Urban One Inc (UONEK) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Urban One's Third Quarter Earnings Call. (Operator Instructions) During this conference call, Urban One will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. Urban One cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs and other reports it periodically files with the Securities and Exchange Commission, could cause the company's actual results to differ materially from those indicated by its projections or forward-looking statements.

This call will present information as of November 2, 2017. Please note that Urban One disclaims any duty to update any forward-looking statements made in the 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.

A replay of this conference call will be available from noon Eastern Time today, November 2, 2017, until midnight, November 5, 2017. Callers may access the replay by calling 1 (800) 475-6701 and using the access code 430557. For international participants, the number is (320) 365-3844. Access to live audio and a replay of the conference call will also be available on Urban One's corporate website at www.urban1.com. The replay will be made available on the website for 7 days after the call. No other recordings or copies of this call are authorized or may be relied upon.

I'll now turn the call over to Alfred C. Liggins, Chief Executive Officer of Urban One, who is joined by Peter D. Thompson, Chief Financial Officer. Mr. Liggins?

Thank you very much, operator, and thank you all for joining our third quarter results conference call. Not only am I joined by Peter Thompson, the Urban One CFO, we also have Jody Drewer, who is the TV One CFO, as we need to dig into any of the TV One numbers; and also, we're joined by our Chief Administrative Officer, Linda Vilardo, who is retiring at the end of the year. So this is her last Urban One public conference call.

And so I wanted to, at the top of the call, say thank you for your almost 20 years of service. And you started out as our outside counsel and against your better judgment became our General Counsel. And I appreciate you taking a chance on us, almost 20 years ago, and appreciate you helping us grow the company into what it is today, a multimedia company spanning many different distribution systems. And I hope you enjoy your retirement and not having to listen to me call you at odd hours on any given day, including the weekend, and I appreciate it.

Thank you very much, Alfred. I really appreciate that.

And Linda, we're also joined by Karen Wishart, who is replacing Linda as our Chief Administrative Officer. So welcome, Karen, to your first Urban One conference call. And Karen used to be the General Counsel, Chief Legal Officer at TV One and left for a period of time and now has come back in a bigger and broader role. So we look forward to your contribution to the overall larger enterprise, and thank you for rejoining us.

And thank you for having me back.

All right. You saw from the results that radio, we feel, has stabilized, and we're starting to outperform our markets again. We continue to manage our legacy costs while, at the same time, investing in growth areas like digital, which we're looking to pay off in 2018.

We're also focusing and continuing to focus on deleveraging.

We repurchased some bonds in the last quarter, and we're highly aware and focused on our refi of those 9 1/4% unsecured notes in 2018. So that is where the company is putting its energy operating and delevering. And I'm going to turn it over to Peter, and let him get into the detail of the numbers.

Thank you, Alfred. So net revenue was up 1.1% for the quarter ended September 30, 2017, at approximately $112.1 million. And as usual, 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.

The radio segment net revenue was down 0.7% in the third quarter. Radio stations outperformed their markets for the quarter by 130 basis points according to Miller Kaplan. Our Atlanta, Baltimore, Cleveland, Detroit, Indianapolis and Richmond clusters posted net revenue growth for the quarter. Additionally, Charlotte, Columbus, Houston and St. Louis clusters outperformed their respective markets.

Our Houston cluster was impacted unfavorably by Hurricane Harvey in the quarter with about $700,000 worth of canceled ads, which was partially offset by some additional ad revenue from the insurance sector of approximately $300,000. So we had a net revenue hit of about $400,000 in Houston. And I think the good news for us is that 3 of our big 4 clusters outperformed their markets, including Houston.

Advertising sales were up in the retail services and financial sectors whilst telecom, government, public, food and beverage, entertainment, automotive, financial, health care and the travel transportation sectors were all down. Auto was pretty much flat at just minus 1.1%. So that wasn't down a lot.

According to Miller Kaplan, the total revenue for our markets was down 1.4% compared to 0.1% down for our clusters. So hence, the 130 basis point outperformance.

For fourth quarter, our radio station is currently pacing up approximately 1%, excluding political, and down mid-single digits including political. Net revenue for Reach Media was down by 13.7% for the third quarter. Several key accounts at Reach from the third quarter of 2016 did not return in third quarter 2017, mainly due to the elimination of multicultural budgets by some key advertisers and dollars exiting network radio. These factors contributed to weak demand in the network advertising market and some further downward pressure on already lower unit rates.

Net revenues for our digital segment increased 26.3% in the third quarter, driven by revenue from the newly-acquired BOSSIP, HIP-HOP Wired and MADAME NOIRE brands. Excluding this acquisition, digital revenue was down approximately 7% year-over-year.

We recognized approximately $48.4 million of revenue from our cable television segment during the quarter compared to approximately $46.8 million for the same period in 2016, an increase of 3.3%. Cable TV advertising revenue was down 0.2%, where a shortfall in delivery versus rate card estimates was offset by higher pricing. Cable TV affiliate sales were up 2.9%, driven by contractual rate increases. We also recognized approximately $1 million from international licensing contracts that were not in place in Q3 of last year.

Cable subscribers, as mentioned by Nielsen, finished third quarter 2017 at 59.8 million, up from 59.3 million at the end of second quarter. We recorded approximately $1.5 million of cost method income for our investment in the MGM National Harbor casino, equal to 1% of the net gaming revenue reported to the State of Maryland.

Operating expenses, excluding depreciation, amortization, impairments and stock-based compensation, increased by 6% to approximately $81.7 million in Q3. Radio operating expenses were up 8.9%. The increase in radio programming and technical expenses was mainly due to a favorable true-up of music licensing fees that happened in the prior period and also the tower leaseback expenses. The net impact of these was $1.1 million and $0.3 million, respectively.

Radio SG&A expenses are up mainly due to higher event costs in the quarter. Reach expenses were flat overall. Operating expenses in the digital segment were up 24%. Expenses from the newly-acquired BHM, BOSSIP, HIP-HOP Wired and MADAME NOIRE brands, totaled about $1.5 million in third quarter.

Excluding this, the digital segment expenses were approximately flat overall. Cable TV expenses were up 1.1% year-over-year with an increase in sales and marketing expenses, partially offset by the absence of bonus accrual this year.

Corporate SG&A expenses were up due to the noncash adjustment to the value of the CEO's TV One award and also an increase in outside legal fees connected to some litigation. For the third quarter, consolidated broadcast and Internet operating income was approximately $40.7 million, down from $43.0 million in 2016. Consolidated adjusted EBITDA was $34.0 million, a decrease of 2.7% year-to-year.

Interest expense was approximately $19.9 million for the third quarter compared to approximately $20.3 million for the same period in 2016. The company made cash interest payments of approximately $20.2 million in the quarter.

The company repurchased $20 million of our 2020 notes at a discount, resulting in a gain on the retirement of the debt in the amount of $690,000. Net loss was approximately $7.9 million or $0.17 per share compared to a net loss of approximately $423,000 or $0.01 per share for the third quarter of 2016.

The third quarter capital expenditures were approximately $1 million compared to $1.6 million in the third quarter of 2016. Company paid cash taxes of approximately $66,000 in the quarter. The company repurchased 672,366 shares of Class D common stock in the amount of approximately $1.3 million. And the company also repurchased 35,370 shares of Class D common stock in the amount of $67,000 to satisfy employee tax obligations in connection with the 2009 employee stock plan.

As of September 30, 2017, Radio One had -- or Urban One, I should say, had total net debt, net of cash and restricted cash balances and OID, of approximately $937.9 million. And for bank covenant purposes, pro forma LTM bank EBITDA was approximately $124.1 million, and net debt was approximately $955.6 million for a total average ratio of 7.7x and a net senior leverage ratio of 5.23x.

With that, I'll hand back to Alfred.

Thank you, sir. Operator, let's go to Q&A.

(Operator Instructions) We'll go to the line of David Farber with Crédit Suisse.

I wanted to ask first on the MGM side, just given how well it's performed. We get the question a lot on the valuation. I guess, I'd be curious to hear how you think about that asset of the company given the news from the MGM side, if you thought of any potential monetization, or how do you think about that in the context of the Urban One portfolio? And then I had a follow-up.

Look, we try to be sort of -- we try not to be emotional about any particular asset that we have, particularly with our current leverage profile, and do what's best to maximize the overall balance sheet and our EBITDA, right? And that also depends on what's growing, what's not growing, where we're winning, where we don't think we can win. And so we haven't been afraid to sell assets or swap out of a market that's not growing and into one that is.

So to your point, the MGM asset is doing well, right? But it's got restrictions on it. It's not freely tradable. It's not like we can sell that particular asset to a third party. MGM's got blocks and rights on that. They wanted us to be the partner. And if we're not the partner, assume that they would end up just buying it back themselves.

The valuation, as we've said in the past, is basically a exit multiple times whatever the EBITDA is at the end of that year. But that exit multiple escalates over time and really doesn't kick in till the end of year 3. And the exit multiple at the end of year 3 is 5.5. At the end of year 4, it's 6. At the end of year 7 -- at the end of year 5, it's 7. And anything other than us exercising those put rights at those multiples is a negotiation with them. And they have not asked us if we wanted to sell out early.

And there -- then would come the question is do they want to buy us out at a multiple that would represent something in the future, pay more for it now than it will be -- than it's worth now and might be worth in 4 more years. And do we want to sell out early at a discount? So we haven't really kind of worked through all that. We'd be willing to have the conversation. But I think the first conversation we ultimately wanted to have was to make sure that, and this was brought up by a lot of investors, is that our investment was not impacted by the REIT transaction.

And we're successfully working through all of that as partners. And so we're very confident now that we won't be impacted, and we're talking to them about adjusting any sort of definitions to reflect the way that the repayments will be accounted for. So we haven't had any discussions about early exit or anything else like that, but we'd be open to it. It's -- yes, I always viewed it is a great diversification play. And at some point in time, if we wanted to exit it, we could make some real money and pay down some debt. But -- I think you covered gaming, too, right, David?

Yes.

Yes. So as you probably know, I think when they announced it, their run rate was like 135 to 140 of EBITDA. And I think those guys are confident. I don't know this by talking to them. They haven't given me any inside information. But based on what my understanding of what they're planning to do and the trajectory and how they think that they feel like that EBITDA is going to go higher to the high 100s to maybe 200, right? So I think there's upside in it.

So if we stick around, it's probably going to be worth more. And -- but we'd be willing to have a conversation. I don't think we want to sell out at some significant discount today, particularly if we don't need to. But it's certainly been a nice investment.

Yes. And I think 2 other things. So the cash flow stream at 1% looks steady at the moment. So we're anticipating around $6 million for this calendar year. Given the changes they've made in the mix of slots and banned table games, we think that there's potential for that to grow. And we have had a couple of investors ask us about securitization of that revenue stream, which, I guess, would be another way to monetize. We had maybe 1 or 2 preliminary conversations. We haven't gone far down that track. But I guess, that's another way potentially to monetize without having to sell back to MGM. So it's something we might consider at an appropriate time.

Okay, that's helpful. I appreciate the thoughts there. I wanted to just touch -- switch gears for a minute. I'm curious to hear, Alfred, or Peter if you had any thoughts, but Entercom had a number of radio swaps that finally made its way into the public. And I was curious if you were active in those discussions, if you had any thoughts. It just seemed like a large amount of stations. I'm not as familiar with some of them. But I'd be curious to hear if you guys thought about that at all or if that has any implications on your radio side of the house, and that's it for me.

Yes. No, we didn't -- when we saw the lineup of the markets, we didn't participate. Most of those stations -- I think out of that whole group of stations, there were only 2 stations that were urban-focused. And a number of them were markets that we weren't in, San Francisco, Boston, you have Sacramento.

I think, as I've said before, we're looking for transactions that will allow us to delever. So we want them to be delevering and highly accretive, and those generally -- those parameters generally lend theirselves to these sort of end market transactions. So we didn't participate at all.

And other than having a new competitor in Richmond because they swapped Boston and Seattle with iHeart for Chattanooga and Richmond, so instead of competing against iHeart. And they're our direct competitor in Richmond. Now we're competing against Entercom, that's really the only sort of difference in the whole Entercom transaction as it relates to our radio group.

And next, we'll go to the line of Brian Denes with Cowen.

Just a couple. Can you expand a bit on the additional expenses associated with the Global Music Rights? What exactly is that?

That is a new rights collection company that has essentially imposed its own deal upon the marketplace. If you want to play recordings by their artists, then we'd have to sign up to a deal, which is costing us $0.25 million per quarter in addition to our ongoing music licensing liabilities and expense.

Great. And then just another thing, I know you guys commented that you're confident radio will stabilize. What are you seeing in the marketplace now that leads you to believe that?

We talked a little -- we touched on fourth quarter pacings, which ex political, are positive, I mean, only slightly positive, up 1%. But that's the first time in a while that we've been positive. And obviously, our third quarter segment in radio being down just 0.7% is significantly better. If you look sequentially, Q2 is better than Q1 or Q3 -- so we're seeing sequential improvement and some positivity in the numbers.

Obviously, we're going to get hit in fourth quarter because there's going to be $4 million of political that came in last year that won't recur. Hence, I mentioned including that, we'd be pacing down mid-single digits. And we're also outperforming our markets quite handily and in 3 of our big 4 markets. And I guess, also Miller Kap being down 1.4% is not that bad, I think...

Nonpolitical year.

Yes, in a nonpolitical year, right, we think, actually, the market's holding up pretty well.

Yes, I've said I think a number of times on these calls and at some conferences, I mean, if you look at the other traditional media industries, radio has been very resilient and held up quite well. Look, it'd be great if we were a growth industry again, but it's not. It's mature. But it's not an industry that's in free fall. And it's structured, I don't want to use the word unfair, but it's got a lopsided structure now because you got one player that's so big that controls so much of the inventory as our rep firm and traffic, et cetera, that they're able to advantage themselves over smaller players. But ultimately, that's something that constructively can be fixed by additional consolidation, ala Entercom and CBS, and then something needs to happen with the rest of the industry.

And it doesn't mean necessarily that a company like us needs to sell out. It may mean that you, like the cable industry, you end up swapping around assets, and we get bigger. Instead of being in 15 markets, we end up getting bigger in 10 markets and create more economies of scale. And so there needs to be some sort of structural fix, I think. And if that can happen, not only do you get more operating leverage, but maybe you get some pricing stabilization as well.

And at this time, I'm showing no questions in the queue. (Operator Instructions)

Well, if there's no further questions, Peter and I are always available off-line for any additional color. We appreciate everyone's support, and we'll talk to you next call. Thank you.

Thank you. And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.