Sinclair Inc (SBGI) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q4 2005 Fisher Communications Incorporated earnings conference call. My name is Shamica and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Ms. Colleen Brown, President and Chief Executive Officer of Fisher Communications. Please proceed, ma'am.

Thank you, Shamica. Good afternoon. Welcome to our fourth quarter and yearend 2005 conference call. With me here at our Seattle corporate office is Rob Bateman, our Chief Financial Officer. Rob will provide you with a financial overview in a minute. We will both be available after those comments for questions later in the call.

As you know, the industry revenues were down in television and essentially flat in radio in 2005. The UPN and WB networks have recently announced their consolidation in the CW network. NBC is heavily into the winter Olympics and the auto category is soft across-the-board. However ABC has solid programming. This is an even year for television, meaning political spending is expected to be particularly strong.

What does that all mean for Fisher? Well, Fisher has recently undergone management reorganization eliminating positions and better aligning our people and our resources to be more competitive. We are focused on driving revenue creatively and rapidly, building ratings, operational excellence, and capitalizing on digital opportunities.

We have recently obtained the services of a new national rep firm. We've signed three transition agreements with key satellite and cable carriers and are successfully focusing on new business development. In addition we were the Super Bowl station for the Seahawks in their home market of Seattle. Also we carried it in Portland. Our home states are expected to have tightly contested political races. We are planning to close in on the Univision acquisition in Portland in the next few months.

With that I am going to turn it over to Rob Bateman.

Thanks Colleen. Before we discuss our financial results, let me remind you that comments made during our call today may include forward-looking statements. These statements may be identified by the use of forward-looking terminology such as anticipate, believe, continue, could, estimate, expect, intend, may, might, plan, potential, predict, should or will, or the negatives thereof are comparable terminology. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These risks and uncertainties include those discussed in our quarterly report on Form 10-Q for the quarter ended September 30, 2005 filed in November, 2005 under the heading "Additional Factors That May Affect Our Business, Financial Condition, and Future Results". We plan to file our 2005 Form 10-K in mid March with an updated listing of these factors. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements are made only as of today's date. We do not undertake any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

Now, with that accomplished, let's discuss our financial results. The revenue story has two parts. First, Colleen already alluded to that. That is the cyclical nature of the political revenues for broadcasters. 2004 was a national election year as is 2006. So as noted in our press release issued earlier today, the comparisons of 2005 to 2004 show the impact of that cycle with lower revenues in 2005.

Second, a change in our national agency relationship caused a sizeable adjustment to our reported revenue. Let me provide some clarity on this topic. Our national television advertising is generally sold through a national agency or rep firm for which we pay a commission. We had a long-term relationships with Katz Communications, which was terminated in December 2005. As of that date, Petry Media became our new national agency specifically Blair Television and sister company Petry, depending on the market.

As is standard in the broadcasting industry, our historical and new agreements with these agencies spanned several years and provide for specific payment in the event of cancellation by the broadcaster. Generally when broadcasters switch national rep firms, the successor firm pays the replaced firm a calculated termination fee with no cash out of pocket from the broadcaster. That was our situation in December 2005. However, because Petry Media satisfied an obligation that really belonged to us, we recognized a non-cash termination charge equal to the amount of the termination fee with the result of a 4.3 million net charge in the fourth quarter of 2005. Because all third-party commissions are presented in our statement of operations as direct reductions to revenue, this non-cash charge has the effect of reducing revenue by 4.3 million in the fourth quarter of 2005 from what would have otherwise been reported.

In like manner, the termination amount will be amortized over the five-year term of the agreements with the successor agency as a reduction to agency commissions and corresponding increase to revenue. So the effect of this non-cash charge is that we take an initial reduction in Q4 2005 revenue and then recognize a non-cash increase in revenue over the following five years of the agreements with Petry Media. Normally when we talk about charges, we're talking about expenses. That is why this makes it a little bit tricky and I wanted to provide some clarity on that.

We had extensive discussions, as you would imagine, with our external auditors on this topic, both the requirement to recognize the non-cash charge as well as the specific geography of where it is presented in our statement of operations. We recognize that there exists some diversity of practice among broadcasters on this topic, which is why we wanted to spend some time on the call and go over this.

Moving on, let me briefly summarize the sources of our revenue for 2005. This is related to 2005 in its entirety as opposed to the fourth quarter. Television accounted for 61% of total revenue. Our two ABC affiliated stations located in Seattle and Portland accounted for just under half of the Company's total 2005 revenue. Radio accounted for 33% of total revenue. Fisher Plaza accounted for the remaining 6% of total revenue.

We reported total revenue of 34.6 million in the fourth quarter of 2005 compared to 42.3 million in the fourth quarter of 2004. For the year ended December 31, 2005, we reported revenue of 144.5 million compared to 153.9 million in 2004. Focusing on the quarterly comparison and excluding the effects of the non-cash 4.3 million charge, broadcasting revenue was lower by 3.9 million or 10% in the fourth quarter of 2005 as compared to the fourth quarter of 2004 due primarily to lower political advertising. Based on the amounts reported, which include the non-cash amount, broadcasting revenue was lower by 8.3 million in the fourth quarter of 2005.

Now focusing on the annual comparisons and likewise excluding the effects of the non-cash 4.3 million charge, broadcasting revenue was lower by 8.5 million, or about 6%, in all of 2005 as compared to 2004 again due primarily to the political cycle. Based on the amounts reported, broadcasting revenue was lower by 12.9 million in all of 2005. The decline in broadcasting revenue in the 2005 period occurred primarily in the television segment as most of Fisher's political revenue is generated from television advertising.

Radio revenue was flat in 2005 as compared to 2004. However, it increased somewhat in the fourth quarter of 2005 as compared to the fourth quarter of 2004 due primarily to improved performance at KOMO AM 1000 and KVI 570 AM in Seattle, two of our three radio stations here in Seattle.

Network compensation was lower in the 2005 period as a result of new ABC affiliation agreements entered into in 2005 that reduced such compensation as compared to compensation under the prior affiliation agreement. Fisher Plaza generated higher revenue in the 2005 period as a result of increased occupancy and service fees. Third-party revenue at Fisher Plaza increased by $500,000 or 34% in Q4 2005. That compared to Q4 2004 to a total of 2.1 million. Revenue at Fisher Plaza increased 3.5 million or 77% in all of 2005 as compared to 2004 to a total of 8.1 million.

General and administrative expenses in Q4 2005 include 1.4 million in separation-related expenses primarily for the termination of certain executives as we redefined roles and responsibilities within our management team as Colleen noted. General and administrative expenses in 2005 also include approximately $1 million in severance-related expenses for the Company's former Chief Executive Officer who left the Company in January 2005. We had somewhat lower consulting and accounting expenses in the annual and quarterly periods ended December 31, 2005 related to the Sarbanes-Oxley Act of 2002 in our compliance with the internal control provision of §404 of that Act. Cost-of-services-sold increased in 2005 compared to 2004 due primarily to increased salary-related expenses and syndicated television expenses as well as increased costs of occupancy at Fisher Plaza.

Depreciation expense decreased in the annual and quarterly periods ended December 31, 2005 in comparison to the comparable 2004 periods due primarily to lower levels of depreciation as certain assets have become fully depreciated. We've seen that trend in depreciation over the past few quarters.

The comparative 2004 operating results include gains and losses from derivative instruments related directly to prior corporate borrowing agreements. These borrowing agreements were refinanced in the second half of 2004 through a $150 million placement of senior notes. As a result of the refinancing, our debt structure was significantly simplified. Debt that was nearing maturity was extended to 2014. We no longer have any derivative instruments outstanding. However, derivative instruments had a significant impact on our operating results in periods prior to 2005.

Normally I wouldn't need to specifically address income taxes on a quarterly call. However, we recorded a significant tax benefit in the fourth quarter of 2005. We mention that in our press release. So let me provide some clarification on that topic as well. In December 2005 we dissolved a certain wholly-owned inactive subsidiary including an entity that had initially been treated as an investment under the equity method of accounting and for which cap basis losses were not allowed as tax deductions until we purchased the remaining equity interest in 2002. At that point, its operations became part of our consolidated tax return. The cash basis for that entity was higher than the GAAP basis. Therefore, upon dissolution of the energy, we recognized the tax benefit of 3.4 million. This explains the fourth quarter 2005 tax benefit exceeding the amount of the pre-tax loss as well as the overall higher-than-anticipated tax benefit rate for the 2005 annual period.

We reported net income of 1.9 million in the fourth quarter 2005 compared to net income of 4.5 million in the fourth quarter of 2004. For the twelve months ended December 31, 2005, we reported net loss of 5.1 million compared to net loss of 12 million in 2004. But to go back to derivatives just for a minute. As I mentioned, we had no derivative instruments outstanding in 2005. However, we had pre-tax gain on derivative instruments of 589,000 on 383,000 after tax in the fourth quarter of 2004 and pre-tax loss on derivative instruments of 12.7 million or 8.2 million after tax in all of 2004. I refer to that in as much as that plays into the net figures I just mentioned.

We ended the year with cash and short-term investments of 19.6 million. Our investment in [Cietco] stock was valued at just under 170 million as of December 31, 2005. We have no debt outstanding under our $20 million revolving line of credit. The full amount remains available to us. As we announced in December, we signed an agreement to purchase certain television stations from Equity Broadcasting for 20.3 million. These stations include a full-power station in the Portland, Oregon DMA where we currently operate an ABC-affiliated television station and low-power stations in or near our existing CBS-affiliated stations in Boise and Idaho Falls, Idaho. We have filed the requisite documents with the FCC and are waiting for FCC approval to proceed. We noted in our December 2005 announcement that the purchase may be funded through existing cash and the use of our $20 million revolving line of credit. We continue to estimate that we have sufficient resources to complete this transaction as well as fund our normal operations. Of course, we have a sizeable investment in liquid marketable securities available as well.

As we did during each quarterly call, I am now going to take just a few minutes and go over our operating cash flow as defined under our debt agreement. As defined and based on a trailing four-quarter period ended December 31, 2005, we calculate our operating cash flow to be 18 million. The decrease from prior calculations is due to dropping off the very strong political results from fourth quarter of 2004. Let me walk you through the summarized calculation. Net loss for the trailing four quarters, or in other words all of 2005, was 1.5 million. No adjustments are required for derivative instruments since they now fall outside of the trailing four-quarter period. However, an adjustment of 4.3 million is required as an add-back for the non-cash charge relating to the change in national television rep firm that I mentioned earlier. You then exclude the effective income taxes. In this case that results in a reduction of 9 million because we had a tax benefit in 2005. Add back interest expense for the period in the amount of 13.7 million. Add depreciation for the four-quarter period totaling 13.1 million. Add back the net of non-cash program amortization over cash paid for programming. These amounts – this particular amount comes from our statement of cash flows. That information we don't have in the press release. The amount of the add-back is $1 million even. If you add those all together, you should come up with 18 million.

That concludes the prepared portion of our presentation today. At this time Shamica, if you would help us with the question and answer session.

Sure. (OPERATOR INSTRUCTIONS). Brian Corvill.

Can you talk about the rationale for the change in the national advertising firms.

Sure. The rationale or the accounting treatment?

No. The rationale. I was thinking in terms of what benefits you actually hope to realize. Do you expect better execution? Or was it cost driven?

Both. The national rep firm that we had been with, we had been with for 50 years. This was an opportunity for us to take advantage of a lower commission rate as well as better performance and new sets of eyes and hands in the mix. It was time for a fresh start.

Okay, fair enough. As far as the segments, I assume the 61% for the TV segment, that includes the $4.3 million charge. Right? If I want to compare the prior years, I need to add it back.

That's correct.

Any chance you can provide the operating income numbers by division?

We'll present all of that information in the 10-K. I am not prepared to present that and go through all of those details on the call.

Okay, I understand. Colleen, I guess for you – I know it's early in your tenure there. Is there anything you can tell us about the strategic direction at this point? And what your charge from the board is perhaps?

What I can tell you is I've been working diligently on that. I'll be presenting to the board in March. I believe we've got a clear vision of where we need to go and how we should move forward. I am excited about it.

So I guess after that March presentation there will be some more detail you can share with us.

Yes. You will probably get tired of hearing me talk about it.

I doubt that. Thanks so much.

Tom Kerr of Reed, Conner.

Two questions. First one. Have you seen any Olympic-related effects on both television and radio in the first quarter? The second question is, can you update us on any long-term margin trends that have changed recently that you see in both the radio and TV segments? When might you obtain industry margins? How does it look to increase those over the long term – a two- or three-year timeframe.

I'll take the first part to your question. Regarding the Olympics, I know that in general the ratings nationally are down. In our own market, they are down about 20% from prior Olympics. However, they did do a very good job of selling in our market. I believe that that has had some effect on the spot sales because they took a lot of it out of the market. We were able to offset a lot of that with our Super Bowl opportunities. But of course, there were playoff games in that mix too. So to some degree, we all had our highlight this quarter from additional revenue opportunities. But overall, I would say that unless the Olympic picks up, they are going to be off national norms by about 20%.

As far as the other question, let me respond to that by saying that we are, of course, working on improving the margins. We can work on two sides of that – on the revenue side and on the expense side. As Colleen mentioned in her introductory remarks, we are working to drive revenues creatively and quickly. To the extent to which that is within our control – and much of that is – we believe we're doing the right things to make that happen. Some things are outside of our control. We're benefiting from those factors, of late anyway. ABC improving and going into a second season in which they are doing quite well. As I mentioned in my prepared remarks, nearly 50% of our total Company's revenues come from our two ABC stations.

On the expense side, some of the things that we're doing from a Sarbanes-Oxley internal control perspective also help us even down to the margin side as we try to standardize and centralize processes. For example, in January of 2006 – just last month, we put in a traffic system at KOMO TV here in Seattle that matches up to being the same traffic system and linked together with our other ABC station down in Portland. These types of things, as we look for these types of opportunities, will help our margins going forward. As far as a specific time when we think we will be at that point where we're comfortable, I can't provide that. I will say we're working diligently toward it.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Thank you for joining us today. I look forward to this call in three more months. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good-day.