Salem Media Group Inc (SALM) 2014 Q3 法說會逐字稿

Good day and welcome to the Salem Communications third-quarter 2014 earnings call. Please note that today's call 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 today for joining us for our third-quarter 2014 earnings call. (Operator Instructions).

I am joined today by Edward Atsinger, 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 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. 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 for the potential growth from future acquisitions. More information on 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, adjusted EBITDA and free cash flow. In conformity with Regulation G, information required to accompany the disclosures of non-GAAP financial measures is available on the investor relations portion of our website at Salem.cc.

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

Thanks, Evan, and thanks to all of you for joining us for this call. I think it will be appropriate today to begin just with a reminder of Salem's unique position in the media marketplace and why we think we should have a particular appeal to investors. Then I am going to provide a broad overview of third-quarter results with a brief discussion on some strategic developments and then I will turn the call back to Evan who will give you more detail on the quarter's performance and provide some guidance for the fourth quarter.

Salem occupies a distinctive influential space in the media landscape. We strive to be the preeminent trusted provider of audio, video and text providing Christian-themed content to conservative themed news analysis and commentary. We are a niche broadcaster, a niche media company.

These seemingly distinct audiences really have a very significant degree of overlap. Both audiences exhibit that most desirable quality of listener, viewer and reader loyalty. As one of the few media companies that has an integrated multimedia platform, all parts of which serve the same target audience, we can leverage that audience through cross divisional activities. We are able to I think consistently get good results from that targeted cross multimedia platform.

Our primary financial objectives continue to be increasing both adjusted EBITDA and free cash flow. That said, our total revenue in the third quarter increased by 19%, recurring operating expenses were up 22% resulting in an increase in adjusted EBITDA of 14% and free cash flow improving by 30% to $9 million.

We are especially pleased with this improvement given the continued soft advertising environment. Over the last 12 months, our free cash flow was $28 million or $1.11 per share. That is up 46%. At the current stock price, our free cash flow yield is 14%. As we continue to use free cash flow to pay down debt, we expect to see continued progress in these important metrics.

This is one of the reasons why the analysts that cover our stock have an average target price of $12 per share and we remain optimistic about the upside for our stock from its current level.

Let me drill down into some of the divisions. In a way it all really works together but we break these down by division and even though there is synergy and there is value-added between the divisions. Let me do it first of all including Eagle which we acquired in January and then we will later look at it with Eagle out.

Broadcast revenue was up 2% with a 6% increase in broadcast expenses. This led to a 5% decrease in station operating income. Internet and e-commerce revenue increased 55% while Internet operating expenses were up 65% yielding a 30% increase in Internet operating income. Lastly, our publishing revenue grew by 165% with 105% increase in publishing expenses resulting in a $1.4 million profit in publishing compared to a loss of $200,000 last year. Obviously the Eagle component wasn't in Q3 last year.

It has not been a good year for the radio industry in general and softness continued into the third quarter and you will recall that all of the so-called weather-related softness in Q1 will not continue on through Q3. The Miller Kaplan reports show that revenue was down 5.4% in the media markets. Those are the medium markets that we are in, despite it being a political year. Yet our radio revenues grew by 2.1% in the quarter.

This outperformance highlight some of the key differences in our business model. First, our steady block programming segment continues to perform for us delivering a 2.9% increase. Additionally, our radio network which provides news, talk and music programming to more than 2600 radio stations across the country performed well for us with a 4.1% growth in revenue for the quarter.

As I mentioned earlier, our Internet revenue was up 54.5% and our publishing revenue was up 164.7%. Clearly these growth rates are benefiting by the January acquisition of Eagle.

Before I give more details on Eagle, let me just mention that excluding Eagle, publishing revenue was up 1.3% while Internet revenue was up 8.5%. You might note that the Internet revenue growth has slowed from prior quarters even though we continue to see very strong page view growth, we had a page view growth of 38% over last year.

The slow in revenue was due to two factors. First, our page views are shifting from desktop to mobile where monetization of mobile pages presents a greater challenge than that of desktop but we see that whole industry making this transition. We are encouraged by the progress made by big companies like Google and Facebook in terms of determining how to monetize the transition to mobile.

A large portion of our page view growth is monetized also at lower value remnant ads as we added redstate.com and humanevents.com, we bring out a lot more inventory and in those initial quarters we will have an additional inventory that we will end up monetizing through lower value remnant ads. That normally just as time as we absorb those assets and are able to develop a better fit for the inventory that we have available. Again, we see this as an area of future opportunity for higher direct rate sales.

I expect to see continued softness on our Internet numbers in Q4 only because in the fourth quarter of 2013, we received a large traffic lift from several Facebook algorithm changes that lasted for most of the quarter but has not recurred since and so the comps between Q4 of 2013 and Q2 2014 will be a little soft given that big blimp that we had last time. Long-term we are encouraged by the continued growth of unique visitors, page views and Internet revenues.

We discussed on our last call the rationale for acquiring Eagle. The assets we acquired are highly complementary to our existing business and existing target audience. It is the same audience that we have targeted with our old media platform, with our Internet assets and now with the publishing assets.

We believe that because of our marketing platform we can be more productive with those assets than they would be on our own and we think then they have been under the prior ownership simply because of that significant advantage that we have with a built-in marketing platform.

It is still a work in progress but the first few quarters have been very encouraging and our basic rationale for that acquisition I think has proven to be a very solid one.

The third quarter was another fantastic quarter. Eagle generated $4.3 million of Internet and e-commerce revenue and $5 million of publishing revenue and had approximately $2 million in profit for the quarter and these results far exceeded the projections we put together at the time of the acquisition and we are certainly pleased with what Eagle has achieved for us so far.

Much of the current success has been the result of a few strong books. Blood Feud, The Clintons vs the Obamas by Ed Klein spent eight weeks on the New York Times best-selling list. America, Imagine a World without Her by Dinesh D'Souza had a nine week run on the bestseller list. Both of these titles were released in June and had a significant impact on our Q3 results.

Also we released David Limbaugh's Jesus on Trial in early September. It also was a New York Times bestseller spending five weeks on the list. We had one big release in Q4, Mark Steyn's The Undocumented Mark Steyn, which was released on October 20. With the success we have seen with these titles this year we are confident in our ability to take a good book and add to its success by leveraging our multimedia platform.

We have done things like advertising books on-air, on our websites, hosting local radio station events with our authors, having local and national radio host interview our authors. This kind of success we believe, will feed upon itself as it helps and it will help us with the acquisition of future books and future authors so we are optimistic that our rationale for the acquisition of Eagle will prove to be very sound. So far we couldn't be happier.

I would like to briefly discuss our quarterly cash distribution. We call it a distribution, not a dividend, because it is actually a return of capital and we are still not a taxpayer. In early September, we announced a 4.2% increase to the distribution of our sixth increase in the last seven quarters. We paid the cash distribution on September 30. It was $6.25 per share or $1.6 million. Our policy continues to be to devote approximately 20% of our free cash flow to shareholder distributions. And an announcement about the fourth-quarter distribution should be made sometime in early December.

Let me just conclude my remarks with an update on our business diversification strategy. Internet publishing revenue now accounts for 33% of our total revenue this quarter, up from 21% a year ago and 14% five years ago. We have certainly evolved from a pure play radio operator into a diversified multimedia company.

Our revenue mix is very close to one-third block programming, one-third niche radio advertising, and one-third Internet and publishing. We like the synergies of our innovative platform and we are not done. We will continue to look for future opportunities to continue to build out our multimedia platform, both through acquisitions and investment in inorganic growth.

With that, Evan, let me hand the call back to you and you can provide a more detailed look at Q3.

Thank you, Ed. For the third quarter, our total revenue increased 19% to $69.6 million. Operating expenses on a recurring basis increased 22% to $59.9 million and adjusted EBITDA increased 14% to $15.0 million. We also had a great quarter of free cash flow as Ed talked about growing at 29.5% over the last quarter to $9 million.

We did see a nice gain from political revenue which was $1.1 million for the quarter as compared to $300,000 in the prior quarter last year. This is still on the same pace as we had in the 2010 midterm elections. On a year to date basis, we have booked $2.4 million of political revenue, the same amount we had through three quarters of 2010. As a reminder, we finished that year 2010 with $3.7 million in political revenue.

Net broadcast revenue increased 2% to $47 million and broadcast operating expenses increased 6% to $32.6 million resulting in station operating income of $14.4 million or a 5% decline. On a same station basis, net broadcast revenue increased 1% and SOI decreased 5%. These same station results include broadcast revenue from 99 of our radio stations in our network offer rations representing 99% of our net broadcast revenue.

I will now break down our broadcast revenue by format. We have 41 of our stations that are in our foundational Christian teaching and talk format and these stations contributed 44% of total broadcast revenue and had a 1% increase during the quarter. Our 27 news talk stations had an increase of 12% in revenue for the quarter in part due to an increase in the political revenue. Overall these stations contributed 16% of total broadcast revenue.

Revenue from our 12 contemporary Christian music stations contributed 23% of total broadcast revenue and had a decrease of 4% for the quarter. The eight stations that we have programmed in Spanish-language Christian teaching and talk grew revenue 12% and this format now comprises 3% of total broadcast revenue.

Finally with respect to our main formats, we have 10 stations in a business talk format. This format also contributed 3% of total broadcast revenue and had a decrease of 1% in revenue for the quarter.

Our network revenue was up 4% for the quarter and represents 9% of total broadcast revenue. Publishing revenue increased 165% to $8.1 million and represents 12% of our total revenue. Finally, revenue from our Internet and e-commerce businesses increased 55% to $14.5 million and now represents 21% of our total revenue.

During the quarter, we repaid $5 million on our Term Loan B leaving a balance of $284 million outstanding as of September 30. We also had $2.8 million drawn on our revolver as of September 30. Our leverage ratio dropped from 5.64 as of last quarter to 5.42 versus a compliance covenant of 6.50. This meaningful decline was due to both the growth in EBITDA and the reduced level of debt.

For the fourth quarter of 2014, we are projecting total revenue to increase 6% to 8% over fourth quarter 2013 total revenue of $62.7 million. We are also projecting operating expenses before gains or losses on the disposal of assets, impairment losses and stock-based compensation expense to increase 8% to 11% as compared to the fourth quarter of 2013 operating expenses of $52.3 million.

Without the acquisition of Eagle, we would be projecting our revenue to be down 1% to up 1% and our expenses to be down 1% to up 2%.

This concludes our prepared remarks and now we would like to turn the call back to the operator to answer any questions.

(Operator Instructions). Michael Kupinski, Noble Financial.

This is actually Juan Bejarano in for Michael Kupinski and thank you for taking my questions. I just wanted to quickly get a sense of how you are seeing the radio spot business. I know it is not a large portion of your business but we are seeing some of your peers state that auto has been weak. Can you speak on that category and maybe the overall spot business as it relates to you?

What you are asking clarification on, did you say the rating spot business or radio spot business? I didn't quite understand.

Sorry, the radio spot business, how you are seeing that overall business?

This is Dave Santrella, President of the Radio Division. Spot business in general has been a bit sluggish. The automotive category has had its ups and downs in Q3. Right now in Q4 we see that business is pretty tepid. The good news again as Ed mentioned earlier in the call, Salem has such a niche audience, very specific targeted audience and we do a good job in gaining local spot from advertisers that want to appeal to that audience. What we don't get from the regular transactional marketplace, we do make up with very targeted business.

Okay, thank you. How are you thinking of M&A going forward and do you have any interest in the Disney AM stations that are up for sale or are you more focused on digital properties going forward?

We always survey the entire landscape. We certainly have looked at the Disney stations and are evaluating them and there may be some opportunities. We are in the process of evaluating that. But as I said in my comments, we continue to run a build a platform and even the old media assets and most of the Disney assets are old media assets, most of them were AM stations. There is a decline in that business on the one hand. On the other hand in our model where it all works together, there is value added, we can take old media assets and we can bring value to publishing for example or to our Internet assets and vice versa. So I don't have anything that I can announce or anything specific but we will continue to investigate and make prudent acquisitions when it seems to add up.

Okay, thank you. Just I missed this, excluding Eagle, what was publishing and Internet in the quarter?

Internet revenue organic, excluding Eagle, was up 8% and publishing revenue organic was up 1%.

Okay. Do you expect growth in Q4 ex Eagle?

The guidance we gave says we can be in a range between down 1 and up one excluding Eagle so that is the guidance that we gave for the quarter for Q4.

Excluding Eagle.

Correct.

Okay, great. Thanks. That is it for me.

Barry Lucas, Gabelli & Co.

Thank you and good afternoon. I know you just talked a little bit about auto, Dave, but maybe you could flesh out some of the other categories either by category or biogeography, what is happening out there in the weeds?

Certainly education and finance continue to be very, very strong categories for Salem and plus very -- just I think it is always important to remember that Salem draws an awful lot of revenue from as you have heard from other broadcast companies from nontraditional means, events in particular have become a very significant revenue category for us. That generates a lot of new income that makes up for local spot, for kind of the tepid atmosphere in local spot. But specifically for the categories that are strong for us, education remains a strong category for us, finance remains a strong category for us, home improvement is always strong for us because of a large home ownership of our audience base. And then of course because of our niche business, we do quite well and will continue to do quite well in Q4 as people get into -- churches get into things like inviting -- Christmas is a wonderful time to invite new folks to the church to see their Christmas pageants and whatnot so that all gets advertised on our teach and talk radio stations and our CCM stations as well.

You asked what categories and most of the categories that are transactional particularly national transactional but also local transactional have been particularly weak on the CCM stations.

Our CCM stations are the stations, Barry, that play for most of the transactional business that is out there and as you look at Miller Kaplan, Miller Kaplan is driven largely by transactional business and that is what has been down pretty significantly and you see that reflected in our data where we said that our 12 CCM radio stations had an increase in revenue because those stations are more reliant on the transactional business. We make that up with what we do on news talk and on teaching and talk with are very specialized appeal to those audiences and with the events that we can do in those categories as well.

And Dave, do you see any regional variation? Was that material as you look across the markets?

I look at that every quarter and I look at business categories by quarter on a regional basis and I would love to tell you that there is some fantastic regional change there, there is really not a significant regional change. Some of what on the events side will dictate a regional significance would be for instance if we are doing a book tour with one of our authors from (inaudible), what cities do they go to? If they go to Washington DC and they go to Atlanta, we will do better in those markets in that region because they were there and we will do an event in that market.

And you touched on this a little bit earlier, Ed, but what does the pipeline look like on the Internet side? Is there a lot available that really fits your criteria out there? You have been awfully successful with a number of the properties that you have bought thus far. But what is out there, what is left I guess?

Let me let David Evans, who is President of that division comment because he is the most active in that area.

It is nothing specific out there right now that we are looking at, Barry. The approach we tend to take is we will make an acquisition and then as we did in January with the Eagle acquisition and then we believe it is important to make sure that we integrate that acquisition, get it off to a solid start and make sure that we have identified and have implemented the cross divisional opportunities that Salem is able to take advantage of. So my focus for the last few months has been primarily on making sure that Eagle gets off to a good start.

Looking ahead, we have obviously gotten off to a very good start and looking ahead I expect to be out there looking for additional digital properties that we can't tuck in and add onto our platform. And yes, they always seem to be a little harder to find but we always seem to be able to find them. I think there is going to be some interesting opportunities out there as we kind of move from focusing on making sure Eagle gets off to a good start to looking for the next acquisition.

Great. Thanks very much, David.

(Operator Instructions). Pete Enderlin, MAZ Partners

Thank you. Good afternoon. Let's start with the same question that came up the last time which is why -- and the disparity isn't as great as it was in the second quarter but why are the expenses up more than the revenues especially in station operations?

If we look at some of our large categories of where we have increased expenses, it is where you would expect some of this. Regardless of revenue, our biggest expense is payroll and you have wage increases year over year. That is part of it and you saw the Miller Kaplan numbers we showed which was the industry is soft. We certainly did better but as Dave also alluded, we have been doing more events and things like that that have a lower margin and a higher cost associated so our two big drivers of expenses are payroll and event type expenses, bank with some special occasion type expenses.

So does that suggest that you will have a more intensive focus on costs going into 2015 or is it going to be more or less the same kind of pattern that we have seen?

We certainly have a very intense focus on expenses. As a matter of fact we've put companywide cost controls in place for the remainder of this year and certainly will impact our 2015 budgeting. That is part of why you saw the decrease in expenses and as you said a lesser disparity this quarter than last quarter in station operating income.

A lot of that is related. It is not so much the growth and expenses as a flag in revenue. Are we budgeted to achieve certain revenue levels, the market has been very soft. It begin with Q1 with the so-called weather related turn down and the Miller Kaplan numbers indicate that revenue is lagging. We did 2% growth, I think with the expenses we budgeted, if it had been 4% we would have had a very positive result there.

What is not reflected there however which I think these results overall do speak to is the fact there is value added that isn't monetized or isn't quantified. All of these events that we do in the markets benefit the publishing, all of the interviews we do with authors on our radio platform benefit the publishing, all of the [calls] you do on the Internet properties benefit the publishing and vice versa. I mean there is cross promotion as well because we can take our authors and bring them into markets and do events and have them available to us because they are our author and because they are under contract and have them available on attractive terms, that helps the radio.

But there is real value added in these great publishing numbers that is not really identified in the traditional way that we report.

That makes sense. That is the basic rationale of the integrated media complex that you have.

Evan, can you just give maybe a little color on the gain that you had on the fair value of the Internet for Eagle and Twitchy? I think it was about $00,000?

Correct. Every quarter we have to analyze the likelihood of making payouts for the contingent earnouts associated with both those acquisitions. Twitchy was based on page views in six month periods, Eagle was based on the various business unit's revenue and so everything we are going through and figuring out what the likelihood is of the fact that we are going to have to pay additional money or pay less money and you look and see reflected there is just the change in the probability weighted assumptions.

It is actually good news. The higher that number is the more successful those acquisitions are.

(multiple speakers) in this case they were lower.

No, actually, it is an expense. It is an additional expense saying it is more likely we are going to be paying out incentives because the business has outperformed.

Right, but in this quarter you have a gain from that which implies that it was a negative adjustment.

No, we had an expense. It was an expense. I think we had an expense, $545,000 expense.

Okay. Do you still expect Eagle to be accretive for the year?

Absolutely.

Okay. How fast can we anticipate additional pay down of debt?

Really depends on acquisition activity. We will continue to use excess free cash flow without any acquisitions. We will continue to pay down debt. You saw that we paid down $5 million in the third quarter. We will continue to pay down more in the fourth quarter unless some acquisition opportunities present themselves so I would say keep looking for more pay downs in the future.

We hope to certainly reduce debt by a full turn of leverage within the life of our current credit facility if not more so that is kind of a target both among management and among the Board.

And that is to 2017?

This deep of paper that we have the Term Loan B goes through March of 2020 and so we are really trying to get ourselves in a much better leverage position by the time we have to refinance that which would be a year before so think about the end of 2018, the beginning of 2019.

We could probably get it done under current market conditions, we could get it done on our current leverage but we've got our eye on the past and we all went through a very painful Great Recession where there was no money available so we want our leverage to be at a place where we don't ever have to worry about that.

Okay, thank you very much.

It appears that there are no further questions at this time. I will now turn the call back over to Edward Atsinger for any additional or closing remarks.

Again, thank you all for joining us and I think the story this quarter is that the Eagle experiment seems to be a valid one. It seems to be paying dividends. Stay tuned. We have got some good finals in the pipeline for Q1, Q2 next year and so we are very optimistic and we will continue to watch it. But the story I think is that this integrated platform is working. We are uniquely positioned to do it because we have this audience that is a specialized audience that we super serve.

So with that, we'll look forward to visiting with you again in three months.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.