Salem Media Group Inc (SALM) 2015 Q3 法說會逐字稿

Good day and welcome to the Salem Media Group third-quarter 2015 earnings conference call and webcast.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference call over to Mr. Evan Masyr, Executive Vice President, Chief Financial Officer. Mr. Masyr, the floor is yours, sir.

Thank you. And thank you all for joining us today for Salem Media Group's third-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.

Today I'm joined by Edward Atsinger, our Chief Executive Officer; and David Evans, President of Interactive and Publishing. David Santrella, President of our Broadcast Media is about to board a plane returning from a listener trip in Israel and will be available on the Q&A portion of the call until he has to hang up.

We'll begin in just a moment with our prepared remarks. 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 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 disclosure of non-GAAP financial measures is available on the investor relations portion of our website at salemmedia.com.

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

Thank you, Evan, and thanks to all of you for joining us for today's call.

I will follow my usual pattern of giving a quick overview of the third-quarter performance. I want to discuss some strategic initiatives that we've taken, particularly in our publishing division. I'll talk a little bit about our recent acquisitions, and then I'll conclude my remarks with a little bit of information regarding our dividend.

When I finish my remarks I'll turn the call back to Evan and he can drill down in much more detail on performance for Q3 and also give some guidance for the last quarter of the year.

So when we look at an overall picture, overall quarter revenue, total revenue, declined 3% with current operating expenses also declining by 1% resulting in a 10.9% decrease in adjusted EBITDA.

But if I take a look at our results by division, there's some encouraging developments. Broadcast revenue was up 1.9% for the quarter despite the fact that it wasn't a political year.

To put that in perspective, in the third quarter of last year our broadcast division had a $1.1 million political revenue for the quarter, this year just $300,000 of political revenue.

If you adjust the impact of the political revenue out of both quarters, our broadcast revenue actually increased 3.6%. So we're quite satisfied with that performance, especially in light of the fact that the entire radio industry was down 1.6% in the markets where we operate according to Miller Kaplan.

A few other bright spots worth highlighting on the broadcast side, local spot revenue was up 5.4%, local block programming revenue was up 3.9% and national block programming revenue was up 6%. Additionally, event revenue increased 27.3%.

The one area that continues to lag is national business, with a national spot revenue down 18.7% and network revenue down 8.4%. Those segments seem to be bouncing back a bit in Q4, by the way.

They were down primarily, I think, in Q3 due to reduced political revenue compared to Q3 of last year and also movie revenue was a significant factor, particularly at the network level.

Broadcast expenses were up 2.9%, resulting in a decrease in station operating income of $64,000 or 0.5%.

One of the factors driving the expenses up in the quarter was an increase in medical costs. We've mentioned in the past that we are -- partially self-insure our medical costs. This means that we'll occasionally have a quarter where medical costs are more than anticipated and this is one of those quarters.

Our medical costs in the broadcast division were about $225,000 higher this year than last. Excluding that, SOI would have been actually up for the quarter.

While we lose a quarter-to-quarter predictability by being self-insured, nevertheless on an annual basis we continue to save substantial amounts of money under this program.

On our last few calls we've talked about the challenges facing our digital division this year, particularly from the transition of desktop page views to mobile page views and the changes in the Facebook news feed algorithm.

These challenges have largely contributed to a 5.7% revenue decline through the first six months. This quarter the decline has slowed, posting a 1% decline in digital revenue.

And although we continue to see reduced traffic from Facebook due to changes in their algorithm, we have seen improvement in our mobile modernization efforts.

So while we continue to focus on further improving our mobile modernization efforts, we have also been quite attentive to controlling costs and improving efficiency. In fact, expenses were down 2.8% which led to an increase of 5.9% in digital operating income.

Publishing, our third division, is clearly our most volatile business on a quarter-by-quarter and even year-to-year basis, as it is significantly impacted by the schedule of book releases, the impact of bestsellers in a given quarter and the typical boost in sales in political years versus non-political for [regularly].

Because of this timing, the results are rather choppy from quarter to quarter.

To putting the results in this quarter in perspective, you need to recall that we had two books that hit the number one list on the New York Times Bestsellers, but we didn't have a similar hit in Q3 this year.

This resulted in a 29.9% decline in revenue and a 15.6% decline in expenses. The expense in the quarter includes reserves on two larger advances where sales have been less than we had anticipated.

On the other hand, looking forward, we have three titles to be released in the fourth quarter this year that should have a nice impact on our revenue, particularly in light of the fact that the fourth quarter last year did not have any big releases.

With regard to these titles today, we released The Emmaus Code: Finding Jesus in the Old Testament, by David Limbaugh.

Additionally, we're branching out from our conservative book publisher to also publish faith-based titles. On November 16 we are releasing our first book under Regnery Faith brand. It is Sweet Freedom, a devotional by Sarah Palin.

Also under Regnery Faith, Phil and Kay Robertson of Duck Dynasty have a book being released on November 23 titled, Exploring the Joy of Christmas, a Duck Commander Faith and Family Field Guide.

Given our strong Christian multimedia platform, we are excited about the future potential of Regnery Faith and we are optimistic that we will do well with that new brand.

We have been particularly busy with respect to acquisitions. I stated in our last call that Disney decided to liquidate its Radio Disney format and divest its 23 radio properties.

We've already mentioned the acquisition from Disney of stations in Orlando, Pittsburgh, Atlanta, Boston and Dallas. Since our last call we have agreed to buy the five remaining Disney properties for a total price of $2.25 million. This purchase includes AM stations in Minneapolis, Denver, Tampa, Portland and St. Louis.

All of these are tuck-ins in existing markets with the exception of St. Louis. St. Louis will give us our first station in this market which puts us now in 23 of the top 25 radio markets in the country and allows our news talk format to have another outlet in a top 25 market, which is important to us strategically.

This will be our first station in this market, as I said, and we look forward to perhaps building a little bigger cluster as time goes on.

Let me just say with the price we paid for the five stations, we believe we can be quite successful with these stations and should be able to integrate them into our operations rather nicely. Very, very pleased with the purchase price we were able to achieve to clean this last of the inventory out for Disney.

Additionally, we have invested in two Bible apps. We acquired the Android DailyBible app for $1.5 million. We also acquired the La Biblia Spanish-language Bible application for $500,000. These acquisitions substantially increase our presence in the mobile app space and help reduce our reliance on Facebook as a source of traffic.

Let me conclude my remarks with an update on our dividends. On September 30, we paid $1.7 million in dividends, or $0.065 per share, which represents a 4.1% dividend yield.

Recall that we return approximately 20% of our free cash flow to shareholders in the form of a cash distribution. For the last 12 months our free cash flow was $26.3 million, or $1.03 per share. At our current share price of $6.30, this represents 16.3% free cash flow yield.

Given the increased political revenue in election years, the increased page views on our conservative opinion websites and the fact that Regnery tends to perform better in election years, we should see a meaningful increase in free cash flow in 2016.

Our Board will be reviewing and approving the next dividend quarterly. Look for an announcement in early December.

With that, I will hand the call back to Evan for additional detail on the quarter and to provide some guidance for Q4.

Thank you, Ed. For the third quarter our total revenue decreased 3.0% to $67.5 million. Operating expenses on a recurring basis decreased 1.0% to $54.7 million and adjusted EBITDA decreased 10.9% to $12.8 million.

Net broadcast revenue increased 1.9% to $49.2 million and broadcast operating expenses increased 2.9% to $35.4 million, resulting in station operating income of $13.8 million.

On a same-station basis net broadcast revenue increased 1.0% and SOI remained flat at $13.8 million. These same-station results include broadcast revenue from 105 of our radio stations and our network operations and represents 99% of our broadcast revenue.

I'll now take a look at our broadcast revenue by format. 42 of our radio stations are programmed in our foundational Christian teaching talk format. These stations contributed 43% of total broadcast revenue and increased 1% for the quarter.

Our 29 news talk stations had an increase of 6% in revenue for the quarter and overall these stations contributed 17% of total broadcast revenue.

Revenue from our 13 contemporary Christian music stations contributed 23% of the total broadcast revenue and increased 4% for the quarter. The nine stations that we have programmed in Spanish language Christian teaching and talk decreased by 7%, and this format comprises 2% of our broadcast revenue.

Finally, rounding out our main formats, we have 10 stations in a business talk format, and that format contributed 2% of total broadcast revenue and declined 3% for the quarter.

Our network revenue decreased 8.4% for the quarter and represents 8% of total broadcast revenue. Publishing revenue was down 29.9% to $6.9 million and represents 10% of total revenue.

And revenue from our digital media businesses decreased 1.0% to $11.4 million and represents 17% of total revenue.

At September 30, 2015 we had $274 million due on our term loan B and also had $6.1 million drawn on our revolver. Our leverage ratio was 5.61 compared to a compliance covenant of 6.25.

For the fourth quarter of 2015 we're projecting total revenue to increase 1% to 3% over fourth-quarter 2014 total revenue, up $65.9 million.

We're also projecting operating expenses before gains or losses on the disposal of assets, impairment losses, depreciation, amortization and stock-based compensation expense to increase 1% to 4% compared to the fourth quarter of 2014 operating expenses of $54.0 million.

With that, that concludes our prepared remarks and now we would like to answer any questions. Back to you, Operator.

Thank you, sir.

(Operator Instructions)

Michael Kupinski, Noble Financial.

Hi, this is actually Juan Bejarano for Michael Kupinski and thank you for taking our questions.

Regarding block programming, that was better than we expected. Can you provide a little more color on block programming, what drove the increase? And then if you can comment on what type of price bump is the Company contemplating for next year?

Dave Santrella is joining us at another extension. Dave, are you with us?

I am with you guys. So with regards to block programming, block programming was up, really, both on our news talk stations and on our Christian teaching and talk radio stations.

Some of that is due to some new programming that we have been successful, we been working on for a number of years. And that programming came on board with us midway through second quarter. So fully in third quarter and wasn't there prior quarter same year. Prior year same quarter, I should say.

And as far as expectations for next year with block performing increases, I think similar to what we've had in the last few years, probably a low single-digit type increase is what we would expect.

Okay, thank you. And then as far as the publishing segment, it seems that the Donald Trump book is not selling all that well. Also the Ed Klein book. Just want to get your comments ahead of the election, does this offer a grim outlook for publishing in 2016?

No I don't think so at all. With the Donald Trump book, you've got to remember that this is a title that was four years old, that was published when Mr. Trump was campaigning to be the Republican candidate for the 2012 elections. So it isn't a new book by any means.

And then second, he did no publicity or promotion for the book. He was entirely, and is entirely, focused on his campaign. So we're happy that we are able to sell some additional books on a backlist title, but we kind of knew going in that it's very different from a brand-new title.

With respect to Ed Klein, yes, the results on that one were a little soft. I think there is probably a little exhaustion with the subject of Hillary Clinton. She's been all over the news for a considerable period of time.

And I think that subject in terms of selling a book is perhaps a little tired. Next year, it's a whole new slate of books and we're looking forward to some of those titles.

Thank you for the color. You mentioned the Q4 titles but can you maybe go over the titles for the first quarter? And then from Q4 and Q1, maybe you can identify the ones that you think may have some breakout potential?

For fourth quarter the three titles that Ed mentioned earlier were a David Limbaugh title, The Emmaus Code; a Sarah Palin title, Sweet Freedom; and a Phil and Kay Robertson title, Exploring the Joy of Christmas.

I don't have the exact calendar for next year in front of me. There's going to be a title from Dinesh D'Souza; there's going to be another title from David Limbaugh; another title from Ed Klein, would be three of the bigger titles we're looking forward to. And they'll be Q2, Q3, Q4 titles, probably not Q1.

Got it, okay, thank you. And then finally, as far as M&A, given the duration of some of the larger radio players, any acquisition opportunities for the Company? And then, if so, would you be willing to make some bigger deals here? Maybe how much leverage are you willing to go to?

We're going to be very conservative on leverage. We have to raise some new capital, there would have to be a new infusion of capital for us to make a big move. We are working on delevering, that's been one of our objectives.

The Disney opportunity, some of these stations were simply so attractive in terms of price. And there were some additional asset considerations, many of them had valuable real estate associated with them as well as the radio property.

We were very comfortable getting a little more aggressive on these Disney properties. Now we're going to have to catch up a little bit. But if something comes available that's really attractive and makes a lot of strategic sense, we would have to probably look for maybe an equity infusion or look for a new player or something creative that does not exacerbate our leverage because the Board simply does not want to go there.

Got it thank you. That's it for me.

(Operator instructions)

Lisa Springer, Singular Research.

Good afternoon. My question concerns digital subscription revenues. The decline was attributed to a decline in the number of new subscriptions, which was impacted by the rebranding effort.

Could you give us an update and a little color on the rebranding effort and what you're seeing in terms of subscriptions?

I'm not sure what you're referring to.

I'm looking at the 10-Q.

Oh, at the 10-Q.

Yes. It said the sale of new subscriptions was impacted by a rebranding effort that began during the first half of 2015.

Digital subscriptions were soft in Q3 compared to Q3 a year ago in our financial publications business. The principal reason is we launched a brand-new title a year ago called Fast Money Alerts. Whenever you launch a new magazine subscription product, your first year renewal rates are in the 20% area.

That's just fairly typical of the newsletter publishing business. So a lot of those folks canceled and we didn't have a similar new product this year.

Okay, thank you.

At this time we have no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Edward Atsinger, Chief Executive Officer, for any closing remarks. Sir?

Thank you, Operator, and thanks again to all of you for joining us for the call. We look forward to meeting with you again in a few months to give you a wrap-up for the year -- for Q4 and for the year. We'll hope to see you then.

And we thank you, sir, and to the rest of the management team for your time also today. The conference call is now concluded. At this time you may disconnect your lines. Thank you and have a great day, everyone.