Urban One Inc (UONEK) 2017 Q2 法說會逐字稿

Welcome to Urban One's Second Quarter Conference Call. I've been asked to begin the call with the following safe harbor statement. During this call, Urban One may share with you certain projections or forward-looking statements regarding future events or its future performance. The company cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks and 10-Qs and other reports periodically filed at the Securities and Exchange Commission, could cause the company's actual results to differ materially from those indicated via its projections or forward-looking statements. This call will present information as of August 2, 2017. And please note that Urban One disclaims any duty to update any forward-looking statements made in this presentation.

In this call, Urban One may also discuss some non-GAAP financial measures in talking about its performance. These measures will be reconciled to GAAP, either during the course of this call or in the company's press release, which can be found on its website at www.urban1.com. An audio replay of the conference call will also be available at Urban One's corporate website at the same www.urban1.com, under the Investor Relations sections of the web page. The replay will be made available on the website for 7 days after the call. No other recordings or copy of this call are authorized or may be relied upon. I will now turn the call over to Alfred C. Liggins, Chief Executive Officer of Urban One, who is joined today by Peter D. Thompson, the company's Chief Financial Officer. Mr. Liggins?

Thank you, very much, operator. We are also joined today by the Chief Financial Officer at TV One, Jody Drewer and our Chief Administrative Officer Linda Vilardo. We -- you have seen the press release, we have released our earnings and as we guided, have continued to guide for -- guide for most of the year. Q2 was a tough quarter across the business, led by downward trends in our radio business and our Reach Media syndication business.

However, the good news is it feels like that radio is improving, not feels like, it is, sequentially improving as we outlined in the press release. Peter is going to talk more about what those trends look like. Hopefully they will continue to get sequentially better, although you still have, as we do expect, the headwinds of political in Q4.

We are very focused on getting back to performing with or better than the market. We did that in June, it's our goal and also continuing to focus on cost containment so that we can still strive to achieve our goal of trying to grow our EBITDA year-over-year. It is going to be a push, we got to see how the back half of the year

comes in but we are not giving up on that goal at this point in time.

TV One, we announced a leadership change. Our President of 2.5 years, Brad Siegel has officially left the network. We -- it was by mutual agreement. We have promoted somebody internally, a woman named Michelle Rice, who is head of our affiliate distribution efforts. She has been at the network since the beginning, I have worked very, very closely with her. We gotten all of our affiliate deals done and so she not only is focused on what our new platform opportunities are but now knows the network as well as anybody, has been in the industry a very long time, has -- very well respected and has a lot of time to help us work through the challenges that the network has.

Primary challenges are similar to other networks has been ratings so far. We have seen declines in the pay TV universe, which we have been getting additional subs coming online, but it still creates a headwind in the overall industry and on top of that, we have seen challenges in our original programming ratings and ratings have been down year-over-year and we have to focus on that and find a fix for it and change that.

So I'm taking much more of an active role, I did that for a period of 2 years prior to Brad coming, so between Michelle, myself, Chief Financial Officer Jody Drewer, the head of programming, D'Angela Proctor, we're all hunkering down and figuring out how we solve the TV One issues. However, even with that, based on our ability to control a number of our expense levels, we're still holding on to being able to reach the aforementioned guidance at TV One, EBITDA guidance of $82 million to $84 million of EBITDA. Right now it's probably looking like the lower end of that range but that's -- we're still holding onto that, that's within striking range. And we're very focused on getting there.

So the 2 things, TV One guidance and also our ability to at least be flat or grow overall consolidated EBITDA of the company are still the goals that we're focused on and are all still within striking distance. With that, I'm going to turn it over to Peter to go through the numbers in detail and then we'll open up for Q&A.

Thank you, Alfred. Net revenue was down 4.1% for the quarter ended June 30, 2017, at approximately $117.6 million. A breakout revenue by source can be found on Page 5 of the press release and a breakout by segment can be found on Page 7.

Our radio stations were down overall in the second quarter. But as Alfred mentioned, they showed sequential improvement with April being down 12.9%, May down 7.2%, and June was up 2.3%. And we also outperformed our markets in the month of June. For the second quarter, local radio revenue was down 7.6% and national revenue was down 2.8% for our radio stations.

Advertising sales were up in retail sector, government/public, automotive and services while telecom, food and beverage, entertainment, financial, health care and travel transportation sectors were down. Average unit rates were down by approximately 3.6% overall and sell-out was down by 2 percentage points overall. According to Miller Kaplan, total spot markets were down 3.6% for the quarter.

Q3, our radio stations are currently pacing down approximately 3%, with July finishing slightly positive over last year. Net revenue for Reach Media was down by 5% for the second quarter as there was weak demand in network advertising market, particularly multicultural network clients and lower unit rates, which were partially offset by a successful Tom Joyner Fantastic Voyage event in April. Now revenues for our digital segment increased 11.1% in second quarter, driven by revenue from the newly acquired BOSSIP, HIP-HOP Wired and MADAME NOIRE brands. Excluding this acquisition, digital revenue was down approximately 12% year-over-year.

We recognized approximately $45.4 million of revenue from our cable television segment during the quarter compared to approximately $47.6 million for the same period in 2016, a decrease of 4.6%. Cable TV advertising revenue was down 5.9% which was driven by a shortfall in delivery versus ratings estimates. Cable TV affiliate sales were down 4.6%. The $1.4 million affiliate rate increase that we got was offset by churn of about $900,000, volume discount of approximately $1.1 million and prior period adjustments of $600,000. Cable subscribers as measured by Nielsen finished Q2 2017 at 59.3 million, flat since the end of Q1.

We recorded approximately $1.5 million of cost method income for our investment in the MGM National Harbor casino, which is equal to 1% of the net gaming revenue reported to the state of Maryland. Operating expenses excluding depreciation, amortization, impairments and stock-based compensation decreased by 1.7% to approximately $84.2 million in Q2.

Radio operating expenses were flat. Reach expenses were down 2.4% due to a lower compensation and event expenses. Operating expenses in the digital segment were up 31.6%, expenses from the newly acquired BOSSIP, HIP-HOP Wired and MADAME NOIRE brands totaled about $1 million in the second quarter. Excluding this, the digital segment expenses were up about 16% year-over-year, driven by investments in our digital sales and products including short-form video and data research. Cable TV expenses were down 8% year-over-year, primarily due to lower incentive-based compensation costs.

For the second quarter consolidated broadcast and internet operating income was approximately $41.8 million, down from $48.9 million in 2016. Consolidated adjusted EBITDA was $36.7 million, a decrease of approximately 8.2% year-to-year. Interest expense was approximately $19.9 million for the second quarter compared to approximately $20.5 million for the same period of 2016, and the company made cash interest payments of approximately $18.2 million in the quarter. Net income was approximately $802,000 or $0.02 per share compared to net income of approximately $7.3 million or $0.15 per share for the second quarter of 2016.

The second quarter capital expenditures were approximately $2.3 million compared to $1.1 million in the second quarter of 2016. And the increase was primarily the result of investments in our enterprise-wide data center and financial systems. The company paid cash taxes of approximately $396,000 in the quarter, and we repurchased 1,054,290 shares of Class D common stock in the amount of approximately $2.1 million during the quarter. The company also purchased 7,699 shares of Class D common stock in the amount of $23,000 to satisfy employee tax obligations in connection with a 2009 stock buy.

As of June 30, 2017, Radio One had total debt, net of cash and restricted cash balances and OID of approximately $945.4 million. For bank covenant purposes, pro forma LTM bank EBITDA was approximately $127.4 million and net debt was approximately $963.9 million, for a total leverage ratio of 7.57x and a net senior leverage ratio of 5.00x. With that I'll hand back to Alfred.

Operator, will you open the lines up for questions, please?

(Operator Instructions) And first, it looks like we have the line of Lance Vitanza with Cowen.

Could you remind me, I have seen obviously in the press release, you -- the $80 to -- $82 million to $84 million adjusted EBITDA guidance for TV One. But what is the guidance for the consolidated company for the full year on EBITDA?

We haven't given full-year guidance but right now we are forecasting flat EBITDA and we're hoping to be able to get that up a bit. So -- but right now, we're forecasting flat year-over-year.

Okay, so I'm trying to get my head around -- your 1Q revenues, I believe were down 7%, 2Q they were down 4%. 1Q EBITDA was down 10%, it's down 8% in 2Q. So obviously, I recognize that these numbers aren't where you want them to be, but was there something special about 1Q because it seems like on the face of it that the trends are least improving?

As Alfred said, radio trends are definitely improving in terms of June being a positive month, July being a positive month. And sequentially, we're seeing improvement there. So Q3 pacing down minus 3, hopefully that trend continues. Q4 is going to be a tough one, right, because of the political. We took about $4.8 million of political revenue in Q4 last year, we'll probably do about $800,000 so we have got a $4 million delta to fill in Q4, so that's going to be tough.

And then, I think TV One has had a rough couple of quarters, ratings down double digits in second quarter has hurt. I think, going into Q3 we're feeling a bit better about that and so we don't think that, that trend is going to continue and also we have got some paying subs coming on in the second half of the year in TV One. So I think TV One back half looks better than TV One front half.

And then Reach has had a tough start to the year. Demand has not been great there, we will have to see how the back half of the year is for them. Digitally it's relatively stable, the new acquisition that we have put in there, I think is very helpful. And MGM has been great, right? So that's doing $0.5 million per month for us. We don't get the cash for that until next March but we feel good about that $6 million for the year, so we think the back half is looking stronger than the first half.

So then just to follow on on that. On the TV One side, to get to the $82 million to $84 million guide, you need to do about $41 million to $43 million in the back half of the year. Can you just remind me, how does that compare to what you did in the back half of last year at TV One, is that up, down, flat?

Back half of last year we did, $30 million -- we did $36 million.

So just to do the math there, we're up 10-plus percent.

But as Peter mentioned, we have some paying subs coming on in the back half. Our third quarter ratings are already up 17% in prime versus 2Q and in the younger demo -- oh, and that's in the P25-54, and we're flat to first quarter, we're up 17% in the younger demo and actually up 4% versus first quarter. So that's going the right way and we don't see that changing in the back half.

And then the other thing in the back half certainly through Q4, the program and [amo line], we're just not running as much new programming year-to-year so you're going to have a pickup on the program and amo line, particularly in fourth quarter. So again, that will...

Right, because one of the things that hurt TV One in the second quarter just as an FYI was first quarter we actually had almost 54 hours of original premieres but in second quarter we only had 36. So that hurt our ratings in second quarter, but third quarter we're going back up again into the 40s.

Operator next question?

Next, we have the line of Clayton Lechleiter of Imperial Capital.

I was just wondering it looks you guys took a lot of corporate expenses out of the business this quarter. What do you think the run rate corporate expense number is for the company?

Yes, I look at it slightly differently to the way we publish. But corp -- Yes, we're down about -- we're forecasting to be down about $1.6 million year-to-year for the full-year corporate line.

You're forecasting to be down $1.6 million in fiscal 2017 over 2016 ?

Yes. For the full year.

And in terms of run rate how do you think the business -- what do you -- you guys have taken a lot of costs out, what do you think that number would be in a run rate, kind of normalized scenario? Once you get done taking out additional corporate costs?

I'm thinking of a way to answer you, the reason I'm hesitating is the first 3 quarters don't have bonus accruals in, and then we've got a big bonus -- well, I say a big bonus. We have a bonus accrual in fourth quarter. So you have 1 run rate for Qs 1, 2 and 3 and then a higher run rate for Q4, which is why I spoke to the annual number.

Okay. And then just as a follow-up. Are there any other types of asset sales similar to the one that you guys recently did in the tower sales?

Our issue is, I think everything we have now makes money, right? So trying to get a price for something that's accretive to what it's worth to us and the cash flow that it generates is the challenge. And we have always been opportunistic in terms of switching around assets.

So we agreed to sell a radio station -- an AM radio station in Detroit that was doing $600,000 of revenue and making $80,000 and we ended up -- for $2 million, and then we ended up buying an AM in Richmond, which was doing $600,000 of revenue, and we're probably going to make a couple hundred thousand dollars on that down there and then we also bought an FM to pair with one of our stations in Washington and so that is going to be a very accretive trade in -- $2 million out, $2 million in.

And so we -- we're looking for opportunities, like if somebody would make an offer to us that was more than we were able to generate in cash flow and it was delevering, we would absolutely consider it. But there just hasn't been a bunch of M&A in the radio space. So we're open to creative ideas but there is nothing on the horizon like the tower sale that would generate a big number, so...

That was helpful. And then if I can sneak 1 last one in there. I think one of your competitors is a little tied up just from a capital management standpoint. Do you think that one of your larger competitors could potentially be interested in this asset, once they have more financial flexibility?

You know what, the question is -- that's an industry consolidation question. And look, I think more industry consolidation would be good for the industry. I can't really speak to whether or not somebody would be interested in any of our markets. They're probably -- should be some swapping around of stuff, right? We're not up against -- we are only up against the caps in one market, which is Richmond -- actually 2 markets, Richmond and Raleigh, other than that, we could actually get bigger in almost every market that we are in, but a number of our competitors have the same issue, right? They want more money for their assets than they're levered at to make it accretive to them, so you can't really do attractive M&A.

And so, I don't know how it's all going to play out, but there should be consolidation, there should be some swapping around. The industry has got a revenue trend that needs to be stabilized and I think future consolidation would allow that. It'd also allow some consolidation in the expense base. So I can't speak for the other guys. There is a long way -- look, the 2 big guys are obviously Cumulus and iHeart and they have got a lot of wood to chop. Even if iHeart gets their current deal in the marketplace done, they're not out of the woods, right? It's a can kicked down the road.

Next question comes from the line of Julian Natori of [Descartes].

The one question that I have is, if you could maybe give me a bit of a more explained -- detailed explanation on how the performance of your company compares versus the market? The each of the individual segments in which you operate and what explains the underperformance, outperformance and how you plan to address that?

Yes, I mean look, I can't give it to you by individual radio markets on this call, but historically, we have outperformed our radio markets but the last 18 months we have been underperforming them, largely driven by competitive attacks that we have had, most notably in our Houston market and then Columbus, Ohio. Houston was a big hit for us. We feel like that, that's stabilizing now and June was the first month in a very long time that we outperformed the markets.

And we'll see what happens in July, that's our focus.

Radio has something called Miller Kaplan, so we have got ready data on whatever our competitors are doing and how we're doing against the market et cetera. Don't have that same data on the digital side or the cable TV side. So I can't really speak to how our individual competitors are doing in the cable television business.

How about Reach, how do you see that comparing versus the competitors?

Yes, Reach's -- I don't know what Reach's market share. Reach's market share has been flat. I don't have a year-to-date, do you have year-to-date Miller Kaplan on network? No. I don't -- we can get that data for you off-line. We have similar data for Reach Media that we have for the radio business and we're happy to give that to you, if you just put in an e-mail or a call to Peter, the CFO, afterwards.

Next we have the line of Eric Bourassa of Jefferies.

Just 1 quick one, I was wondering if you guys can kind of discuss your capital allocation policy going in the back half of the year as you guys generate decent cash flow. I think over the past few quarters it looks like you guys have made some small acquisitions and bought back stock. How should we think about this going forward?

Careful, looking for acquisitions that are delevering and -- every capital allocation of -- decision is kind of, we look at it versus buying back our debt at its current trading levels. If we're going to acquire an operating asset, can it -- will it be delevering. The small digital acquisition that we made, we think was bought at, through Q2 kind of like 2.77x what we think this year's cash flow is going to be or is that trailing cash flow?

That was trailing...

2.77x what the trailing cash flow is at the end of the Q2 and we'll also continue to be delevering at the year-end number and I think you'll see us continue to kind of pick away at little things like that. We're not really in the market for any sort of transformative acquisition swing. So -- but we do believe that there is opportunity in consolidating competitors and taking out costs and getting your leverage down and being able to find revenue synergies.

Next we have the line of Robert Claiborne of Insight Investment.

I got a couple of questions. First on the TV One operations, you mentioned the ratings were down double-digits in the first quarter and then somewhat improved in the second quarter and looking to improve in the third quarter. Can you maybe talk a little bit more about the programming that was driving the ratings there? And then what you are doing to reverse that going forward?

Yes, let me correct you, they are down in the first and second quarter. So second quarter is bad as well. So it all kind of started when we lost over a year and a half ago a big acquisition that we had in Martin. And it did really well for us ratings-wise, but we had -- lost it 3 years ago and in order to -- and let it go in order to repurpose that money into original programming. So when we lost Martin in September of '15? Yes, September '15, the original strategy was we increased the runs of our original repeats, which did not do as well.

Then we essentially went to our library of acquired sitcoms, which a lot of them were older sitcoms like Good Times and Sanford and Son and The Jeffersons. And started running those more and those actually did better and improved, but over time, they started to degrade. And then also on that, particularly going into this year, we've had some significant misses on original programming.

So in Q1, we had a dating show called Game of Dating, which was a really big miss. Our big awards show, the NAACP Image Awards, didn't perform as well as last year. Another reality show that came after Game of Dating, Demands, didn't perform at the level that we had hoped. So we have had some significant original programming challenges in terms of ratings.

What we have done to improve our acquired programming ratings is, we licensed The Cosby Show and that has -- we got a pretty good deal on it, given Mr. Cosby's current legal challenges and profile, but we did a bunch of research with our audience and our audience really is a fan of the show. The show is -- it's a show, right, and it's an historic comedy that's done really well and quite frankly the ratings have been really good on it for us. And so that's what's been driving the upswing in ratings in Q3 and we need a restart on our original programming strategy, which will end up kind of taking root more so next year.

Quite frankly, we had to dial back our original programming hours this year in order to make sure that we could make a number. So we're really kind of focused on what's next year going to look like. And -- but we've got third quarter with the return of one of our major series Unsung, which is doing decently, what else is coming in Q3?

We got Rickey. So for Q3, 3 nights of the week, we'll have an original programming -- original program.

So our original -- our Crime Night is Monday and those are original premieres. Rickey Smiley is on Tuesday and then Unsung is on Sunday. That's our biopic show for Q3. Q4 is going to be light, but we are forecasting all of that out, and we still think we're going to get to our EBITDA guidance.

And right now versus Q2, we're up 6 of the 7 nights of the week versus Q2. The seventh night for Q3 -- Q3 versus Q2, sorry, Q3 versus Q2 is up 6 of 7 nights, the seventh night is flat.

And next we have the line of Terrence Nelson with Baltimore Sun.

I just had a quick question about TV One from a programming aspect. Are there any plans for you to produce material to drive a younger demo to TV One on a more consistent basis?

Younger as in, the target demo for TV One is a 40 to 45-year old black woman and we need to focus on getting her to the network and satisfying her and keeping her on the network as much as possible. And so I think going outside of that is a distraction and quite frankly, has been one of the causes of probably some of our inconsistent ratings performance. So you got to be who you are, we are not a millennial network and we're not going to try to be.

Looks like we do have a follow-up from the line of Julian Natori of [Descartes].

The follow-up question is on digital, I'm trying to understand your -- if you could maybe explain to us, what is your general thinking on your stance on the digital side. Because it has been a period of revenue declines and also EBITDA losses, so I mean, what's your general thinking of that?

So last year digital was a break-even business for us. Going into this year we did 2 things, we invested in more resources to create more digital video, which has got more demand and higher CPMs, so that was staff and content cost. And we also invested in -- more in data analytics because we have been -- and we also built out a millennial ad network so we have been increasing our audience pretty substantially and we are investing in the content to try to drive that revenue. That's number one. So that -- those investments, which swing the digital division to like a minus $3.5 million EBITDA loss.

Then we made an acquisition of 3 brands -- 3 big brands from one of our primary independent competitors that we feel was accretive and deleveraging although they had a negative revenue trend and our goal is to come in, cut some expenses, give them back, because we're putting them on our platform, give them back resources to sell with and reverse the revenue trend. So right now that acquisition of BOSSIP, which is a gossip site, MADAME NOIRE, which is a women's site and then HIP-HOP Wired, it's a hip-hop site, is on a trailing basis been deleveraging and accretive and in fact, it took about point one turn off of our leverage and we think our loss this year, instead of $3.5 million in digital is going to look more like $2.5 million based on current forecast for that, so it improved it.

The revenue line that you saw in the press release is not acceptable in -- for digital and we're working on that and addressing it. However, the digital division is still on target for meeting our -- meeting or exceeding what our EBITDA forecast was. And -- but that's -- meeting your number by controlling your expenses is one way to get home, it's not the preferred way of getting home, so we are addressing efforts on how to grow the digital top line, so that's a focus we have now. But the acquisition we made, I think is going to be helpful, they're actually again performing better than we thought that they were going to perform and probably has some top line revenue upside but we are super focused on it.

If maybe you could also discuss, maybe not in detail, but what's your general strategy, what's your niche here considering that you're competing against guys that actually have much more resources than you do in digital including...

Yes, look, I would have preferred that the digital revolution never have happened because it's a much (expletive) business than the businesses that all of us media people used to be in. If you're a -- first of all, if you're not a technology company then you aren't in sort of the value -- the biggest value-creating chain in the digital space and if you're a digital publisher like we are then you are ultimately beholden to the platforms of Facebook and Google and the economics that they give digital publishers are lousy.

But by the same token we have to be in the digital business as a media company, that's just -- there's billions of dollars flow into it and advertisers request it and we need to compete there. So the answer is, I don't freaking know, I mean I'm hopeful that in our space we can continue to build -- I think we're at an inflection point. I think we're at an inflection point of scale size, we are going to have about $30 million of revenue, where we can continue to layer on digital audience or digital competitors that are struggling and build revenue scale that will result in positive EBITDA. I think we are there.

What I'm unhappy with right this second is our organic top line on direct sales is not growing in the first half of the year and we got to fix that, but I think we're close to this inflection point where we can show EBITDA. I mean, we can actually show positive EBITDA.

It looks like we do have the line of Robert Claiborne with Insight.

I just had a follow-up question on the radio business. In -- you took an impairment on the Houston station in the quarter and I just wondered if you could discuss the Houston market a little bit more as to what your outlook is for that as well as do you -- and looking at your other radio properties, do you see any risk of further impairments in the near term?

Look, Houston has been -- and as Alfred said earlier, Houston has been a tough market for us for the last couple of years, we took a direct competitor from iHeart and it really affected our market position there, so we lost both share and revenue. The market itself, I'm just taking a quick -- total spot market in Houston. The market itself from a spot revenue point of view in second quarter was down 7.6%. So it's a market that's been struggling as well so you've got a soft market and also for us specifically, we were competitively attacked and we bear the consequences of that. So the combination of those things has led to the impairment.

Generally when they're looking for impairments, they -- the accounting, the way it works is, they don't look at you specifically, they just look at a general market participant. So the fact that the market has fallen is one of the reasons why we would have taken an impairment in Houston. There were no -- the impairment indicators, whenever they come up, we investigate on a quarterly basis and we take appropriate write-downs, so the Houston one was the only one we needed to clean up and then it depends what happens in the market from here and out, we don't foresee any more impairments but you can never say never.

And I guess, in the past, you've told me that iHeart has been very aggressive in a lot of the markets where you compete directly and I guess, do you see that not changing in the near term?

I don't see that changing.

At this point, we now have no further questions here in queue for us.

Great. Thank you, folks and again, we are always available off-line. We'll talk to you next quarter.

And ladies and gentlemen here on the phone, that does conclude the conference for this morning. We do thank you very much for your participation and using our executive teleconference service. You may now disconnect.