Salem Media Group Inc (SALM) 2011 Q2 法說會逐字稿

Hello and welcome to the Salem Communications second-quarter 2011 results 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.

Thank you and thank you for joining us today for Salem Communications' second-quarter 2011 earnings call. As a reminder, if you get disconnected at any time, you can dial into 913-312-0867 or listen from our website at salem.cc.

I'm joined today by our Chief Executive Officer, Edward Atsinger, our President of our Radio Division, David Santrella, and our President of Non-Broadcast Media, David Evans.

We'll begin in just a moment with our prepared remarks and once we're 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.

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 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 our website at salem.cc as part of the current report on Form 8-K in an earnings release issued earlier today by Salem.

I would now like to turn the call over to Edward Atsinger.

Thanks Evan and thanks to all of you for joining us for our second-quarter 2011 earnings conference call. We'll follow our normal protocol. Let me touch on some highlights that took place in the quarter. I'll turn it back to Evan then who will provide a detailed summary of our second-quarter results and provide guidance for third-quarter. And then we've got our two division Presidents here in addition who can assist us in handling questions that you might have.

Our total revenue for the quarter increased 6% compared to last year. Broadcast revenue was essentially flat. We were up about, just a tad, but we had a 7% increase in our publishing revenue and a 61% increase in our internet revenue. And those combined with a flat broadcast revenue produced 6% for the quarter.

Included in the broadcast revenue in the second quarter of last year was about $700,000 in political revenue, while in this quarter we had only $150,000 -- this year in the second quarter we only had $150,000. So that was a significant factor in the flat quarter, year-over-year comparison.

Our adjusted EBITDA was up just a tad at $13,000, still flat from the prior year. And we have discussed on at least the last call and I think perhaps a prior couple of calls, the fact that we have made a deliberate decision to make some expenses, to make some investment and increase expenses in terms of those investments. And we did this in terms of internet acquisitions and also in terms of an investment in some of our radio businesses.

We've also said that we expect the expense growth to moderate and EBITDA growth to return. Our expenses grew more than 10% in the first quarter, less than 7% in the second quarter, and I expect that it will be somewhat below that in third-quarter. Evan will provide the specific guidance in a few moments. But we're making progress on building toward a positive EBITDA growth for the year.

As I mentioned, two divisions contributed to our up quarter. Publishing revenue was the first component. It was up about 7%. The growth in this division was driven largely by Xulon Press, which is the provider of self-publishing services that target the Christian audience. Xulon's revenues increased 19% to $1.9 million.

The internet businesses continue to progress nicely. Internet revenue increased 61% from $4.7 million to $7.6 million. This growth was driven, in part, by our acquisitions of WorshipHouse Media, Samaritan Fundraising and GodTube. And in part, by organic growth within our existing web properties and also our existing web radio websites.

Operating income from our internet businesses increased 86% from $800,000 in Q2 of 2010 to $1.4 million in Q2 of this year.

Our recent acquisitions of Hot Air, GodTube and WorshipHouse Media are all proceeding, by the way, on target and we're ahead of our projections and very pleased with those acquisitions so far.

On June 1st, 2011, we redeemed $17.5 million of our 9.625% senior secured second lien notes at a price of [$103.00], now redeemed [$47.5 million] of this debt in the past 18 months since issuing the bonds. We expect to redeem more bonds on December 1st, which is the next opportunity that we have under the bond indenture, as we continue to work aggressively at de-levering the Company and improving our balance sheet.

With those comments, let me turn it back to Evan for a more detailed discussion of our second-quarter results and he'll provide some guidance as well for third-quarter. Evan?

Thank you, Ed. For the second quarter, our total revenue increased 6% to $56.1 million. Operating expenses on a recurring basis increased 7% to $46 million. And adjusted EBITDA increased to $14.1 million.

Net broadcast revenue decreased to $45.4 million and broadcast operating expenses increased 7% to $46.2 million resulting in a decrease in station operating income of 1% to $16.4 million.

On a same station basis, net broadcast revenue increase 1% and SOI decreased less than 1%. These same station results include broadcast revenue from 87 of our radio stations in our network operations and represents 98% of our net broadcast revenue.

Let's now take a look at our same station results by format.

We have 39 of our radio stations programmed in our foundational Christian teaching and talk format and these stations contributed 47% of our broadcast revenue. Same station revenue on this format increased 1% for the quarter.

Revenue from our 11 contemporary Christian music stations increased 12% for the quarter on a same station basis and contributed 25% of our broadcast revenue.

Our 24 news talk stations had an 11% decrease in revenue for the quarter on a same station basis and overall these stations contributed 16% of our broadcast revenue.

Revenue from our internet businesses increased 61% to $7.6 million and our internet operating income increased 86% to $1.4 million.

Our publishing revenue increased 7% to $3.1 million and our publishing operating income increased 141% to $400,000.

As of June 30th, 2011, we had $252.5 million of 9.625% senior secured second lien notes outstanding and had $36 million drawn on our bank revolver.

We were in compliance with the covenants of our credit facility and bond indenture and the credit facility leverage ratio was [5.53] versus our compliance covenant of 7.

For the third quarter of 2011, we are projecting total revenue to increase 4% to 6% over the third quarter of 2010 total revenue of $51.4 million. And we are also projecting operating expenses to increase 3% to 6% as compared to the third quarter of 2010 operating expenses of $43.2 million.

This concludes our prepared remarks and we would now like to answer any questions that you may have. I'd like to turn it back over to the operator.

Thank you. The question and answer session will be conducted electronically. (Operator Instructions). We'll pause for a moment to assemble our queue.

Bishop Cheen, Wells Fargo.

Hi everyone, thank you for the update on this charming market day.

Just a few quick questions. Let me start backwards with the pacing. Your pacing seems to be a little stronger than we, well it's not pacing, it's kind of your guidance. Clear Channel gave out pacing for Q3 and that was kind of radio 3%. I think CBS's was closer to your 3% or 4%, I have to remember. And do you still feel, I mean, you just said it, given what's going on in the economy, I'm not looking to make you take it back. What do you see that gives you this kind of conviction?

Bishop, there are a couple things that kind of give us, I guess, confidence to put those numbers out there. One is where we are currently pacing, what we've seen in the month of July and what we're seeing for August.

The other thing is you've got to remember we've had some recent acquisitions on the internet side and that's definitely fueling some of the growth. Whereas when you're talking about Clear Channel giving the radio numbers, they have a smaller percentage footprint of digital than we do. So, that's helping boost our guidance as well.

Right. But digital is their top priority. And that's a great lead-in to my second question, I'll make this quick. On digital, is everything digital in your internet breakout? Meaning all the radio station websites, is that in your internet or is that in radio?

Bishop, we put the radio station website revenue with digital because it is, it's internet revenue whether it's being sold by the folks in David Santrella's division or David Evans' division, it's still revenue coming from an internet website. So, we accumulate that all as internet revenue.

Okay. That's fine. There's no wrong answer to that question.

On the [103] optional call, like clockwork, so we've got $47.5 million, I think you can do another [$13.5 million] within this 12 month timeframe, correct me if I'm wrong.

(multiple speakers)

Yeah, we could do [$12.5 million]. (multiple speakers)

[$12.5 million], I'm sorry. It's math so you know I'm going get it wrong. [$12.5 million], that would bring you to [$60 million].

Correct.

And that would imply [$30 million] remaining capacity to use all of the potential capacity of the three-year optional clause. Is that correct?

We actually have a four-year period to do it. So we have years three and four still to do.

Okay. So, you can do a max of [$120 million]?

Correct.

Okay. That's where I was trying to get to. That's it. I will leave you guys alone and listen for some other color. Thank you very much.

Anil Gupta, Imperial Capital.

Thanks, guys. So, just kind of wanted to dig into the guidance a little more as well. I've heard from a couple people, or a couple of companies, that July was pretty challenged in terms of the ad markets. I was wondering if you could give any color on whether visibility is declining or your seeing any advertiser pull back that may or may not be reflected in your guidance.

We have seen some advertiser pull back. Some of our transactional stations that get a fair amount of business from import car dealers, specifically Toyota, have seen some impact from the tsunami and earthquake in Japan, all of which has created an inventory challenge.

We saw a couple of big cancellations in a few markets around that and that impacts the third quarter a bit. But again, Salem remains a very direct sale, very much to the direct small market operator and that continues to be where we find our growth opportunities.

Okay. Thank you. And then looking at the block business, I think typically, if I remember correctly, you guys do most of your price increases, tend to happen in the first quarter of the year. So if that's right, I guess the question is at what point would you have conversations about price increases and are those ongoing through the year? Or do they mostly occur kind of fourth-quarter, first-quarter?

Typically first-quarter, latter part of fourth-quarter usually implemented with the turn of the calendar so that usually the rate increases, to the extent they apply would kick in, for the most part, January 1st. So, that process will begin in the fourth quarter, typically midway through.

Okay. And then the last question is on the internet properties, obviously trending very, very nicely and good profitability. Are there additional acquisitions you guys are looking at? Or are you kind of happy with the portfolio that you have?

And I think a while ago you mentioned that the non-broadcasting piece of the business would ultimately get to somewhere in the neighborhood of 20% to 25%. Is that kind of still what you're thinking? Or given the trajectory, do you think it could be a bigger component?

It certainly could be bigger, but I do think we all envision further growth in that division. And if acquisitions present themselves that make sense and pencil out and strategically fit with what we're trying to do, yeah, we would look at them.

Typically in that space the acquisitions have not been, they've not been as pricey, for the most part, as on the broadcast side. So we have a little more flexibility there.

I do think that we see this division as growing rapidly and we expect to see that continue. Bishop asked a question about the station websites that's reflected in our digital media and it is, but it's a relatively small piece of it. It doesn't account for much of the growth, for the most part, organic growth, internally, and the impact of the acquisitions.

The acquisitions we make we try to make acquisitions that strategically add nicely to our existing infrastructure and base. So, that's driven a lot of our decision making.

But to answer your question in brief, yeah I do expect that there will be additional acquisitions, if opportunities present themselves that make sense for us and yes, we would like to see the growth of 25% and beyond.

Let me add a couple of comments. I'd say we're happy with the existing portfolio and digital properties. And I guess I'd define happy as we think we could generate robust organic growth from the existing properties, with or without acquisitions. And any acquisitions that we find will compliment that organic growth, but are not necessary for growth.

Okay. And I had one more question but I forget it. I'll get back to you guys on that.

Conrad Chen, Crescent Capital.

Hey, good afternoon, guys. Just a little more, digging a little more into the guidance you gave. I mean, if we were to look at, think about is there a way you can give more color as to the breakdown between the broadcast revenue versus -- it seems like this quarter obviously internet was really what drove the top line growth. Just was hoping you could provide more detail whether, what you expect to drive it next quarter.

I don't have necessarily the exact numbers and prepared to give out percentage ranges on each of those, but I do still see that when you look at the 4% to 6% growth it will still be, a big portion of the growth engine will be the internet side of things. Xulon as well should have a nice quarter. And radio will still grow, but not at the same rate as those other divisions.

And we could, you could reflect back a little bit, if you adjust radio, if we adjusted out the impact of political and also our network, we aggregate our network business with our radio because it's all radio. Radio would have been up a couple of points, something in that neighborhood. So there's some growth on the pure radio side.

A little slow down in the network business, part of it is what you see reflected typically after a very aggressive political season. There's a little bit of listener fatigue to some of the news talk side of things and revenue can take a little bit of a hit there. And we often see that first and second-quarter after an aggressive election year.

But radio should have some growth as well when you factor out the political, which as we said in second-quarter was $700,000 versus $150,000 for the prior year. And also take a look at pure radio apart from the network.

Okay, and then looking, following up on the political point, was it a significant amount in Q3 of last year?

I don't have that number handy. I know that last year was a very good political year for us. I'd have to go back, I know we disclosed it in our last Q3 call, so let me see if I can dig that up while we're still on this call. And if I get an answer before we hang up, I will give you that number.

I do know, it seemed like it was a lot more aggressive in the front part of the year. An awful lot of money was spent there, it seems as they got, they had used up their [powder] by the time it got towards the election cycle.

Okay, so you shouldn't be having a huge comp against that?

Evan will try and get you the number. But that's just going from memory right now.

Yeah.

Okay. And then on the, I think one of the other callers had mentioned that some of the commentary we've heard from some of your peers sounded like there were a lot of cancellations due to the Japanese effect, but then I think we've heard some color that looking forward they expect some benefit in the back half of the year. Is it too early to say? Are you seeing any benefit from that, a return of some auto spend in Q3, Q4?

For me it's really, for me to tell you that we're seeing a significant increase in auto spend, typically those avails, which is ultimately what puts the revenue on the books, those avails come down fairly quickly with start dates that are within a couple weeks of when they're asking for your pricing.

It's not like it used to be when you'd get an avail four weeks before the buy was supposed to start. Now you're getting the avail many times three or four days before it's supposed to start. And that's because the buying community is relying on the depressed markets so they can get a better price. And because, quite frankly, they're holding onto their money for a little while to see how confident they are about making the buy to begin with.

So, crystal balling that is a little more difficult than I think it was back a few years ago.

Okay. And then my last question, I think last quarter you talked about how on the block side you'd seen strong growth because of increased demand. Is that the trend that's still going on currently?

It is. We're still seeing good demand and we've got, the thing that's encouraging is there's good demand in the pipeline, stuff that's scheduled to come on first-quarter of next year and that type of thing. But yeah, we are seeing good continuing demand on the block side.

Okay, great, thank you guys.

Conrad, I do have that number for you. Looking at what we had in our earnings call last third-quarter was $1.1 million in political.

Okay. So, your guidance assumes that, you're not going to get that, I assume that's not coming back.

That's correct.

Okay. Great, thank you.

Colin Murphy, Longacre.

Hi guys. When you look at broadcast radio revenue in Q2 and year-to-date, what are some of the other factors that drove the broadcast radio? I know you said that there was less political contribution in Q2 versus Q2 of 2010. But, were there any other factors that drove that?

You mean that resulted in a flat quarter?

Well, resulted in a flat quarter and either to the positive or to the negative. So, that took the place of that, or maybe there was nothing.

I can tell you that particularly in April of this year there was, we had a pretty robust transactional month for our CCM radio stations, so that helps on the positive side.

On the other side of that, the direct market, that small market, the mom and pop shop which is a lot of our business, again, I think they put their hands in their pocket a bit as we moved later on into the second quarter and the economy started to look a little more questionable.

Okay. But you're seeing, you've seen an uptick since then, right? It looks like July numbers are stronger.

We're seeing a couple things. We are seeing a bit of an uptick. We do have some events that we do in some of our markets that provide some meaningful revenue in the third quarter. Summer months and the concert business, which for our CCM stations, is very big. That drives revenue in Q3.

And quite frankly, we just have some very aggressive sales practices in place to help both on the terrestrial and the digital side.

Okay. And my final question here is do you actually expect to see a political uptick in revenue in Q3 or Q4 of this year?

There's some hint that in Q4 of this year you could start to see some political money being spent. I don't know that we would see that in Q3 because there wouldn't be a reason for it. Again, there's some hint out there, some conversation that we may see some early spending. And that would result in some Q4 money. I don't see that being a part of Q3.

Okay. That's very helpful. Thank you very much.

(Operator Instructions).

Bishop Cheen, Wells Fargo.

Hey, I have one more of those questions with no wrong answer, my favorite kind. Do you guys stream your stations and could you give us your thoughts about the pluses or minuses in your model of streaming?

We do stream, all of our radio stations stream. And all of our radio stations do ad injection on our stream, which means that when we break for commercials, the commercials that run on the stream are different than the commercials that are running terrestrially unless the client has paid separately for that commercial to run on the stream.

And we do believe streaming is beneficial. A number of listeners have clearly stated a preference to listen to the radio on their computers in the office or on mobile devices in their car. And we want our listeners to be able to access our radio stations whenever and wherever they like. And streaming facilitates that.

So, it's good for listeners and it's good for listeners, we can generally figure out how to make that good for advertisers and for our bottom line.

You might add the apps that are in place --

In addition to streams for every radio station, we also have apps for every radio station on the iPhone, on Android and on Blackberry.

Right. And all of this, you've already spent most of that connectivity infrastructure, whatever it took, to get all this in place. So this is now just kind of part of a maintenance CapEx for you, correct?

Yes, absolutely.

And that leads to the last question, as you warned and you did in the Q1 call, that the expenses, you were going to take the opportunity to invest in new business and we would see expenses rise all year, probably at a less magnitude as demonstrated by Q1, Q2.

As you look out to 2012, does it feel like most of the heavy lifting on the investment, reinvestment in, will have been done?

It's difficult to say. I'm venturing a speculative guess I would say, on the radio side, probably. I don't see any big major investments comparable to what we made in 2010, 2011. We made a significant investment in a couple of markets in terms of talent, in terms of promotion.

On the internet side, we probably will continue to make investment in organic growth. We're driving traffic and those sites are continuing to develop, the expanded the footprint, the [accume] and time spent, time with the sites, page views.

So, there's undoubtedly going to be some there, but it's difficult to see. It always depends on what opportunities present themselves. I can tell you, Bishop, that there is a real focus on trying to take advantage of these 103 redemption opportunities. And we have sort of maxed out our ability to pay down those bonds in year one and we're well on our way to doing that in year two. We've got another [12.5] as you mentioned, as you asked about, on December 1, and our goal is to take as full advantage of that as we can, as much as we're able to.

So, that is a high priority with the Company, with management, with our board. We think if we can de-lever, in these first couple of years particularly, it really helps everything.

That would be a priority that might be something of a constraint on our further investment and increasing expenses.

Right, but the returns, as you pointed out, are compelling. And you guys are like, you're more dependable than the railroad in meeting that timetable.

Alright, that was it. Thank you. Have a pleasant evening.

And with no further questions in the queue, I'd like to turn the conference back to Edward Atsinger for any additional closing remarks.

Well, again, let me thank all of you for participating in our second-quarter conference call. And look forward to visiting with you again in three months when we report on third-quarter.

Again, that does conclude today's presentation. We thank you for your participation.