Urban One Inc (UONE) 2008 Q3 法說會逐字稿

Welcome to Radio One's third quarter conference call. I have been asked to begin the call with the following Safe Harbor statement. During this call, Radio One may share with you certain projections or forward-looking statements regarding future events or its future performance. The company cautions you that certain factors including risks and uncertainties referred to in the 10-Ks and 10-Qs and other reports periodically filed at the Securities and Exchange Commission could cause the company's actual results to differ materially by from those indicated by its projections or forward-looking statements. This call will represent information as of November 6th, 2008. Please note that Radio One disclaims any duty to update any forward-looking statements made in the presentation.

In this call, Radio One may also discuss some non-GAAP financial measures in talking about its performance. Certain measures will be reconciled to GAAP either during the course of this call or in the company's press release, which can be found on its website at www.radio-one.com. An audio replay of the conference will also be available on Radio One's corporate website at www.radio-one.com, under the Investor Relations section of the web page. The replay will be made available on the website for seven days after the call. No other recordings or copies of this call are authorized or may be relied upon.

I will now turn the call over to Alfred C Liggins, Chief Executive Officer of Radio One, who is joined by Peter D. Thompson, the company's Chief Financial Officer. Please go ahead.

Thank you, much, operator and thank you all for joining us for our third quarter results conference call. Also joining Peter and I on today's call is Barry Mayo, who is President of our Radio Division, and Linda Vilardo, who is our Chief Administrative Officer as well. With that I'm going to turn it over to Peter who is going to jump right into the results and then we'll hear from Barry and then we'll go for questions.

Thanks, Alfred. On a consolidated basis, net revenue was $86.2 million, down 2.3% year to year. Our core radio division, excluding Reach Media, produced net revenues of $66.7 million, down 7.2% from the same period last year. Reach Media had net revenues of $14.9 million in the quarter, which was down 6.4% year to year, as a result of discontinued event and TV revenues. Pro forma for the acquisition of Community Connect Inc., Q3 consolidated net revenues were down by 6.8%.

We continue to outperform the radio markets in which we operate which were down by 8.4%. Performance in local revenue was relatively strong, declining 5.6% against an 8.7% decline for our markets. However, we continue to experience substantial declines in national revenues, where we are down by 17.4% against our markets being down 12.5%. Our four largest markets, which together are responsible for approximately 50% of our core radio revenues, performed as follows. Houston was minus 1.2%, Washington, we were down 7.7%, Atlanta, minus 21%, and Baltimore, minus 4.2%. We had some strong performances in other markets, notably Philadelphia, which was up 15%, Indianapolis, which was up 7.4% and St. Louis, which was up 12.6%, and we were helped by political advertising revenues of $600,000 against $144,000 in the same period last year.

Year-to-date, our core radio net revenues are down by 3.1%, which we believe compares favorably with our competitors. The numbers we're seeing in Q4 indicate to us that the advertising market continues to worsen. Currently, our fourth quarter radio revenue is pacing down 11% in local, 3% in national, and 9% on a combined basis. Excluding political, Q4 radio pacings are down by 15% year-over-year. And early indications for Q1 2009 show no improvement in this trend. Number of spots are down by 6% compared to prior year and the average unit price fell by 5%. Looking by advertising category, auto continued to decline rapidly, down 37% year to year, as did retail, which is down 24%, healthcare down 16%, and telecom's down 17%. This was partially offset by the political goal, as I mentioned earlier and also financial which was up 3% and travel and tourism which was up 47% for us.

Turning to expenses, after normalizing for interactive divisions and one-time items, core expense declined by 3% overall. Declined by 0.4% for the radio division, excluding corporate, and by 2% for radio with corporate. The items included in this normalization are as follows. Community Connect expenses of $4.1 million, Interactive One incremental costs of $1.8 million, two one-time items, restructuring expenses of $0.5 million and in 2007 Q3 we reversed a retention bonus for the previous CFO of $2.4 million.

For the third quarter, station operating income was $34.7 million, which was a decrease of 17% on a same station basis from 2007. Adjusted consolidated EBITDA was $27.9 million, a decrease of 25% versus 2007. After normalizing for the two one-time items mentioned above, the decline was 18% and for our core radio business, excluding Reach Media, the normalized adjusted EBITDA decline was 14.2%. During Q3, our Interactive One division lost $3.1 million, the adjusted EBITDA level on revenues of $5.6 million. Which is in line with our expectations and forms part of the $30 million investment car out that we have.

Our interest expense continues to fall which is a result of debt paydown, lower interest rates and the retirement of part of our 8 7/8 bond issue. Q3 interest expense of $14.1 million was $4.3 million less than in Q3 last year. Moving down the P&L, as part of our quarterly impairment review, we recorded impairment charges to our FCC licenses of $377.9 million. This reflects the combined effects of slower revenue growth, riskier economic and credit environment and the lower multiples that we're currently seeing in the radio industry. As a result of this large non-cash impairment charge, net loss for the quarter was $266.1 million, or $2.81 a share.

For the quarter, CapEx was approximately $2.8 million, an increase of $1.4 million year to year. Which was driven by studio build-outs at Interactive One. As of September 30th, 2008 we had debt net of cash balances of approximately $735 million, and our total leverage ratio for bank covenant purposes was approximately 7.23 times against the limit of 7.5 times. Interest cover was approximately 1.77 times, against the limited 1.75 times. During the quarter we retired $43.1 million of our 8 7/8 notes, resulting in a non-cash gain of $5.7 million bringing our year-to-date total to $51 million of bonds retired. TV One continues to perform well with key fee revenues up 57% year to year. At $19.1 million and generated operating cash flow of $1.7 million in the quarter. We anticipate our first dividend from TV One to be received in Q1 2009.

Hope this is helpful in providing some additional detail on the numbers contained in the press release and I want to hand it over to Barry Mayo who will provide some information on our current performance.

Thank you, Peter. The third quarter saw our radio group just barely outperform our markets in total revenue. We beat all markets by 60 basis points. Let me add some color to Peter's numbers. Our strong work in national continues. We underperformed our markets by 490 basis points, and frankly, I expect to see this trend continue into the fourth quarter, largely because of political. As you know, most political advertising is booked nationally.

Six months ago, I never really considered that Barack Obama's lead amongst African-Americans would be such that his campaign would strategically place the overwhelmingly large amount of their advertising on general market stations. As a result, our share of political advertising was nowhere near the share of our general market competitors in Q3, and you're going to see that relationship magnified when the Q4 national results are released. On the other hand, as Peter mentioned, we did outperform our local markets by 310 basis points. As a result of the continuing success of -- excuse me, as a result of the continuing softness in our market, our managers undertook an initiative that targeted key advertisers who were already doing business with Radio One. This initiative has borne fruit and continues into Q4. So far it's netted us $3.8 million in incremental revenue and is largely responsible for outperformance of their local markets.

September's Hurricane Ike actually helped our Houston cluster in Q3. The market was only up for the quarter 0.4, but the market was up in September over 14 points due to the large amount of insurance money that was spent and we captured between -- about $550,000 of that money. However, we're going to see some business disruptions because of the hurricane in Q4.

Now, a larger portion of cancellations in Q3, than most of our other markets hit our DC market and this was led by the bankruptcy of one of Washington's top five advertisers, and the market that provides our biggest challenge right now is Atlanta. On two fronts. Q3 saw the Atlanta market down 17.3% and we did underperform the market. We replaced our long-standing market manager this quarter with Tim Davies, a veteran manager from CCU who brings both a working relationship with our regional Vice President and a strong track record of successfully growing an urban cluster from his time in Memphis. I believe that we now have the management team in place in Atlanta that can start to get our par ratio up to be more in line with some of our better performing clusters.

We saw in the third quarter the results of putting a superior management team in place can provide in our Philadelphia market. Our 2007 overhaul of management let by Andy Rosen continues to bear fruit in Q3 with this cluster being up 15 and outperforming the Philly market by almost 20%. Other highlights in Q3, as Peter mentioned, include Indianapolis for a combination of good ratings, a great sales team and the market being an early beneficiary of political advertising, produced revenues up 7.4%. The Indy cluster outperformed the Indy market by 11.8%. Another bright spot for us this quarter was our St. Louis performance. They also had a superior sales effort, which produced revenues up 12.6% and they actually outperformed the St. Louis market by 23.3%.

Let me give you an update on the Mo'Nique show which is currently in eight Radio One markets. As of our last call, it had just debuted. The summer book results, which have been completed by last week have been excellent in the diary-based markets. Of the six markets where the diary exists, Mo'Nique had growth rates that range from 10% to her number one show in 25-54 adults in Indianapolis. She grew from a 4.8 to a 10.4 share. Unfortunately, her program did not produce as positive results in our two PPM rated markets. She was flat in Houston and showed a small decrease in Philadelphia. While the controversy continues about PPM and urban stations, we at Radio One are focused on making adjustments to our programming that best deal with the new methodology. We are in the process of working with our syndicated personalities on the structure of their shows, and we plan to utilize our experience from Houston, where we took early rating hits when PPM debuted to our other markets as PPM continues to roll out.

Thank you.

Thanks. We are obviously in a very challenging advertising environment overall. We're in a very challenging economic environment and radio in and of itself has struggled with flat revenue growth up until this decline and now we're obviously seeing a decline like most other mediums. Our focus continues to be grabbing market share, improving our cost containment, our efficiencies, which I think we're doing a good job of and you can see that by the decline in our operating expenses at the radio division. And also, diversifying the company's revenue streams more into long-line and into television and we're excited about the fact that TV One is now starting to make money. We're going to see benefits from that in 2009.

And also Interactive One, which we launched a little over a year ago, is showing very positive signs of growth. Year-over-year, that division is going to be up about 5%, even though we did not own Community Connect for the entire year. We only owned it -- we only bought it in April. We're still going to see about a 5% year-over-year increase, and even more telling is the advertising part of that business is up about 8% year-over-year. Community Connect's business breaks down into display advertising which we call direct advertising, remnant inventory which is essentially very low cost per thousand advertising generated by mostly ad networks and then our diversity business which is a partnership with Monster.com. Our ad business, which is really what's going to fuel the growth of Interactive One was up significantly in -- or is pacing up significantly in Q4. It's pacing up about 20% in Q4, so we're excited about that progress. We believe that online is going to continue to be the fastest growing segment of the ad market and we're uniquely positioned to be the dominant player and take advantage of that growth.

Also in the Interactive One division is our GIANT Magazine sub which is a small revenue stream for us but year-over-year it's going to be up over 13%, also continuing to take market share. Bonds and stock buybacks, over the last quarter or two, we retired bonds, we bought back some stock. We are going to continue to selectively look at opportunities. We obviously think that there's a major disconnect with all equity prices, not just ours, and I think the entire radio industry has gotten whacked because of primarily the economy, but more importantly, a deleveraging and also a revaluation of these cash flow streams, kind of the bellwether broadcasting stock if you will of CBS and I think last time I checked they were trading at about five times EBITDA while the vast majority of the radio companies out there including us are all levered at somewhere around seven times, and if you just do that math, I think the market is now saying that they don't believe there is much if any equity in the radio business. Nothing to do with how much cash flow we have, nothing to do with how effectively we're servicing our debt, obviously by our ratios you can see that we've got plenty of interest coverage and we actually are amortizing our debt and delevering on a quarterly basis.

But just fundamentally, I think investors have said that broadcasting or media cash flows are worth a very different multiple now, and that multiple is out of line with actually what these companies have historically been able to handle in terms of debt service. So at some point in time, that disconnect will be fixed, and I expect that the stock will recover. In the meantime, selectively opportunistically we look to buy back our bond. However, we only have X amount of capacity to do that in our bank agreement. I believe set out that we have $150 million to buy back bonds and that's only the 8 7/8 and we've done a decent amount against that already so we don't have unlimited capacity. So to the extent there are attractive opportunities available to us, we'll take advantage of them but at some point in time it will come to an end.

With that, I'd like to turn it over to the operator to start fielding questions from our audience, please. Operator?

Absolutely. (OPERATOR INSTRUCTIONS) . We have a question from Bishop Cheen with Wachovia. Please go

Good morning, Peter, Alfred, Barry, thanks for taking the question. Let me focus on the balance sheet and the leverage because I know you guys are. I just want to make sure I have the right math done for the covenant leverage and I think, Peter, you said LTM at September 30th, you were 7.23 against that 7 1/2 in the credit facility.

Correct.

That has a carve out with a max of $30 million operating expenses on the interactive division, I believe, and by my math, when I added in the $5 million it looked like the interactive division had spent in Q3, it looked like that basket had achieved about $17.6 million.

Yeah, our number is 17.9.

Okay, 17.9. So that's how you get there. All right. So that covenant now has stepped down October 1st to 7.25?

Correct.

All right. So you're close to it. How do the numbers rejigger so that you don't scrape that covenant?

There are a number of things. Obviously, the bond repurchases that we continue to make will get us some head room in that, but also our cost -- you will see that we took a restructuring charge in Q3, which has led to cost benefits in Q4 and moving forward. So, again, that will buy us some head room there, Bishop, so it's a combination of operational things that we're doing and continued buybacks which give us additional head room.

Okay. But other than a massive, you strike oil, you hit the lottery, a massive capital inflow, it looks like in this very challenging environment that's going to be a very tight fit going forward into '09, even with the incredible hockey stick growth of Interactive One.

Yeah, I mean, this is Alfred. The answer to the question is yeah, at the end of the day you've got people calling for Q4 radio revenues to be down 20% and Q1 radio revenues to be down something similar and just -- you cannot plan for a down 20 quarter, and so we are managing the company and managing our covenants as the environment changes underneath our feet. And if you tell me that you know what, some people are wrong and Q1 is not going to be down 20, Q1 is going to be down 10 I'll tell you we're not going to have a covenant problem. If you tell me Q1 is going to be down 20% I'll tell you that as we're planning for right now, we're working the room on the operational side, on the balance sheet side, every lever we can on the TV One side as I mentioned. We're going to start to see dividends from them. They don't need my more cash. They're making cash. And we're working the room to make sure that we do our best to avoid any sort of covenant issues.

But, with that said, if the market ends up down 30% in Q1 there's probably nothing we can do and unless you can kind of predict where we're going then we can't really give you any solid answer, that far out. We feel today, and we do a lot of analysis of where we're at and where we're at today, where we're projecting to be and then we do sensitivities on if it's not that bad, if it's way worse than we think and we figure out where we're going to make it and where we're not going to make it. So, I mean, that's what it comes down to. But I suspect that in all of 2009, there's going to be nobody, unless you're levered at two times or three times, that's going to be sleeping easy.

Right. Everything you said I absolutely I think anybody sensible agrees with. Just one quick follow-up. Alfred, you've managed through this before in past dislocations. Do you have any sense out there among the lending institutions, no matter how freaked out they might be right now, that there is kind of a nonsensical solution to force assets onto a market with no bid?

Well, do I think that -- well, we have not had -- the discussions we've had with our bankers to date are, one -- early on in this mess, the banking environment was really, really hostile, I think, if you will. So for people that got into covenant situations, banks were looking to sort of take as much of a mark-to-market on these bank deals as they could to improve their own economics. But I think as the banks' own fortunes have declined, you know, they start to become a more hey, we're all in this together, we need to work through it attitude, because at the end of the day, for them to push companies, not talking about us specifically, but companies into default with default interest rates, and trying to force companies into asset sales when there is no credit and there are no buyers, just doesn't make any sense whatsoever. It's the same issue you have with US homeowners and the mortgage situation. I mean, you can push people into foreclosure and end up with a bunch of empty houses or you can work with them. So I think banks in general now have a more -- what's the -- a more collaborative attitude towards their borrowers and quite frankly I think the US Government has been giving them tens of hundreds of billions of dollars in order for them to be more collaborative with their buyers, not to be more hostile.

Now, our situation is also unique. Our capital structure has a varied mix of debt. We're only levered three times, just about three times to the banks. That's -- even in a very, very bad environment, that is not a lot of exposure what this company has to our bank group. And our bond issues, the first one is not -- doesn't come due until the middle of '11. At the end of the day if we ever have to have a conversation with the banks, this company covers its interest at almost two times. We're delevering on a quarterly basis. We're paying off $10 million of debt a quarter and we're doing other things to delever. I would find it very difficult to believe that there would be any incentive for our bank group not to work with the company, if in fact we had to come back to them for something.

Our number one goal is not to have to come back to them for something. And you know what? We've been doing a good job. We got that covenant amendment done a year ago. And the environment has just been getting worse since and we've been managing to that. But as a company, if you look at the stock price, the stock is trading like the company is basically insolvent. I've never heard of a company that -- any company that's insolvent that pays its interest and delevers on a quarterly basis. I've just never heard of one. We have over $100 million of EBITDA and access, including a Cable Network, that are growing. And the Internet division.

So, look, you know, am I nervous about the environment? Yeah, I'd be crazy not to be nervous. But I'm more nervous about the environment than I am about our particular situation. Because people are using the D word. That really scares me. I didn't live through it obviously, I'm only 43. Everything I've read about it and all the pictures of the soup lines, people use the D word, it freaks you out. It just does.

Does that answer your question, Bishop? Hello?

Thank you, Alfred.

Yeah.

Thank you. (OPERATOR INSTRUCTIONS). We'll go to the line of Tim Schlock with Wachovia. Please go ahead.

It's actually Marci Ryvicker.

With Wachovia.

With Wachovia still. Given where you're trading and where your market cap is, why not just buy in the float at this point?

You know what, we're levered 7.25 times. We have a bank covenant of 7.5, that's dropping down to 7.25. Job number one is to manage through the bank covenants. If we manage through the bank covenants then we have flexibility and we have liquidity. If we don't manage through the bank covenants, then we don't have that liquidity. We bought in 10 million shares over the last -- how many months did it take us to do that?

About four.

About four months, I think the average price was $0.94. And then the market obviously went further in distress and now stock's where it's at. We will be opportunistic. We think -- we obviously think the shares are attractive here but it's not like we don't have other concerns. So I would say that we would absolutely look at additional stock buybacks but job number one is to keep our flexibility in place. So we've got to manage those two things. It's a bit of a tight rope.

What about a management buyout?

You need financing to do that. I mean, when you're leveraged 7.25 times you've got to go and get additional outside capital and I think that -- one of the things you've seen now is the private equity and the -- first of all, hedge funds are in tremendous pressure as you know with redemptions. In fact I believe that most of this deleveraging is them just selling indiscriminately because they have to. Now you're starting to see private equity firms under stress. I read something in the in the Journal the other day with Calpers, may have $1.5 billion out in commitments to people, and they're telling them don't draw the money.

I guess what I'm saying to you, it's a possibility but it's not like people are rushing to do deals right now. So it's just not that simple. And my number one priority is to make sure that we maintain flexibility, we continue to grow our business, and we get a solid footing underneath of us because you don't want to finance any kind of transaction unless you know or at least have a general idea of what the economic environment's going to be like. Even if it's going to be challenging for five years, I'd like to know that so then I can plan the financing around that. Does that make sense?

Yes. I'll leave you alone on that. But I have one question --

If you have some extra dough in your 401(k), you want to help us take the company private, you know --

I have nothing in my 401(k) at this point. Barry, any color on the underperformance in national?

Again, it's part of an overall trend, but --

Is it just the political?

No. Well, you could see, we've been underperforming national for months now.

Yeah.

That's part of a trend, national is in trouble for our industry it's not been good but political has exacerbated the problem, starting in Q3 and I think as -- again, as I mentioned, for this company, even more so I believe in Q4. I mean, I don't think it's a big secret. Barack Obama spent massive amounts of money in radio and won himself an election. But he did not spend massive amounts of money with this company. So I'm just basically giving you a heads-up about Q4 along that front. However, so you know, Marci, I mean, my focus is on that which I and my managers can control and that continues to be our local markets and I think they're doing a pretty good job.

All right. Thank you so much.

Sure.

Thank you. Next question comes from [Simone Denino] with Black Diamond. Please go ahead.

Hi, in your Internet publishing segment, can you talk about the progression of kind of the negative cash flow and how you see that improving potentially going forward?

About $10 million, give or take nine or ten. We should cut that in half next year and make money in '10.

Thank you very much.

Currently there are no additional questions in queue. Please continue.

There are no additional questions, then I think we thank everybody for joining and operator, if you could give the replay information and as usual we're available offline for any additional questions.

Thank you. Ladies and gentlemen, this conference will be available for replay. After 12:30 Eastern time today and running through tomorrow at midnight. You may access the replay service by dialing 1-800-475-6701 and using the access code 965195. International callers may dial 320-365-3844. Once again those numbers are 1-800-475-6701 and area code 320-365-3844 using the access code 965195. That does conclude our conference for today, thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.