Urban One Inc (UONEK) 2019 Q1 法說會逐字稿

Welcome to Urban One's 2019 First Quarter Earnings Call. I've been asked to begin this call with the following safe harbor statement. 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 they periodically file 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 March 31, 2019. 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.

A replay of the conference call will be available from 12:00 p.m. Eastern Time May 9, 2019, until 11:59 p.m. May 11, 2019. Callers may access the replay by calling in the U.S. 1 (800) 475-6701. International callers may dial direct 1 (320) 365-3844. The replay access code is 466683. Access to live audio and a replay of the conference call will be available on Urban One's corporate website at www.urban1.com. The replay will be made available on their 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, please go ahead, sir.

Thank you very much, operator, and welcome to our Q1 conference call. Also joining us today are Michelle Rice, the General Manager at TV One; Jody Drewer, the CFO at TV One; and also Karen Wishart, who's the Chief Administrative Officer for the whole company.

As the press release stated, actually pretty pleased with Q1 results, although our Radio division finished a little softer than we expected partly because of a, yes, really unexpected ransomware attack that Peter will talk about. But we had forecasted, guided to down mid-singles and ended up kind of down 7%. But the good news is, and as I continue to be very happy with how radio has held up as an industry, our Q2 is off to a great start. April was up tremendously, kind of in the mid-teens, and we're pacing up high singles for Q2.

Reach rebounded in Q1. We had a nice beat on the expense line by our digital division due to a new strategy. TV One ad sales numbers performed well. Ratings in Q1 at TV One have stabilized. And we're feeling good coming out of Q1 and definitely going into Q2.

We expect to spend more money at TV One this year in programming and marketing with the launch of our late-night talk show with D.L. Hughley, which is performing currently at the daypart average. But we are definitely making more, albeit modest, programming investments to improve our ratings and delivery on TV One.

With that, I'm going to throw it over to Peter who will give you more detail on the numbers.

Thank you, Alfred. There was some noise in the numbers for our Q1. Firstly, the change in accounting for leases under ASC 842, reduced operating expenses by approximately $1.3 million with a corresponding increase in interest expense. We grossed up the balance sheet to reflect a right-of-use asset with a corresponding increase in lease liabilities in the $50 million range.

Secondly, as Alfred mentioned, we were hit by a ransomware attack, which disrupted operations and resulted in approximately $0.5 million of onetime-only expenses and a similar amount of lost revenue. So there was a $1 million impact to the first quarter, which will be mitigated to some extent by insurance claims in process.

Net revenue was down 1.2% for the quarter ended March 31, 2019 at approximately $98.4 million. 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.

Radio segment net revenue was down 7% in the first quarter. National ad sales were down 9.8% primarily due to 2 nonrecurring national ad campaigns from the first quarter of 2018 in the amount of $1.8 million. Local ad sales were down 6.1%, while the local ad market, according to Miller Kaplan, was down by 4.5%.

Advertising sales were up in 2 of our 3 largest categories, services and automotive, but all of the other categories were down, most notably telecommunications, down about 20%, and retail, down about 8%. Much of the telecom decline was from a single nonrecurring ad campaign by T-Mobile in 2018, and the retail decline was from a nonrecurring ad campaign for Walmart.

Our radio stations are currently pacing up high single digits in the second quarter with April finishing up in the mid-teens. And our 5 biggest radio clusters are all pacing up for second quarter.

Net revenue for Reach Media was up by 7% in the first quarter driven by higher demand and better inventory management, especially for The Rickey Smiley Morning Show. Adjusted EBITDA was up by approximately $600,000 year-over-year.

Net revenues for our digital segment decreased by 8.7% in the first quarter driven by lower direct sales at iOne Digital. However, adjusted EBITDA in the digital segment increased by approximately $900,000 driven by a realigned digital sales strategy, a successful tentpole event and ongoing cost-control measures.

We recognized approximately $47.8 million of revenue from our cable television segment during the quarter, an increase of 3.5%. Cable TV advertising revenue was up 6.6%, including $400,000 for the new CLEO network, a 2% increase in CPMs on 4% more units and a 5% increase in the TV One DR rate. Cable TV affiliate revenue was up by 0.8% driven by a modest increase in rate, offset by churn.

Cable subscribers, as measured by Nielsen, finished the first quarter at 56.5 million, down from 57.7 million at the end of Q4. We recorded approximately $1.7 million of cost method income for our investment in the MGM National Harbor property for the quarter, an increase of 5.6% from the first quarter of 2018.

Operating expenses, excluding depreciation, amortization, impairments and stock-based compensation, decreased by $2.5 million or 3.3% to approximately $73.5 million in Q1. $900,000 of this decrease is noncash and excluded from adjusted EBITDA. Additionally, as a result of the adoption of ASC 842 for operating lease accounting, operating expenses decreased by $1.3 million. However, this is a change in P&L geography and not a reduction of expense.

Radio operating expenses were down 1%. Radio SG&A expense line is down, but about $300,000 of that is from the change in lease accounting. Aside from that, our SG&A expenses increased for the new station in D.C., but the increase was offset by savings on sales commissions and event expenses. Radio programming and technical expenses were flat, including a $0.5 million of lease accounting impact and $300,000 of expense for the new station in D.C. And on-air talent expense in some of our markets was slightly up compared to prior year.

Reach programming and technical expenses were down 5.2% driven by savings in talent and staff compensation. Reach SG&A expenses were up 6.9% due to higher sales commissions. Corporate SG&A expenses at Reach were down 3% with $76,000 related to the change in lease accounting. Operating expenses in the digital segment were down 27.5% or $2.9 million. $1.5 million of the decrease was a noncash charge for deferred consideration associated with the [Mobildem] acquisition in 2018 that was excluded from adjusted EBITDA. Lower cost of revenues as a result of the new sales strategy and lower content and headcount costs make up the rest of the decrease.

Cable TV expenses were down by 2.6% or $700,000 year-over-year. About $400,000 of that was noncash and is excluded from adjusted EBITDA. CLEO programming added about $200,000 to expense.

Corporate SG&A expenses were up by $1.2 million, of which, $700,000 was for the CEO's employment agreement award, which is excluded from adjusted EBITDA. Outside services were unusually high this quarter as a result of our incident response to the cyber-attack.

For the first quarter, consolidated broadcast and digital operating income was approximately $34.5 million, up 6.1% from $32.5 million in 2018. Consolidated adjusted EBITDA was $29 million, an increase of 1.9% year-to-year.

Interest expense was approximately $22.2 million for the first quarter compared to $19.3 million for the same period 2018, an increase of $2.9 million. Of that, $1.3 million of interest expense was recorded for operating leases under the adoption of ASC 842. Cash interest expense increased by approximately $800,000 due to the higher rates on the new credit facility. There was an additional $200,000 recorded for deferred financing fees, and approximately $0.5 million of PIK interest was recorded on the MGM secured loan.

The company made cash interest payments of approximately $13.2 million in the quarter. In total, the company reduced debt by $21.8 million in the first quarter. The remaining 9.25% bonds were redeemed at par in the amount of approximately $2 million. The Comcast note was paid off in the amount of approximately $11.9 million. The new senior unsecured term loan was paid down by approximately $10.6 million. And the Term Loan B was paid down by approximately $800,000. This was slightly offset by a net $3 million draw on the revolving line of credit and PIK interest of approximately $500,000 on the senior secured term loan.

Provision for income taxes was approximately $2.2 million in the quarter. Net cash taxes paid was approximately $91,000. Net loss was approximately $6.7 million or $0.15 per share compared to a net loss of approximately $22.6 million or $0.48 per share for the first quarter of 2018.

First quarter CapEx was approximately $707,000 compared to $914,000 of CapEx in the first quarter of 2018. The company repurchased 22,380 shares of Class A common stock in the amount of $50,000 and 369,000 shares of Class D common stock in the amount of $755,000. The company also executed a stock vest tax repurchase of 852,000 shares of Class D common stock in the amount of approximately $1.6 million.

For covenant purposes, pro forma LTM EBITDA was approximately $140.3 million. Net senior leverage was 4.80x against a covenant of 5.85x. Total net debt was approximately $902.3 million compared to $141.2 million of reported adjusted EBITDA for a total net leverage ratio of 6.39x.

And with that, I will hand back to Alfred.

Great. And as Peter pointed out, we continue our march towards deleveraging and paying down debt. Our new credit facility essentially is designed to have us continue to do that, which we're very happy with. That's our highest priority.

One of the things that -- I don't know if I mentioned in the last conference call, is that our investment in MGM National Harbor, that property did close to $200 million of EBITDA last year. And our residual equity interest of 6.67% ultimately has got to put value on that EBITDA of about 7x. I think it's at the end of another 2.5 years.

So at today's valuation -- and the expectation is that EBITDA is going to grow past $200 million this year. I don't know where it ends up. We've seen all kinds of reports from different analysts that have been as high as $225 million. But anyway, long story short, there's probably another residual $50 million-ish of equity value that we don't get credit for because we only get credit in our stock price. I'm assuming on the cash that comes in from MGM, about $7 million times a multiple of trade in that. But anyway, that's a solid credit story. So I like to -- yes, I kind of like to think of our leverage as whatever our net debt is, also, less that residual equity value.

With that, I'd like to turn it over to questions from the audience. Operator?

(Operator Instructions) And our first question will come from the line of Ben Briggs with INTL FCStone.

So you guys obviously paid down right around $26 million of debt in the first quarter. On the last call, you said that you were going to pay down a total of about $40 million over the course of fiscal 2019. Is that $40 million number still the total number you expect? Or has that moved around at all as we move through the year?

Ben, yes, that's still about the number. There's a variable in that because we've got an excess cash flow sweep on both the front-end and the back-end loans. But the debt pay downs were a bit front-loaded, right, because we took care of the Comcast repayment, call it $12 million. And we also paid down the back-end credit facility with the $7 million dividend payment -- or distribution that we get from MGM. So you kind of had a $19 million bump there. And then you've got the regular quarterly $3.6 million of amort on the back-end piece and $800,000 on the front-end piece. So it's a bit front-end weighted. I think we feel good about the $40 million number. Hopefully it can be more, but that's the minimum for the year.

Okay. Great. That's very helpful. Next thing I've got here is on CLEO. Congratulations on the launch of that. Just any color you can give on how that's going? Are the costs for that -- are the costs for that, I know you said it was about $200,000 of costs, I think you said, during the scripted portion of the call. Is that going to be a pretty stable run rate? Or is that going to move around? Is it going to be back weighted?

CLEO is -- actually, we're in very productive conversations about distribution for CLEO with a number of additional carriers. We've got Charter, we've got Comcast. We just picked up an OTT service called Philo, which is good for us. One of the things we like about CLEO is, because it's a free service, it's going to hopefully allow us to make deals with a number of these OTT players that don't want vast, expensive bundles. We're talking to a bunch of other people. In fact, my flight calendar is kind of booked over the next month with continual meetings. And as our CFO, Jody Drewer, pointed out in the email yesterday, we're being very efficient in how we're running it. Today, CLEO is kind of net breakeven to us from a programming standpoint even though advertising has been light. Advertising has been way lighter than we expected.

And I'm not quite surprised at that, which -- and the reason is when we launched TV One, it was all we had to sell. Now our guys have CLEO and TV One to sell. And so CLEO is not rated. When you have a rated network and an unrated network, you tend to push dollars towards the big ship. But irrespective of that, because CLEO is a complement and different but a complement to TV One and a similar programming target, albeit younger and more focused female, we're able to run it really efficiently from an expense standpoint. So you should expect us to be -- have -- be belt and suspendered on CLEO from an expense standpoint. My mandate is CLEO can't be a negative EBITDA drag on the company. So we'll invest in CLEO as we get more distribution and ad revenue goes up, et cetera.

Okay. That's helpful. Is it -- you said it's not rated. Is it going to be rated at some point in the future?

You know what, that's a good question. At what point will we get rated? I don't know. We're contemplating doing some set-top box data deals in order to get some sort of currency because the fact of the matter is that there's an audience there now. And to the extent that we can quantify that audience, we could maybe get some rating -- I mean get some credit for it. But I don't know quite when we're going to be rated. TV One didn't get rated till we were at how many subs, that's a question, 30 million?

It was like 30 million or 40 million.

About 30 million.

Yes, yes. We didn't get ratings for TV One until we were at like 30 -- was it 40 million?

30 million.

At 30 million subs, which, by the way, is we can definitely see our way to 30 million subs on CLEO in the not-too-distant future.

Where are you on subs at CLEO right now?

About 8.5 million. And we'll for sure be at 12 million, 12 million -- anywhere between 12 million and 15 million by the end of the year based on the visibility that we have now and deals that we have in the pipeline.

That's very helpful. And then, last one from me is -- last year, you provided some guidance for the full year. I think it was on the first quarter call. Can you give us any kind of EBITDA guidance this year?

Not yet. Not until we -- as said before, we've got a couple of wildcards. We're investing in programming at TV One. It's costing us more. And the big swing is the D.L. Hughley talk show, which has immediate expense ramifications because it's basically a daily talk show. So there's really no long-term amortization of it, and we're going to market it. I want to see how those ratings play out and what our scheduling strategy, how that plays out before we kind of get a feel for what -- where we're going to land with TV One in EBITDA. And then the second wildcard was political on radio. And we had a number of strategies to offset the loss of, what, $7 million of political revenue or $8 million.

Yes, as I recall.

A big number in political -- yes, a big number in political last year. And 2 things have happened so far. Even though our first quarter was crappy, everybody else -- and when I say crappy, that thing down mid-singles or down mid-7 -- or down 7% for us was crappy on local radio. But the rest of the industry seems to have done much better than that. So I look at where -- yes, if the industry tide is really negative, then that's scarier to me than us having a bad performance in a quarter. And we're really bouncing back in Q2 to the point where, at least today, I bet that we're going to significantly outperform the industry in Q2. We have to see. I don't know exactly what the other folks are doing. But based on guidance, Entercom is pacing, they said, like 4% in Q2, and we're pacing up high singles.

So long story short, I need to understand where radio is going to come in. So I don't really want to throw a number out there yet. And -- but people who want to kind of figure out -- our debt documents -- we've got covenants, we feel like we're in great shape against those. Investors who bought our securities all have models and the whole bit. So I feel comfortable that we're going to meet or exceed the expectation from those debt investors. But I'm just not comfortable throwing a number out there yet.

Okay. And then just to sneak one last one in. Regarding political, can you just refresh my memory, when do you expect -- kind of from a 2020 presidential election cycle, when do you expect to see political revenue start to come in for that? And do you expect it to look the same as it did in the last cycle? Better? Worse? Any guidance?

Yes. I don't know. I need to -- we need to -- I guess when do primaries in our states start, right, is the question. And I'd have to look at that calendar, and I don't know the answer to that. But...

I mean, I looked -- some data going back, if you wanted to look at '16, for example, we did $7.9 million. About $4.8 million of that was in the fourth quarter, and we got $1.7 million in Q1. So there was some Q1 and some Q2 activity. But as Alfred said, it's state-by-state and primary-by-primary. All right. Yes.

Yes. So it's going to be like when do primaries happen and then what's the field going to look like for Democrats. I mean it seems like there's a new Democrat trying to get in every week now. So I'm hopeful that it'd be robust. I just don't know. I do know all these Democrats are getting in the race. It's been costing me a lot of money because I know a lot of them, all, call it.

(Operator Instructions) The next question will come from the line of Tom Klamka with Guggenheim.

Peter, can you mention -- can you talk about the lease accounting change? Did that effectively then benefit EBITDA by the $1.3 million? And what would the effect have been -- how do we apples-to-apples that with last year?

Yes. So yes, exactly right. So operating expenses were reduced by $1.3 million. So essentially, that's an improvement to EBITDA with the other side of that going on the interest expense side. So it's obviously a cash-flow-neutral event. And I think that's probably a good run rate to model out for the rest of the quarters, although we're still finalizing the balance sheet entries for the quarter.

And then I'm just looking at my notes. The way that, that fell, radio broadcasting was, call it, $1 million of that. And then there was a couple of hundred grand in TV One and a little bit in Reach and digital, so it's, for the quarter, kind of $950,000 impact in radio, a couple of hundred in TV and $70,000 each in Reach Media and digital. That's how that $1.3 million breaks out.

Okay. Great. And then just when you look at the turnaround in Q2, is that because -- was your Q1 radio performance primarily because of T-Mobile and some of these large things not recovering? And when you look at the Q2 recovery, what do you see driving that, just better market or is it some easier comps you have?

I think -- I feel like that, yes, it is a better market. We had -- we didn't have -- I mean it wasn't just T-Mobile in Q1. We had a big number in Walmart. It was like over $1 million in a quarter, and it was -- we had a contractual relationship with Walmart for like the last 6 years. So they needed to spend an amount of money to make good on that contract, so that got dumped into Q1. The ransomware attack, probably $500,000 to $800,000 of revenue and then another $500,000 on expense line.

And then in Q2, yes, we're seeing ratings momentum that's coming through and improved markets. Atlanta is going to drive me nuts. Well, now it's driving me nuts in a positive way. But last year, we had good ratings momentum, but the market was just awful. The first 6 months, it was down like 11%. It improved through the back half of last year, but it still ended up being negative. But then coming into this year, it started to accelerate. It was pretty good in Q1. And in Q2, it's up tremendously. Now it's a combination of our stations there, particularly our Urban AC is just doing gangbusters. It's like #1 or 2 or something like that 25 to 54 and beating our primary competitors, and our hip-hop station is doing as well.

Washington, D.C., our stations here are doing great ratings-wise. Houston, we've had a rebound on our hip-hop station there. And I think the market in Houston is healthier. Baltimore is a healthier market than it has been in the past. Baltimore has seen significant declines. I forgot for I don't know how many years I was having this conversation. I was having the conversation with the Baltimore manager. Baltimore is a market where the format -- there's only 10 radio stations -- FM stations in the market. And so the players that are there all kind of got their format positions and staked out and the whole bit. But cash flow in Baltimore has been halved over the last 6, 7 years just because the market's declined. There's really been no change in competitive positions in the market. The market -- there used to be $130 million of revenue in the market, now there's $88 million.

Anyway, long story short, it -- the market is doing better this year than we anticipated. And quite frankly, a lot of these markets are doing way better than we budgeted for and forecast for. And then you've got a number of markets that are going the opposite direction, like the Ohios, for us, aren't doing great. So I would say improving markets and strong ratings positions in our biggest markets are driving that Q2 performance.

Okay. Excellent. And then just quickly on the ransomware, I get the $500,000, I guess, to fix the issue. How did that impact revenues?

About a similar amount, north. It's a little tricky to quantify is the honest answer. But as best we can quantify, we think just over $0.5 million. That's a combination of not being able to get streaming back up as quickly, not being able to respond on the first weekend to remnant orders and not being able to change some of the traffic in that first weekend. So we lost some national spots that we couldn't get on in time as we responded to the incident. But all told, we think $500,000, $600,000 is our best estimate.

And at this time, there are no further questions in queue sir.

Great. Thank you very much. As usual, we're always available offline, and we'll talk to you next quarter.

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