Salem Media Group Inc (SALM) 2014 Q1 法說會逐字稿

Hello and welcome to the Salem Communications first quarter 2014 earnings call. Today's call is being recorded. I would now like to turn the conference over to Mr. Evan Masyr, Executive Vice President and CFO. Please go ahead, sir.

Thank you, Camille. And thank you all for joining us today for Salem Communications first quarter 2014 earnings call. As a reminder, if you get disconnected at any time, you can dial in to area code 719-325-4900 or listen from our Web site at www.salem.cc. I'm joined today by Edward Atsinger, Chief Executive Officer; Dr. Frank Wright, President and Chief Operating Officer; Dave Santrella, President of Radio; and David Evans, President of Interactive & Publishing. 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 and 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. These forward-looking statements are based on currently available information. Actual results may differ materially from those anticipated and reported results should not be considered as an indication for future performance. We do not intend and undertake no obligation to update our forward-looking statements, including forecasts of future performance, the potential for growth of existing markets, the opening of new markets, or the potential growth from future acquisitions.

More information on the risks and uncertainties that may affect our business and financial results are included in our Annual Report on Form 10-K for the year ended December 31, 2013 and other public filings we have made with the Securities and Exchange Commission. 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 is available on the Investor Relations portion of our Web site at www.salem.cc.

With that, I'd now like to turn the call over to Edward Atsinger.

Thanks, Evan. And thanks to all of you for joining us for our Q1 2014 earnings call. As is our normal format, let me begin with a kind of broad overview of important developments in Q1, I'll look at some of the numbers, and then Evan will take it back and get into more detail on the specifics in terms of financial performance and also provide you with some guidance for Q2.

So as we look at the important developments, of course we have to begin with the acquisition of Eagle Publishing. We completed that acquisition in early January, I think on January 10, and we spent much of the first quarter integrating those assets into the Salem platform. As many of you know, Eagle is one of the most influential companies in the conservative media space. In addition to that fact, when you combine Salem which has its unique portfolio of conservative media properties together, we have a very strategic integration of great assets that make for a powerful platform. We tie our old media together with new media and we target the same audience.

So, the opportunity we like most about this acquisition is that each of Eagle's businesses matches up so well with Salem's extensive media platform. And I'm pleased to report that Eagle's off to a very encouraging start. We beat both our revenue and profit projections for the first quarter and we seem to be well-positioned for a good first year of operations. We're particularly enthused about the prospects for Regnery Publishing because we have a strong slate of book titles coming together that we will be releasing throughout the year. In fact, the first significant Regnery title has been released since we acquired Eagle and that is a book titled Blue Collar Conservative by former presidential candidate and Pennsylvania Senator, Rick Santorum. That was released on April 28.

Blue Collar Conservative presents Rick Santorum's vision for how the GOP can win in 2016 by reconnecting with its working class base across America and small town values. And while it's still early, the initial sales for the book are in line with our expectations. We were able to launch a number of experiments in Q1 rolling this book out. We put together a number of cross promotional opportunities within the Salem platform to build awareness of the book's release. For example, Rick was featured on five of our nationally syndicated talk shows, each of which have a couple hundred affiliates in addition to the old and operating stations. And we also featured him on a number of interviews on our local shows, we have a number of standalone talk shows in individual markets.

We've also scheduled a number of local news events, promoted them on the normal radio station, and incorporated book signings. And all of these things are designed to increase awareness of the book, to drive sales, and to help us figure out how to best integrate these assets. We're also using some of our digital assets such as Townhall.com, HotAir.com, and now that we've acquired Eagle of course we have HumanEvents.com and RedState.com. And all of those assets are also being experimented with and used in a variety of ways to see how we might best increase awareness and drive sales. This marketing approach we think will help us boost sales, but I think it will also provide Regnery with additional leverage in terms of being competitive for signing up new attractive offers.

So, the experiment is underway. We feel pretty good about it and keep tuned and we'll keep you informed as things develop and as we fine-tune the integration of these assets. By the way, our next big Regnery releases are scheduled for later in the second quarter. We will be releasing America: Imagine a World Without Her by Dinesh D'Souza. D'Souza offers a full flooded defense of America as a force for good in the world and challenges the myth that our wealth or our influence are based on the evils of capitalism. Additionally, we're releasing the book Blood Feud: the Clintons versus the Obamas by Ed Klein. It will be an interesting book. Blood Feud pulls back the curtain on the sometimes shocking and interesting and sometimes destructive relationship between what have become two royal families of the Democratic party.

Again, we are able to bring all of the Salem assets to bear on these book releases and we will continue to implement that as we move forward and we'll update you about how those experiments, I guess we can call them, progress and we'll fine-tune that and we're sure that they will bring value. Let me summarize our financial results and let me do it on an all-in basis including the impact of the Eagle acquisition and then I will provide some numbers that exclude the impact of the Eagle acquisition so you can kind of put it in perspective kind of on a year-over-year basis or on a same-station perspective. For the quarter, total revenue including Eagle increased 12% with 16% increase in operating expense, which resulted in a 4% decline in adjusted EBITDA.

Let me comment on the adjusted EBITDA decline. We projected that and we commented on that in our last call. First as you recall, we strengthened our management team by filling the role of President and Chief Operating Officer, which had been vacant since about 2008, 2009. And we also launched a new division and installed a President of the newly created Radio Division, Salem Espanol. Secondly, we had something of a negative impact in terms of the calendar, simply a timing issue with regard to Easter, which I'll comment on in a minute. Let me drill a little deeper into the 12% revenue growth. This was composed of 5.4% increase in broadcast revenue, which is very encouraging given the fact that the economy was flat and most of our peers were also flat if not down.

We had a 32.9% increase in Internet and e-commerce revenue and a 44% increase in publishing revenue. Obviously, the biggest driver of this growth was Eagle Publishing acquisition. To put it in a little different perspective, if you look at these results both with and without, you can still see some solid growth. Let me start with Eagle itself. Adding Eagle in the first quarter, Eagle itself generated $3.7 million in revenue, of which $2.8 million was Internet related and $900,000 was publishing related. If you exclude Eagle, revenue was still up 5.3%. This 5.3% increase in total non-Eagle revenue is composed of 5.4% increase in broadcast revenue, a 3.9% increase in Internet and e-commerce revenue, and a 9.6% increase in publishing revenue.

As I commented a minute ago, Easter last year was in the first quarter in March, this year it's in April so this resulted in a negative impact on our Q1 Internet revenues clearly because Easter is the biggest week for our Church e-commerce businesses, our WorshipHouse Media and SermonSpice. I guess the good news is that the same decline in Q1 this year will have a positive impact on Q2 since Easter will now appear in April and we'll get the benefit in Q2. If we were to ignore the impact of the Easter timing, Internet e-commerce revenue would have grown about 9% plus, which is in line with what we have been reporting in recent quarters for organic growth for our Internet business. As a result of our Eagle acquisition, Internet and publishing revenue in Q1 now represents 27% of our total revenue compared to 22% last year.

With the strong book releases scheduled at Regnery later this year, we think for the balance of this year in those results, we expect Internet publishing to probably exceed 30% of our total revenue by year-end, again emphasizing our multimedia and diversification strategy. Let me finish by highlighting two items on the radio side of our business. As I said, our operating performance and our acquisitions. First as I said, I'm quite pleased with the actual 5.4% increase in the core radio business. And as I mentioned, we had a brutal winter and a flat economy for the rest of the country, but we did quite well. There were two important drivers underlying this growth. First, as always we saw solid block programming revenue growth of 5% on our Christian Teaching and Talk station so that stability continues to be there even when the economy slows.

Second, we saw a strong growth in Q1 in the film advertising category. Films like Noah, God's not Dead, Heaven is for Real are targeting our audiences; the industry, the studios are targeting our audience and spending money with us to reach them. Looking at the rest of the year by the way, there are also a number of faith-based films slated to be released this year. Those that we're aware of at this point are Exodus, Left Behind which will be interesting, and [God's Been Killed]; all of which again will be of interest to our audience. And it's encouraging to see that the studios are recognizing the importance of our audience by not only making films that appeal to them that they will be interested in, but also buying time on our platform to promote those films and for that we are grateful.

I suppose contrary to reports, the film God is not Dead certainly seems to be a reality for Salem. Let me finally conclude with a brief discussion of our acquisition activity. Late last year we briefly mentioned the pending acquisitions of few radio stations. KRDY-AM in San Antonio, which we added to Salem Espanol; KDIS FM in Little Rock, Arkansas which has been added to our Christian Teaching and Talk group of stations. These acquisitions closed during the quarter and we currently have two more station acquisitions pending. The first is WOCA-AM in Miami, we are paying $2.2 million for that station including the transmitter side and real property associated with it. Additionally, we are acquiring WOLT-FM, which is licensed to Greer, South Carolina. It's actually the Greenville, South Carolina market and the co-owners have subsequently gotten involved. The (inaudible) are now changed to WRTH.

That acquisition was made for $1.1 million and I think it probably is closing even as we speak. The documents have been signed today and have been exchanged and I think we probably will consummate that acquisition today. We've also closed on three FM translators, those were done last month. One was in Omaha, Nebraska; another in Tampa, Florida; and a third in Orlando. So, it's been a good quarter for Salem in terms of our operating results and in terms of the development of our multimedia platform through acquisitions particularly Eagle Publishing.

So with that, Evan, let me turn the call back to you for some more specific details.

Certainly. Thank you, Ed. And I'll provide a little bit more detail on some of the numbers, some of them will be repeats of what Ed talked about. For the first quarter; our total revenue increased 12.1% to $62.3 million, operating expenses on a recurring basis increased 16.9% to $56.4 million, and adjusted EBITDA decreased 4.3% to $10.7 million. For reference, we had approximately $700,000 in political revenue for the first quarter as compared to $200,000 last year and $900,000 in 2012. Through the first three months, our political revenue is pacing at 77% of our highest political year which was 2012 when we had $5.5 million. So, we're happy with the way that's starting and also the decline from 2012 is to be expected given that it's a mid-term election as compared to a presidential year.

Net broadcast revenue increased 5.4% to $45.6 million. Broadcast operating expenses increased 5.5% to $31.2 million, which resulted in station operating income of $14.4 million or a 5.2% increase. On a same-station basis, net broadcast revenue increased 5.2% and SOI increased 5.2%. The same-station results include broadcast revenue from 98 of our radio stations and our network operations and represents 99.7% of our net broadcast revenue. I'll take a quick look and break down some of our revenue by format. 40 of our radio stations are in a foundational Christian Teaching and Talk format. These stations contributed 45% of total broadcast revenue and increased 4% for the quarter.

Advertising revenue was up 9% while block programming on this format was up 3%. We have 27 stations doing News Talk and they increased 16% for the quarter due to increase in political revenue. Overall, these stations contributed 17% of total broadcast revenue. Revenue from our 12 Contemporary Christian Music stations contributed 21% of total broadcast revenue, and decreased 2% for the quarter. We have seven stations that are programmed in Spanish language Christian Teaching and Talk and revenue on those stations grew by 4% and that format is 2% of our total broadcast revenue. And rounding out our main formats, we have 10 stations in a business talk format and this format contributed 3% of total broadcast revenue increasing 2% for the quarter.

Network revenue increased 17% and represents 9% of total broadcast revenue. Publishing revenue increased 44% to $3.8 million and represents 6% of our total revenue. And revenue from our Internet and e-commerce business has increased 33% to $12.9 million and now represents 21% of our total revenue. Profit was up 8%, but was impacted by the Easter timing as Ed already discussed. If we exclude the impact of the timing of Easter, profit instead of being up 8% would have been up 17%. During the quarter, we repaid $2.3 million of our Term Loan B. At March 31, we had $289 million outstanding on the Term Loan B and $2.3 million on the revolver. Our leverage ratio was 5.52 compared to the covenant of 6.50. And interest expense for the quarter declined 34% to $3.8 million from $5.7 million last year.

With respect to next quarter, second quarter of 2014, we are projecting total revenue to increase 13% to 15% over second quarter 2013 total revenue of $60.1 million. We're also projecting operating expenses; before gains or losses on the disposal of assets, impairment losses, and stock-based compensation expense; to increase 16% to 19% compared to the second quarter of 2013 operating expenses of $49.7 million. Without the acquisition of Eagle, we would be projecting our revenue to increase in the range of 5% to 7% and our expenses to grow 6% to 9%.

And this concludes our prepared remarks and we'd now like to answer any questions and I'll turn it back over to you, operator.

Thank you. (Operator Instructions) Michael Tanzer, DG Capital.

It was really great to see some of the robust revenue growth considering what your peers are doing on the broadcast side. My first question is with regard to the G&A reported on the income statement in your press release. What was the substantial increase due to? And going forward, what do you think is sort of a reasonable run rate to think about?

When you're looking at G&A, are you talking just corporate expenses or are you looking at all of our operating expenses?

I guess I will get to the general operating expenses next. But I was just talking about corporate expenses, the $6.83 million versus the $5.8 million that you reported in 2013?

There were a couple of key drivers on that expense growth. Part of it was the new hires that Ed had mentioned of Frank Wright, our President and Chief Operating Officer; and Tony Calatayud, who is our President of Salem Espanol. Additionally, we became an accelerated filer this year and so our auditors had to test our internal controls so we had an increase in expenses related to audit fees in the quarter. Those were kind of the two big drivers of that expense growth.

I mean the two new employees that you hired, were there sort of like signing bonuses or something like that or could we just sort of take the $6.8 million number and sort of annualize it and that sort of led to ongoing costs?

I think $6.8 million is a little high. There were some other things. We have an Annual Managers Meeting for example that's in the first quarters so the first quarter expenses are always a little bit higher and I don't think you're going to see that same percentage growth the rest of the year. As I look at Q2, I don't see that same large growth in corporate expenses in Q2 as we did in the first quarter.

Okay. And then just on broadcast operating expenses and Internet operating expenses, I know we've asked this question from you guys before, but are we going to be able to perhaps see operating leverage and increases in EBITDA anytime soon?

If you look at the guidance for Q2, it looks like we are getting close there, depends somewhat on the release of some of these books and how that plays out. I do think in the latter half of the year we expect to see some operating leverage, little bit too early to tell, it depends on the overall economy and where things are. But at this point, we think we'll get there this year.

And if we have a good political year, that will certainly help and we're hoping we will and it's gotten off to a decent start.

Okay. Great. And then just one more question for me. When you look at your CapEx budget, excluding some of these acquisitions that you're doing, what would be sort of the budget for the year? Is it $7 million or is it $10 million on an ongoing basis that you think is the appropriate long-term rate?

The CapEx budget that I think is the more normal CapEx number for us is about $8 million a year. This year 2014, I expect it to be somewhere closer to $10 million and that's because we have a few situations where we're having to move. For example in San Francisco through eminent domain, our building those was taken and so we had to move and so we'll have CapEx associated with that. We have a similar situation in Seattle where the building where we lease has been sold and the new owner is basically shooing us out of there. And we also have a situation in Miami where a transmitter site in the Everglades has been taken through eminent domain and so we're going to have to relocate there. So, we have a few situations where CapEx will be elevated this year. A more normalized number is probably somewhere in that $8 million range, but it will probably be in the $10 million range in 2014.

Okay. I think that's it for me. Thanks very much.

(Operator Instructions) Michael Kupinski, Noble Financial.

Pardon me if you've addressed this question. But I was just wondering, did you have political advertising in the last quarter?

We did. Political in the first quarter was $700,000 approximately, last year in 2013 in the first quarter it was $200,000.

Okay. And then in terms of the radio stations, what do you attribute the outperformance of the radio stations, (inaudible) kind of programming and so forth. But what do you attribute the outperformance to? Were ratings exceptionally strong or your sales force doing a more effective job and then obviously because of the variance of what we've seen versus the rest of the industry, you're far ahead of the other radio peers are doing. I was wondering if you can shed some light on what do you think you're doing right?

This is Dave Santrella by the way. We're pretty intentional about our sales effort and we have some pretty regimented activities that we do on a weekly basis. Transactional business was actually pretty soft. So while our more ratings based radio stations remained pretty stable in the quarter, they really weren't the beneficiary of additional revenue because transactional business was soft. Most of our growth came from as Ed mentioned the movie business, education business was very strong for us, a lot of ancillary direct retail business and then a fair amount of sports programming as well.

Okay. Those are all the questions I have. Thank you.

(Operator Instructions) And as we have no further questions, I'd like to turn the call back to Edward Atsinger for closing remarks.

Thank you, operator. And again, thanks to all of you for joining us. We look forward to visiting with you when we report on second quarter earnings later this year.

That does conclude today's call. We appreciate your participation.