Urban One Inc (UONEK) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radio One first-quarter earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS)

And as a reminder, today's conference is being recorded. I would now like to turn the conference over to President and Chief Executive Officer, Mr. Alfred Liggins. Please go ahead.

Thanks, everybody, and welcome to our Q1 conference call. Before I jump into the introductions, Scott wants to read a little disclaimer.

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 are subject to risks and uncertainties that could cause the 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; seasonality in terms of 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.

Thank you. Joining me also on the call today besides Scott Royster, our Executive Vice President and Chief Financial Officer, is Mary Catherine Sneed, our Chief Operating Officer.

As I stated in the press release, we are pleased to report Q1 results better than our guidance. While the macro radio environment continues to be challenging, I believe that our industry will bottom out in Q2 and things will improve in the back half of the year.

As a company, we are having our challenges, aside from a sluggish industry. We are currently underperforming and there are a number of factors causing that, the first of which is our L.A. radio station, which we have talked about a bit in the past, which has suffered significant audience declines over the last year and revenue has suffered accordingly.

We have a new programming and marketing strategy that will be implemented over the next 30 days that we are all very excited about and believe will dramatically improve our prospects in Los Angeles. However, it will take time for this new strategy to show up in the ratings.

Second, we are experiencing underperformance in national advertising in a number of key markets, including Washington D.C., Atlanta, Columbus, Cincinnati, and Cleveland. This underperformance began in March and we expect it to continue through the second quarter. Last year, we moved all of our radio stations to the Katz Radio Group, and that transition is taking longer to ramp up than we thought.

Another reason for our underperformance nationally is that we had a huge first-half last year, partly due to Clear Channel's less is more initiative, and this year, they are regaining lost share at the expense of us and our peers. The Katz Radio Group and Radio One executive management are focused on the problem and resolving it. The less is more effect will abate as the year goes on and the environment improves.

We are very excited about the recent winter ratings survey that are just now returning. We have had great books in many markets, including Atlanta, Philadelphia, Minneapolis, Cincinnati, Dallas, Indianapolis, and Washington D.C. These ratings should give us more revenue momentum as we work towards getting back to outperforming the industry.

We have decided not to give Q2 guidance, as it is difficult for us to accurately predict results given our investment spending in markets like Los Angeles, Philly, and D.C. New initiative spending is also in place for our top network that is still ramping up. And it is also difficult to quantify the positive effect of our recent ratings gains will have on our revenue going forward. Lastly, it is also difficult to quantify the negative effect of Clear Channel regaining lost share and how we ultimately fare against that.

However, we have isolated our issues and are rapidly improving our situation and believe the industry has bottomed out as we move to restore ourselves and retain our position as a market leader.

Now I'll let Scott walked through the numbers and we'll take questions after that.

Thanks, Alfred. For Q1 2006, Radio One reported results that beat our guidance, but even those results were clearly impacted by the very strong outperformance we exhibited in Q1 of 2005, when we outgrew our markets by 500 basis points.

On a consolidated basis, net revenue came in at $82.1 million, up 7% from last year, while station operating income was $35.3 million, a decrease of 6% from last year. The primary driver of this revenue growth was the inclusion of REACH Media for an entire quarter this year as opposed to one month last year. Exclusive of REACH Media, Radio One's net revenue was down 4% and station operating income was down 12%.

The primary driver of this decline in station operating income was the revenue decline, as core station operating expenses only grew 3% for the quarter. The negative growth in radio exacerbates the effect on station operating income in the first quarter because of the overall lower level of absolute revenue and profit in what is seasonally the slowest quarter in the industry.

On an overall basis, station operating expenses grew 18%, but most of that is from the full-quarter inclusion of REACH Media, plus there was an additional $550,000 impairment charge taken for the Tom Joyner Television Show, which will not be pursuing for a second season, that was a onetime expense for the quarter included in station operating expenses.

On a fully consolidated basis, adjusted EBITDA was $26.6 million, down 18%, but if you further adjust for non-cash compensation, including the impact of FAS 123, the EBITDA decline was 13%. You will find in Q1 and throughout 2006 that a number of the new initiatives we are pursuing may have a disproportionate impact on consolidated EBITDA relative to radio station operating income because of the nature of allocating expenses for these initiatives. We segregate these expenses when we break out our pure radio operations, but on a consolidated basis, the expenses for the initiatives are mostly in the operating expense categories other than corporate.

These initiatives include our recently launched nationwide news talk network, our independent film initiative, and our Internet initiative. Net income applicable to common shareholders was $0.03 a share versus $0.07 last year.

For the quarter, it really was a tale of two markets, with national up mid singles and local down mid singles. From a category perspective, financial, health care, and entertainment were strong, while telecom, travel and transportation and food and beverage were weak. The all-important auto category that everyone focuses on for us was actually only down 2% for the quarter. So while auto was negative, it sounds like it wasn't as negative as what some of the other operators are reporting.

The number of spots in the quarter was up approximately 2%, while pricing was down about 7%.

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 33% for the quarter due to the reduction of our Ohio tax liability due to a state tax law change, and a release of reserve contingencies from historical acquisitions. Fully normalized, the rate would have been approximately 41%.

Lastly, the impact of FAS 123 was approximately $1.6 million for the quarter, and we are now guiding to a full-year impact of approximately$6 million to $7 million, which is lower than the $11 million to $13 million impact in the original guidance on this topic, due to further analysis. This does not include the potential impact of any potential stock options that might be granted during 2006.

For the quarter, CapEx with approximately $1.9 million versus $3 million last year. CapEx guidance for the year is approximately $15 million. As of March 31, 2006, we had net -- debt net of cash balances of approximately $929 million and our leverage ratio was approximately 6.1 times.

As Alfred mentioned, due to the uncertain climate for radio and the number of initiatives we are pursuing, both radio and non-radio, we are withholding Q2 guidance at this time, but we look forward to making progress on a number of fronts during the quarter and reporting back to you on this progress in a few months.

Thank you. Operator, we will now turn it over to you for the question-and-answer session.

(OPERATOR INSTRUCTIONS) Laraine Mancini, Merrill Lynch.

First of all, on your rate decrease in 1Q, is there a way for you to isolate how much of that you think could be because of "less is more" and how much of that is ratings related?

Second, a lot of your competitors have talked about their digital initiatives and there is a lot of growth there. Can you talk about what type of growth you're seeing in your digital initiative and how big that is now in your revenue stream and how big you think it might be able to get?

Quantifying how much "less is more" is affecting us is very, very difficult, which we made the statement earlier, which is part of our reason for withholding guidance. It is definitely affecting us. We don't know how much. And I don't know if there is a way to figure that out.

Our digital business is not very big -- our Internet -- I'm assuming you're talking about Internet is not --

Are you talking HD or Internet?

More Internet and new types of media.

Yes, our Internet business is nascent right now. It's probably about $1 million. But it breaks even on the $1 million. But it is definitely a focus for us.

I was happy to see a comment in Inside Radio from John Hogan of Clear Channel, those guys where sort of they are echoing what I have been saying for a year -- that radio companies, while we are in a business that I still see as attractive, ultimately need to figure out a way to grow into other mediums, particularly the Internet. The Internet is going to take content.

So it is an area that we are definitely now going to. We have not figured out our complete strategy yet. But again, ultimately, I think our strategy for going -- I think our opportunity in that area is going to be very big, because we've got a similar opportunity that Univision has, and that is to really to go after an attractive, large demographic where we have a big foothold.

Between our radio platform and our interest in the cable network, I think we are the traditional media company to beat for African-Americans. So long story short, it's small now, but we haven't even begun to launch what the real initiative is going to be.

How about any other alternative distribution methods, cell phones or (multiple speakers)?

That is all part of what the digital business is. I mean, once you figure out what content you are going to deploy online, then you'll deploy it on cell phones and other places. But that will be wrapped up.

Ultimately what we really need to do and we have not done that yet, and we are interviewing people now, is we need to find somebody who will head up our interactive effort. Right now, we have somebody in-house who handles our station websites, but we don't have somebody coordinating our complete interactive strategy.

Great. Thank you.

[John Chu], Mentor Partners.

I wanted to know what is your decision-making process and criteria for allocating capital. And I have a couple of questions, but you don't have to answer them specifically, but it's to give background to this main question. If you bought stock at the $12 range, probably believing the intrinsic value is $16 or $20, how do you estimate that and what do you consider your cost of equity capital? And if you have been buying less stock in the first quarter than the fourth quarter, what influenced that?

And then why would you buy a stick station versus buy back stock? What specific returns drive your decisions? And why have a national strategy if radio is mostly a local medium? How specifically does that drive the return on invested capital and future growth and intrinsic value?

And then finally, if you had to sell personal stock under $8 because you are overleveraged, and you were buying stock at an average price of $12, how can investors determine if you are competent to allocate capital for the Company in the future? Those are my questions.

Okay, a lot of questions. I guess some of them are for me -- this is Scott -- and some for Alfred.

With respect to the buyback activity, last June, our Board approved $150 million stock buyback to occur over an 18-month time frame. It was a very different environment from our perspective call it almost a year ago. We were growing significantly faster than the industry at the time. We felt that when you looked at our growth prospects at that time, when you looked at some of the other things that we were focused on, like TV One, our estimate of the value of our NOL and our tax shield and what we thought was an improving radio environment possibly, we decided that a stock buyback was in shareholders' best interest.

And we told the marketplace that we would be looking to execute that, as we articulated, over an 18-month time frame. So we did spend the back half of last year buying back stock. And in fact, we were buying back stock as the stock was going down through the year.

We do have five-year models, not only for Radio One, but also for TV One. And so we absolutely look at the future for our businesses to determine what we think the intrinsic value is today. As we have stated in the past, we historically used a threshold return of 20% on the equity portion, the assumed equity portion, of any acquisition that we might look to do. So I think that may sort of answer one of your questions as to what our historical IRRS have been.

And then as we approached the end of the year and rolled into the beginning of this year, we actually saw the industry get worse. The industry was negative in the first quarter overall. That was a surprise to us. And the positive effects on us that we benefited from last year relative to "less is more" clearly have been working against us this year. And I would admit that is probably somewhat of a surprise as well.

Fundamentally, I don't think necessarily anything else has changed, certainly with regard to TV One and certainly with regard to our long-term outlook for our business. You ask a very fair question, because we are not in the business of predicting stock price movement on a short-term basis, but clearly, with the stock significantly lower today than it was last November, in hindsight, we should've been buying stock back now and not then. But a lot of things have happened, quite frankly, that we did not anticipate, primarily very late last year and obviously into this year.

Then with respect to why we are not buying stock back now --

You have a lot of leverage.

Exactly. We look at our leverage. We look at the uncertain environment that we are in today. And one of the reasons that we went to our bank group very recently -- we got an amendment -- is we felt that we needed to have a little more flexibility with regard to our covenants relative to the next couple of years, in particular, given the uncertainty in the radio industry this year, and of course the impact of "less is more."

And we thought that at least at this point in time, it would be more prudent for us to focus on leverage as opposed to -- focus on maintaining leverage or driving it down as opposed to buying back stock. We would love to be buying back stock right now. We absolutely think that it is a rational, maximizing economic decision. But we are also very cognizant of our leverage.

I know I'm going on here, but there were a lot of questions. Then with regard to the stick acquisition, we had historically found that returns on the stick acquisitions are superior to returns associated with buying cash flow. When you sort of just think about the fact that you are buying something that has no revenue and cash flow, in some people's minds, how can you pay something for nothing?

But in our minds, when you look at five-year growth rates for stick stations, assuming that you execute operationally, we find that it is much easier to get to your 20% targeted threshold return acquiring sticks than by paying 13 to 15 times for existing cash flow. I think if you look at where we have created the most value in our Company over the years, it has come from buying either stations with very little cash flow or in fact no cash flow. And so that continues to be a strategy that we believe is in our shareholders' best interests.

With regard to sort of local versus national --

Going back to the stick station, I assume you're talking about Cincinnati and you're talking about St. Louis.

Right.

One of the issues that we have in Los Angeles is that we are a stand-alone, all right? And sometimes you can operate as a stand-alone and be just fine. However, if a market does get very competitive, somebody with more stations can come in and start to nibble at the edges and erode your revenue and your ratings opportunity, and you are very exposed.

You're at a competitive disadvantage and don't have much economies of scale in that market.

Don't have much economies of scale. But even more importantly -- because the economies of scale run out -- don't necessarily have the ability to block your particular format off. The case in point in Los Angeles, one of the challenges there is that the market is almost 50% Hispanic, and the African-American population is about 8% and it's probably going to go down to 6% over the next five years as the market continues to grow its Hispanic population.

And formats are fragmenting there. So oftentimes, Latinos who would listen to hip-hop music would listen to black radio stations because that was sort of their second favorite music. But more Latinos stations have come on the air, so it has hurt urban stations, including the [Image Station] and including ours.

Now if you have more stations, then you could sort of protect your position. Cincinnati is a market that is a very good business for us. We do well there. And we've had one FM station there for a long time, and we have always felt very, very vulnerable in that market. Because if we were to take a competitor, even though the market is only 11 or 12% black, if we were to take a competitor, that competitor would not really do all that well, because splitting the market they wouldn't make a lot of money, but it would us. So potentially, we could lose a significant part of our business. The competitor makes no money, but we're just worse off.

Now in that market, we're going to have a position where we can basically own and protect the 11% of the African-American population with our two FMs and our one AM. And we feel very good about being in Cincinnati and staying there and protecting that niche for the long-term, because we make money there.

St. Louis is a market where we had our one stand-alone, again, up against our primary competitors, Clear Channel -- they had, I think, four or five stations. Now we are on a more competitive -- we're on a more even footing competitively. And quite frankly, St. Louis is one of the places that is driving a part of our revenues, one of the bright spots right now.

So that is why we did it. If you notice our acquisition strategy, we've just been basically filling in markets that we were already in. So now how people can determine whether or not we are good -- so competitively, I think you need to do that; otherwise you could have problems. And we are seeing that in Los Angeles now.

Now, how can investors see if we're -- or believe that we are good allocators of capital? You know what? We have a five-year model, but call us optimistic, but the five-year model does not say that the radio industry is going to be flat for five years.

Two of the metrics that we spend a fair amount of time discussing and debating that sort of gets to the heart of your question is sort of what's the long-term growth rate for radio and what is an appropriate terminal value multiple to use? Because that really does drive everything relative to assumptions, right?

So let me answer another question. We assume that our WAC -- and I have seen it as low as 8% in published reports, but we actually use a 10 or 12% WAC all-in when we do present value analysis on cash flows -- but we are assuming -- and this has changed over the years -- we are assuming terminal value multiples that are 12, 13, 14 times. And so at the end of the day, if radio really is an 8 times business, then I can understand your concern about how we think about valuation.

But I will just again say to you that one of the things you have not seen us do since 2001 is acquire existing cash flow. So if we acquire stick stations, we will create some sort of value just by owning those stations and putting them on the air and getting some sort of revenue and cash flow out of them. One of our concerns over the past few years has been acquiring cash flow, because what is the growth potential of that cash flow and then how do you value it five years out in terms of terminal multiple? So we hear you on that.

So when we do our analysis -- and let's say we're looking at 12 times exit multiples now -- and maybe, again, we need to look at something 8 to 10. But in holding the exit multiple aside for a second, we just haven't got -- I know some people say that we have been negative on the industry, and we are not negative on the industry. We don't have a model in this house that says that the industry is going to be flat for the next five years.

So when we look buying back stock, and of course assuming a positive industry growth rate, then you can make a mistake. And you know what? iMIS has made the mistake. [Intercom] has made the mistake. So that we were all buying back stock, because none of us are so bearish on the industry that we think it is a flat business. And so fortunately, we bought back stock and we've only done what -- $75 million?

80 (multiple speakers).

80 million. A little over half of our buyback. Better than having done a lot more. And then also I would add to that, at least my view as the CEO, I have a very long-term view on this business. And when I say very long-term view, I am very bullish on our cable network, which we get no value for. That asset will be worth hundreds of millions of dollars to this Company at some point in time. Maybe five years from now, maybe six years or seven years from now.

So the way I look at it is I'm buying back stock at $12, I expect to be here six or seven years from now. So if it's $20 in six or seven years, I still feel like, okay, it is not a bad long-term (multiple speakers).

John, we absolutely have models -- this is sort of another part of your question -- that in our minds show how this company should have a $20 plus stock price within three to five years, assuming modest growth for radio, what we think are fair terminal values for the industry, as well as what we think the value of TV One will be in the future.

But that also assumes that there is some modest industry growth as well.

Right. I just wanted to know your assumptions and your thoughts on how you allocate capital. I assume that you are also concerned about paying down debt, because if you are wrong and the industry declines further, you're not forced to sell off assets in a helter skelter manner.

We are absolutely focused on reducing leverage. We have publicly said that we would sell noncore nonstrategic assets to reduce debt. We are working on that.

And we're not going to have to do it in a helter skelter manner. We just got an amendment done.

And one of your other questions related to -- and it's a really more fundamental question about radio. If radio is such a local business, what is the competitive advantage?

I wanted to answer that. Because you said what's the competitive advantage to having a national strategy? One, I think what Scott was about to say, is having a portfolio strategy. Because if some markets are up and others are down, then they sort of hopefully cancel out each other.

And I remember in the early days of building this company, one of the reasons banks would not lend us money is because we were basically Washington-Baltimore and they looked at it as one market. So they wanted you to be diverse and have a number of markets.

But two, again, as Clear Channel has come out and stated, one of the ways that radio is going to need to create value is to monetize its audience. We have large audiences, and if you have a national footprint, that is easier to do. Otherwise, you're really just sort of at the whim of what the traditional media sector, and in particular the radio sector, is going to grow.

Our cable network would not have happened if we did not have a national platform. If we did not have -- when we walked in and we pitched Comcast, we said that we could be successful in this business although we've never had any television experience whatsoever because we know how to sell and market to this demographic. And look how we overlap with your particular cable system, and we can cross-promote and cross-market it, and they loved that idea.

So therefore, we are in a business that now is going to create value. At the end of the day, our cable network is a great hedge for the uncertainty in the radio business. Because it is worth money. Whether we get value for it in our stock or not, it is worth money.

Personal stock sale --

That's okay. You've answered so many -- you've already really answered the question.

You asked a lot of questions (multiple speakers) so everybody know. You have seen the personal stock sales for myself and our chairperson, Kathy, who is my mother. We've owned this company 25 years and have sold extraordinarily little stock, because we believe in the future of this company. And we basically took out margin loans to finance our lifestyle -- building my house and things of that nature -- over a long period of time.

When the stock gets cut in half in a year and you are a control shareholder subject to 144 rules and selling and volume limitations and stuff, the banks wants their money, all right? Because they can't get out of your stock fast enough if it goes to 4, and so they are not interested in you giving them more stock. They just want their money. In fact, those loans, we were collateralized by probably 3 times, we were overcollateralized. Wasn't the issue.

So I didn't like selling. And certainly, if I was just looking to diversify my position, I would have done it at $15 or $20. But that was purely a bank issue. But we've handled that and it is done and now we are back to fixing our interests and growing our business.

Thank you.

Craig (indiscernible), Off Wall Street.

I guess there's not many questions left to be asked. I guess if you could touch on two things. Just on the asset sales maybe a little more color on what's the progress you're making.

What is the second one, Craig?

First, the asset sales, just a little more color on that. And then also, I guess maybe regarding TV One, if you could talk a little about what's going on in some of the markets, such as Detroit, from an advertising standpoint and what you're seeing there.

For TV One?

Yes. For TV One.

Well, local advertising --

When you say in Detroit, TV One's a national cable channel.

Yes, and the cable systems fill all the local avails.

I understand that, but I've been reading about and talking to some people that were very positive on what's going on (multiple speakers).

I hear where you're going. One of the things that is a benefit to -- one of the things that helps a cable network be of value to a cable operator is how strong a local ad sales vehicle it can be. And because for north of 20 years, BET was the only African-American network out there, it did really, really, really well for local ad sales, but was oftentimes sold out in places like Detroit.

So TV One has actually had a very strong showing in markets like Detroit and the Washington/Baltimore area and in Atlanta, because now those markets that have huge black populations now have another alternative besides BET, and they also have an alternative that has a different age demographic target, which is very important. And that alternative is quality.

So TV One is doing great from a local ad sales standpoint, from a national ad sales standpoint. I think they just sent out a press release yesterday; they crossed the 30 million sub mark for subscribers. We have often -- we've said that it should break even in the fourth quarter of '07 and then have a really good '08. And we're not backing away from that. And the ratings are doing well.

The other thing that people need to understand about TV One is -- and we've talked about it -- it's a dual revenue stream model, and right now, basically almost 1% of its revenue is advertising. There is affiliate-fee revenue that starts getting generated in a big way in '08, and that is all contractual.

And so you can sort of take that to the bank. You just have to wait, but it happens. It starts in '08 and it ramps up from there. And it really drives the profitability of that business. So we are very, very optimistic and happy about TV One and happy with TV One.

With regard to asset sales --

Yes, asset sales. We have engaged StarMedia out of Dallas to work with us. We are not doing it willy-nilly. We have sent out information on some stuff that has been requested by interested parties. We don't know which stations we would divest. It is going to depend on how attractive the offers are for each individual station.

We are really looking to manage to a number. We are looking to sort of call it -- manage to 100,$150 million of proceeds from these sales. So it's not necessarily just about the station. It is about how we get to our number. And so it is a process. There isn't the same M&A activity or level of frothiness that there was a year ago, but we are in good markets. And so we are confident that we will get something done. It is going to take a minute, but we are still proceeding and we are focused. We have engaged, again, StarMedia. They are working on it.

What type of buyer do you expect? Obviously, I wouldn't expect a public company to --.

You know what? I would not rule that out, that a public company would step up. So I don't know what kind of buyers we're looking at.

When you talk about proceeds, what are the tax implications?

Actually, because of our NOL position, we are sheltered at that level. At that about 100 to $200 million level, which is kind of the range we have articulated as our hold bar, what we are focused on, we are sheltered, we are fully sheltered.

Let's say you get $150 million, optimistically. Will you pay down that 8 7/8 debt?

All right, no. So the 8 7/8 is callable in July. And so we will refinance that with probably a combination of lower-priced bond and bank debt. There is a cost associated, obviously, with taking out bonds with proceeds from asset sales, so more than likely we would just pay down our revolver, because there's obviously no cost associated with that.

What is the current cost of your revolver?

LIBOR plus 125.

Okay, because I'm just looking at this $300 million piece of debt. I mean, it's basically $26 million, right, roughly in interest expense?

8 and 7/8 times 300, right. It is callable in July and we will refinance it at lower rates and probably pick up -- assuming the rates don't go crazy over the next couple of months, probably pick up a couple hundred basis points in savings on that, just by doing a straight refi.

Sure. We've been talking about this for several months and the rates are picking up, so you haven't -- there's no way you could have hedged against that?

Well, okay. I mean, first of all, we could have tendered for the bonds, but there is a cost associated with that, and when we did a present value analysis of whether or not this close into the call date we should spend an additional premium to tender for the bonds, the decision -- the determination was made to just wait until the call date. We always have the option of tendering, but the closer you get to the call date, it becomes less economic because the tender is effectively a fixed cost on top of what we already are going to have to pay to take the bonds out.

One last question. You're not going to reprice options, are you?

No, never have.

Definite no? I mean, it's a very important --.

Seriously, we have not done it, okay? So I'm not going to sit here on a conference call and tell you that we'll never do it, but historically it has been our philosophy that we don't do it. We just issue them each year.

To give you a sense as to how the governance works here, a lot of companies accelerated options at the end of the year. We did not do that for purposes of avoiding FAS 123 charges. Our board decided that they did not want to accelerate existing option grants. So hopefully, that is some indication for you as to how we think.

Okay, thanks guys.

Bishop Cheen, Wachovia.

You are now the darling of every hedge fund in the free world, I guess.

What we do now?

I don't know, but all the questions -- they are good questions.

Oh yes, coming from guys who don't normally ask questions on conference calls. Yes, it's pretty interesting.

It's a new breed of brave new investor. Okay, a couple of questions that I don't think was asked. On the new $800 million, it wasn't a refi but it was a recovenant package. How loose are the covenants?

How to answer that question. How loose are the covenants? Well, and this has been filed, right, so you can see what we've done. We've taken -- the total leverage covenant was scheduled to step down from 6.5 to 6 times, basically starting on October 1st of this year. We have actually taken the covenant up to 7 times, and it stays there through the end of 2007. So in terms of time -- and then it steps down to 6 in 2008.

So we bought about 15 months' worth of -- about 18 months' worth of higher covenant levels, and we did that obviously because of the uncertainty that we've been talking about that we see in the radio industry. Obviously, we went to the bank, we had what we thought was a covenant proposal that provided a significant amount of cushion for us.

With regard to interest coverage, that was taken from 2.5 times down initially to 1.9 times. It steps up to 2.25 in 2008 and then back up to 2.5 times in 2009. So again, a couple of years of additional flexibility for the same reason -- not only the uncertainty of the radio industry, but also obviously the rising interest rate environment, which who knows when the Fed is finally going to be done, but some of our debt is exposed to variable interest rates. Not a lot, thankfully, but some of it is.

And so we just wanted to make sure that we were protected, because you sort of -- when the industry is soft and then you also have rising interest rates, you potentially find yourself squeezed with regard interest coverage. But again, we built a covenant package that we thought provided us with a significant amount of flexibility and cushion.

Right. And that is the key word, a word I wish I had used in the question, flexibility.

One other thing. The Joyner -- the REACH Media expense spike in Q1. You characterized that as a onetime. As we look forward to the rest of the year -- and I know you haven't offered guidance on the rest of the year -- is there anything that you see coming on the horizon that would approach that programming expense spike?

All right. But when you talk about the spike, there's a couple things. I mean, REACH Media expenses are higher this year than last because it's three months versus one. Okay?

Okay. So it was just as simple as math -- as that?

Yes, that is the biggest component, is the fact that it's a full quarter this year; it was one month last year. With regard to the $550,000 impairment charge which I referenced, that was a onetime -- that was actually an accounting charge taken in the fourth quarter as well.

This television show was something that they wanted to pursue, the manager at REACH Media. It actually did pretty well, but at the end of the day, not as well as we needed it to do to avoid some of these charges. Because we are not pursuing a television show in the second season, you should assume, based on everything that at least we know today, that there will not be any additional impairment charges like this going forward.

Okay. And last, the 20% IRR screen, which is always been good kind of screen, all things being equal, Joyner and Reach were very much a strategic acquisition, as I think you have articulated and I understand it. Is there a different kind of stream when you look at an acquisition and a move like REACH Media?

I guess from a purely financial perspective, not really. We ran in that case ten-year models, because the agreement with Tom is ten years. We certainly cut back -- like, as an example, they have four or five different lines of business -- radio, Internet, special events, obviously the television was something they had built in.

We actually ignored the television revenue and cash flow in their models when we valued Reach because we thought that there was a fairly good possibility that it might not be successful. The big debate about Reach with regard to ultimately what it worth to us today was what is the terminal value that you put on, effectively, an individual, who at some point in time might not be working for you anymore.

And so in that case, we actually assumed a significantly lower terminal value multiple on year ten cash flow. I think we used three times, because we assumed that they would be some library value and that we would find other ways to actually monetize the infrastructure of Reach, which we have actually started to do with the development of this news talk network.

But in terms of how we thought about WAC and how we thought about return thresholds, that did not frankly vary from my perspective. Now in terms of thinking about strategically how Reach fits, I'm not sure that there was much of a different methodology used overall.

A couple of things. One, we were a very big affiliate of the Tom Joyner Show. And Reach was going to be making more money each year, and we thought that it made a lot of sense for us to at least get half of that back. We did move Tom in a number of markets where it helped us. It has particularly helped us in Philadelphia.

And also, they are basically a radio network and they are doing the affiliations and rolling out our talk network. And it is good to have that part of the business because it is -- we do business with networks, whether it is ABC or Premier, and at least now we've got an arm where we can do some of that stuff ourselves.

Then in hindsight, from a defensive perspective, we were negotiating with Reach before the Howard Stern announcement was made with regard to Sirius. Tom is a huge personality, 115 affiliate stations. So at least now we know that if he goes to satellite, we share in that decision. I don't think that would ever happen, but it certainly could happened if we didn't own his company. And then that would have been a big loss, not only for Radio One, but for urban radio in general.

And you know what? He is a great personality. He is a great businessman, a great guy. David Kantor is a great CEO, so we are very happy with that.

That is great color. Thank you.

[John Klem], Credit Suisse.

A real quick question, just 30,000-foot level. Could you describe the current local advertising environment generally? And then more specifically, why do you think radio industry revenue growth is lagging the current economic growth?

M.C., why don't you take the first one and I'll take the second one.

Locally sluggish right now, unfortunately, and that is the best word I could use for it.

And so why is radio lagging the economic recovery? I would not just pin it on radio, and I have said this in a lot of different forms. I would pin it on traditional media. When you have $12 billion last year going to the Internet that seven years ago, eight years ago, that pie did not really exist, it has to come from somewhere. We have local cable interconnects. And ten years ago, the cable business was considerably fragmented. So buying advertising on cable systems was not very efficient at all. Now they are completely consolidated. It is really, really, really efficient and it is fairly inexpensive. That money has to come from somewhere.

So I think that you see traditional media losing share and taking those hits. I also think radio has had some bad PR. People look at satellite radio and go, Oh, my God, it's the death of radio. It is not the death of radio. Are we going to now share the car with another medium? Yes. None of us have any idea how much that's going to cost us in audience.

Sure, it's going to cost us something. But will we be able to actually still use the power of our brand, the power of our personalities, our localism to continue to build our businesses? Absolutely. But given all the negative press, you would think that this industry was declining 5% a year, when basically it's been flat. And if you think about the Internet and you think about cable, then it explains why one would expect a flat industry.

So, look, I am not sitting here saying that radio is going to restore itself back to the historic growth rate. But certainly it is a business that is here to stay, and our challenge as companies, as Clear Channel is figuring out and as Univision has figured out, our challenge is to figure out how we take our biggest asset, our listener base, and monetize that.

John, this is Scott. Just one quick follow-up. I have been saying for a year -- in fact, we were saying this last year -- we would much rather see -- we would be happy to perform a little less well and see Clear Channel perform better, because they are obviously so big and so dominant that they need to be the leader in the industry. We would certainly love to grow faster than them, and we did that last year, but we grew 1000 basis points faster than them last year. That was unnatural and that was probably unhealthy for the industry.

The fact that they are doing so well right now makes me feel really, really good about the outlook for this business. Because if Clear Channel can lead the way, we will all follow, and I think we all do so successfully. So our outlook for the back half is actually pretty positive, and of course into '08, particularly given how well Clear Channel appears to be doing right now. That is a very, very positive sign for this industry.

When you think about -- we are taking it in the short on some level. Again, don't know how much of it is Clear Channel and how much of it is our own issue, because LA for us is a big number. And if you X out South LA and a few other minor problem areas that we have, we are actually pretty much kind of in line with everybody else. So we have got to figure out our LA solution and we're doing that.

But what that says is once you get through this "less is more" stuff that the industry, and we and our performance should be back in a healthier place.

All right, John?

That is great. Thank you.

[Justin Evans], Langley Capital.

I just wanted to ask you about this fastest-growing cable television network in this decade, the one that nobody is focusing on. Can you guys help me get some data? I need a couple of things, like total day rating or primetime rating on the Nielsen ratings, and your effect on the target demographics. It's called a VPVH.

Yes. You know what, why don't you try us off line on that and we will see what we can do. I know Scott is looking at me strange. I guess we have to be careful about what we can get you. But maybe we can steer you to someplace you can get that, because Nielsen data is available in lots of places.

And you know what? It is a fair point that you make. Obviously, it is becoming, I guess, more prominent in some people's eyes, particularly given how successful it is. We will endeavor -- again, we've got a partner called Comcast who obviously cares about what we say. But we will endeavor to provide more transparency on certain metrics in the future, because obviously we think it is helpful for shareholders and it probably now matters more. And so we will look to do that, being mindful of the fact that we have got to adhere to Reg FD.

Yes, definitely. As you get closer to your 50 million sub number that looks like might happen, those numbers change the valuations per sub tremendously, anywhere between 20 and 50 or $60 a sub. I mean, it's gigantic.

We've actually been told that 30 million is a very important threshold for advertisers as well. They really view that as a nice critical mass number. And when you look at where TV One is distributed, it is actually a very intelligent, sort of strategic distribution, where it is in a lot of big, relevant markets with large African-American populations.

And so I think the one thing that the market has missed is 30 million is -- there's 30 million and there's 30 million. Our 30 million is a lot more relevant to the target market than just a sort of random distribution of 30 million homes across the country.

Yes, from a big picture point of view, it should work. And if you guys can really deliver your target demographic, it is going to be tremendously more per sub in a valuation model than a lot of ordinary numbers.

From a ratings standpoint, I think total day, TV One is doing is about 0.22; and in primetime, we are doing significantly better than that. I think it's close to a 0.4 or something like that. Don't quote me, but it's like 0.36, 0.37, kind of rounded to a 0.4 in primetime.

We don't have ratings issues. And it is heading in the direction. We just made a very nice deal for acquired content from Warner Brothers, which is going to give us a great slate of new programming. UPN being merged with WB did good things for us, because UPN had significant amounts -- significant nice amounts of African-American programming. Now I think the merged network is going to have one. So some of that audience is going to be looking for a home, and hopefully they will find it on TV One.

If you have a primetime rating of 0.4, that is gigantic. Fox News is 0.5 and ESPN is 0.9.

Like I said, don't quote me. It might be in like the mid 0.3s. I don't have the numbers in front of me.

If it is not 0.4 --

I think it is like 0.36, 0.37. But I always get nervous when people start using words like gigantic and get excited off the stuff that I say about businesses that we don't control.

Fair enough. Now another question for you here is about your buy-up option in TV One. When will you exercise that option and how much --?

It's years.

Another four years probably.

Okay. Is that a fixed cost or is that based on a --?

It's fair market value.

Got you. Also about stock option guidance, how much do you guys expect to issue, given where the stock has gone? What will you need to incentivize people properly?

I don't know. I haven't talked to any of the other CEOs, but I've talked to some of our employees, and radio employees are bummed. Everybody's options are underwater. Particularly people who have been in the business a long time, they were used to having options be part of their nest egg. And so we have to -- ultimately, I think the industry is going to have to address how that affects morale of the employees because it is an issue.

There is a compensation study that is being done for us now that is looking at equity and quasi-equity securities, obviously given FAS 123. And PriceWaterhouseCoopers is actually doing this for us.

So we will look at restricted stock. Lots of companies are shifting to restricted stock. So we haven't made any definitive decisions, but we will be reviewing this report from one of our partners to see what other companies are doing on this topic.

Last question, probably for Mary Catherine, political spending increases. Do you expect them in the second half of the year for traditional radio?

Yes, I think it is going to be a real healthy environment, especially for us, because there are numerous candidates that are focusing on the African-American voter. So we are looking forward to that.

Got you, okay. That's perfect. Thanks so much, guys.

Anthony DiClemente, Lehman Brothers.

Thanks for taking the question. Just getting back to quarterly trends here, on both revenues and expenses, I understand you're withholding guidance for the 2Q. Can you give us some color on what you saw in April? I'm sure you have some more visibility there.

And then if you imply what Clear Channel's outperformance was in the 1Q and what they guided towards on pacings, it seems as though it implies that the industry itself will be down in the 2Q. Can you give me your impression of that conclusion?

And then secondly on expenses, your expenses were up 7% in the quarter. You talked a little bit about what was driving that in the press release. I am interested in the run rate of expense growth. I know it is an uncertain environment, but maybe you have little more certainty on your own expenses, at least the semifixed portion. So what should we expect recurring expenses to look like -- is it mid-single digit growth?

All right, when we say we are not giving guidance, we mean it. And so we are going to probably not answer your questions to your satisfaction because of that position that we have taken. I have always said that I think that expenses grow in the low to mid-single digit range in a normalized environment. Just because when you think about the high fixed-cost nature of this industry, when you think about the fact that something like 70% of your costs are personnel-related, you do have to pay people more money, at least in theory, every year.

You do have costs such as facilities costs, leases on towers, Arbitron, other major cost categories where there are probably embedded escalators of 2, 3, 4% in those various buckets. And so it's sort of hard in a normalized environment to avoid a 2, 3, 4% cost increase. So that is what we have always said on cost and we're certainly not changing our position on that. I think you are right. The industry probably is still somewhat soft. I guess it was down 1 in March.

That's what I said in my opening comments, that I think it will bottom out in Q2 and then improve from there. But definitely, I believe we will be flat to down a bit.

For the industry for the second quarter.

Yes.

Okay. That was not unsatisfying.

[Lizette Santiago], Goldman Sachs.

Surprise. It's Mark (indiscernible) actually.

That was a new name.

Just trying to throw you off. Besides the ratings improvements that you cited, what type of operational or sales management changes are you and Katz making that you think can help drive growth in national business in the second half?

Part of our issue is Katz actually created a new rep firm to service other clients, clients that they felt that they were going to be able to bring over from Interep. So Eastman is a new rep firm. And as we look through it -- and they are representing a couple of our big markets, Atlanta and Washington. And the ramp-up is slower there than expected.

Now in all fairness, the ramp-up is slower there than expected, but we're also in the face of "less is more" and it takes time for sellers to get acclimated to how you sell these radio stations and how to overcome all of the objections for this particular format and so on and so forth.

So we met with Stu Olds, who is head of Katz, last week here in the office. I am going to New York and I'll meet with the guy who runs Eastman on Monday. And so I am going to hear what the plan is for them to fix it. But we are working on it by having our managers bring in the national reps, staying even more on top of national than they have before, to the point where they need to be tracking every single national avail.

And if they need to go directly to buyers, as opposed to going through the rep, they need to do that. So I am putting responsibility on our managers' plate now. I told Mary Catherine that her number one priority has got to be Los Angeles and also getting national turned around.

But I have not heard their plan yet. They have one because I got an e-mail this morning. So --

Just one thing to note as it relates to what to expect for Q2, and one of the reasons why we are actually very optimistic for the back of this year and certainly into next year, is that last year in the second quarter, we actually outperformed nationally by 1300 basis points. And overall, we outperformed by 600 basis points. So that really goes to show you the impact, the positive impact "less is more" had for us last year.

Again, that is coming back in a little bit of a boomerang this year, but the good thing is that by next year, all this noise will be gone; later this year, it will be significantly reduced, and we will be looking at a much more normalized environment to comp off of.

So hopefully, people understand that we did exceptionally well last year. It is tough to do exceptionally well on top of 1300 basis point outperformance, but we are focused on doing what we can. But again, looking forward a couple of quarters and then into next year, we actually think that the good thing is that all this noise will be out of the market and it will be back to normal radio, which we are feeling very good about.

Another initiative we have with Katz is also that there are several dedicated sellers that work only with the (technical difficulty) in the Katz camp.

All right. Thank you, everybody.

Operator, you can close this out, please.

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