Salem Media Group Inc (SALM) 2010 Q4 法說會逐字稿

Hello and welcome to the Salem Communications' fourth quarter 2010 earnings 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 and thank you for joining us today for Salem Communications' fourth quarter 2010 earnings call. As a reminder, if you get disconnected at any time, you can dial into 913-312-0942 or listen from our website, www.salem.cc. I am joined today by -- by our Chief Executive Officer, Edward Atsinger, our President of Radio, Dave Santrella, and our President of Non-Broadcast Media, David Evans. We begin in just a moment with our prepared remarks. Once we are done, the conference call operator will come back on the line to instruct you on how to submit any 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 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.

This conference call also contains non-GAAP financial measures within the meeting -- 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 measures 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 by Salem earlier today. I will now turn to conference call over to Ed Atsinger.

Thanks, Evan. Thanks, thanks to all of you for joining us for this fourth quarter 2010 earnings call. We'll follow our -- our normal protocol. I want to give you a broad overview and look at some of the trends that characterized the quarter and some of the significant developments that impacted the Company, not only financially but -- but on the other fronts that we normally discuss, and then I'll turn it back to Evan, and Evan will drill down more specifically into the -- into the financial numbers for Q4 and then give you some guidance on Q1 2011.

It was a good -- it was a good quarter for us. Total revenue for the fourth quarter was up 6%. The growth was aided by approximately $1.4 million in political revenue compared to $300,000 in the fourth quarter of -- of -- in the fourth quarter of 2009. For the year, we had $3.7 million in political advertising, making 2010 one of our strongest political years. To put it in perspective, we had $1.1 million in 2009, $2.5 million in 2008. And 2008 was a presidential year so midterm election, it was quite an interesting political year for us. That being said, the combined revenue growth in November and December, which were not the heavy political months were actually higher than October, which was the strongest political month, and that revenue growth in the last two months of the year has set up a good momentum going into the -- into Q1 of 2011, which Evan will discuss in a few minutes.

Some other broad highlights, our music stations were up 15% for Q4. Did very well. A couple of things that seem to be driving this. First of all, National Spot has come back in 2010 nicely and that trend continued well into the fourth quarter and I think it even picked up a bit of momentum. And then the other thing that is gratifying for us is that Arbitron is -- seems to have finally shaken down their PPM methodology so the -- they have got more sampling out there now, they have gotten better at the methodology and we are back with those stations in top 5 female 25-54 which is our target demographic and both of them turned up very good books in the fourth quarter and they continue with that momentum.

And we've also seen local spot up generally across the platform about 3%. However, if you adjust that for political it's probably flat, but still acceptable. Not quite as strong as we have seen in terms of national spot. In the music formats, by the way, I might comment that local transactional business is also picked up. We saw a pick-up in the fourth quarter with some momentum there, as well.

Our block programming continues to do well. Last quarter we reported that this important segment of our business was up 3%, fourth quarter it was up 4%. And a very positive development in terms of fourth quarter was the growth in our Internet revenues. The Internet revenues went up -- were up 39% over Q4 2009. They -- they went from about -- from $4.5 million to $6.2 million. We attributed this to organic growth. We have done a lot of work in the last year, particularly from our Bible study tools website, Crosscards.com, and the radio station websites have all contributed to this growth in page views and in revenue. The acquisitions of hotair.com, GodTube.com, and of Samaritan fundraising, of course, all contributed to this as well and these acquisitions are -- are proceeding very, very nicely. We use page views as the metric because there's a tight correlation between increased page views and increased revenue and the page view growth is well ahead of our projections.

As we think back on 2010, we -- we did make some significant investments. For example, in New York City, we launched the Curtis Sliwa Show on WNYM in New York and that increased talent cost and an increased marketing budget did -- did impact the bottom line but we think it was a prudent investment to make and -- and as -- we also made I think significant investment in our -- in our Internet and our publishing businesses and some of the growth that I just commented on in fourth quarter, of course, is related to these. But the investment did impact our EBITDA, which was down 1% for the quarter and 2% for the year. As we anniversary much of this increased spending, we expect to see some positive momentum and movement on EBITDA for 2011. 2010 was the right year to make the investment in the interactive and publishing businesses and it was also the right year to make the investment on the development of our expanding News Talk platform. On December 13, we paid each of our shareholders $0.20 per share in the form of a special dividend, despite the challenges that we have -- that have been facing or industry, we have been able to generate meaningful free cash flow. Our Board of Directors felt that this dividend was an appropriate way to benefit our shareholders.

Let me take a few moments before I turn it back to Evan to discuss activity on the M&A front. On March 1, we closed on the acquisition of the WBZ -- WBZS AM -- I'm sorry, that -- we, it's pending. We expect to close on it in the next few days. We haven't closed on -- on that one yet. But we've -- we've agreed to purchase that station for $550,000 and the closing is eminent. We're waiting for a few loose forms that have to be executed. We began to operate KVCE AM on January 3 of this year but we made the deal in -- in November. It's a long-term LMA agreement that -- that we consummated on November 11 and we began the operation on January -- on January 3. We -- we are now operating the station in Dallas, feel very good about it, it's working very well. Both of these stations will be integrated into our existing clusters. In the case of KVCE, Dallas cluster; in the case of WBZS, our -- our Boston cluster. On January 6, we closed on the sale of KKMO AM in Seattle for $2.7 million and on February 25, we closed in the sale of the KXMX AM in Los Angeles for $12 million. Neither of these stations were programmed in our core formats. We intend to use these proceeds to further our deleveraging efforts. With that, I'll turn the call back over to Evan Masyr for a more complete discussion of fourth quarter results and some guidance for first quarter. Evan?

Thank you, Ed. For the fourth quarter, our total revenue increased 6% to $54.1 million, operating expenses on a recurring basis increased 9% to $43.9 million, and adjusted EBITDA decreased 1% to $14.5 million. Net broadcast revenue increased 3% to $44.5 million and broadcast operating expenses increased 5% to $27.5 million, resulting in a decrease in station operating income of less than 1% to $17 million. On a same station basis, net broadcast revenue increased 3% and SOI decreased 1%. These same station results include broadcast revenue from 89 of our radio stations and our network operations, representing 99% of our net broadcasting revenue. Taking a look at some of those same station results by format, we have 39 of our radio stations in our foundational Christian Teaching and Talk format and those stations contributed 45% of our broadcast revenue. Same station revenue in this format was down 1% for the quarter.

Revenue from our 11 contemporary Christian music stations increased 18% for the quarter on a same station basis and contributed 21% of our broadcast revenue. Our 22 News Talk stations had a 1% increase in revenue for the quarter on a same station basis and overall these stations contributed to 17% of our broadcast revenue. Revenue from our non-broadcast business increased 27% to $9.5 million and now represents 17% of the Company's total revenue. Revenue from our Internet business increased 39% to $6.2 million, while our publishing business increased 10% to $3.3 million. Our non-broadcast business operating income increased 22% to $1.6 million. On December 1, 2010, we redeemed $12.5 million of our 9.625% Senior Secured Second Lien Notes for $13.4 million. Our agreement allows us to redeem up to $30 million in two redemptions over any 12 month period at a price of 103%.

This redemption, plus the $17.5 million we redeemed on June 1, put us at $30 million redeemed in the first year, which is the maximum amount that we can redeem in -- in any 12 month period. So as of December 31, 2010, we had $270 million of our Senior Secured Second Lien Notes outstanding and had $35 million drawn in our bank revolver. As you may recall our revolver was limited to $30 million but on November 1, we did an amendment and at the same time increased the capacity from $30 million to $40 million. We were in compliance with the covenants of our credit facility and bond indenture. The credit facility leverage ratio was 5.78 versus a compliance covenant of 7. And for the first quarter of 2011, Salem is projecting total revenue to increase 5% to 7% over the first quarter of 2010 total revenue of $48.3 million. Salem is also projecting operating expenses to increase 8% to 11% as compared to first quarter of 2010 operating expenses of $40.2 million. This concludes our prepared remarks and we would now like to answer any questions you may have. Operator.

Yes, thank you.

(Operator Instructions)

And we'll pause for a moment to assemble our roster. And our first question today comes from Bishop Cheen with Wells Fargo.

Hello, everyone. Thank you for the very detailed update. Evan, I just want to focus on the balance sheet a second because I may have missed something. I'm aware you increased the capacity on the revolver but there was a glitch, did I hear you say anything about the optional redemption on your bond? It has -- it has occurred so far this year?

Yes -- the -- are you talking the redemption that we could do at a price of 103%?

The 103%, yes.

Correct. We -- in the calendar year of 2010, we did $30 million, which is the maximum.

Right. So that leaves your option open again for 2011, correct?

That's correct.

Okay. Is there any color you can share on your intention to do such or is it too early to tell?

Our goal, Bishop -- this is Ed -- is yes, to -- is to -- is to try to take full advantage of the -- of the 103% redemption provision. That's 9 5/8% money. So if we can do it through free cash flow, sale of assets, or even utilizing our bank revolver to the extent it allows us to and it's pretty flexible in that regard, we delever even if we -- even if we substitute the bank debt for bond debt, it's -- it's under four. So it's a delevering event and our intent is to take full advantage of it. It -- it certainly has the most bang for the buck if you do it in the first years. That's why we were intent on taking full advantage of it in -- in year one, which we did, and certainly we set it as a corporate goal to take full advantage of it in year two and we're optimistic that we'll be able to get there. We certainly know that we'll get most of it and our goal is to get it all.

Right. And that would -- I'm just guessing it's probably a back half of the year event, Q3, Q4?

Here's -- here's what we did, Bishop, in 2010. We redeemed $17.5 million on June 1 and $12.5 million on December 1st. And the way indenture reads you can do $30 million over two redemptions in any 12 month period. So we would have the ability starting on June 1 to do another $17.5 million. So we will again try to maximize the $30 million. I do not know exactly what the amounts will be at each time but our expectation would be to do one June 1 and do another redemption in December.

Yes, that -- that's very helpful. Thank you for -- for that color. And then turning toward growth, which I mean, you guys have done everything you can to stimulate growth including diversifying away. It just feels tough out there. So maybe I am being overly bearish. I mean, how -- how does it feel for you in terms of participating in the recovery? Do you think you're on par? Do you think you're lagging and if so why? Do you feel like you're leading?

Well, the economy, it certainly is -- continues to get better. And the momentum we had in November, December on revenue in general that wasn't driven by political certainly suggests that. We had a good year. We are optimistic as we move into 2011. We, the -- the guidance that Evan has given our revenue for -- for Q1, I think, reflects the realities we're seeing out there. The challenges are always different. There is always a different mix of -- of opportunities. Certain things have to -- you have to work certain things more than others. But the basic categories look good to us. As I said, the -- the music business has gotten back to more of a regular pattern with PPM stabilized, with transactional business coming back, both at the national level and the local level. Block is -- is shown growth over the last two quarters for us. Local spot continues to be a little bit weak and I think we've got to get more creative and figure out how we -- how we stimulate that business a little bit more. The economy should be a big factor there.

And what about infomercials? Where does that fit in to some of these broad categories you're -- you're talking about?

When you're talking about what's, I mean?

Infomercials for long form advertising.

Well that's sort of -- that's sort of with us, it's always pretty stable business. It flows up and down a little bit. Are you talking about our block programming as -- you talking about--?

Yes, that's all in your block programming, correct?

Yes, well that's -- those aren't infomercials. We don't refer to those as infomercials--.

But that's -- that's time brokerage, but I was wondering if you or your --.

Well no, it's not really, it's not really, I mean, it's not technically time brokerage either, it's -- but it is block program where we sell it in -- in 26 minute segments or 25 minutes segments and it is ultimately, it's listener-supported programming, that's -- that's ultimately the way it happens. They don't pay us directly but the -- the block programmers that contract for the time from us support their -- their organizations primarily by developing a donor community that listens to the program in each of the cities in which we're in that -- where they use our facilities. And so --.

Sure.

That -- that continues to improve. I mentioned that we're up -- we were up -- in both the -- the third quarter and the fourth quarter. So we -- we've seen some good stability and some good upward pressure on inventory and -- and we -- there was a price increase that we instituted for 2011 over 2010. So we had a fright -- we had a rate freeze in 2010 from 2009. But we did -- we did -- there was across-the-board rate increase for 2011. So the market's taking it, we think it's -- it's much stronger today -- they did feel the effects of the recession and the economy has improved and we see improvement in that sector as well.

Okay. I will pass it on, may follow up with one. Thank you very much.

All right, thanks, Bishop.

And our next question comes from Barry Lucas with Gabelli & Company.

Good afternoon, gentlemen.

Hello, Barry.

A couple of quickies. You -- you were -- it looked like CapEx about $2 million in the quarter, $7.8 million for the year. Do you have a -- a thought on where capital spending is going to be in '11?

Yes, we've generally thought CapEx should be on a regular basis $7 million to $8 million, kind of normalized. So we kind of feel comfortable in that range. There were a few things in 2009, when things were a little bit more challenging for us that we delayed. Some of that hit 2010, some of it might hit 2011. So I would expect still somewhere in the $7 million to $8 million, maybe a little bit more than that in 2011.

Any -- any color you'd care to provide on -- on categories in particular -- auto, retail, and some of the other larger categories for you?

Yes, I can comment on that. Certainly we are seeing auto pick up at -- at a decent rate. That is most impacted in a positive way on our music radio stations because a lot of that is placed through the agencies. And in general what you are seeing with all retail is an interesting trickle effect and that's that as transactional business came back last year, which is typically that business, the retail chains, that kind of led the recovery and then what happens is -- is that those -- those direct accounts that really have to hold on to their money, they're not publicly traded, they don't have the benefit of -- of deep coffers. They kind of hang on and they hang on to their money and -- and, but then under pressure because now the advertising is back in a national way, they have to start advertising because their competitors are advertising and that's really what we're seeing. We started to see that late in Q4 of -- of '10 and we're starting to see that in Q1 as well where we're getting more of that nontransactional business, direct business that we get largely on our News Talk and our Talk and Teach radio stations.

Barry, that's Dave Santrella, President of our Radio Division, by the way, that is here with us.

Right. That's helpful, but as long as I've got you, Ed -- you -- you sounded a little bit disappointed on the decline in -- in EBITDA in the fourth quarter. Expenses outpaced revenue growth. And it's the -- it looks to be the same in the first quarter of this year. So when does that reverse itself? When do we start bringing more down to the bottom line?

Well, I -- I wasn't disappointed. The fact of the matter is that we beat our own internal projections. We made a decision, our Board made a decision in late 2009 when we adopted the budget that we were going to target that we were going to make a significant investment, particularly in our Internet and publishing businesses, but also in our major market stations, in this case it was New York, and we knew there was a price to pay, but as I said in my comments, 2010 was the right year to make the investment. And we're seeing some fruit from that. I mentioned that our Internet business was up 39% for Q4 in terms of revenue. It's -- it -- good bit of it is internal growth, which was part -- was what we funded in part with that investment. We -- we hired a lot of developers. We did a lot of improvement on sites. We did things that generally enhance their ability to track page views and we saw significant improvement in 2010 and we're going to see significant improvement in 2011 in terms of the -- the interactive and publishing, David Evans is with us who's president of that division. David, you want to just comment on when you think we're going to see more returns so that the bottom line -- the EBITDA begins to reflect the revenue growth?

Yes, we begin to anniversary cost increases in marketing and in the number of developments we have in January. We anniversary the acquisition of Hot Air in February. We anniversary the acquisition of GodTube in June and each of those things resulted in cost increases as we took on those acquisitions. So as we anniversary those three things, you'll see the expense increase moderate down sharply and we believe with the extra unique visitors and the extra page views, you will continue to see strong revenue growth. So you will see a gradual transition from negative operating leverage on the Internet side to positive operating leverage during the first six months of the year.

Okay. And the last -- the last one for me. I'll throw this out either to -- to Ed or -- or Evan. We had to -- finally got the -- this -- this long dance not quite completed yet. But Cumulus has a deal with -- with Citadel now. By my numbers, maybe right or wrong, looks to be about nine and -- just under nine times BCF for 2011. And a number of your peers are trading in the marketplace, I wouldn't say up at nine, but -- but certainly above the, call it, six or less than -- than Salem is trading. So how do you think about the -- the gap in valuation and how do you think about closing that gap?

Well, the two sales that we just completed, for example, which were not core formats for us. It's interesting the multiples we got there -- I think -- I think at KXMX, the multiple was --.

The multiple on KXMX in Los Angeles was 12, actually just a shade under 12 and in Seattle, KKMO was a 10 multiple.

So when we sell these assets, we're -- we're able to get those multiples and I -- maybe the market will begin to recognize this. The decision that the Board made last year to make investment, to make an investment in interactive and -- and publishing as well as some of the -- to diversify our radio platform a little bit more. We want -- it was an important strategy for us to get this talk station developed in New York City. We were in all the other, most of the other major markets -- Los Angeles, Chicago -- and so we made the investment there to bring that station on as another one of our News Talk stations. And then they -- the investment that we made on interactive and publishing is very important to the Board. We hope to diversify our revenue base so that that part of our Company continues to -- to grow. And a short-term goal, relatively short term in the next few years is to probably try to get the revenue up to about 25% so that we -- we -- and to by the way integrate our -- our old platform with our new platform, which we continue to work very aggressively at doing and that does require that investment but we think in terms of the long-term benefit to shareholders, it will pay big dividends.

Okay.

And I think the other thing, Barry, that -- that will be helpful is as -- we do have some of these investments that we've made and continue to make in our business, as we anniversary some of these and we start to show growth in EBITDA, I believe our multiple will come back more in line with our peers.

Great. Thanks, Evan.

(Operator Instructions)

And we'll go next to Drew Marcus with Sugarloaf.

Hello, guys, how are you?

Very good, Drew. Good to hear from you.

Nice to -- nice to be here. On -- at the end of the year, you did a dividend/cash distribution. Can you discuss the logic behind that and the likelihood you could do that again in the future?

Well, our Board felt that -- we had successfully refied our debt with our new seven year bond indenture and -- and the bank facility, we stabilized that. The business was moving forward and making progress at all fronts. And with the uncertainty in the tax situation, we felt that most shareholders -- at the time that dividend was granted, remember there was the -- the so-called Bush tax cuts were -- were set to expire and I think the Board took that into consideration and the decision was made well before they ultimately extended that. And that was one of, I think that was a factor in their decision to decide to grant the dividend.

In terms of -- in terms of this year, I would say that our priorities are to take full advantage of the 103% redemption provision, to continue to delever, and that will take priority over any decision on a dividend, at least that's my judgment in terms of where our Board is. And if we, in fact, can successfully take advantage of the $30 million reduction in bond indebtedness, which would be $17.5 million on June 1 and another $12.5 million on December 1. If that is done and there was free cash flow left, I think the Board might take a look at it, but I think, it would certainly be a secondary priority to the delevering impact of getting the bond indebtedness down. That's expensive capital and we want to -- we want to reduce that. And for every $30 million, obviously of -- of bond debt that we can retire, there is approximately $3 million of free cash flow that goes to the bottom line and -- and, of course, that is cumulative.

And then a follow-up. David, you mentioned that you hope the -- or I guess, maybe Ed, you mentioned that the interactive business could be 25% of revenues at some point in time. Will that be profitless prosperity or do you think that will be a high margin business?

It's not going to have the operating margins of radio. But at the same time it doesn't have the high upfront costs of acquiring a radio station. So, I -- I think when I look at the operating margins on Internet business, you're talking about a 10% to 15% profit margin whereas historically radio stations would see SOI margins in the 35% to 55% range, depending upon the size of market. So it's -- it's a different picture but we absolutely expect to be nicely profitable with good ROIs.

Great. Thanks a lot.

And we'll go next to Conrad Chen with Crescent Capital.

Hello, good afternoon, guys.

Hello, Conrad.

Just -- Ed, I think you mentioned earlier and I just wanted to clarify, you do feel that on a full-year basis you guys can show positive EBITDA growth?

You're talking about for 2011?

Yes.

Well, I -- I mean, we haven't given guidance beyond the first quarter, but we're fairly optimistic. I mean, Evan, you might want to comment on that.

Yes, I think as we anniversary some of these costs, we -- we think the EBITDA picture should improve over the course of 2011.

Okay. And then just going to some of these costs again. I -- I, it seems like they're split between the -- the radio programming costs from New York and then on the non-broadcast revenue side, can you give us a sense of what is it, like half-half on each side or does it skew more towards one or the other?

Are you talking in the fourth quarter or are you talking in the first quarter?

In the first quarter guidance.

In the first quarter guidance, I'd say, probably a little bit more on the non-broadcast front as far as the expenses there. There are a couple other things in first quarter that weren't there first quarter of 2010 that are probably worth discussing. We did bring back staff raises effective January 1. We felt it was a way to invest in -- in truly one of our most important assets, our employees. So we did give raises January 1. Additionally, last year we had a national block programmer that owed us a significant amount of money, that was -- a fair amount of it was -- was past due and they gave us a seven figure check last year and that had a nice, favorable impact on bad debt expense in the first quarter of 2010 that's not repeatable in the first quarter of 2011. So those are a couple other facets on why you're seeing maybe larger than expected expense guidance in the first quarter.

Okay. That's helpful. That's what I was wondering. And then on the -- the revenue, I think the top line was positive -- certainly better than I expected. Just curious as to what portion of that is coming from the block programming price increase versus just sort of core growth in the -- in the advertising side.

For the revenue growth in Q1, a small amount of it is due to any -- any price increases on the block, but we're seeing more on the block side is filling of available time slots and basically creating a bit more of a demand for our product. That has a -- I'd say, a bigger impact than rate increases. Obviously, the fact that we did some acquisitions on non-broadcast or in particular, in the Internet side during 2010 gives us some increases in revenue in the first quarter of 2011, as well.

Okay. So then -- so a fairly large portion of that, though, is from sort of just core strength in the advertising business?

You know, I can address that a bit for you. Locally, if you look at all of our local revenue buckets, and this would, by the way, not include the block programming that ad largely refers to as national program business but local programming sales that we do as well as local spot sales, local digital sales, events, and miscellaneous revenue. If you look at that right now and look at the entire first quarter of 2011, we are almost at the budgeted number already. So there is, with almost the entire month of March left to go. So there is some definite robustness in -- in local sales right now.

And if you look at the Q1 revenue trends, that we've given guidance on, followed to a large degree, what we actually achieved in Q4. So in Q4 there was 6.4% overall revenue growth of which 3% -- there was 3% growth on the radio broadcast side, there was 27% growth on the Internet and publishing side, which kind of gets you to that blended average. Similar trends in Q1, the radio is probably picking up a little better than in Q4, as the economy has continued to recover. The Internet and publishing will probably be a similar percentage Q1 versus Q4. So I'd use Q4 to -- to think about -- I'd use the Q4 actuals in how you think about the Q1 revenue trends.

Got it. Okay. Thank you, guys.

And we have no more questions in our queue so I'd like to turn the call back to Mr. Edward Atsinger.

Well, thank you operator, and thank all of you for joining us for this call. We look forward to meeting with you again in about three months.

This concludes today's call. We thank you for your participation.