROI from that marketing spend.

Okay. Julie, there are a few other things that will -- that distort a bit the comparison. Last year as we were all struggling to restructure our debt and to maximize our free cash flow to facilitate that, we literally suspended almost all accruals for senior management bonuses.

We've reinstituted those with our restructuring and with a stabilization of the economy, some improvement in the economy, we've instituted some accrual for that and that's a comparison that would add a little bit to it as well as these marketing expenses in New York. And the New York marketing expenses are substantial. That's a significant investment for us and David's comments about non-broadcast, particularly the websites, that is a prudent investment. So, yes, that's primarily where it's coming from.

And there's one other expense to be aware of. Our stock-based compensation expense in 2010 is running quite a bit higher than it was in 2009.

Okay. So that's an add back which will make the comparisons look a little bit better, huh?

That's correct.

Okay. Can you talk about your acquisition strategy? I guess they were a little bit more between second quarter and what happened in July than I had been expecting. How are you thinking about acquisitions and dispositions going forward?

Well, we've talked about there before. If you'll -- you say a little bit more. I mean they've been fairly modest, they've been very targeted, they've been very, very -- they've been very targeted and specific in terms of a strategic objective. WWRC was a modest acquisition for a Washington, D.C., station. We liked the price. We like the facility. We can improve the facility with a fairly modest investment. It adds to our news talk lineup.

One of the top ten markets that we did not have and arguably the most important of the top ten markets for news talk if you're going to do that format, so that was a very strategic acquisition for us and fairly modest. Most of the others have related to the non-broadcast side and this is -- continues to be our fastest growing division and as we are able to acquire important strategic assets like GodTube.com it perfectly complements what we do on the web and the good news is that we acquire it with most of the traffic that it generates without -- with very -- with relatively few of the expenses. I mean we can get the efficiencies of our platform and operate that much more efficiently than the prior owners could operate it in our opinion.

It was a very good acquisition for us. The same thing could be said for HotAir.com. Perfectly complements TownHall.com, doubles our page views, doubles our uniques, same targeted audience, gives us more content. So this again -- we think that ultimately it will prove to be one of those one plus one equals three, four or five. But, again, they are modest they have not been aggressive and we haven't had any very large acquisitions. On the other hand, we just announced the sale of an assets for $12 million. So on balance we've sold more than we've purchased.

Right. And I was going to ask about that, too. So the $12 million that you're getting in the fourth quarter, will those precedes be used for debt reduction?

Well, that certainly is one option. All or part of it can be used for that. I suspect that that will probably be the case, but the board will have to decide how they want to allocate that capital.

Okay. Thank you.

Okay. Thank you, Julie.

(Operator Instructions). Next question will be from Michael Kupinski with Noble Financial.

Thanks for taking the question. Some of us have been around the block a couple of times and we've been -- we've seen these cycles before. I was just wondering, national tends to be pretty strong out of the gate and then local tends to catch up and perform pretty well. Is there anything here in this cycle that might be a little different or are the trends that you are seeing right now kind of indicative of past cycles that you've had?

I don't really know that I can answer that question. I mean we can give you an answer and likely as not it'll turn out not to be accurate but Dave Santrella is our Radio Division President. And Dave, maybe you've got some thoughts on that.

Michael, one thing that seems to be a bit unique about this cycle is that there is a significant division between transactional local business and direct local business. Transactional business, which was down for the last three years, seems to be up both at the local side and more so certainly at the national side, but direct business, which went down about three years ago, continues to stay down. And by direct I mean the mom and pop advertiser, the guy who is writing the check himself for his advertising schedule, that individual is still holding on to his money and that's the biggest division that we're seeing right now.

Okay. (Overlapping speakers.)

Michael you could speculate, too. I mean part of that is, from our experience, that segment seems to be the segment that's being starved for capital. Banks are still not really accommodating businesses in that category and we think that that's part of what's dragging down this economy and so ultimately there's got to be some improved liquidity for that segment before they're going to be expanding and investing.

Right. And in terms of -- I know that going forward you guys have really done -- performed extremely well in a slower growth economy and tended to outperform your radio peers during those periods of time primarily because of your block programming and so forth. Do you anticipate, if we are in a slow growth economy, that you would outperform your peers or is there something that might have been different in this cycle given the troubles that we have seen in the block programming that might change somehow going forward?

I think the stability, the inherent stability of block programming will remain. Nothing that we've seen indicates any change there. We have had in our challenges with block in the last couple of years related to four -- three or four specific long term ministries that had internal problems ranging from the death of the founder with a program that was very topical and very timely, very public affairs-related, to just a relocation from one part of the country to the other with another organization that became very disruptive, and management challenges, but the -- for those that are not affected by those problems we see the continued stability, we see that they continue to perform well. All the metrics that we're doing indicate to us that we should perform in that regard as we have in the past.

We do a large number of events all over the country, primarily working with the church community. We do pastor appreciation lunches and breakfasts and rallies, and we're doing more today than we've ever done and we're getting tremendous response. We're having record attendance at all of these events. Everything that we get indicates that the following for that content still remains pretty much as it has in the past and if anything it's more responsive in terms of at least audience participation in these events.

Okay. Perfect. Thanks for taking the questions. I appreciate it.

At this time we have no further questions in the queue. I'll turn it back over to our host for any additional or closing remarks.

Thank you, operator. We appreciate again all of those that have joined the call and we'll look forward to visiting with you on our next earnings call.

Again this does conclude today's conference call. Thank you for your participation.