Urban One Inc (UONEK) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Urban One 2021 Second Quarter Earnings Call. As a reminder, this conference is being recorded. We will begin this call with the following safe harbor statement.

During the 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 and 10-Qs and other reports that periodically follows 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 August 5, 2021. 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, www.urban1.com. Replay of this conference will be made available from 12:00 p.m. Eastern Standard Time today, August 5, 2021, until 11:59 August 8, 2021. Callers may access this replay by calling the following number: 1 (866) 207-1041 or dialing 402-970-0847, with the access code of 6180679. Access to live audio and a replay of the conference will also be available on Urban One's corporate website at www.urban1.com. The replay will be 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 will now turn the call over to Alfred C. Liggins, Chief Executive Officer of Urban One, who is joined by Peter Thompson, Chief Financial Officer. Mr. Liggins, please go ahead.

Thank you, operator, and thank you, everybody, and welcome to our second quarter results conference call, also joining Peter and I is Jody Drewer, our Chief Financial Officer at TV One and also Kristopher Simpson, our General Counsel at Urban One.

We have issued our results in the press release. And so hopefully, you've seen the good news. We had an outstanding quarter, a great bounce off the lows from COVID. Happy to the get vast majority of the COVID effect behind us, although, as we all know, we're not out of the woods yet with potential reinfections and mask mandates, but we are starting to really feel like there's light at the end of the tunnel.

And in addition, there has been significant interest in our platform, African-American-targeted, African-American-owned platform from major advertisers all across the spectrum, which is considerably positively impacting our business. And it's my belief that this is a systemic change and not a moment in time. And it's great to see, really proud of our management team, all the way at the radio market level and through the different divisions for coming through this pandemic on the other side stronger than we went into it. The team really handled themselves extraordinarily well in the toughest of times and is now really poised to take advantage of the positive momentum that the business has and the environment has and the economy is clipping along at a very nice pace. So we got a lot of wind in our sales.

To that end, we decided to update our year-end guidance. We have been kind of guiding people to us doing about $130 million of EBITDA this year. We're very comfortable at this point in time of increasing that guidance to the mid-$130 millions. A lot of what's going to happen the rest of the year is going to depend on Q4. We had an exceptionally strong Q4 last year. So we now need to see how that's all going to play out. So we know it's going to play out better than we thought. We just don't know exactly where it's going to land. So there could be more good news on the horizon.

I'm going to turn it over to Peter to go into the detail of the numbers. And then after that, I'll give you all an update on our progress in the Richmond Casino gaming efforts where we're making a lot of good steady progress. And so I'll give you an update there, and then we'll go into Q&A. So Peter?

Thanks, Alfred. So net revenue was up by 41.6% year-over-year, quarter ended June 30, 2021, at approximately $107.6 million. Net revenue for the Radio division was up 73% year-over-year in the second quarter. Local advertising sales for Q2 were up 108.7% year-over-year, while national ad sales were up 36.8% compared to last year. All of the major advertising categories were up from last year. Government & Public was the largest category driven by COVID-19 vaccine outreach followed by services, which was driven by law firms coming back, then telecoms and retail, and automotive was up by 83.9%. Radio continues to be a high-margin platform with 83% of the revenue increase fall into adjusted EBITDA, which is an improvement of $12.4 million year-over-year.

The outlook for radio in the third quarter is also strong. Q3 2021 is currently pacing up by over 40%. And we expect Q3 core radio to finish up over 20%. Net revenue for Reach Media was up by 50.2% in the second quarter, driven by increased advertiser demand for the African-American audience. Adjusted EBITDA was up by approximately $1.9 million year-over-year.

Net revenues for our Digital segment increased by $9 million in Q2, continued demand for black-owned and target brands drove growth in direct advertising sales at iOne Digital. And adjusted EBITDA increased for the quarter by approximately $6.1 million year-over-year in our digital segment.

We recognized approximately $48.5 million of revenue from our cable television segment during the quarter, an increase of 10.7%. Cable TV advertising revenue was up 21.3%. Increased demand drove about a 35% average unit rate increase and CLEO TV ad revenue was up by $1.2 million. However, ADU partially offset these gains. Cable TV affiliate revenue was up by 3.2%, with rate increases of approximately $1 million, partially offset by churn.

Cable subscribers for TV One, as measured by Nielsen, finished Q2 2021 at $45.5 million, down from $49.4 million at the end of Q1, and CLEO had 28.8 million Nielsen subs. The reduction in Nielsen subscribers was not reflective of the underlying trend in paying subscribers, which were down by just 1.9% for the same period. We recorded approximately $1.9 million of cost method income less administrative expenses for our investment in the MGM National Harbor property for the quarter compared to only $40,000 last year and $1.7 million in 2019.

Operating expenses, excluding depreciation, amortization, impairments and stock-based compensation, increased to approximately $67.2 million in Q2 compared to $53 million in Q2 of 2020 and $84.9 million in Q2 of 2019.

Employee compensation expenses increased by approximately $3.4 million, mainly due to the reversal of temporary salary cuts in 2020. Marketing and promotional spending increased by $4.8 million, mostly at TV One. Revenue variable expenses increased by $2.3 million. Outside services increased by $2.2 million and program content amortization expense of cable television segment increased by $1.3 million in the quarter, all signs of a healthier business environment.

The increase in corporate selling, general and administrative expense is primarily due to an increase in professional fees related to the Richmond gaming opportunity as well as a noncash charge for the CEO's TV One award, both of which are added back to adjusted EBITDA.

Radio operating expenses were up 8.7%. Employee compensation and commissions were up, while bad debt expense and severance expense were down. Reach operating expenses were up by $1.1 million, mainly due to higher employee and talent compensation and higher affiliate station compensation. Operating expenses in the digital segment were up by $3 million against a revenue increase of $9 million, driven predominantly by variable expenses related to traffic acquisition costs and sales.

Cable TV expenses were up 39% year-over-year. Programming content expense increased by approximately $1.3 million. Sales and marketing expense was up approximately $5 million driven by increased media campaigns to support programming, and we are also catching up on some contractual marketing spend commitments that were deferred from 2020.

Operating expenses in the Corporate and Eliminations segment were up by $1.6 million due to an increase in professional fees for corporate development activities related to the Richmond Casino venture and a noncash charge for the CEO's Employment Agreement Award.

For the second quarter, consolidated broadcast and digital operating income was approximately $49.6 million, an increase of 64.3%. Consolidated adjusted EBITDA was $44.8 million, an increase of 82.4% year-to-year and $5.1 million higher than the second quarter of 2019. All of our divisions are significantly ahead of our operating budget for the first 6 months of the year. Given the strong performance, we've raised our full year adjusted EBITDA guidance to the mid-$130 millions excluding casino chase costs. Obviously, a resurgence of the COVID-19 pandemic and subsequent business closures would, of course, have an adverse impact to this guidance.

Interest expense was approximately $15.9 million for the second quarter compared to approximately $18.4 million for the same period in 2020. Company made cash interest payments of approximately $172,000 in the quarter, as semiannual debt service payments are due on February 1 and August 1. Provision for income taxes was approximately $6.1 million in the quarter, and the company paid cash taxes of $814,000.

Net income was approximately $17.9 million or $0.36 per share compared to $1.4 million or $0.03 per share for the second quarter of 2020. Capital expenditures were approximately $1.6 million compared to approximately $1.2 million last year.

Company issued and sold 1,893,126 Class A shares during the quarter and received net proceeds of approximately $21.2 million. As of June 30, 2021, total gross debt was $825 million. Ending unrestricted cash was $129.3 million. Net debt was approximately $695.7 million compared to $156.2 million of LTM reported adjusted EBITDA for a total net leverage ratio of 4.45x.

And with that, I'll hand back to Alfred.

Thank you, Peter. So again, really happy with those results. Leverage ratio continues to come down, again, although this mid-4s leverage ratio is not where it's likely to stay given fourth quarter was so strong last year. But it certainly is going to be a lot lower at the end of this year than where we were at the end of Q1. So super excited about that.

Update on Richmond Casino efforts. We've passed all the voting hurdles through City Council. City Council voted to allow the City to sign the host community agreement. We've signed the host community agreement and that host community agreement has been submitted to the courts. And the courts have the -- have to give an order to put the casino location and operator on the ballot for the November 2 referendum. The courts have to, I believe, August 13 in order to do that. We -- in order to even submit it to the courts, we had to get a pre-certification check done by the Virginia Lottery Board and that obviously happened and got cleared before it went to the court. So we're now waiting for that court order, so we can begin an official campaign for the referendum, although the company has started to do educational -- additional educational marketing about the casino project and its benefits that started this week in the city of Richmond.

And we feel good about the support in the city for gaming. We've done polling. We've done polling all along. We did polling when we first started lobbying the general assembly back in the first quarter of 2020. We did polling right when we -- right after we submitted our RFP in March of '21. We did polling again in May of '21 to see how people were feeling about locations and gaming right in the heat of the competitive battle. We did polling once we got selected and our site was selected and saw improvements from the lows, if you will, during the heat of the battle. And then we've done some recent small polling as we were looking at -- of testing our television commercial. All those signs have been very, very favorable, although I can't take anything for granted and we're going to go hard on the referendum. But it's a good project for the city, no tax dollars, no tax payer dollars being used. So significant revenues to the city and to the state. And obviously, it's a great opportunity for Urban One and its stakeholders.

So we've seen -- it's interesting, people talk to us about the increase in our stock price all the time this year and a lot of people know what an extraordinary rise. I tend to focus on the UONEK and not necessarily the Class As because the Class As, UONE tend to trade at a significant premium and have been subject to wild swings based on a lot of retail interest and demand up and down. But at the end of the day, there's really no economic difference between the K shares and the UONE shares. But any event, I kind of wanted to just make the comment that based on the results of the company and based on where we expect EBITDA to be and particularly after we got our refinancing done, we always expected that the UONEK stock price should kind of be in this range where it's at just based on the media business alone, irrespective of what happens with the Richmond Casino opportunity.

Just using a 7x multiple on our EBITDA and backing out our net debt and divided by the number of outstanding shares gets you to a stock price in the neighborhood that it's in, and you got to factor in any sort of hidden value for our MGM interest. So I think -- I, in particular, have been waiting for the share price to kind of catch up to where our performance has been because our leverage has been steadily coming down, and we've been issuing equity opportunistically to help get that leverage down. And our cash flow has been increasing. And we continue to -- when we think about it, use a reasonable multiple of about 7x, which is kind of in line with a lot of the radio sector and even though we're a much more diversified company.

And so I get a lot of questions about the stock price. I've given sort of my analysis of how we value it before. And so I just kind of wanted to add in that the rise, although it may seem dramatic off of the -- where it was in the high 1s. Again, a year ago, it was $1. I believe that, that was depressed because of COVID and a lot's happened since then, including a very favorable refinancing, improved performance and deleveraging.

So with that, operator, I'd like to open the lines up for questions from anybody.

(Operator Instructions) And we have several people queuing up to ask a question. We'll go to the line of Patrick Wang with Voya Investments.

Could you just follow up on your last comment on the shares. Could you just tell us the difference between A shares UONE and the B shares UONEK?

Yes. So the U -- it's basically the UONE shares have -- they come with a vote. They've got -- they get 1 vote. And the UONEK shares are no vote shares. So early in the company, when we went public, we went public with the A shares that had a vote. The company has always been ultimately controlled by super vote shares that are held by myself and my mother, the Chairman, that don't trade, that have 10:1 voting power. So ultimately, the decisions on Board seats major decisions are controlled by those shares and they don't trade. And over time, and this has happened way back when we -- probably during the first year after we went public in '99, we stopped issuing the UONE shares and did a stock dividend and created the no vote shares UONEK and we started issuing those going forward. And we did those for years -- did that for years. All the liquidity was in the UONEK. Most of the liquidity is there now. And the shares basically started to trade on top of each other in terms of value.

However, in June of last year, we got sort of swept up into this whole retail interest, WallStreetBets, Robinhood, and the shares of UONE spiked, and they did because at that point in time, there's only like 1.5 million shares outstanding. And so they were easy to move if retail got involved on it and you've seen it happen a lot. At the end, there's really no economic difference between the two. And they have the -- UONE has the 1 vote, but the 1 vote doesn't get you much and so that's really the difference. And so the company has been opportunistic. You've seen our filings. I mean, if those UONE shares are trading at a premium or a high level, we're taking advantage of it, and we'll sell equity into it and use it to delever which is good for shareholders. And so -- and that's what we've been doing, but that's the explanation of the difference between the 2.

And that you sold how many shares for $21 million during the quarter of A shares?

Yes. Call it, 1.9 million. The exact number was 1,893,126. So just a whisker under 1.9 million.

So are you done with the ATM program of A shares because you raised enough money?

We have and we plan to keep ATMs up our shares registered for both classes because we don't know which one is going to make the most sense for us to monetize at any given time. So I think if any -- if there's one of the things that I've learned during this particular financial crisis is to always be prepared. So you should expect us to always have a shelf up or an ATM up to be able to take advantage of any opportunity to create shareholder value by selling equity. So that's our plan to always be in a position to act.

Right. I guess the investor equity side to have trouble assigning a value for the casino projects. So maybe you can just go into the details of the economics of the ownership that I know you're putting $75 million cash equity. And so...

That's changed. And I think Peter, Kris, in our filings, we've changed from this -- have we notified people that the economics have changed?

Yes. We believe in both the registration statement that went out in the 8-K at the time.

Yes. So look, the economics of the project changed what we needed to pay the city in order to get the deal went up and the cost of the project went up. It's now at $562 million, $563 million project. Originally, it was $485 million. Essentially, the company's investment was going to be about $75 million. Now the company is going to be on the hook for, is it -- yes, it's $110 million, but about $10 million of that will probably come from the local investors, although those local investors aren't contractually committed at this point in time to have to put up that $10 million. They basically have signed pledges to do it and so as we come to closing on the financing. But I suspect that they will fill out that $10 million easily and then some maybe. So the company is now going to be on the hook for about $100 million of investment.

We will end up owning somewhere between 85%, 90% of the entity, and we have not given numbers officially out for it. But I have said and I've had conversations on these conference calls where people have kind of backed into it that the casino -- it's public knowledge based on what we submit it in the RFP and what the state of Virginia has said they thought that they think the top line revenue for the Richmond Casino is going to be in the $300 million range. City's got a favorable tax rate -- excuse me, the state's got a favorable tax rate. And so projections are going to kind of pencil out to EBITDA that could be very similar to or better than our radio and our TV divisions. So you could expect that EBITDA to be -- the range could be anywhere from north of $100 million, $112 million to miss projections, could be $70 million, right?

But I think our radio division's EBITDA is in the 70s. And last year, TV One did about $100 million. So my statement has been that this casino opportunity will create another division. And this doesn't include our MGM interest another division that would rival the EBITDA. It will have greater revenue, but the arrival of the EBITDA of both of our existing divisions.

So you're referring to EBITDAR?

Albeit these casino investments are valued at a much higher multiple than either radio or cable TV as well.

Right. So you're referring to EBITDA of the casino?

I'm sorry?

EBITDAR, before rent, I assume the project finance will be additional debt within that silo.

Correct. Correct. The project will -- it will be project finance. It will have its own debt capital stack and we are providing a 100-ish of equity. Our gaming partner is providing another $25 million to $35 million of preferred equity. They won't own any common stock in the entity and the local investors are going to put up about $10 million.

Right. But the P2E is 25% to 35% preferred. What's the equity interest do they have or they're just...

That's what I just said. I just said it's -- they're just going to have a straight single-digit coupon and they don't own any common equity in the entity whatsoever.

Well, are they going to be running the operation?

That's correct. That's -- they are -- again, this is in all of our filings, okay? They are our gaming partner. They're our operating and development partner. So we're working with them to develop it. And they will have a management agreement to operate the casino on our behalf.

Our next question comes from the line of Todd Morgan with Jefferies.

Thanks for all the detail as usual. Just turning to radio. I know Alfred in the past, you've been pretty frank about plans for radio kind of just being opportunistic. I don't know if there's any different sort of environment as you see it going forward now as to the ability or the opportunity set for swaps or accretive smaller deals or anything else like that? Is that -- is the environment evolved at all in the last several months?

Look, I don't think the opportunity sets changed. I mean the fact of the matter is, the owners have basically been the same and not many assets have changed hands. I think what is changing is a better economic environment in general and for radio, in particular, audio continues to have a resurgence and be hot. I believe that radio is a medium, albeit we got hit the hardest in the pandemic because our advertisers were the ones that were hit the hardest and then people were at home and not riding around the cars. Prior to that, people kind of felt like the digital disruption has already happened to radio. I've seen some really good numbers coming out of the other radio operators, Townsquare, Cumulus's numbers, their guidance just went up. The guides for -- they're projecting for '22 to be back to near where they were in '19. Look, that's a long way out. So who the (expletive) knows what happens at the end of '22, but they're feeling bullish about it, and they raised their guidance for '21. So I think that's all good for radio. But at the end of the day, the regulatory environment hasn't changed. And radio has always been about a mismatch of price expectation. And people -- what people were willing to pay and where everybody's leverage was. That's -- there's always been the stumbling blocks, if you will.

And so nobody who owns a -- who owns a radio station that's not a public company wants to believe that their radio station is really only worth 7x cash flow. They don't want to believe that because that's not what the old days used to believe, right? And then people used to really look at stick value, right? Well, people's view of stick value has certainly changed in an environment where top line radio revenue is not growing at 7% a year. But I definitely believe there's much more interest in demand for audio and radio from advertisers. We're seeing it, talking to people. And I believe that the business has definitely stabilized. So I'm bullish about it. We still plan to be opportunistic. And the media business is crazy because there's challenges, threats, disruption in every part of it. And so I'm just happy that we've got to bet in all these different sectors, and that diversification is helping us. And when people ask us what our strategy is, it's to be opportunistic and create value in each of these silos, whether it's radio, cable TV, gaming or digital.

No, that's very helpful. Just a quick follow-up on the cost side. One area, programming technical, you guys have done a great job kind of holding that -- those costs down, certainly through the pandemic. But compared to where it was in the past, it's dramatically different. As you go forward, is that a number -- I mean, is this kind of a run rate or at least sort of generic percentage kind of a good way to think about things, in particular, thinking more on the TV side, you need to spend more on programming going forward kind of thing?

Look, we probably -- we are spending more in programming. I wouldn't say -- yes. Look, if you asked the TV programming people, they tell you, yes, we need to spend more in programming. But it's also going to depend on what happens to our distribution, right? And so you don't want to spend a ton more on programming. And if you don't actually have the distribution or the eyeballs to monetize it, then it's not a great investment. However, we have been looking at ways to increase the distribution of TV One and CLEO. Our new network, CLEO got a lot of upside. And so I do feel optimistic about new distribution opportunities for both of those networks. And therefore, I think you'll see continued programming investments.

We do not have a direct-to-consumer offering at this point in time. So when you hear about Viacom's programming investment or Disney's programming investment, a lot of those programming investments are driven to fuel their DTC offerings, right? And so we're not in that boat at this point in time. So I would get nervous about our programming spend. I can tell you that the way that we've always run the company is we -- and particularly when you have high leverage, you have to think about this, and our leverage is coming down, but we've always thought about where do we need to be in order to be successful as opposed to, hey, we've got to make this big programming investment, and we're hoping to hit the ball out of the park.

If we've got leverage of -- that's in the 4x range, then, yes, you could spend an extra whatever the number is, $50 million in a video programming strategy and hope that it works out, right? But you can't do that when you're leveraged at 7x, right? And so we've been working our way down to getting ourselves into a position and we're getting close. But to date, there's no huge programming uptake in terms of spend on the horizon. But you got to create quality programming that people want to see in order to get eyeballs and you got to figure out how to get that distributed. So I'm not sitting here telling you to never expect us to make more investments in programming. I'm just saying that at this point in time, they're moderate. They're increasing, but they're moderate.

There are no other questions.

Great. Thank you, operator. Thank you, everybody, for joining the call. We appreciate your support, and we'll talk to you off-line if you need anything else, and we'll talk to you again next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you again for using the AT&T teleconference center. You may now disconnect.