Salem Media Group Inc (SALM) 2014 Q2 法說會逐字稿

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

Thank you and thank you all for joining us today for Salem Communication's second-quarter 2014 earnings call. As a reminder, if you get disconnected at any time, you can dial in to area code 719-325-4750 or listen from our website at www.Salem.cc.

I am joined today by Edward Atsinger, our Chief Executive Officer; Dr. Frank Wright, President and Chief Operating Officer; David Santrella, President of Radio; and David Evans, President of Interactive and 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 an indication of 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 conforming with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the investor relations portion of our website at Salem.cc.

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

Thank you, Evan, and let me add my welcome to all of you for joining us on today's call.

I'm going to depart a little from my normal practice and starting with a review of the numbers and just visit with you for a few minutes about our strategic objectives and some of our operational objectives. Then we will look at the numbers briefly and then I will comment on some important developments that took place in the quarter. Then I will turn it back to Evan who will provide some additional detail on our second-quarter performance and give you some guidance for Q3.

Let me begin by reminding you that our primary marketplace objective has always been to be the preeminent trusted provider of Christian and family themed and conservative opinion content. We see those as two distinct audiences and by focusing on those two core audiences which to a large extent overlap, Salem has been able to deliver consistent stable predictable revenue streams for many years enabling us to outperform the radio industry in nine out of the last 10 years. And this performance of course enables us to progress on our goals of achieving financial success, growing our EBITDA, growing free cash flow, improving our balance sheet.

Because we focus on these specific audiences, I think we found ourselves in somewhat of an advantageous position in terms of being able to take advantage of this changing technological environment. Early on beyond 15 years ago, we began to make a major effort into developing Internet assets. We have continued with that objective in terms of acquiring new additional new media assets and also in terms of acquiring other traditional media assets. As you will recall, it was on January 10 of this year that we closed on the acquisition of Eagle Publishing. Eagle represented both new media assets and old media assets. We acquired redstate.com, humanevents.com, but we also got Regnery Publishing, which is a traditional book publisher and we got some other digital assets and other traditional assets as well.

One of the objectives, operating objectives is to diversify our platform. We still want to continue to focus on super serving these two audiences but we want to do it in as many ways as we can on as many platforms as we can.

The Eagle acquisition is part of that strategy and it is probably not a bad time for us to reflect a bit on that strategy, how are we doing? What we are trying to achieve in super serving this audience in as many ways as we can is we are trying to basically appropriate both convergence and synergy.

We see these platforms as not being one plus one equals two but the proverbial one plus one equals three. There is a dynamic that is released when you begin to do cross-platform promotion and you find ways that the one enhances the other and we certainly are finding that.

One of our objectives in acquiring Eagle was to be able to use our extensive news talk platform to promote a number of these books that we publish and promote authors and to be a more attractive vehicle for acquiring authors. So I think it would be fair for investors to begin to look at us in future quarters and ask how are you doing in implementing that strategy? I think it is a fair question and of course, it is one that we ourselves are pursuing aggressively.

With that background, let's take a look at some of the numbers for the quarter. These results of course will reflect the acquisition of Eagle as I said which was integrated into the Company on January 10 last quarter. So this quarter represents the first full quarter in which those results are incorporated. But with Eagle included for the second quarter, total revenue was up 14%, total expenses were up 21% resulting in adjusted EBITDA going down 8%.

If you look at our key business units individually, you can gain a little additional clarity on these numbers. The radio division had a 2% revenue increase but a 10% expense increase leading to a decline in SOI of 14%.

Our Internet division had a 45% revenue increase, a 46% expense increase providing a 43% increase in operating income and finally, our publishing division had a 99% increase in revenue obviously impacted by the Eagle acquisition and an 87% increase in expenses.

A couple of observations are in order. Salem as has been reported from others, saw a noticeably soft radio advertising market in the quarter and we also experienced a significant increase in operating expenses and we will drill down on those two areas in a little more detail. Let's talk about radio first.

Based on our published reports and conversations with our radio industry colleagues, it appears that second-quarter was particularly challenging. In fact, lower capital and data for the markets we serve showed the entire industry down 6%. Yet Salem's broadcast revenue was up 2% in these same markets. However, this positive industry outperformance might be seen as a bit of a two-edged sword in that much of our revenue growth was driven by nontraditional media which includes concerts and events and other nontraditional media sources.

Our revenue from these sources typically tends to have higher associated expenses which explains much of the increase in broadcast expenses.

On a positive note, our block program revenue increased 3% during the quarter once again highlighting the stability of that portion of our platform.

Our Internet division had another strong quarter of growth here with a combination of organic growth and growth driven by acquisitions. Organic growth of 13% was somewhat aided by the timing of Easter as we mentioned on our last call. Last year Easter was in the first quarter, this year it fell in the second quarter. Easter is the biggest season in terms of revenue for our church e-commerce businesses.

Excluding the impact of Easter, total revenue -- total Internet revenue was up 8%. The quarter saw strong page view growth, especially from mobile devices and the growth in mobile traffic represents a significant opportunity which we are prioritizing.

Our publishing division also had a solid quarter with revenue up 99%. Naturally the Eagle acquisition contributed significantly to this growth yet organic publishing revenue growth was strong at 11% with Xulon Press, our digital on-demand book publisher utilizing organic revenue growth of 22% in the quarter.

So let's just take a few minutes and talk about Eagle and look at it in terms of the impact it is going to have going forward and the impact it had during the quarter.

The growth of our Internet and publishing business has certainly been driven and impacted by Eagle. For the quarter, Eagle contributed $6.1 million of revenue of which $3.2 million was Internet revenue and $2.9 million was publishing revenue including an operating profit of $700,000.

As I mentioned even though one tends to think of Eagle Publishing as old media, it was a combination of both old and new media and in fact the new media revenue piece was a little bit bigger than the old media revenue piece. I doubt that that will continue to be the case but in Q2 that was the case.

Current performance of course in Eagle was driven by the success of particularly of two books published by Regnery. The first one titled America, Imagine a World Without Her by Dinesh D'Souza, was released on June 2. This interesting book, D'Souza offers a defensive America as a force for good in the world and challenges the myth that our wealth and influence are based upon the evils of capitalists. It has been selling very well and is currently number one on the New York Times Bestseller List.

Additionally on June 23, we released Blood Feud, the Clintons versus the Obamas by Ed Klein. Blood Feud describes the relationship between the two royal families of the Democratic Party. While it is currently number three on the New York Times Bestseller List, it was number one three weeks earlier. In fact both of these books have been kicking around for five to six to seven weeks on all of the bestseller lists.

To have two books topping the bestseller lists is a great achievement and we are very pleased with that and it begins to give some validity to our whole concept of synergy. We think we have played a significant role in driving book sales by increasing the number of author interviews we were able to accomplish with our own platform and using all of our assets to promote these books.

We expect continued strong sales from these books for those reasons and others and we have high expectations for two additional releases coming out soon, one by David Limbaugh, another by Marge Stine scheduled for Q3 and Q4. We are particularly excited about David Limbaugh's book which will have title we think will be Jesus on Trial, which gives us an opportunity to promote it across our entire platform, not just news talk but also Christian teaching talk.

So to be continued. We will see how the synergy works out. We are so far quite pleased with it. As I said in my opening comments, our objective is to super serve the audiences interest in Christian family themed and conservative opinion content and we want to super serve them, we can be platform agnostic in one sense but in the other sense, we are finding that there is a synergy and a dynamic that is released when you can cross promote to the same audience in a variety of ways and we are certainly finding those benefits to be playing out. We hope to continue to see that in a positive way and future quarters will let us know the degree of success we will achieve.

So let me finally conclude my remarks by simply saying that on June 30, we paid a cash dividend, we paid a cash distribution of $0.06 per share or $1.5 million. This was a 4.3% increase from the previous quarter. This is the fifth time in the last six quarters that we have raised the quarterly dividend. Our policy continues to be devoting approximately 20% of our free cash flow to shareholder dividends. An announcement about the third-quarter dividend should be made in early September.

And I think with that I will throw it back to Evan and let him give you more detail on the quarter and give you some guidance for Q3.

Thank you, Ed. For the second quarter, our total revenue increased 14% to $68.6 million. Operating expenses increased 21% to $60.2 million and adjusted EBITDA decreased 8% to $13.1 million.

We did see a nice gain from political revenue which was about $0.5 million in the quarter as compared to $400,000 in the prior year. Political revenue has been a bit weaker than we had initially expected but we still do expect a fairly solid political year based on the fact that year-to-date 2014 political revenue is on pace with what we experienced in the last midterm cycle in 2010. And just as a reminder, that year we finished with $3.7 million in political revenue so we have reason to believe that we should have a good second half when it comes to political revenue.

Net broadcast revenue increased 2% to $47.8 million and broadcast operating expenses increased 10% to $33.9 million resulting in SOI of $13.9 million or a 14% decrease. On a same station basis, net broadcast revenue increased 1.1% and SOI decreased 13%. These same station results include broadcast revenue from 99 of our radio stations in our network operations and represents 99.4% of our broadcast revenue.

I will take a quick look at our revenue now by format. We have 41 stations that are programmed in our foundational Christian teaching and talk format. These stations contributed 44% of total broadcast revenue and increased 2% for the quarter. Advertising revenue increased 8% while block programming on this format increased 1%.

Our 27 news talk stations had an increase of 9% in revenue for the quarter in part due to an increase from the political revenue that I mentioned earlier. Overall these stations represent 16% of our total broadcast revenue.

Revenue on our 12 contemporary Christian music stations contributed 24% of total broadcast revenue and decreased 3% for the quarter. We have eight stations that are programmed in Spanish-language Christian teaching and talk and those stations grew revenue by 2% and that format also comprises 2% of total broadcast revenue.

Finally, we have 10 stations in a business talk format. That format is also 2% of total broadcast revenue and saw a decline of 4% for the quarter.

Network revenue increased 2% for the quarter and represents 8% of total broadcast revenue. Publishing revenue, as Ed mentioned earlier, increased 99% to $6.4 million and represents 9% of our total revenue. Finally, revenue from our Internet and e-commerce businesses increased 45% to $14.4 million and now represents 21% of total revenue. So you can see on a combined basis, Internet and publishing is now up to 30% of our total business.

Acquisition activity was fairly quiet during the quarter. We closed on two previously announced station acquisitions, WRTH FM in Greenville, South Carolina for $1.1 million, and WOCN AM in Miami, Florida for $2.5 million. Additionally, we are in the process of acquiring KXXT AM in Phoenix, Arizona for $600,000.

At June 30, we had $289 million outstanding on our Term Loan B and $700,000 drawn on our revolver. Our leverage ratio was 5.64 compared to the combined covenant of 6.5.

Looking ahead for the third quarter of 2014, we are projecting total revenue to increase 13% to 15% over the third quarter of 2013's total revenue of $58.5 million. We are also projecting operating expenses before gains or losses on disposal of assets, impairment losses, stock-based compensation expense to increase 17% to 20% as compared to the third quarter of 2013 operating expenses of $49.2 million.

Now if you exclude the acquisition of Eagle, our revenue projections would be increasing or in a range of 2% to 4% and expenses we would expect to increase 4% to 7%.

That concludes our prepared remarks. We now are available to answer any questions and I will hand it back over to the operator for that.

(Operator Instructions). Pete Enderlin, MAZ Partners.

Thank you. Good afternoon. I guess the biggest thing that jumps out is the question about why the costs were up so much at the stations?

As I mentioned, we have put quite an emphasis in recent quarters on developing more nontraditional business and we have been successful at it and it has opened up a lot of new categories for us. But most of those businesses have much lower operating margins, expenses to pull them off tend to be higher and that has had something of an impact. There has been some increase in other categories. Payroll is up a bit but I think that is the biggest driver for the radio side.

If you think about, if we had additional revenue on just pure spot business, there is very little cost associated with it but if you talk about a concert or an event, the margin on that is much smaller so you see expenses up related to that.

And roughly what percentage or proportion of the radio station revenues comes from those nontraditional categories?

Hard to give an exact number on that because sometimes you will have events like we have a concert, Celebrate Freedom in Dallas where you are not only have nontraditional revenue where someone will have booth space let's say at the event, but there will also be spot sales associated with it. So pretty difficult to get an exact number on that.

And I guess it is also not totally clear why the industry was weak. You didn't get a little more help from the late Easter in the broadcasting category. I mean you mentioned that it helped the Internet related business.

Easter has never been a driver for radio. The reason it is a new driver for the Internet is not Internet per se, it is our e-commerce Internet business and so that business primarily sells videos for use in church services and those are downloaded by churches and so Easter is one of the biggest times of the year and actually the biggest season for that activity. So that is a big driver in that area but it is not a driver on the radio side.

Okay, fair enough. And then when will you start to see some significant increments from election spending? I suppose it will be later in the quarter but you should see some in the third quarter I guess, right?

We are beginning to see some in the third quarter and we expect third quarter and fourth quarter will be -- the fourth quarter will be the biggest but we are beginning to see some substantial activity.

This is Dave Santrella, Pete, traditionally in Q4, you will see the biggest jump in October and even with just a few days in November, November typically is extremely meaningful because there tends to be a real heavy political advertising almost closest to the point of purchase so of speak.

I am sure. The bestseller performance from those two in particular was really impressive. How much of it do you think really resulted from your cross promotions and the synergies that you talked about in marketing?

Of course that is the $64,000 question. We think it is significant and it is consistent with the experience we had in the past in terms of operating synergies but time will tell.

But I think, look, the success of these two books has been very good. I think we will see more impacting Q3 than we saw in Q2 because they continue to be on the bestseller list and there are some other benefits that may not play out as much in terms of the financial impact quarter to quarter but we also believe having the platform as extensive as we have will allow us to attract more authors and we think that already has been the case.

So it is an advantage that we have over other publishers that don't have that marketing platform and so we will see how it plays out but so far we think it has been significant. Time will tell.

And then one sort of detailed question. Can you give us a little granularity on the 24% increase in D&A expenses for the quarter versus a year ago?

Yes, the big issue we have is related to Eagle and some of the assets we acquired there, also to a lesser extent, Twitchy, so you have in particular when we are buying nonbroadcast assets in particular Internet assets, you have things that have a shorter life from an accounting perspective so that is why you see the increase.

Okay. One more and that is interest expense was up 9%; that surprised me a little bit given that the level of debt seemed to be pretty flat and interest rates seem to be pretty flat.

I have to look to see what drove it. I think we had during the quarter though because of the acquisition of Eagle, we are paying down debt compared to last year. We weren't carrying that so we had a little bit more on our revolver during the quarter in Q2 this year versus last year.

And then at the end of the quarter, it was down to almost zero but during the quarter it was higher.

Correct.

Okay, thank you very much.

(Operator Instructions). Barry Lucas, Gabelli & Company.

Great. Thanks and good afternoon. Let me throw two out if I may. If core radio advertising is growing at kind of this low single-digit pace, what would you say you can really seriously hold expense growth on the radio side because that has been a perennial thorn I think?

And the second item if you would, Ed, maybe describe the back list at Eagle Publishing because while we don't like to look necessarily quarter to quarter, I am looking out towards second and third quarter of 2015 and thinking how do you replace the revenues on hit titles. So is there a serious back list that consistently sells out of Eagle? Your comments are greatly appreciated. Thank you.

With regards to the second question, I am going to let David Evans answer that who is head of that division.

With regard to the first one, we are trying to develop a nontraditional source of revenue trying to make it a more significant piece of our business and hope that we can get some more operating efficiencies and improve the margins there. But this quarter I think a lot of the story was we had internally budgeted about a 4% increase in revenue and it turned out to be 2% which was a disappointment. If we had had a 4% increase in revenue, the expense side would have been less painful obviously but second quarter was disappointing in that regard.

I suppose if there is a silver lining most of our colleagues had negative results if you followed some of the public conference calls the last couple of days. They were all in negative territory so we can take some comfort in that.

This Company has never -- we probably aren't the ones that are going to be hitting the grand slam home runs every quarter or even every year but we get more than our fair share of singles and doubles. The stability of our platform has always been the keynote.

So I don't know that I can give you -- our hope is that we can get those expenses under control and that we can improve the margins and that will certainly be an objective.

David, you might want to talk about the back list problem.

Yes, in terms of back lists, Regnery is a front-list publisher. Most of the titles are very new sensitive political cycle sensitive titles so back list as a percentage of total revenue is in the single digits. So yes, we are going to have a tough comp next year because of these two titles and the opportunity and challenge for Regnery every year is lining up the authors and titles to consistently have a strong year.

If you look back at history, Regnery has averaged about $10.5 million of revenue per year but in a strong year, that is as high as $13 million or $14 million. In a soft year, that is as low as $7 million. Even numbered years, i.e. political years, tend to be much stronger and odd-numbered years tend to be on the weaker side. And that is just a challenge that we are going to deal with. So yes, tough comps next year.

It appears there are no further questions at this time. Mr. Masyr, I would like to turn the conference back to you for any additional or closing remarks.

Thank you all for joining us to discuss Q2 and we will again in three month's time discuss the third quarter. Thanks again.

This concludes today's conference. Thank you for your participation.