Sinclair Inc (SBGI) 2007 Q3 法說會逐字稿

Welcome to the Fisher Communications Third Quarter, 2007, Earnings Conference Call.

[Operator Instructions]

This conference call contains forward-looking statements relating to the development of the company's operations, products and services, and anticipated future operating results. These statements are based on information available at the time they are made, but aren't necessarily subject to a number of risks and uncertainties, and actual results may differ materially from expectations. The factors that could cause actual results to differ materially from those expectations described in our annual report or on form 10K in our quarterly report on form 10Q, as filed time to time with the Securities and Exchange Commission. The company undertakes no obligation to update publicly any forward-looking statements due to new information, events, or circumstances after this date of this conference call or to reflect the occurrence of anticipated events.

All calls have been placed on mute during the presentation, and further instructions will be given prior to Q&A session.

I will now turn the call over to Mae Numata, Senior Vice President, Chief Financial Officer and Corporate Secretary for Fisher Communications. Please proceed.

Thank you, [Lacey.] Good afternoon, everyone, and thank you for joining us on Fisher Communications Third Quarter 2007 Earnings Conference Call. Our third quarter earnings release was issued earlier this morning and can be accessed through our website, along with our non-GAAP performance measures.

Joining me on the call today are Fisher's President and Chief Executive Officer, Colleen Brown, and Senior Vice President Rob Dunlop. We will begin with opening comments from Colleen, and subsequent to her comments I will review the third quarter financial results. We will then open up the call to your questions.

Thank you, Mae. The third quarter results reflect the efforts of our selling initiatives, Fisher Plaza revenues and dedicated cost controls across the company, with focus on revenue development and ratings growth in our properties. We are pleased to report continued revenue improvement compared to the same period in 2006.

Revenue was $41 million, up 5% year over year. This was driven by television revenues, which were up $1 million to $26 million, an increase of 4% year-over-year, despite cycling against strong political revenue in 2006.

In addition, our radio segment posted a 6% increase in revenue of $700,000, to $12 million, for the same period.

Fisher Plaza revenue was strong at $3 million, an increase of 19% over third quarter 2006, which for the most part is a result of increased occupancy. Total occupancy was 96% at the end of the quarter.

Loss from continuing operations was $600,000 against a prior year loss of $780,000 due to start-up news costs in our Univision and Internet initiative. Net loss of $530,000 was a 21% improvement over the prior year's quarter and includes income from discontinued operations of $68,000.

Let me provide a little color on this quarter's performance. Third quarter was challenging across the industry, due greatly to the cycling against 2006 political advertising. For Fisher, we were able to overcome the political cycle in this quarter, and I'm particularly pleased that our revenue growth performed favorably compared to most peer companies.

While ABC prime programming struggled during the summer for ratings, our news product continued to strengthen. Just one example of this -- morning news at 6 a.m. on both of our ABC affiliates in Seattle and Portland delivered year-to-year ratings growth in key adult and women's demographics. With Eugene maintaining its dominant number one position and Boise garnering year-to-year increases in multiple newscasts, our CBS stations continue to show positive results in the market.

Our key focus has been to drive revenue creatively and rapidly through better inventory management, increased sources of revenue, training, and non-traditional advertising. In addition, we improved our selling effectiveness and saw increases in the home products, food products, and general services advertising categories.

For the market revenue audits received, our stations have all achieved growth in local market shares from year to year.

Total page views for Fisher's interactive area improved 18% in third quarter 2007 over 2006 to an average of 18.7 million monthly page views. Unique visitors increased by 49% during this period to an average of 2.1 million.

Centralization has reduced operating costs. We have three of our eight CBS stations running successfully and centrally out of the Fisher network operations center based in Seattle.

We continue our leadership alignment with strategic initiatives. On September 27th this year, we announced that Jim Clayton was named vice president and general manager of Fisher Seattle. He adds our Seattle radio stations, KOMO 1000 News, Star 101.5 and 570 KVI to his current responsibilities of Vice President and GM of KOMO 4 and KUNS TV. This is our first step towards fully realizing the synergies and efficiencies between all of the Seattle broadcast properties.

In August we named Nancy Bruner as Vice President, Fisher Interactive Network. She is a seasoned media executive with expertise in Internet, business development and strategic market development, product development and media management. This is the next step toward achieving our Internet revenue goals for the company.

On August 6th, 2007 we announced an agreement to purchase two television stations in Bakersfield, California, a CBS affiliate and a Fox affiliate. This unique duopoly opportunity in Bakersfield was purchased for approximately $55 million. If all goes as planned, we should be closing on this acquisition in early January, and we will have moderately diversified our geographic footprint and positioned Fisher to participate in the strong advertising environment in California.

In July we announced the addition of Pegasus news, a Dallas-based online local news company, pioneer of hyperlocal media. Pegasus news specializes in providing personalized local news, information, and advertising. Fisher plans to take Pegasus News' information and advertising model to additional U.S. markets in the coming year, further enhancing our delivery of news to our younger consumers and allowing us to apply our expertise in any market in the country.

In summary, the work of our strategic plan is on track. I am pleased with the company's improved performance. However, we recognize we still have more to do and look forward to continuing the momentum we have begun to establish.

And with that, I'll turn the call back over to Mae to provide you more details on the financial performance.

Thank you, Colleen, and again, welcome to our call today. We issued our third quarter earnings release this morning, and we plan to file our form 10Q by the November 9 deadline. Those documents include in-depth information regarding our financial results, so please refer to those sources for additional information.

Let me briefly summarize the sources of our revenue for the first nine moths of 2007. Television accounted for 66% of total revenue. Our two ABC-affiliated stations, KOMO-TV in Seattle and KATU-TV in Portland, continue to account for approximately half of the company's revenue for the first nine months of 2007.

Year-to-date 2007 revenue also includes Internet and our new cluster of Univision-affiliated, Spanish-language television stations.

Radio accounted for 27% of total revenue, excluding discontinued operations. Our remaining five small market radio stations in Montana continue to be held for sale. This group of radio stations has been carved out of the radio segment presentation and is disclosed under the caption, quote, "discontinued operations," unquote. The sale of these properties were slowed down by the magnitude of broadcast assets placed on the market. However, activity has been picking up in the recent months.

Remember that we have the radio broadcast rights for the Seattle Mariners baseball team. Therefore, our radio revenue and expense that includes a built-in rights escalator is greatest during the baseball season. We have one season remaining with the Mariners under this contract.

Fisher Plaza accounted for 7% of total revenue.

Now, some further details. Fisher increased total revenue by about 5% to $41 million, as Colleen mentioned, in third quarter 2007 compared to $39 million in third quarter 2006. Fisher's total revenue increased 6% to $116 million, compared to $110 million in the comparable nine-month period in 2006.

Broadcasting revenue was higher in 2007 due to increased revenue in both television and radio, as compared to 2006 for both a three- and nine-month period comparisons. The increases were due primarily to the start-up of our Spanish-language stations in the second half of 2006, stronger national and local revenues at our CBS affiliates, and stronger local sales at our ABC affiliates.

In addition, the growth in our Internet revenue continues. This is a solid revenue performance as we cycle against 2006 political spending.

In comparison to the nine months ended September of last year, year-to-date 2007 non-political local television revenue continues to increase. We attribute the revenue growth to improved selling efforts and stronger ratings.

Our radio operations showed an increase in revenue in the nine-month period ended September 30, 2007 as compared to the same period in 2006. We attribute the increase to improved ratings - excuse me, improved ratings on KOMO-AM and KPLZ-FM. This increase was partially offset by lower revenue associated with the broadcasts of the Mariners baseball games.

Internet advertising and retransmission revenue also increased in the first nine months of 2007, as compared to the same period of 2006.

Revenue at Fisher Plaza increased $441,000 and $1.8 million in the three- and nine-month periods ended - excuse me, nine-month periods ended September 30th, as compared to the same periods in 2006.

These increases were due primarily to increased occupancy, as well as increased electrical infrastructure fees. With four consecutive quarters of profitability under our belt, Fisher Plaza's results continue to strengthen.

Operating expenses increased 7% to $111 million in the first nine months of 2007, as compared to the same period in 2006. Total operating expenses increased 6% to $39 million in third quarter 2007, as compared to third quarter 2006. These increases were due primarily to increased news, selling and depreciation expenses.

News expenses increased 8% to $42 million in the first nine months of 2007, as compared to the same period in 2006. These expenses increased 2% to $14 million in the third quarter 2007, compared to the third quarter of 2006. These increases were comprised of investments in our news gathering and additional news programming, costs associated with our growing Internet business, and the addition of our Spanish-language stations.

Selling expenses increased 8% to $43 million in the first nine months of 2007 as compared to the same period in 2006. These expenses increased 10% to $15 million in the third quarter of 2007, compared to the third quarter of 2006. These increases were comprised of news and sales costs associated with the addition of the Spanish-language stations and increases in market research expenses, selling costs associated with our growing Internet business, and the built-in rights escalator on the Seattle Mariners contract.

Depreciation increased 15% to $9 million the first nine months of 2007, as compared to the same period in 2006. Depreciation increased 13% to $3 million in the third quarter 2007, compared to the third quarter 2006. These increases are due primarily to depreciation associated with our digital buildout and Fisher Plaza's continued infrastructure buildout, which were placed in service primarily during the second half of 2006.

For our net results -- the third quarter 2007 consolidated net loss was $533,000, a 21% improvement over third quarter 2006. In both years, third quarter consolidated net loss was comprised of continuing and discontinued operations.

From continuing operations, we reported a net loss of $601,000 in the third quarter of 2007, a 23% improvement over third quarter 2006. Both years included income tax adjustments of $448,000 and $388,000 respectively, as a result of a continuing IRS audit of prior year federal tax returns.

Without these tax expense adjustments, third quarter results would have improved 61%, and third quarter 2007 would be close to breakeven.

For the nine months ended September 30th, 2007, we reported a loss from continuing operations of $1.2 million compared to a loss of $780,000 in the comparable period in 2006. With the addition of income from discontinued operations of $1.6 million, year to date 2007 consolidated net income was $478,000 compared to a loss of $104,000 last year.

For cash and liquidity, we ended the quarter with cash and cash equivalents of $7.5 million and working capital of $29 million. Significant items affecting our cash flows include the second quarter radio station sale, the purchase of four low-power Spanish-language TV stations in eastern Washington, a deposit placed on - excuse me, an escrow deposit placed on the purchase of Bakersfield stations, and additions to property plant and equipment.

As of the end of third quarter 2007, we had our entire credit facility available to us. Our investment in Safeco stock was valued at $184 million as of quarter end.

As part of our regular quarterly investor conference calls, we provide the trailing four quarter calculation information for operating cash flow as defined by our debt agreements. Operating cash flow was $35 million, excluding the effect of discontinued operations. The details can be found on our website, along with adjusted EBITDA details.

That concludes the prepared portion of our presentation. Thank you for listening. At this time, I ask that Lacey assist us with responding to the questions that you may have.

[Operator instructions]

Our first question comes from the line of Bishop Cheen with Wachovia. Please proceed.

Thank you for taking the question. Hi, Colleen. Hi, Mae.

Hi, Bishop.

Thank you for the very comprehensive summary. Let me go to something that I don't think was in the summary, and that's Bakersfield. Please remind us again when you anticipate closing on that transaction, the amount of the transaction that will still have to be funded that is not in escrow, and how you plan on funding the closing of that deal.

Thank you, Bishop. It's always nice to hear from you. Our anticipated closing date is January 8 of next year, and the second piece of your question is what is the remainder to be funded. It's a $55 million purchase price, and we have an escrow deposit of $2.5 million. So $52.5 million is left to be funded, and at this time we will utilize cash and we are continuing to look at our options on how best to fund the rest of the amount.

Okay. And again, your credit facility is - was really in - I think, in the summer of '04, and you have never really amended that existing credit facility. Is that correct?

Yes, that is correct.

Okay, so there - it would seem that there is something that could be done there.

And then, as you look at Bakersfield, which is the kind of station between the two stations that does generate in the political viewers, I think, noticeable political revenue.

Yes, that's correct.

All right. That's good.

Bakersfield is significant in the even-numbered years. As you know, California is a huge political state.

And then can you give us any color on whether you're seeing any significant political ad spending seep into Q4 '07, and whether you are adjusting expectations up or no adjustment for political across your whole platform in '08?

That's a great question. On 2007, we generally don't give forward advice or forward guidance, but I will say that since October is behind us, it was a very strong political month for the company.

As far as going forward in 2008, I think it will be an interesting time in the political arena, depending on how this spending works out with the way the primaries were moved up in some of the larger states. Washington has moved theirs up, but for some reason moved it up two weeks behind where the big states moved theirs up. So it's going to be somewhat new to us on how the primary spending will fall out in the state of Washington. We do expect some primary spending, but we have no real knowledge at this point to what degree in Washington.

Oregon didn't move up their primaries, and we don't anticipate any real change from even-numbered years.

Okay. Let me let somebody else get in here, and I may come back with a follow-up on your digital and Internet (inaudible).

As long as we have you, Bishop, why don't you go ahead? If you'd like.

Okay. Well, I just wanted to know, the Internet initiative seems to be off to a very good start. I'm wondering if you have enough data yet to say whether - how long it will take for the - to break even, as such. I know that you have - you probably have some sort of hockey stick growth curve off of basically no - nothing there before. But initially, to get Internet operations and platform extensions up, they seem to require some operating costs, and I'm wondering if you can tell us when you think, on a timeframe, you might hit the breakeven point.

I think that's a great question, and we have, depending on the month, hit breakeven. Again, it really does depend on how you're ramping up. And you're right, it is a huge hockey stick. This company was a little bit behind its peer group, and once we were able to get our servers and get our functions in place for the company, we have seen dramatic growth.

And I do anticipate that - depending obviously on how we roll out Pegasus and how we account for Pegasus, I do expect our Internet division to be profitable. And I would say in the near term, but again, I caveat that, because this is an area of great growth, and I see that continuing in the near term. And so we want to take advantage of that and we'll continue to invest to make sure that we bring in the dollars that are due the company.

In, let's say two years from now, can you see a point where your Internet and I guess your -- whatever you generate -- let's call it digital from retransmission -- would contribute X% of your total TV ad revenue?

Yes, Bishop, I have publicly said already that Internet represents 3% of our revenue. And in fact, it really represents 4% of our TV revenue at this point. So we're picking up steam.

Yes, seems to be.

And I do know that's slightly ahead of our peers. I think most of our peers would be lucky to be in the 4% category. I think the marketplaces we operate in and the functions we currently are working with on our Internet sites are really slightly ahead, and as a result we're getting that nod on the Internet revenue side.

Well, it seems to be - [Lynn] said today that they combined retrans or their- as they called it, digital revenue.

We didn't -

Retrans and Internet, and they said the goal is 5% of their base.

Yes, well, I would shoot for more than that for our company.

Okay. That is helpful. Thank you very much, Colleen.

You're welcome, Bishop.

[Operator instructions]

And the next question comes from the line of [Tom Curr] with RCV Investments. Please proceed.

Hi, guys. How's it going?

Good. How are you?

All right. Just - you touched on this briefly, but kind of step back and give us the big picture update on the overall duopoly strategy. I think you're where you want to be in terms of stations, but in terms of getting the margins and the whole purpose of the duopoly, where do we stand in terms of ads and what's left to do?

Yes, great question. As far as duopolies go, we have three of our markets duopolozied with the Univision stations, and, as you know, duopolies generally increase or improve your margins, and we feel very good about the hockey stick growth we're seeing on those Univision properties. And with very minimal additional costs, other than we did start a Spanish-language newscast, and that was what you saw start up in this quarter.

But other than that - and I need to back up and say the newscasts put us on the map of advertisers. Once we got that on the air, we were sponsored, and it started to grow from there. And we started switching from standard advertisers that were just, let's say, a lower cost per point to the big advertisers, like General Motors, insurance companies, et cetera, once we had the newscast.

So we see a good hockey stick growth. Duopolies make great sense where you can do them. Obviously, in our smaller markets, there's some challenges with that because of the FCC restrictions, but we continue to look at legitimate and appropriate ways to do duopolies.

And when you say hockey stick growth, that refers to revenues or cash flows or margins or all three?

All three.

Okay.

All three. It has so far been a very solid development with, first of all, our assumptions, and second of all, the delivery. And it's still not significant enough to break out, but I would anticipate that it might be in the near term.

Great. That's all I have. Thanks.

You're welcome.

Our next question comes from the line of Kevin Seagraves with Fort Washington. Please proceed.

Hi, I'm new to these calls, so these are issues you may have discussed in the past, but I guess I'm interested in two things. One, the, I guess the strategy behind the expansion into Bakersfield. I mean, is that a diversity play for you guys? Is there an opportunity there for you to improve the margins that were there, improve the product?

And then also, I'm trying to understand the, I guess, the plans with that Mariners contract that you guys talked about. I think you said it ends next year. Would you think you would try to renegotiate that, extend it, walk away from that? Just to try to get a better sense for maybe where the profitability of radio is heading, I guess, going forward.

Yes, Kevin, thank you for the call. First of all, regarding Bakersfield and the strategy there, we are heavily focused in Washington and Oregon and in Idaho, but this does diversify us geographically. It was a duopoly opportunity, which is unique, because it is a market that typically isn't allowed a duopoly because of the number of voices in the marketplace. But because of the way Fox had structured their deal, they're on low powers, and we're able to broadcast like a VHF television station, and that station had not been developed yet. So we fully look forward to developing the Fox affiliate there. Obviously, they're signed on and they're broadcasting, but there's very little news initiative. There's very little repurposing. There's very little development of that particular station. So there's great upside on the duopoly in Bakersfield.

In addition, to enter the California market, a market that is so rich in advertising, as well as phenomenal growth -- Bakersfield outstrips growth in Boise, Idaho, which is our fastest growing market -- and in addition, it benefits from very strong political advertising. And I mentioned, during even years, but even during what we're seeing now in odd years in California, because they have so many issues initiatives that end up on the docket. So it's a strong political state, and very good for local revenue.

As far as where we go with the Mariners contract -- it's a year away, essentially, from expiring, and we continue conversations with them. The way I like to state this is we continue to look at a way to do a win/win deal for both companies. And if it's not win/win for both companies, it doesn't make sense for us to do. But we'd very much like to see the Mariners be successful and for them to remain on KOMO 1000.

Okay. And then with the Bakersfield, with the, I guess, further developing the Fox, is that a - I mean, I don't know what that - what are the economics behind that? Is that a material increase in cost I guess in the short run to build out the news, or to build out the other--

Yes, it was all built into the analysis in our acquisition strategy. It's not large. When you do create duopolies, there isn't a lot of infrastructure cost that goes with that. It's really just a matter of reorganizing. There might be some incremental costs, but for the most part, that's the benefit of the duopoly is you lever the costs that already exist with the CBS station.

Okay. Okay. Great. All right, thanks. Appreciate it.

You're welcome.

At this time, there are no questions in queue. I would now like to turn the presentation back over to Mae Numata for closing remarks.

Thank you, Lacey, and thank you, all, for joining us today. We are very pleased with our continued revenue improvement and our third quarter results. And of course, if any of you have any side questions, you know how to contact both Colleen and myself.

So again, thank you very much, and this is the end of our call.

Thanks. Bye-bye.

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