Urban One Inc (UONE) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Radio One second-quarter earnings release. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session with instructions being given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Alfred Liggins. Please go ahead, sir.

Thank you very much and thank you, everyone, for joining us for our second-quarter results conference call. With me today is our EVP and Chief Financial Officer, Scott Royster; our Chief Administrative Officer, Linda Vilardo; and our General Counsel, John Jones.

Not with us today is Mary Catherine Sneed, who for the last 11 years has been our Chief Operating Officer. About a month ago, she and the Company parted ways; and she was a mighty contributor for 11 years, and we appreciate everything she has done.

Once she exited I used this is an opportunity to assume the interim role of Chief Operating Officer. I embarked on a tour of all 71 of our radio stations to meet all of our employees and to assess the resources and the strategies needed to move the Company forward.

I just completed that tour last Friday, actually; I have been on the road a month. I feel very positive about the future and our position in it. I will be happy to discuss more of what I found and what our plans for the future are when we get to Q&A. But right now, I would like to turn it over to Scott.

Thanks, Alfred. Good morning, everyone. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because these statements apply to future events they're subject to risks and uncertainties that could cause actual results to differ materially, including the absence of a combined operating history with an acquired company or radio station, and the potential inability to integrate acquired businesses, need for additional financing, high degree of leverage, seasonal nature of the business, granting of rights to acquire certain portions of the acquired companies' or radio stations' operations, market ratings, variable economic conditions and consumer tastes, as well as restrictions imposed by existing debt and future payment obligations.

Important factors that could cause actual results to differ materially are described in Radio One's reports on Forms 10-K and 10-Q and other filings with the Securities and Exchange Commission.

For Q2 2006, Radio One reported results that are disappointing on one level, but readily explainable on another. While we are normally not the kind of management team that looks for excuses to explain our performance, we do feel that there was a powerful confluence of events in this quarter that make things look worse than they really are. To summarize what made this quarter as difficult as it was, you need to focus primarily on four things.

One, in last year's second quarter, we outperformed the radio industry by over 600 basis points, a level of outperformance that was due to certain industry dynamics that do not exist today, primarily the early days of Less Is More, from which we believe we benefited. This level of outperformance was obviously unsustainable.

Two, two of our significant markets, Los Angeles and Washington, DC, were drags on the Company's performance in this year's second quarter -- L.A., due to ongoing ratings declines and DC due to competitive pressures. In L.A., we have recently made some major programming changes that we will discuss further, that we hope will improve the performance of that radio station.

In DC, where we last year benefited greatly from Clear Channel's Less Is More initiative and where we this year saw a reversal of fortunes, as the impact of that initiative reversed and negatively affected most of the non Clear Channel operators in the market. In fact, the early signs in DC are positive for Q3, and we would hope that we will get closer to a normalized environment as the months go by.

Three, in last year's second quarter we outperformed nationally by over 1,000 basis points. In this year's second quarter, we underperformed vital by over 1,000 basis points. Again, Less Is More had a positive impact last year and a negative impact this year.

Additionally, our switch to an all [cats] (inaudible) portfolio of radio stations has been a challenging transition in some markets, but is beginning to stabilize. National was down double digits for the Company in Q2 of this year, but is actually pacing up in Q3.

Four, on the cost side, we outlined some discrete cost items that we incurred in this year's second quarter that, if backed out, would have led core station and corporate operating expenses to only have grown about 2% to 3%. Some of these costs are nonrecurring and some are investments in our future that should lead to future revenue gains.

As an example, the cost of setting up our independent film distribution entity and distributing the first film were almost all incurred in the second quarter; yet the bulk of the revenue from this film, based on DVD sales to date and expected future DVD sales, will occur over the next 18 months or so. We will incur little incremental cost as this revenue is earned.

We can talk further about these Company and industry dynamics in the Q&A session.

On a consolidated basis, net revenue came in at $97.8 million, down 4% from last year, while station operating income was $46.9 million, a decrease of 15% from last year.

As stated above, most of this revenue decline was due to declines in Los Angeles and Washington, DC, with the rest of the portfolio operating as a fairly typical mixed bag of results.

Industry revenue was down 2% in the markets in which we operate for the quarter. The primary driver of the decline in station operating income was the revenue decline, after taking into account the nonrecurring and growth-oriented expenses as stated above, as core station operating expenses only grew in the low single digits for the quarter.

Adjusted EBITDA was $38.8 million, down 21%. But if you further adjust for the impact of FAS 123, the adjusted EBITDA decline was 18%; and approximately 10% if you back out the discrete expense items as mentioned above.

Net income applicable to common shareholders was $0.08 a share.

From a category perspective, every sector that we analyze was negative, other than government and services. Entertainment, telecom, and travel and transportation were particular weak. The number of spots in the quarter was up approximately 10%, while pricing was down about 16%, which I think echoes the statements of some other radio industry executives that pricing has yet to firm in our industry.

Elsewhere on the P&L for the quarter it was a pretty typical period. The only significant deviation from a more normalized period was the income tax provision, which was at 49% for the quarter due to a new Texas state tax law as well as the impact FAS 123 of approximately $1.5 million.

For the quarter, capital expenditures were approximately $3.8 million versus $5.2 million last year. CapEx guidance for the year remains at approximately $15 million.

As of June 30, 2006, we had debt net of cash balances of approximately $946 million; and our leverage ratio was approximately 6.5 times.

Once again, we will be withholding guidance for the upcoming quarter. While we do see some improvement in the industry and in our relative performance, it is still a bit too early to gauge performance. We do believe that we are returning to a more normalized environment now that LIM or Less Is More has been in place for a while; and we are encouraged by the way July ended up in some of our markets.

Lastly, in this quarter we will see some nonrecurring expenses associated with our 25th anniversary event later this month, as well as a commitment to iBiquity to purchase a significant number of HD radios as part of an industry initiative to drive retail sales of HD radios.

With that, we would like to turn it over to the operator to open up the call to questions. Thanks very much.

(OPERATOR INSTRUCTIONS) Victor Miller of Bear Stearns.

Scott, a lot of what you talked about did suggest that third quarter in a lot of ways may be a turning point, with cats and national now being up, the movies, the revenue coming in, the DC market turning positive for you, L.A. programming efforts kicking in.

Can you talk about any other things that might help the third quarter, relative to what was happening last year? Maybe even describe what you're doing in L.A. specifically.

Suddenly, Alfred, can you talk about the process you are going under in terms of management changes you have made recently? Will there be a President for the Company? Will there be a new COO of the Company. What role will that person play?

I will handle my question, and I will also handle L.A. Like I said, I have been on the road for a month, and literally I just left L.A. yesterday. And I am really happy to be off the road.

But I enjoyed every minute on it, because I did get to meet every single one of our employees. It was a real eye-opening experience.

I spent the last week in Los Angeles because, if you look at the Company's performance issues in terms of underperforming the market, it is an L.A. story. Scott, I don't know what the percentage is, but it's got to be what, 75% 80% of the issue?

It is certainly two-thirds to three-quarters of the Q2 shortfall, absolutely.

Yes, so at the end of the day, a number of things happened in L.A. which essentially caused us to lose about half of our ratings. Some of those things were in our control, some of those things were not.

We did make a morning show switch out of Steve Harvey to the John Salley, and that was not received very well by the L.A. market. But also, what happened is a new competitor from Spanish broadcasting came in, Latino 96.3, I think it is, or 96.5; I forgot the exact moniker of the station, but the call letters are KXOL. They basically do a Spanish hip-hop and reggaeton format, which peeled off us Hispanic hip-hop listeners, off the stations like The Beat and also Power 106, the Emmis station. We used to get 5-share stations, now 3-share radio stations.

So you have that dynamic going, at the same time going in Less Is More comps, and just a whole litany of other issues. A perfect storm.

So long story short, we evaluated our position and decided that in order to get the station back to the kind of cash flow -- focused on cash flow not just revenue. On a cash flow that it historically had, we needed to get better adult numbers. We used to have about 3 share, now we got about a 1.5, 1.6.

So we decided to take the station Urban AC, led by the Tom Joyner Morning Show in the morning; and also we launched the Michael Baisden Show, which has done very well in a number of markets that noon to 4; 4 is where we historically had problems getting ratings on that radio station anyway.

This allowed us to also significantly reduce the operating expenses of that station, because the Steve Harvey contract was very, very expensive, and these shows are syndicated. We don't own the Baisden show; that is an ABC network product. But obviously we own Tom Joyner at Reach Media. Tom actually expanded his show by two hours to do two hours of local L.A. radio only, which I'm pretty excited about. I spent the last week going to the live remotes that he was doing across the different communities in L.A., which was great to see.

So it's going to take a minute for it to turn around, because these changes have just gone into effect. We are still tweaking the radio station. We have got another research project in the field.

One of the things from a management standpoint, to help me cover off some of the things that Mary Catherine had done, is I hired a guy by the name of Barry Mayo. He used to run the Emmis cluster in New York, but also was the president of Broadcast Partners, Incorporated, a former radio company. He is a longtime colleague, old family friend, and one of the smartest guys in the radio business. He actually invented the Urban AC format, which is the format that we are executing now in Los Angeles. He and I are spending a large number of hours out in the L.A. market. So I'm pretty confident we are going to get that situation turned around.

We got about a 1.5 now. All I need to do is add a share point, get it up to a 2.5 or 2.6, and with our expense base I can cash flow the same amount of money that we had when we had Steve Harvey there. So we are really focused on that. The sales team is holding together and clients are rooting for us out there.

But in the end, in Los Angeles, ultimately it's very difficult to serve our particular demographic with just one radio station. This is one of those areas where it's -- really tough to be a stand-alone, because of the high concentration of Hispanics and the relatively low percentage of African-Americans at 8%. That is the bad news.

The good news is there is $1 billion there. And it's actually lengthening its lead over New York in terms of radio ad dollars. So for all the things that we ultimately want to do in terms of the platform, for the biggest opportunities to generate real cash flow upside, L.A. really has that. So we are focused on getting that station repositioned and back into positive territory.

When I say positive territory, I mean significant cash flow growth momentum as opposed to negative. Because the station still has a significant amount of revenue in cash flow.

In terms of management, I have assumed the role of interim Chief Operating Officer. I have done this before, so I am not in a rush to replace Mary Catherine or to find a President. But I am absolutely going to do it, because I have for a long time wanted to build deeper bench strength at the Company. I think that is an area of weakness that we have had.

What I have done in the meantime is I again hired Barry Mayo to help us, along with Alan Sneed, who has been our longtime consultant and who still continues to consult the Company from a programming standpoint, Barry and Alan.

Also, I rearranged some of our regional responsibilities. I terminated one regional. I promoted one general manager, the gentlemen who runs our Houston cluster; a guy named Doug Abernathy. I promoted him to regional and allocated a couple of markets to him. I realigned some markets and gave more responsibility to some of our other regional managers that have performed well.

In the meantime also, our Vice President of Operations, Zemira Jones, has picked up significantly more responsibility, including having one of the regionals report directly to him. So we are covering off the markets quite well.

In terms of other corporate infrastructure, I plan to hire a Vice President of Programming. I plan to put in format specialists underneath that Vice President of Programming, so you'll have somebody in charge of Urban AC, somebody in charge of gospel, somebody in charge of talk, and so on and so forth.

I will fill -- have continued to be filled Vice President of Operations job. I may replace the Chief Operating Officer and/or name a President. Haven't decided whether I'm going to put one person in that gig or two people. But I'm focused on finding the best possible people that I can put in place to build the Company for the future. Because this is the platform that is going to take us to the next level.

This radio group has got to be operating as it has in the past, as an industry-leading company. I really feel good about being able to get it back to that status. We've got a great strategy and we are a few bodies short of having the right team to execute it. But I feel confident that we will.

Scott, any comments on the other factors like cats, national movies, the DC market getting better? What is the impact of what Alfred just said on corporate for next year?

We're not providing any guidance near-term or longer-term at this point. I think Alfred did a great job of sort of covering off some of the areas of particular focus. I think my comments hopefully gave some insight into some of the areas where we hope to see better performance in Q3. So I think we have pretty much answered your question.

Thanks very much.

James Dix of Deutsche Bank.

Just a couple things. Any sense as to the magnitude of types of onetime items which will affect OpEx next quarter, Scott, as opposed to this past quarter where you seemed to have a lot?

Then I guess also for you, Scott, what goes into your decision in terms of assessing the markets and their stability, as to when you're going to give guidance and when don't you?

Then in the second quarter, I know national was weak. What was local?

Then finally, for July, how did your clusters grow versus your markets, if you know that data?

All right, we will jump around a little bit. We haven't seen July (indiscernible) overall, so don't have an answer to that.

In terms of the onetime items, I'm not going to do provide specifics at this point; because quite frankly I am not sure that with regard to the iBiquity purchase I can at this point. Because I think lots of different operators are going to be purchasing different levels of radio stations; and I would feel uncomfortable disclosing that without iBiquity's formal approval, which I do not have.

With regard to our 25th anniversary event, we are still sort of finalizing that, so I unfortunately cannot be more specific than that. Probably not a lot of other stuff other than those two. So it should be -- relative to the numbers of things that I outlined for Q2 -- certainly not as many.

You asked a question about local. Local for the industry was down 3% in the quarter. That is Q2.

Scott, Q3 has been -- some of these severances should be flowing through.

Well, okay, most of the severance flowed through Q2. If there are any additional severance items, the severance associated with the Chief Operating Officer at least so far, has flown through Q2.

Scott, do you have what you were in your markets in local in the quarter versus that 3%?

We were down just under 6%. Now, that is looking at radio stations. Remember, you have to recognize that in our Company we have got other pockets. So there's core radio; and then of course there is Reach; and there is the miscellaneous items, Syndication One, Distribution One, et cetera.

With regard to the severance that Alfred just mentioned, because of some of the management changes that are ongoing within our Company, there will be additional severance costs more than likely in the third quarter. So there were some severance costs in the second quarter; there will be some additional severance costs in the third quarter.

That is where I was going with it, because some of it is a moving target.

Yes, that's correct.

Some of that will flow through OpEx as opposed to corporate?

Yes.

Okay, thank you.

Marci Ryvicker of Wachovia Securities.

It sounds like instead of being a seller in Los Angeles you're possibly a buyer. I am wondering if you would be interested if Univision were to put up its assets, now that it is being sold. Then, along that line, with your debt up to about 6.5 times, what flexibility would you have buying something in the market?

I would say that we have always have been mindful of our leverage. I spent most of my career highly leveraged and am quite comfortable where we're at. When I say comfortable, I'm uncomfortably comfortable where we're at right now, to the extent that we are looking at non-strategic asset sales.

However, that progress on that front has been slow. One, it is just the M&A environment is not robust, given that most public companies are looking to sell as opposed to buy.

Second, there is a fair amount of inventory on the market now from the CBS divestitures. So interest in our assets has been tepid. Now, when I say tepid -- do we have people who want to buy some of the things that we would consider selling? Yes. Are they at values that we find acceptable today? No.

Is there some activity at all on any of our assets? And I would say, yes; there's a couple things swirling around out there, and we will see if they ultimately come through. But what we don't want to be is we don't want to be put into a situation where we have to fire-sale something just because of timing.

So with that in mind, one of the things we did in Houston when I was on the Roadshow, we had -- we paid $72.5 million for a radio station in Houston; we turned it Hispanic; and we did a really bad job of executing that format. We had a 1 share.

In fact, this is a funny story. One of the -- we put through two program directors, and the second one actually changed the format, and we didn't know it, because we don't speak the language. So when I was there and we figured that out, me and the general manager looked at each other and said -- time to do something that we know how to do.

So we change the radio station to gospel. Actually, we call it contemporary inspirational. We were losing about $60,000 a month on that station as a Hispanic station; and under -- as a contemporary inspirational station, we are going to be able to run it for a lot less money. And I believe that we are going to have significant and immediate ratings upside because of the ability to run huge margins there.

So whereas we were looking to sell that radio station, now the way we look at it is we can actually get the kind of cash flow and ratings that we originally projected when we decided to buy it; and it strengthens our hand in Houston. We make a lot of money. So now we will have three Urban radio stations in a market that is 17% African-American.

So we think that it is less likely that somebody will attempt to compete with us. If they do, we think it is more likely that we will more than weather the storm.

Los Angeles, I will be honest with you, nobody actually even called us about buying Los Angeles. The only company that would have been remotely interested would have been Emmis, who is the direct competitor. But two things happened. One we became not a direct competitor; and two, they ultimately decided they were going to try to take their company private. So.

And I know that that is off the table now. But at the end of the day we are more focused on fixing that radio station than ultimately divesting it. And we think that we can fix it. It was broke when we got it the first time and we fixed it. So now that it's broke again, we believe we can fix it a second time.

Do you have any interest in Univision assets if they were to go up for sale?

No, no. I would say that in order for us to -- I have said that we should get bigger in Los Angeles. Essentially, that is a place where it is tough to be a very broad radio station. So if there was an asset that covered our market that was a reasonable valuation, we would look at it. But we are very sensitive to our leverage.

I wouldn't look at it before we maybe disposed or were well on our way of disposing of some other assets that would give us some capacity. But we are not going to go long in terms of leverage in order to get bigger in L.A. We would probably have to come out of somewhere else in order to get bigger.

Thank you so much.

Anthony DiClemente of Lehman Brothers.

I apologize if I missed any of this; but if you can give us some color on progress at TV One, just in terms of your distribution, as far as number of subscribers and potential addition to your subscriber base.

Then also you had said in the past that TV One was on pace to break even in 2007, by the end of 2007. Are you still on track for that?

Then I have a second question. You had talked, Alfred, you had mentioned that most public radio companies are sellers of assets. Maybe you can expand a little bit on that.

And then also address Emmis. At this point, given the recent news, would you lump Emmis in as a seller of radio assets? From your vantage point do you think they're a better buyer, or seller, or neither? Thanks.

TV One is on pace to breakeven at the end of '07. I don't know exactly where the exact subscriber count is today. They add subscribers every quarter. But I do believe it is in the mid 30s. Scott, you have better color on that?

It is probably in the 32 million range.

Okay, so 32 million today.

What is the target, long-term target for distribution? It's not targeting full distribution, are you?

No, but we would like to -- put it this way, there is no model that we have that assumes full distribution.

Okay.

But I think that we can clearly see our way into the 40 plus million sub category. Now the question is -- how do we get to 50 plus million subs?

Emmis, I can't speak to as to what their business plan is. We have got ours. If we sell assets, I would like to turn around -- and once we are comfortable with the direction of our cash flow -- start buying in stock as opposed to necessarily plowing more money into radio assets.

We are very specific in our acquisition strategy over the last five years, and that is to build our position so that they were competitive and safe from attack. That is the reason we bought the second FM in Cincinnati. It is the reason we bought a second FM in St. Louis.

So I don't really sort of speculate on what the big M&A opportunity would be for us or Emmis. We are focused internally on how we grow Reach Media. We just launched our BlackTalk network on January 30, which is now breaking even. We put out the Preaching to the Choir DVD through Distribution One; and that looks like it's actually going to turn out to be a pretty good deal for us. So we are looking at ways to do more of that.

Also, I have got to come up with an Internet strategy that I believe is going to allow us to build some dominance in this category, as we have radio and as we are in television. Because I think that all three of those things, all four of these things work together -- radio, the cable network, content, and the Internet. So, once I get radio restructured, I'm going to spend about 80% of my time on our online strategy.

Thanks for taking the question.

Eileen Furukawa of Citigroup.

Given that you note that the interest in your assets has been tepid, I just was wondering -- are you still targeting in that 100 to $150 million in asset sales? Could you give us an update on planned timing of any sales?

Then also, similarly, you talked about implementing all these changes in Los Angeles. How long realistically do you think it's going to be before we can see meaningful improvement in that market?

I think that we could start to see -- I think we will start to see ratings improvement over the next six months. I think that we will be able to monetize that ratings improvement fairly quickly. So I think it is a six-month process. What was the other question?

Assets, are you still targeting 100 to 150?

I tell you, I think the answer is no, because a big part of that getting to the $150 million or $100 million, $150 million, was we were fully prepared to sell that Houston FM. Once we didn't get any bites on it at any reasonable valuations, then we decided to run it like we were going to own it.

Quite frankly, I think this format is going to be fire in that market. I have never seen a market respond to one of our contemporary inspirational formats like this one has. I don't know if it's the fact that it's in the Bible Belt or what have you. But I don't -- I am not in the business of predicting ratings, but I think we are going to see something really substantial there and really strengthen that position.

So long story short, I think that we have got a real shot of building some significant cash flow fast. So with that off the table as part of that $100 million to $150 million, it is going to be difficult to get there.

What is your sort of new range of targeting? What do you think the timing is?

I haven't figured that out yet. I'm also going to wait to see how right or wrong I am about Houston and some of this other stuff. Because there's a couple ways to delever. One is to sell assets and pay down debt; the other is to grow your cash flow. So I think that we've got a real good shot of growing our cash flow.

We've got some bright spots. Growth markets, Houston, Detroit, Baltimore, Philadelphia, and Richmond. Detroit and Philly are markets where we're gaining market share in terms of audience and our revenue is catching up with our ratings.

One of the markets that is soft for us right now is Atlanta, and it doesn't need to be soft because we got a pretty strong ratings position there. So I'm working with the team down there to figure on how we better monetize Atlanta.

Then there are a few set of -- there are a few stations that I do believe we will get acceptable offers on and we will let go of. So that combination of those, I don't know where we're going to end up in terms of total amount of proceeds raised. But I am hoping to bolster that with increased cash flow in (indiscernible) markets.

Okay, thanks a lot.

Bishop Cheen of Wachovia.

Alfred, not to drive you nuts, but I'm just trying to get the sequence. Granted, you're still deciding what to sell and how much. But I thank you said just a couple of minutes ago that you would rather buy back your stock than buy back assets.

Is there a linkage of sequence here? Will you wait to increase your stock buybacks till after you identify what to sell and actually get some deals?

Yes, I don't think there's any scenario. Scott and I have not talked at length about this. But I don't think there's any scenario where we're going to resume stock buyback until we know where we are at on asset sales.

I agree with that.

Okay, so whatever stock buybacks you have been doing, is going to continue at the same level or stop?

Bishop, we have not bought back stock since last November.

Okay, last question. Your take on all the stock buybacks that we have seen in the radio space, and they just haven't seemed to work. Whatever happened to very old school of less debt means more equity?

That's a good question. I guess the way I look at it is when I buy back the stock I don't really look at it from the standpoint of -- oh my God, I hope the stock goes up. I just look at it as buying back a Company that I believe in.

Bishop, at the end of the day you have to make these capital allocation decisions based on what you think will lead to the greatest return on a present value basis for shareholders. So given our expectations for our business, at least last year when we did an analysis, we came to the conclusion that the shareholders would be better off if we were buying back stock over the long term than taking every dollar of free cash flow to pay down debt.

Now, obviously, as the cost of capital changes, as the interest rate environment evolves, as the business prospects potentially change, which could have an impact on future multiples in the industry, you have to relook at all that stuff to make a determination at any point in time as to what is the best way to create value for shareholders.

Fair enough and very helpful. Thank you, guys.

Jonathan Jacoby of Banc of America Securities.

I apologize; I joined a little bit late. But the key question I would like to focus on, perhaps, if you exclude all these new initiatives, Scott, what was the core same-station expense growth for radio?

It was low single digits. We did mention that.

Okay, that is sort of something I wanted to focus on. Thank you.

Jason Helfstein of CIBC World Markets.

Two questions. One, Alfred, obviously, what happens in L.A. with respect to Hispanic competition, that could happen in other markets, just given that that is a more attractive format to operate in than English language. So what are you guys doing as a Company proactively to make sure that you stay ahead of that, assuming that is going to happen in other markets?

Then, Scott, the second question, we always talk about, and you always get this question from investors, what can you do to realign your cost structure with the realities of the business today? I guess let's tie into, Alfred, given that you're doing a reassessment of the business and kind of reorganizing your management team, what about looking to use stock options or some kind of restricted stock as a greater compensation method, to essentially bring your costs more in line, or your cost growth more in line, but at the same time incentivizing people that if you really pull off a more dramatic turnaround that the employees really benefit? Thanks.

We are -- right now my first priority is operational, and so that's what I have been focused on. But right shortly thereafter we have got to reassess how we view incentive-based stock and option-based compensation across the entire Company. Because I have got a whole Company with everybody that has options that are under water; and ultimately, that is something that we've got to deal with. Otherwise you'll lose good people.

We are already seeing on the sales side it becoming more and more difficult to get people into the radio business. When people leave the radio business they don't go to the competition; they go to different industries.

So we've got to figure out a way to make sure that this business is still viewed as a place where people can create economic opportunity. I don't think that is just a Radio One problem; that is an industry problem.

In terms of keeping our costs in line, --.

Yes, Alfred, let me pick that up, please, because we talked about 2% to 3% core normalized operating expense growth, which I think is very consistent with what we have always said in terms of we think operating expenses grow in the low to mid single digits; and then everything else that drove our costs higher were either nonrecurring in nature or were growth oriented.

Until we -- and again I don't want to speak for Alfred -- but until we get the sense that perhaps some of these growth initiatives aren't going to pay off and generate positive returns for shareholders, we're going to continue to invest in those types of things. But for the most part, the investment occurs upfront and the payoffs are down the road.

So you've got to look at the business in two separate buckets. I think from the core bucket, my sense it that our cost growth is fairly, if not very, consistent with the rest of the industry.

Just a follow-up on that one -- and then, Alfred, if you will talk about the Hispanic competitive threat -- Scott, you have historically said in the past you always saw it as kind of a 4% to 5% cost [growth] business. Are you now seeing that, okay, core expenses growing 2% to 3% is something that is manageable over the long term?

I think what I have said or least over the past -- we have known each other a long time -- so over the past couple of years I have sort of modified my comments to say low to mid single digits.

Obviously, part of that, where you end up on that spectrum, is what your revenue is doing, right? So if your revenue is flat to down, your variable costs are flat to down. If your revenue is actually up, then obviously your variable costs are up.

So you've got to keep in mind that when you look at core expense growth, obviously you have the fixed component and the variable component. I know you know that. But I would rather sort of keep the band a little wider and just say low to mid single mid digit cost growth, because obviously some of that is dependent upon what the revenues are doing.

The point is you have not changed your cost outlook for the business (multiple speakers) three or six months ago?

Not over the intermediate or long-term. We certainly do things in the short-term, like hiring increases and wage freezes to control costs even more stringently. But certainly, with regard to the intermediate and long-term, again unless you tell me that the industry is going to be going backwards for the foreseeable future, I do believe that low to mid single digit cost growth continues to be the perspective that we have for what it takes to run this business.

Okay. Alfred, if you could talk about how you (inaudible) being more proactive or be proactive in the future with the Hispanic radio threat.

You're basically talking about Texas and California. You know what? Houston and Dallas already have more Spanish radio than they need. They don't need us to become a Spanish player. And L.A. is the same way.

So we are done. We are done in the Hispanic radio market. The rest of it is sort of protecting our Urban positions. I guess one could argue if we had a third FM in Charlotte, North Carolina, that there is probably an opportunity to do Spanish on the FM there. But we have got a gospel station and an Urban AC; I would still probably today take that third FM and take it hip-hop.

I'm talking about the other way. That where somebody puts on a reggaeton station and it cuts into you, so how do you -- assuming that's going to happen more in the future --.

It already happens. It already happened in L.A., and it's already happened in Dallas. So we just need to have better positions in those markets.

In Dallas market we have got our hip-hop station, which got a little reggaeton competition; albeit they were from [weaker] signals, it cut us back a bit. But we weathered that storm.

In Houston had the same thing happen to us, and we actually were not affected at all. The Univision station was the station that got affected by Clear Channel putting on a reggaeton format. So I think we are fine.

Okay, thank you, guys.

The problem in L.A. we were the second hip-hop station as opposed to the first, so we got hurt even worse than Power did.

Kit Spring of Stifel.

Can you give us a little more info on what your commitment might be to buy radios for the HD initiative?

Then can you just talk about what do you think the industry is going to grow next year after you cycle through the tough comps, just in a normalized economy?

No, and I don't know. I don't think we should tell you how many radios we are going to buy from iBiquity. But we're definitely going to participate in a significant way. We've got a specific strategy for the radios that we are going to buy.

Kit, I think if everyone else in the industry basically says what they are doing, it will probably be some big numbers for some of the bigger players. And we are happy to disclose that information. We're just a 100% clear if it is something that iBiquity wants specifically articulated.

Yes. And what was the second question?

What is the industry going to do next year, Alfred?

That's right, that is the "I don't know" part of -- I give up, you know?

You're giving up that easily?

On predicting.

Okay, fair enough. Thanks.

Igor Lotsvin of Symphony Asset Management.

I had a question on the potential asset write-downs. We saw in the industry today a competitor took down their assets pretty meaningfully. I was wondering if you guys have done asset evaluation or is that something on your radar screen.

Yes, we do it every year. We actually had an asset write-down a couple years ago when a bunch of radio folks were looking at valuations.

I know I think you're referring specifically to Citadel, who announced a pretty significant write-down today. I have no idea kind of what drove that. They operate in a bunch of smaller markets. It could be that they had to look at revaluating those things because multiples have come down.

We, other than the write-down that we did in the past, for the most part we have shown decent valuation relative to carrying value. But again, it's an exercise that occurs every year. Obviously, multiples matter. Obviously, growth in cash flow outlook matters.

So I am not going to tell you that we're never going to have to take a write-down again. But it is something that we look at very closely; and I guess we will know more as we go through that process at the end of this year.

John Klim of Credit Suisse.

Two quick questions. What revenue growth rate do you need to post in a normalized environment to drive margin expansion?

Then, second, what percent of your total revenue currently comes from the Internet? How fast is that segment of the business growing?

All right, the problem is, every quarter that goes by we are more of a portfolio of assets. I think what you may be getting is in core radio, what does it take to drive margins? Because Reach Media obviously is good growth engine for us.

I would say as I have said in the past that I think core radio revenue needs to grow 2% to 3% in order for you to potentially grow margins a little bit; 4% or 5% I think if you want to show relatively decent margin expansion.

But Reach's margins are expanding as we look at the other buckets of revenue that we generate. Relative to distribution syndication, as Alfred said, Syndication One, our news BlackTalk network is breaking even. So assume it has a zero margin today, but will have positive margins in the future, even if it grows its revenue a dollar.

So the good thing is that we are in some businesses that are relatively early stage that can show significant margin expansion. But in core radio, which obviously makes up the bulk of our business, I would say it is sort of a low to mid single digit need in order to expand margins.

In terms of the Internet, we are doing okay there. The Internet business, for us, we generate about actually over $1 million a quarter. As an example, in the second quarter of this year, that was up about 15% from last year.

So not as robust as we would like it; but again, we are, as Alfred said, sort of otherwise focused right now. The Internet is something that we will certainly be turning our attention to in earnest in the back half of this year.

Those Internet advertisers, are they incremental or is it an upsell to a current advertiser?

It is mostly an upsell. I don't believe that we have a lot of advertisers online who do not advertise on radio.

Got you, thanks.

David Bank of RBC Capital Markets.

A couple of questions, the first is, Scott, could you just review for us where the total debt to EBITDA leverage is today, and the maintenance covenants, and when the next stepdown is?

The second question is -- I guess we won't find out the total number of HD radios you're buying; but obviously since you are looking to buy some, can you give us a little sense of how you are planning to program them? When you buy all these radios and give them away or do whatever you are doing with them, how many HD streams do we expect? How do you think you will program them?

You know what, I don't want to do that. Because we have got a specific strategy that is market specific that I don't really want to tip my competitors off to. It is really not all that dependent upon us having an HD2 programming strategy.

So we don't really have an HD2 programming strategy today. I think it is more important for us to get our Internet initiative put together than figuring out how to program our HD2 channels when there are not any radios out there.

However, when we get this chunk of radios, we are going to focus on one of our markets; and then we are going to come up with a strategy for trying to increase our listenership in that particular market. And that is the most I want to tell you.

In terms of leverage, as I said in my opening remarks, we are at 6.5 times today; the covenant is 7. It takes us through the end of '07. So we have got a decent cushion.

Our bank group is been incredibly supportive of the Company in these uncertain times. So in general, as Alfred said earlier, we are comfortable. We are uncomfortably comfortable, which I think is a great way of looking at it.

We clearly have an open dialogue with our bank group, so that if the world unfolds from here in a negative way, we can certainly, I'm sure, open up a dialog with them even further about a cushion. But for now, we feel like we are in pretty good shape.

I just want to clarify with regard to these HD radios, some people might be thinking -- well, why isn't this a CapEx item, particularly if you're buying a whole bunch of radios?

Obviously, this is probably clear to most people, but this is effectively marketing and promotion dollars, right? So we are buying these radios and we are going to be giving them away to drive recognition of the product in the marketplace. So as we understand it, and I think all radio companies are going to be in the same boat, this is going to have to be an operating expense item in the quarter as opposed to a CapEx item.

Thanks, sorry you had to repeat that.

No, that's fine, thank you.

Michael Freedman of Omega Advisors.

Alfred, I appreciate the detail on L.A. I was just wondering if maybe you could highlight -- I guess and Houston. Was wondering if you might be able to highlight one or two other situations that are doing worse that you would like to see, and that you might be able to turn around sooner rather than later.

Then just kind of more broadly, what should investors focus on in terms of metrics that we should look at and how quickly we can expect to see improvement on the radio side? What should we be looking for? What should we try to hold you to? Thanks.

You said examples in L.A. and Houston? I didn't --

No, other markets, Alfred, where we may be looking to turn situations around and what specifically we might be doing.

You got L.A.; you got Houston. Our sales effort in Atlanta needs some help. I am heading down there at the end of the week.

I think our Philadelphia sales effort can use some improvement. We have made some new hires there, and Zemira Jones is very focused on that, because we've got ratings that we are looking to monetize there. Detroit's monetizing their ratings.

I think in Washington it's really just a process of -- because we have got a great management team and decent ratings -- I think it is just a process of sort of working through the tough comps from last year.

Cincinnati, we've got a second FM coming online and so you will see revenue growth out of there. Actually, St. Louis is showing some significant revenue growth since we've added the second radio station there.

In terms of your other part of your question, obviously, ratings matter. So particularly in those markets where like in L.A., where it is a significant part of our overall revenue, following those ratings trends should give you a sense as to how we think we can ultimately do from a revenue perspective.

Then obviously, the industry matters. The performance of the industry is still, I think, the primary driver of how well we will do as a Company.

If the industry is flat and we kill it, we are up 5. Nobody is jumping for joy for that, you know? But --.

I would actually jump for joy if that occurred. Why don't we go on to the next question?

John Blackledge of JPMorgan.

A couple items. Core radio revenue declined in the second quarter. I don't know if you guys mentioned it. I thought you said national was down 10, local down 6.

Then on the film distribution initiative, is there like a target number of films you guys are looking to do annually? Are these films direct to DVD? Typically, distributors get 8% to 12% of net sales. I am just wondering if you guys can give some color on that. Thanks.

Core radio, again, we are trying to be -- we would rather not necessarily focus on core radio because of the way that all this stuff sort of interrelates. So I don't want anyone to think that we are in any way sort of misrepresenting things by trying to break out stuff that is interconnected to other things.

But I would say that -- and of course local and national are just two components of how well you do from a radio perspective. There is also NTR, which I think a lot of operators are seeing a significant area of growth in.

But if you were to just look at national, local core radio, yes; we were probably down. We were down mid single digits, all right? But again, that ignores the NTR revenue bucket as well as Reach Media and a lot of the other stuff.

With regard to -- Alfred, do you want to talk a little bit about film, and then maybe I can talk about the economics?

We, to date, Preaching to the Choir was an experiment. When we distributed it, when we took it theatrically, quite frankly, we were really disappointed. Because we thought we would do $1 million to $1.5 million at the box office, and we did $400,000.

But we made a mistake. We released a gospel-oriented movie on Easter weekend. That was my bright idea, because I thought -- I don't know what I thought. I thought people were going to leave church and their family dinners and go see our movie. And that was stupid.

Yes.

But long story short, we promoted the heck out of it and the thing is selling a ton of DVDs because of the exposure that it had. So, we are now pretty excited about this, and we are looking for other projects that fit this mode.

Now there are a number of tests to meet. And by the way, Distribution One in the meantime has actually been formally capitalized as an entity that is a partnership between Radio One and TV One.

So now we are looking for other films that fit the model, which is, TV One; it would be a good film for TV One; have some theatrical promise and deep sea legs. But also it's an economic model that is relatively low risk from our standpoint.

I like this model because a couple things happen. One, TV One gets good films entertainment, which is probably one of our weakest areas. Two, Radio One and TV One, but it's been mostly Radio One, creates a new advertiser because we control the advertising budget; and then we get our expenses, our advertising dollars back up off the top. Then we get a distribution fee significantly higher than 10%; and we get a piece of the back-end significantly higher than 10%.

Just to clarify, Distribution One, which is an entity that is being formed and it will be a joint venture between Radio One and TV One, there is still from a legal perspective some i's being dotted and t's being crossed. So I just want to make sure that I clarify that that entity does not sort of formally, formally exist, but it informally exists; and it will more formally exist by the end of this quarter, we hope.

Then I think Alfred was pretty clear in terms of the economics. But again, just to make it even more clear if necessary, the great thing about this model is we do stand to recoup our expenses from all of the different revenue buckets that get generated by these films. So the theatrical revenue, the DVD revenue, cable window, broadcast TV window, etc. etc.. However revenue is generated, we are sort of first in line to recoup our expenses.

Then there is a distribution fee which is significant that in this case, we share with a company called Codeblack Entertainment, which is the leader in urban DVD distribution. Obviously, they are the ones that have the retail relationships. They are out in L.A. so they have access that we don't necessarily have. But it's been a great partnership thus far.

This DVD can be found in Wal-Mart, Best Buy, Circuit City, Target; and the unit numbers are very strong and all the retailers appear to be very, very happy with this independent film's sales numbers thus far. So we are very excited as a go into the holiday season to hopefully see even further volume from this title.

Okay, great. Thanks for the color.

Thank you. There are no further questions at this time, gentlemen.

Thank you, everybody, for joining us. We will see you next quarter, and as always, we are available for off-line conversations.

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