Urban One Inc (UONEK) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Radio One second quarter earnings release teleconference call. Following today's presentation there will be a formal question and answer session. At that time instructions will be given; until that time, all lines will remain in a listen-only mode. At the request of Radio One, Inc., today's teleconference will be recorded. Any objections, one must disconnect at this time. I would now like to turn the call over to Mr. Alfred Liggins, President and CEO. Sir, you may begin your conference call when you're ready.

Thank you very much, everybody, for joining us for our second quarter results conference call. As you know, we've issued a couple of press releases today. On earnings and also on acquisitions. We're pretty pleased with our earnings, up 7 in terms of net revenue, and operating income up 11. It's a challenging environment, but we continue to try to weather the storm and increase our metrics in all categories. We announced a Charlotte acquisition, which we'll talk about a little later, but for right now I'm going to turn it over to Scott, who's going to read something to you and then take you through the numbers.

Thank you, Alfred. Let me start with the disclaimer, and then get into some prepared remarks.

This conference call will include forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. Because these statements apply to future events, they are subject to risks and uncertainties that could cause actual results to differ materially, including the absence of the 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 company's or radio station's operations, market ratings, variable economic conditions and consumer taste, as well as restrictions imposed by existing debt and future payment obligations. Important factors that could actual results to differ materially are described in Radio One's reports on Form 10(K) and 10(Q), and other filings with the Securities and Exchange Commission.

Though the second quarter of 2004 was yet another quarter where Radio One outperformed the radio industry from a revenue growth perspective. Additionally, we grew out station operating profit by more than 1.5 times our revenue growth, and grew our free cash flow north of 20%. Furthermore, we continued to deleverage the balance sheet; announced 2 acquisitions, 1 in Atlanta and 1 in Houston; and further strengthened our management team. Also, TV One result improved dramatically. For the quarter, net revenue increased 7%, to approximately 86.2 million, in the middle of our previous guidance range for revenue growth of 6 to 8%. Station operating income increased 11% to approximately 48 million, adjusted EBITDA increased 10% to approximately $43.8 million, and net income increased 11% to approximately $17.5 million, or 12 cents per share. Free cash flow increased a strong 24% to approximately $28 million.

For the quarter, gross national spot revenue grew 11%, while gross local spot revenue grew 5%, and special events revenue was up 13%. The financial, travel and transportation, government, public services, and telecom sectors were strong, while automotive, retail, and healthcare categories were not as strong. Strong expense management held expense growth firmly in check, but corporate expenses grew due primarily to staff expansion, Sarbanes-Oxley spending, and the removal of the hiring and wage freeze, and higher bonus accruals relative to Q2 of 2003. Other highlights for the quarter include the station operating profit margin increasing to 56% from 53%. CapEx continues to be modest at 2.4 million for the quarter, although this spending will increase in the second half as more projects come to completion, but still in line with previous guidance. Debt fell to approximately $571 million -- that's gross debt, and the leverage ratio fell to approximately 3.8 times EBITDA, or 3.5 times if you net out the cash from short term investments. As for TV One, their pro rata loss decreased dramatically to approximately $1.4 million from approximately $2.4 million in Q1, as ad revenue growth was stronger than anticipated and expenses declined due to strong cost controls.

Looking forward, the Company expects Q3 net revenue growth in the 3% to 5% range. I want to be clear that this does not include any results from our Philadelphia station, WSNJ, which should be going on the air this quarter, but we're just not exactly sure when. So that will be the upside for Q3, assuming that it comes on in the quarter and we actually generate some revenue from that station. Lastly, we today announced that the acquisition [inaudible] in Charlotte, North Carolina, for approximately $11.5 million, bringing the number of our stations we own in that market to 2. With 3 large market [inaudible] stations recently added to the portfolio, we are optimistic that we can continue to show industry-leading revenue growth for the foreseeable future.

With that, I'll turn it back over to Alfred.

Thank you very much. Also joining us today is Mary Catherine Sneed, who is our Chief Operating Officer, as you guys know, and as Scott mentioned, we are pretty excited about our performance and our future opportunities in terms of stations that we have coming on line. We have a stake in Houston, we've got one in Philadelphia. Now we have Charlotte and we also have some underperforming and non-mature stations in our portfolio, our existing portfolio that continue to -- that continue to give us growth rates that are pretty impressive. We are also doing quite well with TV One, which we'll answer questions about if you have them. Again, the network launched January 19th. We continue to build distribution. We continue to get advertiser momentum, and our management team there has been fully filled out and is very solid staffed with a number of great professionals from the cable industry, and also, we get a lot of questions on the road about our -- future internet probabilities. What kind of internet activity we're going to engage in. Which Scott has been actually heading up for us, but we won't answer any questions about that because we continue to forge ahead in that area. Mary Catherine, do you have anything to add?

No.

Before we open it up to questions, one analyst actually had inquired about the station in Charlotte. And the coverage of the market. So I kind of wanted to be clear about it. I don't know exactly what map or signal contours that this particular analyst was looking at, but they questioned whether this was a decent signal to cover the market. We only paid $11.5 million for it, which we think is a great price, and actually, it's pretty close to the price that we paid for the station that we actually own there already, that we've had -- how long have we had that? Four years, three or four years? A long time. So the fact of the matter is this new Charlotte station is moving into Charlotte has a CP, and its signal will actually cover just as many people as the station that we currently have. And that station that we currently have, when we operated it as a young urban station, did about a 3 share 12-plus, and then we changed the format to urban adult contemporary because we were able to get Tom Joyner -- the Tom Joyner morning show from our station -- I mean to our station from the Infinity station, and now that station actually has a 5 share 12-plus.

Charlotte is $120 million market, roughly, so bare minimum with this new signal, which again, is comparable to our old signal, bare minimum, we think we're going to do a 3 share on it, because that's what we did even if we -- we haven't decided on what format we're going to do, but even if we just go back to the old young and urban format, that we did, that was consistently a 3 share station. If we do something else, maybe we do better. But long story short, it looks like we're going to end up having 8 share points of Charlotte radio -- excuse me, of Charlotte audience in a $120 million-market, and we will have roughly paid $21, $22 million to get into that market. And we're pretty confident that we'll have a total of 8 share points there. That's a good deal, the way we look at it, and that's also a market that we expect to grow pretty nicely over time.

With that, I think we turn it over to questions and we'll delve in deeper to whatever anybody wants to.

Operator?

Yes.

Can we open it up to questions, please?

Yes, we can. [Caller Instructions]. Our first question comes from Drew Marcus, Deutsche Bank.

Good morning, everybody.

Hey, Drew.

First, about your reaction to the announcement from Clear Channel, about their cutting inventory, obviously something that you've probably talked about that you thought they had too much inventory, and now I guess you've been proved right by this announcement, so I'm curious on your reaction. And also as part of that, can you give us a sense of -- they had given a statistics that 29% of their inventory is non-revenue producing. Can you give us a sense of how many ads are on the air from you guys are bonused ads or non-revenue producing?

First question is what's the reaction. And I've said this to a number of people. It's a positive reaction. Any time you get the industry leader staying that they're going to try to reduce inventory and stabilize pricing. That can only be good, not bad. So we're excited about that. And you know what? They have to take a leadership -- in order to fix any of the sort of the industry woes, it's got to start with them because they've got the most stations. They control more inventory than anybody. So that's a good thing.

As far as what percent of our units or messages on the air are non-revenue producing, that's a tough -- I hope none of them. We do have promos that talk about what the station is doing. We're giving away $1,000 an hour, we're giving away a trip to Cancun. But I think Mary Catherine generally tries to get that stuff sponsored by somebody. But even if you just look at that, those particular station or programming-specific messages, that's got to be, I don't know, what? 10% to 15% of the inventory? And everything else on the air, except for D.J.s talking too much, which is very difficult to control sometimes, but all the other messages -- recorded messages should be revenue-producing. We're not going to give a mention to Chrysler and not somehow receive revenue from it.

Now, maybe what Clear Channel is talking about is what is Chrysler actually paying for on the spot, and what they're also required to give Chrysler in terms of promotion, but all that sort of goes into how you produce the revenue because oftentimes, in fact most times, advertisers want to buy more than a spot. They want to buy some sort of unique promotion -- promotional mention. They maybe want to have some sort of activity onsite at a particular retail location. But I don't think that we've ever gone and done an analysis of each of the commercial messages or each of the messages on the radio and said what is revenue-producing and what's not revenue producing. Am I missing something here?

No, you're right. We're nowhere close to 29% at all. We have on average 1 to 2 promos an hour that are actually owned by the program directors. So, I guess it sounded like perhaps maybe Clear Channel has more than that because they also said they were going to be reducing promos as well.

But for Radio One it's not standard behavior to give bonus ads as part of a buy?

Well, when you say not revenue-producing, we try to avoid that. But if we do it, it is revenue producing. Because if you give a bonus spot -- let's say somebody pays for 1spot and you give a bonus spot, we're using that somehow to come at the cost per thousand or the cost per point, we're not just giving it to them and still meeting our cost per point. So essentially, it's like cutting your rate in half. Somebody may say, Oh, I'm just giving it to you, but my rates really $300. No, the average rate's really $150. Now, the benefit of giving somebody a bonus spot or a low charge and keeping the higher rate is that when there's more demand, it's easier to take away a bonus spot than get somebody up from $150 to $300. But I still looked a that as revenue-producing. The thought process goes that if you don't give them that extra bonus spot, are you now not efficient on the buy given the rest of the market and will you get the money?

Great. Thank you.

Thank you. Our next question comes from Joel Stauch [ph], Schwab Soundview.

Thank you, good morning. Mary Catherine, can you talk about some of the changes in the radio market or how you conduct business or what your competitors are doing, really, as a result of the pacing reports -- sort of widely distributed pacing reports now going away, in particular, concerning that maybe the people you negotiate with don't have as much information as they had and then I have two follow-ups.

Wow. You know, we haven't even talked about the pacing reports. So evidently, we're not missing them in our Company. From a local standpoint, though, the salespeople didn't really have that information. We didn't really share it with them. So I think that it's business as usual for them. And, you know, you really as a seller in a market, you really need to know everything about your market anyhow, about your competitors, what they're charging. And hopefully, that's ongoing. But I haven't heard any followout from the pacings reports not being available.

One thing I heard -- Joel, this is Scott, is some of the managers complaining that it makes forecasting more difficult because, they can look at their results, but they're looking at them in a vacuum, and so they don't really know if they're overperforming or underperforming, and they don't have a sense of how the market is trending, so are they -- has their business experienced a blip one way or the other, or are they operating in line with the industry? So I can imagine that from a methodological perspective, it makes forecasting a bit more challenging. But I think it also is going to make us smarter, because I think it will force us to be more analytical about our business as opposed to just relying on industry data to sort of help us do our internal reports.

And you mentioned also advertisers having the -- negotiations. Have you ever run up against an advertiser knowing what the [inaudible]?

No, I have never had an advertiser mention it.

Put it this way. It would be smart of the advertiser to try to get that stuff.

Any follow-ups, Jeff?

Yeah. Thank you. And sort of the TV One subcount, what is it currently, and --

Currently about 4 million homes. Our goal is to be somewhere between 9 and 10 cable homes between now and the end -- by the end of the year. Don't know if we'll get a satellite deal done by the end of the year, but we're hopeful. If we do get a satellite deal done, we will have many more subs than 9 or 10.

Great. Then finally, Scott, I guess, can you sort of bring us up to date on sort of where the internet venture is? Thank you.

We are still in the knowledge acquisition mode. Although we are making very good progress on that front. I think we have a vision fairly well defined. We are talking to lots of different potential partners. And, you know, starting to focus on what it's going to take from sort of a content acquisition perspective. And, you know, we're certainly focusing on a launch in '05. My preference would be to do it in the first half of '05. But there are a lot of pieces of the puzzle that need to be put together, and obviously, we're also extremely focused on what this might cost. I will tell you that my sense is this can be done via alliances for actually, not a lot of money. Maybe we give up a little bit up side to keep the actual cash cost low. But the fundamental notion that there is a market opportunity for an African-American targeted destination site that is fully integrated with our radio station website and TV One's web initiative is a very real business opportunity. One of the neatest things about it is that there are probably half a dozen potential revenue streams to be derived from something like this. So the fact of the matter is that we think that this is a business that we can launch successfully for not a lot of money and potentially make, at first, a little bit of money on fairly quickly, and then hopefully build it into a good-sized business over time.

Thank you. Our next question comes from Michael Russell, Morgan Stanley.

Thank you. I guess, Scott, if you're in the internet knowledge acquisition mode, that means the Sarbanes-Oxley efforts are in good shape?

Sarbanes-Oxley efforts are in extremely good shape. Got a great team here at Radio One. That effort is being headed by Debbie Cowan, who's the V.P. of finance here, and the entire Company really has come together to focus on 404 compliance. We actually had an audit committee meeting a couple of days ago, and we're hearing from Ernst & Young, who obviously is working with lots of different companies on this that we are in exceptionally good shape. I've been reading a lot lately about where companies stand relative to 404, and think there are a lot of companies out there that have a hell of a lot of work to do over the course of the next few months. And I am highly confident that we're probably in the top 10% in terms of status and overall performance relative to the efforts. As you know, I've been pretty vocal about this over the past year. I think partly just to make sure that everybody at this Company was focused on the goal of, you know, passing this 404 test. But also, because I think it has taken tremendous man-hours away from running this Company from a cooperational perspective, and it has cost a lot of money. But at the end of the day, I actually do think that we are a much better Company because we have a much better handle on all aspects of our operations. So it has been a positive exercise all around, even though it has taken a lot of work. Thanks for the question. I think it is something more and more investors should be focusing on as we approach the end of the year.

I wanted to chime in here. I was on a audit committee call the other day, and Scott and his team really got a lot of praise from our auditor, and also our auditor on the progress that they have made complying to all the new -- the coming new regulations and time deadlines for filings as well as the progress that they've made on Sarbanes-Oxley. And I, you know, sat through some presentations, and really felt that it was a good exercise for the Company to find out early on where our weaknesses were. Overall, we were in good shape, but we can always be better, and that was an extremely eye-opening exercise for us. The drill is nothing but good for the Company and for shareholders.

That's good. It's always better to worry early so you worry less. How much in expense -- this went into the corporate expense line? Does that ever kind of stabilize or change as we look out over the next 2 years?

Well, alright. So you've this initiative, right, section 404 compliance, which, for me, is sort of a first-time perspective is extremely costly, because not only is there huge opportunity costs, we've got to build some staff here, but the outside consultants, the auditors, etc. I would say that, and we really don't know the answer, but I would say that probably half the that cost is one time in nature and it will continue through the end of the year. Hard to really ballpark what the ongoing monitoring costs will be into '05 and '06, but I certainly don't expect the costs next year to be the same as they are this year. Maybe they'll be 20% less, or maybe they'll 50% less. But most of the work and a lot of the money is an '04 event.

Have you given a number to roughly what that is?

You know what? Yeah, I talked a little bit about it. It's probably going to be -- it really -- there's still a lot of work to be done, and obviously, you have the auditors coming in in the fourth quarter. I would guess at the end of the day, and this is a pretty wide range, but it's going to be probably 5 to $600,000, up to as much as $1 million, all in. And that doesn't include opportunity costs. If you look at the man hours that have gone into this, it's -- I don't even know what that is, but it's scary. If I were to quantify that, I bet you that's another million bucks. But in terms of cost that hit the P&L, probably half a million to a million bucks.

Got it. And then you're prerelease on July 6 on the revenue side said there was a 6% revenue growth and you posted something a little bit better, 6.6%. Is that just rounding? Is that adding up NTR after the fact, or what should we read into that on your -- on the financial systems that you have? On July 6, it seems great, you can close the books, and give us some insight, and that's very helpful. Just wondering how should we look at the extra 60 basis points? What transpired?

It's actually not an extra 60. That's a fair question, I knew I was going to get that question. It's actually not an extra 60 basis points. Quite honestly, we were at about 6.4% when we put out that 6% number. Obviously, if I had come out with 6.4% -- I wasn't going to post a tenth of a point, so I had to round down at that time. But at the end of the day, there was some revenue that sort of comes from other categories. There's collectibility issues. We have network deals where we actually don't get reports from the networks in terms of the actual revenue for the prior month until a couple weeks after the end of the quarter. So those numbers actually came in a little higher. So that pushed us up above 6.5%. The difference is not 6 versus 7 or 6 versus 6.6, the difference is really more 6.4 versus 6.6, and it's really because of some confirmation of some monies that come in later than June 30.

Great. I appreciate it. I just wanted to understand the details. Thank you very much.

Yeah.

Thank you. Our next question comes from Bishop Cheen, Wachovia.

Good morning. My kids are going to love you if you take Charlotte urban, that's all I can say. They'll love you again, they're mad at you for taking it AC. Question is Scott, on Atlanta. The 32 held for investment. You closed on that Q4. Is that going to be another incremental [inaudible] that will come out of your balance sheet on Q4 for the final closing on Atlanta?

Another incremental $3 million.

Yeah, because I thought it said 35 million acquisition, and you're showing 32 held for investment.

There is -- 32 held -- I'm sorry, where are you looking, Bishop?

I thought I --maybe I'm hallucinating. On your press release.

Yeah?

Don't you have under cash?

No. Short-term investments is just --okay. Okay. I'm sorry. Short-term investments are dollars that are in interest-bearing accounts longer than 30 days.

Okay.

That's not held for acquisitions.

Okay.

That's just going after a little higher yield than what you'd get in a checking account.

That's general. That's not earmarked for Atlanta?

Absolutely. Has nothing to do with acquisitions. It's just a cash management strategy.

Got it. Alright. Next annoying question. TV One is something like $15 million contribution coming this year. Will that be all in Q3?

So TV One, so again a $74 million all in commitment, the first traunch of $18.5 million was committed last August, August of 2003. What I have said is I expect us to roughly fund that $74 million over 4 years and, you know, rough numbers, I would expect it to be roughly the same every year, although I have no control over that. We have not heard from TV One management what the capital call amount is going to be, or when it's going to be. My sense is that it is a Q3 event, although we're already a third of the way through the quarter, and I've not been given any heads up with regard to that. Whether or not it's a little more or a little less than the 18.5 is also something that has not been told to us. But, you know, I think it's fair to assume that the number will probably be something between 15 and 20 million. They could call $50 million if they wanted to. There's no chance they'll do that, but certainly they have the right to call as much or as little capital as they need.

But the fact of the matter is, you can see from their results that the loss is significantly lower in Q2 than in Q1. So my hope is that means that they're burning through less cash. And I think that's right, although I think it's probably modest.

All things being equal, even though they never are, do you think break even comes at a certain subcount level on TV One?

You know what? The model suggests that break even comes at 26 million subs. All right? And that's, you know, in 4 years from sort of launch. You know what? Advertising has been better than we thought. We spent a little less money. Who knows? Subs could come faster than we thought. I think subs will come on time. But, you know, we could get lucky here. And the other thing we can't predict is when you look at cable networks, they sort of look at -- different cable networks have different advertising revenue per sub numbers. Somewhere -- anywhere between one -- or really kind of sort of some, you know, really underdeveloped or newly-launched or are not very good networks, you know, for a dollar a sub to fully distributed networks like a Lifetime, which could probably come in at 6 bucks a sub. I'm not exactly sure where we're going to come in yet. I do believe that TV One's going to come in higher on the ad revenue per sub because of it's niche, and sort of the lack of competition in the market. So once the thing gets to $15 million -- we're outperforming at 4 million subs. We're actually -- we're selling advertising off of the 10 million sub projection right now. Once we get to 15 million subs, I think we will outperform that, too. But I don't know if our ad revenue per sub number goes up -- I don't know there's some sort of multiple expansion because of the additional subs on that add revenue per sub number. I just generally think we're going to do better -- the signs are that we're going to do better than we expected on this project.

A lot of exposition in that answer. Last question, Alfred. Your time allocation. As it turns out, higher, lower, about the same, have you anticipated focusing and developing?

You know what? It's about the same as I expected. I thought in the early days that I'd spend 50% of my time on TV One. I haven't. I haven't really sat down and tracked my hours. I'm just throwing that 50% number out there. You know, right now. But I do think that just like Radio One, it's going to, you know, my time commitment to having to help with the day-to-day is going to drop off because we've got great people there. We've got a great CEO, we've got a great head of ad sales. We just brought in a really, really stellar affiliate sales guy who used to run affiliate sales for Comedy Central, which is obviously a very successful fully-distributed network. We have a good CFO, a great programmer.

So if they're doing their jobs correctly then, just like with Radio One, where I'm going to be needed is high level affiliate meetings or high level advertising meetings, and at Radio One, I get involved with sort of high level advertising situations, you know, as a CEO, when they want me to come in and try to make a difference. Strategy, personnel decisions, you know, budget -- other than that, Mary Catherine runs our radio group. She's got now a new Vice President of Operations, which we announced a guy named Zemira Jones, who's got a great reputation. He's very good. I've known him for a while, he used to run the ABC Chicago cluster. She's got four regionals. We're trying to set the management team up so that -- we had an initiative here that if somebody gets hit by a bus, can the Company run, because we weren't always like that. And I believe if I get hit by a bus, the Company certainly runs. And I think Scott's done a good job with his team and Mary Catherine is now in a position with a strong number two, that's the case with her as well. And we haven't really expanded past our 22 markets. You know, the strategy was to add in those markets. Last year, we did Charlotte, Philly, Houston, Atlanta, all fill-ins. So theoretically, we're getting -- management's getting deeper we're getting bigger revenue opportunities, but we're not really spreading the things we have to manage too far out of our neighborhood that exists today. So I feel great about that.

Great. Alfred, stay away from buses.

Stay away from buses. I'll try. Assuming if one hits me, it's going to find me, I'm not going to --

Thanks, Bishop.

Thank you.

Thank you. Our next question comes if Paul Sweeney of Credit Suisse First Boston.

Two questions. First, Mary Catherine, on the pricing environment out there, I know you've been -- had some candid comments in the past. I was wondering if you can give us an update on what you're seeing and whether you believe inventory reduction will have an immediate impact on pricing -- or any impact on pricing if it's followed to some degree in the industry. And second, Scott, have two big stations coming on line in the next couple of quarters in Philly and Houston. Just give us a sense of when you -- when you bring a big stick on line in a big market, how should we think about kind of the time to break even for those types of fill-ins? Thanks.

Yeah. That's one of the things that I'm most excited about with Clear Channel and their initiative. It should definitely put more pressure on inventory, which, of course, will help us garner higher rates all around. So that should -- I don't know when that will be reflected, but we're certainly going to be watching it. So that's something that we're all looking forward to. Because right now, pricing's a little iffy. I know that the Clear Channel initiative isn't really supposed to kick in until January, supposedly. It's going to take them a minute to get everybody on board with it, even in their own company. So I wouldn't imagine that we'd see anything until probably 2005.

So in regard to your question about acquisitions, particularly as it relates to Houston and Philadelphia, like you said, big markets, 300, $400 million in revenue, and one share point, with a 1-0 power ratio gets you a few million bucks of revs and obviously we would expect to have ratings higher than that. And given the fact that we have existing operations in both those markets with 2 stations each and in both those markets we actually have decent margins. In Houston, huge margins, and in Philadelphia, we have very good margins. My sense is, and this is -- you're trying to get me to make a prediction here, but can we break even in the first year? Absolutely. Now, it depends on how you think about cost allocation and all of that, but if you looked a the direct cost associated with operating these new stations relative to the revenue being generated by these stations, because of the fact that the other costs at the stations are for the most part fixed and we're already margining 50, 60-plus%, then I would say that there is a very good chance that we can show positive cash flow in the first year in both those markets on these stations.

Thank you.

The next question is from Timothy Wallace with UBS.

In terms of your guidance for the third quarter, Scott, could you tell us how things are sort of trending out -- is most of the growth coming in September, and secondly, do you have any visibility beyond that to see if trends are continuing to look pretty healthy? And on the operating expense side, you kept costs down fairly dramatically, or below our expectations certainly, in the second quarter, which was great. What should we expect in the third and fourth quarter in terms of operating expenses? Thanks.

Three questions there. With regard to Q4 overall, we really don't have any perspective on that. That's too far out. I personally don't have any commentary on Q4 I don't know if Mary Catherine -- I don't think we do. With regard to how things are trending, things are looking pretty good. July was clearly a soft month for the industry. It was a soft-ish month for us. But August appears to be bouncing back. Although we're at probably 75% of goal for August. That's not a bad place to be. I'd love to be at 80 by the end of the week. Can we get there? It really depends on how much business we put on the book yesterday, today, and tomorrow. Certainly it is possible. This business can be choppy. You can see a lot of business in 1 or 2 days, or it can be quiet. So we're in decent shape for August, but the question as to when August is really going to show the momentum that, you know, we would hope and expect to see relative to July, like I said, there has been a modest pickup but it's not totally in the bag. And September is actually looking very healthy right now. We feel very good about September. You've heard that before. Obviously, you know, business will slow from time to time. As you get closer into a month, it's hard to call at this time. Starting to see a little bit of money from the election, but I'm personally optimistic that that will be one of the drivers for Q3. Could it represent some up side for the industry? Yeah, it could, I think. In fact, there was an article in yesterday's "The Wall Street Journal" talking, particularly the Democratic party having a competitive advantage against the Republicans targeting African-Americans because of advertising on urban radio. So that's something that might benefit us.

And then with regard to expense growth, you know, as you know, it seems every quarter people are concerned, and every quarter, I think we do a pretty good job of holding costs in check. You know, we are a growth company and we do a very good job of managing our costs, but we also will look to invest in our business when we need to. So I need, and we need to have the flexibility to do what we need to do when we need to do it. The quarter is one-third of the way done, and I think we're still doing a very good job. But to what I've always said, we will look to try to grow or revenue faster than our cash flow, 1.25 to maybe as much as 2 times faster. We're not going to do it each and every quarter, but that's certainly our goal and continues to be our goal. And the other thing I said is I think costs, in this [inaudible] environment grow in the low to mid-single digits. When revenue is a little softer, hopefully, you can back up on that cost growth. So it's an intensive management process, and as Q3 right now, we are guiding for it to be lower than Q2, we are more focused than ever on costs. But we also have to balance that with the needs of the enterprise. So we will do everything in our power to show cash flow growth faster than revenue growth. Will we get to 1 1/2 times? I don't know. It really all depends on sort of where the revenue ends up more than anything. But in general, I feel very good about overall our near term and intermediate and long-term ability to grow cash flow faster than revenue.

And then, Scott, on your corporate, is the second quarter a bit of an anomaly, or can we use that as a run rate?

Again, Sarbanes really makes it a little more variable than I'd like. And because the 404 effort's going to continue through the end of the year, the expenses are kind of chunky, because you don't really know what's going to hit when with regard to consulting fees and the amount of time and hours they're putting into the project. So, you know, I think that we also need to hold back on being too specific with regard to corporate for the upcoming quarters just because of that. But in general, I think that you know, we, again, will be looking to maintain corporate expenses that are roughly consistent quarter to quarter, but Q3 might be a bit higher just because of the fact that we're coming into the really intensive final stage of Sarbanes.

Okay. Thanks a lot.

Thank you. Our next question comes from James Marsh of SG Cowen.

Hi. Gentlemen. Scott, maybe a follow-up on the editorial in the "The Wall Street Journal" yesterday. Two kind of related questions. One, it talks quite a bit about the effectiveness of urban radio. And I wanted to get a sense -- there has been a lot of complaining about the effectiveness of radio advertising recently. I wanted to get a sense for what you think that urban radio is more effective in reaching its target demographic than maybe some more mainstream formats are at reaching their target demos. And then secondly specifically related to political -- hearing articles like that, does it raise your expectations as far as political and what markets would you imagine would be best-position to capture some of those [inaudible]?

I tell you what, as a CFO, I'm going to pass on that question and hand it off to Mary Catherine or to Alfred. I think they're obviously better suited.

What advertisers are saying that radio is not working?

That has been a common complaint. Just lack of identifiable return on investment, just accountability issues. I think the standard -- will be helpful to negotiate lower rates.

People are saying radio is not working. First of all the most ad buys that go down have a media mix to them. It's rare that radio is the only medium that a big advertiser is using. Now the lifeblood of our business, local advertisers, particularly for urban radio, whether it's concerts or the local club, or, you know, the car wash or whatever. They definitely know whether radio is working for them or not, and so I don't think anybody is talking to them to find out whether it's more or less effective. So I'm going to let Mary Catherine finish the rest of it. I just wanted to ask that question. Because I think the fact that radio's not working is sort of somebody's, you know, maybe the industry's sort of rationalization why revenues are soft right now. But I don't know if the two are necessarily connected.

No. Ad radio definitely works. But I will say that I think the urban format works better than probably any other. And it's because the listeners are more invested in the format. It's their CNN. You know, just looking at events we do across our group or for other advertisers, I mean, we can turn out a crowd almost any day, any time that you want us to. That's just something that we --we know how to do it, and the format is really, really good at it. But, you know, in general, I think radio definitely works, regardless of the format. I mean, there are people listening. We have a research department in Atlanta and we're able to track a lot of our advertisers, so we actually can prove that our formats work. So I think radio is very, very healthy.

Great. Thanks.

Thank you. Our next question comes from Jim Boyle of Wachovia Securities.

Good morning. Mary Catherine, it appears Radio One has a lower inventory load than Clear Channel during all day parts, accept morning drive, should you also reduce morning inventory, or does the urban format just lend itself to a higher unit load?

I think you might be looking at some of the stations we have that possibly could be Tom Joyner. Tom Joyner does have a pretty high spot load, but Tom Joyner also has extremely high ratings everywhere. And I think that one thing Tom is really good at doing is masking advertising. I mean, when Tom is talking about an advertiser, it's almost like they're his friend, his buddy. Not that it's a stone-cold spot you're listening to. He just has a way of endearing himself to the advertisers. And I think most of our stations, or personalities, that are not syndicated, do the same thing. So I think that might be what you're looking at, and I don't see -- a lot of that is dictated by Tom's company, though, so we don't have total control over it.

We don't have any control.

We don't have any control over it.

Okay. And -- do you believe corporate can police inventory reduction without waving a pretty heavy stick or firing repeat offenders?

Well, I think we can, but I think it's because of our size and I think it's also because my background is programming, and I know how important it is. And we have from the very beginning done spot checks. We actually did fire somebody a couple of years ago because they were just prostituting their station, and I saw the ratings going down month after month. Couldn't figure it out because we were doing all kinds of research. We knew the audience liked the station, but constant listening was just lower. And lo and behold, it's because the spot load was too high. I don't know if you can do 1200 stations, but, you know more power to them. I think they're going to try, so good for them.

And finally, September may look rather robust right now, but it also may somewhat fade like prior months. Do you see any early signs that it may not be a spurt or another [inaudible]?

No. It is too early to tell. We do sometimes see a month that far out change, but one good thing about August is that the National Retail Federation is predicting that back to school is going to up 7.2% over last year, so based on formats we have -- well actually, based on radio in general, that's really good news. So hopefully, you know, August will come in, maybe even a little bit better than we're looking at right now.

Thank you very much.

You're welcome.

Thank you. Our next question comes from Victor Miller, Bear Stearns.

To follow up on Tim's question on the costs. We had less than 1% growth in the quarter. Have you cycled through the talent increases? You had been doing promotions, have you cut back on those a little bit because you don't need them? You talked about a wage freeze that was coming off on the corporate side. Is that going to extend now to the expense base with the, you know, the operating expenses and the costs of the new stations, how do we wrap that all in, in looking at the second half? Just a little bit more granularity. And then on the spring book, it looks like out of the 11 markets -- or the 15 markets that are in, more than half the markets are up high single digits to double digits in terms of market ratings, and 11 of the 15 markets are up in general. Could you talk about what you're seeing in your ratings trends? Thanks.

We're seeing good ratings.

The ratings are huge, obviously.

Lots of chatter around this office about that.

We're very excited about, you know, every day. We've got a couple of markets that could be better, and we're definitely working on those, but all in all, they've been phenomenal.

So on the expense side, it's interesting because the wage and hiring freeze was actually lifted company-wide. But just be clear. Most personalities who are big-dollar personalities have contracts. So those folks were seeing increases per their contracts independent of any wage freeze because obviously, we're contractually obligated to paying them more. So that was always part of the numbers, the growth year over year of those contracts. So really the wage freezes were more focused on the rest of the organization, including corporate, and that was lifted in Q2. But the way we're doing it, we're sort of cycling it through. We wait until anniversary dates or we do it by category. So it will continue to impact, you know, in terms of seeing modest increases, some kick in late in Q2, some will kick in in Q3. But for the most part by the end of Q3, we should have flushed most of that out. But overall, even though that was, obviously, on the negative side, meaning because we lifted that, we were seeing cost growth in that area, I was looking at the analysis of where we were saving money, and it's pockets everywhere. Across 22 markets if you can find $50,000 to $100,000 here and there, that really adds up. That's exactly how we've been managing this company, looking for the low-hanging fruit, and then in some cases going a little deeper. And when you aggregate it all together, there's just very strong cost controls there.

I want to give some special kudos to Mary Catherine who spends an awful lot of time each quarter really picking through the expenses and what do we have to do, and what can we live without. I think in most radio groups people just leave that up to the general manager and in some radio groups, you have to leave it up to the markets because they're just so dadgum big. Like I couldn't imagine how you do that at Clear Channel or at Cumulus. Obviously, they figure out how to do it some way, but with 22 markets, it's more manageable. But still, somebody has to stay on top it. Because you don't want to -- you just don't want to say don't spend a dime, because if you say that in a blanket statement, then you've really kind of hurt your business. Some things you're going to have to spend money on. And she does that every quarter. And it's shown in our results. So, with regard to further guidance, I mean spending for the back half of the year, I think I have said everything that I can and want to say at this point about that.

Thanks.

Thank you. Our next question comes from Jeff Helfstein of CIBC World Markets.

Hey, it's Jason, thanks. A few questions.

Do you want to be that guy?

Right. First, Scott, I don't mean to put you in a box here, but could you define not a lot when you said the money you would expect that if there was a loss, that you would expect to have linked to internet next year. Would not a lot be less than $5 million dollars for the full year, is that -- or over a 12 month period, is that a fair assessment? Is that your definition of not a lot?

Well, all right. So the way I sort of look at this is, what matters is how much money -- what matters is ultimately, what happens to the cash flow of the enterprise. My goal would be to certainly not spend that much money independent of whatever revenue that we're going to generate. If you told me we were going to generate 0 revenue next year, there is no way I would ever -- this company would ever do anything on the internet that would cost $5 million. But if you told me that I was going to generate 10 million of revenue next year, would I spend 5 million to make 10 million? Absolutely.

Sure. That's fair. I think everyone appreciates that thought.

So I mean, my goal, again, we're still negotiating with various parties and we're still doing a lot of work, but I really believe we can, at the outset, build a business that only has a couple million dollars of "exposed costs" in it, and I also believe we can generate some revenue pretty quickly on that.

And a few more things. Alfred, should we assume that the losses related to the cable network start-up continue at this rate, or would you see expenses picking up in the back half of the year? Is there any way just to think about perhaps what the full-year equity expenses are?

This is Scott. That's a tough one, again, because I was actually a little surprised by the results in Q2, positively surprised from TV One. Because they really did ratchet down their costs and the ad revenue was higher than expected.

Here's the way I think about it. They've got a budget. And we made our investment based on that budget. And we're into this now for a little while. And based on the trends that I'm seeing in that business and the momentum that we have, yeah, I'm -- I'm more confident -- very confident that we will achieve, you know, our budget. And we may do better. The wild cards are the distribution deals. Because, you know, if somebody doesn't come through, then, you know, it has a big impact on your business. But having talked to all the distributors -- I personally am in conversations with all the distributors along with our TV One people, the feedback that I'm getting is that they're going to come through of so it's more likely that we do better than do worse. So I think that what Scott's told you about what, you know, what you think -- what he thinks the losses will be, you know, which is essentially tracking our budget, I think you can feel comfort with it.

It's going to be lumpy, and there's nothing any of us can do about that. Do I wish I had a somewhat better handle on that? Yeah, I do, honestly. But I think that for Q3, the pro rata loss that we'll show on our books will be somewhere in between the first quarter and the second quarter. And that's all I can say at this point.

And I want to throw something else that Scott throws -- said to me, but we don't control -- we don't -- Scott's team doesn't do the books down there. And so, it really is a separate entity, even though we're managing it. So to a large extent, it's difficult to manage and forecast their particular P&L and losses and so on and so forth.

Because a the end of the day, obviously, the P&L's a reflection of the operations, and the day to day operations and the strategic decisions that are made are made by the CEO of that enterprise and all of his lieutenants. And so -- but anyway -- listen. This is all good because clearly they are doing better than expected, and my sense is that, you know, hopefully, that will continue.

Okay. That's actually really helpful. Lastly, Mary Catherine, can you talk about perhaps how you're going to divide responsibilities with Zemira and just perhaps how your role changes now that you have that additional support?

Okay. It's Zemira, is his name, Jeff [laughter], and I'm going to get to go on vacation now, so I'm thrilled that he's here. He's actually going to start by doing specific projects because I don't want to just throw him into everything all at once. I've got him focused on a couple of things that I need help with. And already, I think he's making a big difference, and we're just really excited to have him here. It's also somebody to -- it's great to have somebody else to bounce ideas off of as well. I don't know if that --

But how about when you look at like 12 to 18 months from now, if you break down the business between focusing on national advertisers, focusing on general managers and sales trends more locally, focusing on programming, is there a way you guys think about dividing that up?

Well, I think that, you know, eventually, I think the markets will report to him. I'll always be here and definitely be involved, but from a strategic standpoint, that's my goal. From a programming standpoint, I don't know exactly how much he will be involved in that. Certainly as it relates to sales, he will totally be entrenched in that. But the day-to-day programming stuff, I don't think he'll probably ever be, you know, totally involved in that. He has major strengths in the sales area, so we certainly want to utilize those in the best way we can.

Thank you.

Thank you, Jason. Our next question comes from Jonathan Jacoby of Banc of America Securities.

Thanks for the clarification on the acquisition. Just 2 questions here. One, we're seeing a lot of talk from some of the packaged good companies, similar to what you're seeing about political focused on African-American radio advertising. Are you seeing more of that in terms of interest in annual contracts for '05? And then my second question is can you give us color on the NTR environment for you guys in the third quarter?

Well, it's too early to tell on annuals because we won't start those probably for another maybe 2 months. So I couldn't really give you any color on that. But, you know, we have seen that throughout this year. There seems to be more of an initiative and a focus with some shops, especially on urban or Hispanic media. And what was the second?

NTR is back. It's looking really good.

You know what it is? We have some big concert events in the summer that didn't do well last year. Now, you know, I'm not exactly sure why they didn't do well, because we did have good line-ups. But I guess people -- thinking back, people just were not spending money on that type of entertainment. And also, we've learned how to price these things. We've spent a lot of time this year researching our listeners and asking them exactly what they would feel comfortable paying for tickets to all of our big events that we do. And I think we nailed that this year because we just had 2 enormous ones, 1 in Atlanta and 1 in Philadelphia, and just did great with those. We've got another huge one coming up in L.A. That's on target to do great as well. I think we just learned to manage NTR a little better, and also get rid of the events that didn't make sense so we weren't spending as much time on them. Because NTR takes out so much of your staff. Any big event is going to involve the programming department, the sales department, it involves your business manager, it takes everybody out of the day-to-day.

Thank you so much.

Thanks. Operator, this is the last question, please.

Thank you. Our next question comes from Spencer Wang of J.P. Morgan.

Hi. Thanks for taking my question. I know that you guys have done a couple of deals this year. Can you just update us on what the priorities are for free cash flow, if you could maybe divide that into future acquisitions, paying down debt, buying back stock, and returning capital to shareholders? Thanks.

Well, we've announced -- certainly announced a couple of acquisitions. We haven't closed on Houston. That will be Q3. Mapleton will be later this year, and then of course, Charlotte will be later this year. So there's still a fair amount of capital that we'll need to spend for acquisitions before the end of the year. Clearly, we're focused on that. We have a bank facility that requires through the balance of this year another $26 million of paydown on the term loan, 13 million at the end of the third quarter, and 13 million at the end of the fourth quarter. So those payments will obviously be made. That actually ratchets up to annualize $70 million of principle paydown next year, so we clearly need to make sure that we're in a position to be servicing that, which will not be a problem. In the near and intermediate term, I think the combination of financing these acquisitions and continuing to deleverage the balance sheet will be the primary focal points. And hopefully there's other acquisition opportunities that will present themselves that will, you know, continue to provide us with an opportunity to take this excess cash flow and continue to build the enterprise. Then, of course, we have TV One, which we'll need to make another capital commitment to this year. So, I think that -- listen. We have a lot of good uses for the cash flow. It's balanced well between investing in the new business, TV One, paying down debt, and also growing our core business. With regard to share buybacks and/or dividends, we certainly talked about that stuff internally, but I think, at least in the near term, we're pretty much focused on the 3 things that I just talked about.

And we clearly see a path of how we can grow this business and build scale and not go wild in terms of the number of markets that we enter into. And if we're lucky, that stuff will come up over time, and not all at once, so we don't ever have to do anything drastic to our capital structure. That's how I'd like -- if I had my druthers, I'd love to have the leverage, drop down to 3, run up to 5, drop down to 3, run up to 5 and buy everything that we wanted and never issue equity again. Maybe we get lucky and it happens somewhere close to that. But the reason I think that -- because we know the stuff that we need to buy and it's in a relatively few markets and we kind of know who the sellers are and the whole bit, it could happen sort of along a path -- not just like that, but kind of like that. So, you know, we -- you know, we'll keep our powder dry for those particular acquisitions. I, you know, as a, you know, as a big shareholder would love to see our Company pay a dividend. I don't know when the right time is. You know, that is going to depend on how some of this other stuff plays out. You know, but it's something that we talk about. And also, when the dividend rate first got cut, and we really thought about it, we tested it with a couple of investors, and a lot of investors said they would rather see -- and even our Board said they'd rather see it put back into the business. But the extent that the entire industry starts to go that way, you get another mid-market guy doing it, and if everybody in the radio sector is doing that, that might force our hand somewhat to think about it earlier.

I do believe that this is one of the few industries out there where you can still be a growth company and pay a modest dividend. That does not mean that's the Company's policy. That's absolutely not, that's a personal opinion. And certainly, there is nothing imminent whatsoever, but there has been healthy discussion internally, and as Alfred said, I think we would follow our peers if our peers head in that direction. But I think we'd still have -- I think we'd still have inherent growth that perhaps they might not have if they announced a dividend.

And my issue with buybacks is that every time I hear a buyback announced, it never does anything for the stock. I hear all these companies announcing buybacks, and the stock is still the same. So to me, a buyback is not a way -- and again, I'm not the CFO, I'm not a financial wizard, you know, I'm an operating guy. But if we're going to start buying back stock, then we need to wait for the stock -- or the industry's at a level where we're just trying to figure out how to take the Company private. That's a buyback. But buying back $100 million worth of stock, is like, I'd rather to see that go to shareholders personally. That's something that people can count on. It's tangible. It's my personal opinion.

Thanks.

Thank you very much. Appreciate you all attending our second quarter conference call. Operator, do you want to close it out for us?

Thank you. I would to thank everyone for participating in today's second quarter earnings teleconference call. Have a great day.

Thank you.