Salem Media Group Inc (SALM) 2015 Q2 法說會逐字稿

Good afternoon and welcome to Salem Media Group's Second Quarter 2015 Earnings Call. All participants will be in listen-only mode. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Evan Masyr. Please, sir, go ahead.

Thank you and thank you all for joining us today for Salem Media Group's second quarter 2015 earnings call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website at www.salemmedia.com.

As usual, I'm joined today by Edward Atsinger, our Chief Executive Officer; David Santrella, President of Broadcast Media; and David Evans, President of Interactive and Publishing.

We will 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. 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 risks and uncertainties that may affect our business and financial results are included in our annual report on Form 10-K and other public filings we have made with the Securities and Exchange Commission.

This 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 disclosure of non-GAAP financial measures is available on the Investor Relations portion of the Company's website at www.salemmedia.com.

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

Thank you, Evan and thank you all for being part of today's call. I will follow the format we normally follow. I'll provide a little overview of the second quarter financial performance, I want to make a few comments about acquisition activity and then I'll conclude with some brief comments about our dividend.

I'll turn it back to Evan who will get more specific on performance details for Q2 and provide some guidance for the third quarter of 2015.

Well, with that, for the quarter, our total revenues declined 2%. Recurring operating expenses however declined 3.2% resulting in an increase in adjusted EBITDA of 3%. Additionally, we had strong growth in free cash flow, which was --growth was 14.9% for the quarter.

Let me comment briefly on results by division. Broadcast revenue was essentially flat, down a fraction, 0.1% for the quarter. Given that this is not an election year, we consider this a good performance and was within our expectations.

To put in a little more perspective with regard to the political issue this Q2 we had $244,000 in political revenue. Last Q2 which was a political year we had double that amount in political revenue. So if you adjust out the impact of political revenue on broadcast revenue, we were up a modest 0.4%.

And one other, I think, fact that we at least note, when you look at our broadcast revenue performance against the radio broadcast industry as a whole, in the markets in which we operate, Miller Kaplan is showing that the entire industry was down 0.9%. So 0.01%, not bad.

I'll only make one additional observation on potential political revenue for the remainder of the year. This field of credible Republican candidates vying for the 2016 Republican nomination is now at 17. That wouldn't surprise me if it went higher. This number of candidates is certainly unprecedented and consequently with that many candidates trying to gain traction with voters, it's very likely that we will see a higher amount of political spending in the back half of this year than would normally be the case and we hope that we would get a piece of that if that's the case.

In fact, we are already starting to see money come in as candidates are posturing to gain traction and support from our listeners so as to qualify, drive poll numbers, and qualify for the upcoming debates.

Just a few other comments about broadcast revenue, block program, our block program business was up a solid 3.1% for the quarter, again demonstrating the steady and reliable nature of that revenue stream.

One further note about broadcast revenue, on the network side of our broadcast business, which is a smaller piece of the division than radio, we did experience a sizable decline in network revenue which was off 10.9% from the prior year. Most of the decline was related to two factors. Last year, Hollywood produced a significant number of [fate in the] films and we were the beneficiary of a significant amount of advertising promoting those films. This was certainly true for Q2 last year, but the category was really strong for all of 2014. This advertising category, however, was almost completely lacking in Q2 this year.

And there was another factor that impacted Q2 revenue for the network side of our business. Michael Medved, one of the leading syndicated radio hosts, was out for much of the quarter undergoing and recovering from throat cancer treatment. We're happy to report that he is now cancer free and fully recovered and is back on the air with most of the advertising revenue associated with his show stabilizing and returning. Nevertheless, his absence for over six weeks had a material impact on Q2 network revenue.

On our call last quarter we devoted a fair amount of time discussing our focus on cost containment. This effort began to show substantial improvement last quarter which has continued to positively impact Q2. Expenses could be quite a bit more unpredictable so we tend to be cautious about guidance with regard to expenses.

That said, we can report that for Q2, we were able to reduce our broadcast expenses by 1.8%, which was a major factor in driving SOI up by 4.2%. We do believe that these reductions are the results of improved efficiencies that for the most part can be sustained without negatively impacting revenue.

We certainly would welcome strong revenue numbers for the broadcast division given that this is a non-election year and a flat performance was within budget and we certainly can take some satisfaction from the fact that we continue to outperform the radio broadcast industry as a whole when comparing [Miller Kaplan events]. So all in all it was within expectations and we're fairly well satisfied.

After 16 consecutive quarters of solid growth in the digital division, however we hit a few bumps in the road beginning the early part of this year. First, as we've mentioned in our last call, we continue to struggle with a transition from Internet usage from desktop to mobile devices and this transition puts pressure on top line as mobile visits are harder to monetize than desktop visits.

We currently estimate that a mobile visit is half as valuable as a desktop visit. We've also been impacted by changes in the Facebook news feed algorithm which is making it harder to use Facebook as a traffic driver to websites. These two issues drove our digital revenue down 6.7% for the quarter.

Just these challenges are not new and we have been dealing with them for several quarters now. We initiate steps to improve operating efficiencies and have been able to make some reductions in staffing and cut some other costs which has resulted in the 5.4% decline in operating expenses in the digital division.

Publishing revenue was down 6.3% in second quarter compared with prior year due to the fact that we had two titles released in June 2014 that hit the New York Times bestseller list and remained on the list for an extended period of time. This creates a tough comparison, not only for this quarter, but will also have an impact on Q3 as well. That's not to suggest that Q2 was not productive for publishing. It just makes for a tough comparison.

In June this year, we released Ann Coulter's Adios, America: he Left's Plan to Turn Our Country into a Third World Hellhole, a provocative title that's doing well. It's selling well and has been on the New York Times bestseller list now for eight weeks. But the book we published this quarter Q2 did not compare with the blockbusters we had last year Q2.

We got some additional works -- titles in the works that have potential for strong sales. On the top of the list is a book by well-known author Ed Klein about Hillary Clinton titled Unlikeable that we think will get good traction and while we don't have an exact time table, we will publish at least three other books this year which should have exceptional sales potential. One is authored by Sarah Palin, another by David Limbaugh and a third by Phil Robertson of Duck Dynasty.

Because of the political and public policy focus of Regnery Publishing this business typically does much better in election years. Although, with the upcoming titles, we think this year may have potential rise close to the sales of a typical election year. We'll see.

Publishing expenses were down 5% for the quarter when compared to the second quarter of last year. Again cost associated with book sales such as print costs royalties were down due to the comparative decline in book sales given the blockbuster releases last Q2.

We continue to look at potential acquisition targets in all three divisions. With respect to publishing, we have nothing new to report since our last call. We've been fairly acquisitive in the radio division recently. Last year Disney decided to liquidate its Radio Disney radio format and divested its 23 radio properties. This presented a rare opportunity to get some good properties in big markets at reasonable prices. On recent calls, I mentioned our acquisition in Orlando -- acquisitions in Orlando, Pittsburgh and Atlanta, all of which were acquired from Disney. We've now agreed to buy KMKI-AM in Dallas and WMKI-AM in Boston for $3.5 million from Disney.

In addition, we did acquire two digital businesses. On May 6, we bought one of the leading daily devotional Bible apps which very popular on both Apple and Android devices. We paid $1.1 million for Daily Bible Devotion and could pay an additional $300,000 based on its performance.

In addition, we complemented our investment newsletter business with the purchase of DividendInvestor.com for $1 million. We believe that the DividendInvestor.com adds a new tool to an already strong mix of investing products.

Let me conclude my comments with an update on where we are with dividends. I mentioned earlier that Q2 free cash flow increased 14.9% to $7.5 million. For the last 12 months, our free cash flow was $28.2 million. At our current share price of $6.35 this represents a 17.2% free cash flow yield. We believe this is one of the higher free cash flow yields in the media sector and compares, I think, pretty favorably, with the market as a whole.

Remember that we returned approximately 20% of our free cash flow to shareholders in the form of a cash distribution. On June 30, we paid $1.7 million or $6.5 per share. This represents a 4.1% solid dividend yield.

Salem Board of course reviews and approves the dividend quarterly and we will announce those decisions at the earliest opportunity following that review.

With that, I'll hand the call back to Evan for additional detail on the quarter and to give you some guidance for Q3 2015.

Thank you, Ed. For the second quarter, our total revenue decreased 2% to $67.3 million, operating expenses on a recurring basis decreased 3.2% to $53.8 million and adjusted EBITDA increased 3.0% to $13.5 million. Net broadcast revenues decreased 0.1% to $49.1 million and broadcast operating expenses decreased 1.8% to $35.2 million, resulting in station operating income of $13.9 million or a 4.2% increase.

On a same-station basis, net broadcast revenue declined 1.2% and SOI increased 3.9%. These same station results include broadcast revenue from 101 of our radio stations and our network operations, representing 99% of net broadcast revenue.

I'll now just take a quick look at our broadcast revenue by format. 42 of our stations are programmed in our foundational Christian Teaching and Talk format. These stations contributed 44% of total broadcast revenue and decreased 1% for the quarter.

We have 29 new talk stations and they increased 2% in revenue for the quarter and overall these stations contributed 16% of total broadcast revenue.

Revenue from our 13 contemporary Christian music stations contributed 24% of total broadcast revenue and had an increase of 2% in revenue for the quarter. The nine stations we have programs in Spanish language, Christian Teaching and Talk decreased by 2% and the format comprises 2% of total broadcast revenue.

Finally, with respect to our major formats, we have 10 stations in a business talk format and this format contributed 2% of total broadcast revenue and decreased 7% for the quarter.

As Ed mentioned earlier, our network revenue decreased 10.9% for the quarter, and represents 7% of total broadcast revenue. Publishing revenue went down 6.3% to $6.7 million and represents 10% of our total revenue. Finally, revenue from our digital media businesses decreased 6.7% to $11.5 million and represents 17% of our total revenue.

At June 30, we had $274 million due on our term loan B and we also had $4.5 million outstanding on our revolver. Our leverage ratio increased from 5.35 as of last quarter to 5.39 compared to a compliance covenant of 6.25.

Looking ahead for the third quarter of 2015, we're projecting total revenue to decline between 3% and 5% over the third quarter of 2014 total revenue of $69.6 million. The third quarter of 2014 was benefited by both political revenue and the sales of the two best-selling books that Ed alluded to earlier. We're also projecting operating expenses before gains or losses on the disposal of assets, impairment losses, depreciation, amortization and stock-based comp expense to decline between 1% and 4% compared to the third quarter of 2014 operating expenses of $55.2 million.

And with that that concludes our prepared remarks and we'll turn the call back over to the operator to answer any questions. Operator?

Thank you. (Operator Instructions) Michael Kupinski, Noble Financial.

Thanks for taking the questions. First of all, I know that you had some difficult comparisons in publishing from the year earlier. Can you just tell me how many titles there were in the year-earlier third quarter versus what we are expecting in this quarter?

The very similar number of titles. We typically publish about 10 titles every quarter. It's really driven by the bestsellers. So last year we had two bestsellers, the Ed Klein title and the Dinesh D'Souza title. This year we only have one bestseller the Ann Coulter title. It's really the difference between two bestsellers and one.

I get it. And in terms of SG&A expenses were well below my expectations, was that all driven from management changes in the year earlier or could you just add some color on what happened in the quarter?

Certainly. Definitely part of it is what you talked about some of the management changes and if you recall last quarter we mentioned, we had some layoffs, just as we were about to do our earnings call, just before that time period. And you take those two into consideration, that drove a large portion of the decline.

But I would say it also sent a message across our general managers of all of our business units that they really needed to manage not only their top line, but really hit their bottom line and they were looking at other ways that they can cut discretionary spending and it really just helped, I'd say, maybe change a little bit of the mindset across the Company.

How does the outlook that we're seeing for many radio broadcasters is actually improving revenue trends as we go into the third quarter? I was wondering maybe if you can just differentiate your expectation of a slight acceleration in the rate of decline in revenues from this quarter into the third quarter. Is that large -- virtually all driven by the publishing side, I guess, because of the tough comp there or can you just give us a little bit more color on what's going on between the mix of the businesses that you have?

The biggest cause of the decline when you look at what our revenue was in Q2 versus the overall revenue guidance in Q3 is absolutely publishing. That is the cause for that the deterioration.

And in terms of just the general trends in broadcast then, would we look for an improving trend in the radio side of the business?

Yes, Mike, on the broadcast side, this is Dave Santrella by the way, on the broadcast side, yes, it's not gangbusters, but it certainly is better. July finished pretty decent, August is pacing right now to see a slight increase. So there is some improvement on the broadcast side, and by the way, and that's with us competing against a lot of movie business in 2014 that we just don't have in 2015.

So the underlying trends look really positive outside of that one particular category?

Yes, it does.

And then why is the Internet side showing some weakness here because of the fact that I know that you guys talked about the advertising moving towards more of the mobile applications versus the desktop things like that, is that still the trend that we're seeing in terms of the weakness on the Internet side or is it -- are there other things?

There is really two things going on, mobile and Facebook. If you look at our total Internet traffic the number of sessions quarter over quarter, so Q2 2015 compared to Q2 2014, the number of visits was down about 3%, the number of page views was down about 9%. The decline in both those numbers is principally driven by Facebook. Facebook is making it harder for organic posts to get in the news feed. They are trying to keep people on Facebook. They seem to be running more ads and it's harder to get our posts into everybody's news feed. So that's issue number one.

Issue number two is visitors on mobile devices tend to visit less pages per visit than desktop visitors, hence the larger decline in page views than in visits. So the switch from desktop to mobile is a challenge, both in terms of the number of impressions that you get for your advertisers, but also advertisers are typically paying a slightly lower rate. So the combination of those things is currently a little bit of a drag on revenue.

And so would you anticipate the large influx of unique visitors coming in possibly as we get closer to the elections and the interest in the elections, could we assume that that influx of visitors would be able to be monetized where we actually could see at least some stabilization in the revenues in the near term or do you think that we should just look for continued declines given these two, what could be secular challenges?

Political will certainly help, but if you look back it -- if you look at the traffic patterns from 2012 to our conservative website, the traffic lift began on or around the end of August with the really the beginning of the presidential final campaigns. So traffic began to lift end of August, early September and the traffic lift lasted through the first week of November. So there is a give or take 2, 2.5 month window when page views go up and revenue follows that. So look for that in Q3 and Q4 next year.

In terms of these current drags on revenue mobile and Facebook, we do expect the Facebook challenge to continue, we do expect the mobile situation to improve. Advertisers see that they have to advertise on mobile and more and more advertisers are embracing mobile and figuring it out all the time. So I think we will see improvement and progress in that area in the quarters to come.

Barry Lucas, Gabelli and Company.

You always do a good job breaking down the format and the performance therein. Could you talk a little bit, Dave, about the geographic breakdown and are there any material differences? Even when you get down into the oil patch at Dallas station you are seeing any effect from lower crude prices?

Yes, actually Dallas did quite well for us in Q2. And just in general Dallas, Atlanta, Los Angeles are markets where we do more transactional business for radio stations that have higher ratings and they're competing for that transactional agency based business. They tend to do well for us in general. And so, Dallas is having a great year and it did well. How much of that has to do with the regional economy, I don't know. A lot of it just seems to be that we have consistent ratings in that market. This station is a consistent higher ranking women 25-54 radio station, a lot of buyers go down in that demographic and we're good at [delivering] a lot of that business.

The nature of our revenue streams the block programming and others, they're not really regionally impacted very much, they're very stable and regionally stable and year-over-year stable, just because of the nature of the beast how it's put together. Many of those programmers have been on those stations for decades and they've built up a following. And if they moved off of it, they would lose that -- you lose years and years and years of work. So that kind of revenue for our business doesn't really -- you don't see those kinds of fluctuations and volatility from a regional perspective. Talk business is based as a little bit more, but I don't think that we thought about it in those terms that we can put our finger on any particular region [to solve].

Okay. And just want to come back to David Evans on the weakness associated with both Facebook and mobile, so what's under your control, David, that you can do to change that trajectory?

Working with our advertisers to embrace mobile, helping them come up with ads that get clicks and landing pages that get them leads and prospects. Once they see appropriate success on mobile, we think they'll move more advertising dollars in that direction. So it's really just working very closely with our advertisers to help them with the transition from desktop to mobile. That the piece that is very much in our control.

Lisa Springer, Singular Research.

I wanted to ask you about the DividendInvestor site acquisition and in general what piece of the pie is the investment newsletter business and is that an area where you see more acquisitions and opportunity?

The investment newsletter business on an annual basis is about between $5 million and $6 million of our revenue, so 2% to 3% of the Company, so a pretty small components. It was a business that we acquired about 18 months ago when we acquired Eagle Publishing which also included the Regnery book publishing business and the Human Events and Red State conservative opinion websites. So it's part of an overall deal.

We recorded that revenue within our digital business because all of the sales are e-commerce in nature and the publications are digital in nature. All of the newsletters are sent out via e-mail. This was a tuck-in acquisition for us. We are able to tuck into an existing operation, very little increase in expenses as a result and a very interesting cross-marketing, cross-promotional opportunity. We are able to go to our existing subscriber base and our existing prospects and tell them about this new investment newsletter product. We are also able to go to the DividendInvestor list of subscribers and tell them about our existing newsletters. So a very nice tuck-in acquisition and, yes if other such opportunities came along, we would certainly look at them.

(Operator Instructions) Being no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Edward Atsinger for any closing remarks.

Thank you, operator and thanks again to all of you for joining the call. We look forward to visiting with you when we report Q3 results in about three months.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.