Salem Media Group, Inc.
Q1 2014 Earnings Call Transcript

Published: 7 May 2014

[Operator:]

Hello, and welcome to the Salem Communications First Quarter 2014 Earnings Call. Today's call is being recorded. I would now like to turn the conference over to Mr. Evan Masyr, Executive Vice President and CFO. Please go ahead, sir.

[Evan Masyr:]

Thank you, Camille. And thank you all for joining us today for Salem Communications' First Quarter 2014 Earnings Call. As a reminder, if you get disconnected at any time, you can dial in to area code [phone] or listen from our Web site at www.salem.cc. I'm joined today by Edward Atsinger, Chief Executive Officer; Dr. Frank Wright, President and Chief Operating Officer; David Santrella, President of Radio; and David Evans, President of Interactive & Publishing. We'll begin in just a moment with our prepared remarks. And once we are done, the conference call operator will come back on the line and instruct you on how to submit questions. Please be advised that statements made on this call that relate to future plans, events, financial results, prospects or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available information. Actual results may differ materially from those anticipated, and reported results should not be considered an indication of future performance. We do not intend and undertake no obligation to update our forward-looking statements, including forecasts of future performance, the potential for growth of existing markets, the opening of new markets or the potential growth from future acquisitions. More information on the risks and uncertainties that may affect our business and financial results are included in our Annual Report on Form 10-K for the year ended December 31, 2013, and other public filings we have made with the Securities and Exchange Commission. This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically station operating income, EBITDA and adjusted EBITDA. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the Investor Relations portion of our Web site at www.salem.cc. With that, I'd now like to turn the call over to Edward Atsinger.

[Ed Atsinger:]

Thanks Evan, and thanks to all of you for joining us for our Q1 2014 earnings call. As is our normal format, let me begin with a kind of broad overview of important developments in Q1, I will look at some of the numbers and then Evan will take it back and get into more detail on the specifics in terms of financial performance and also provide you with some guidance of Q2. So as we look at the important developments, of course we have to begin with the acquisition of Eagle Publishing. We completed that acquisition on – in early January, I think on the 10th of January, and we spent much of the first quarter integrating those assets into the Salem platform. As many of you know, Eagle is one of the most influential companies in the conservative media space. In addition to that fact when you combine the Salem, which holds its unique portfolio of conservative new properties together, we have a very strategic integration of great assets that make for a color platform. We tie only together with new media and we target the same audience. So the opportunity we like most about this acquisition is each of Eagle's businesses matches up so well with Salem's extensive media platform. And I'm pleased to report that Eagle's are off to a very encouraging start. We beat both our revenue and profit projections for the first quarter and we seem to be well-positioned for a good year – first year of operations. We are particularly enthused about the prospects for Regnery Publishing because we have a strong slate of book talents coming together that we will be releasing throughout the year. In fact, the first significant Regnery title it has been released since we acquired Eagle that is a book titled Blue Collar Conservative by former presidential candidate and Pennsylvania Senator, Rick Santorum. That was released on April 28th. Blue Collar Conservative presents Rick Santorum's vision for how the GOP can win in 2016 by reconnecting with its working class base in North America and small town values. Now, it's still early the initial sales for the book's are in line with our expectations. We are able to launch a number of experiments in Q1 rolling this book out, we put together a number of cross promotional opportunities within the Salem platform to build awareness of the book's release. For example, Rick was featured on five of our nationally syndicated talk shows each of which has a couple of 100 affiliates in addition to the old and operating stations. And we also featured him on a number of interviews on our local shows, we do a number of – we have a number of standalone on talk shows in individual markets. We have also scheduled a number of Easter events converted the normal radio station and incorporate book slidings and all of these seem to design to increase awareness of book to drive sales and to help us figure out how to best integrate these assets. We are also using some of our digital assets such as Townhall.com, HotAir.com and now that we have acquired Eagle of course we have HumanEvents.com and RedState.com and all of those assets are also being experimented with use of a variety of ways to see how we might best increase awareness and drive the sales. This marketing approach we think will help us boost sales, but I think it will also provide regularly with additional leverage in terms of being competitive for signing up new attractive offers. So the experiment is underway. We feel pretty good about it. And we will keep doing that and we will keep you informed as they develop and as we fine tune integration of these assets. By the way our next big Regnery leases are scheduled for later in the second quarter. We will be realizing America

[Evan Masyr:]

Certainly, thank you, Ed. And I will provide a little bit more detail on some of the numbers some of them will be repeats of what Ed was talking about. For the first quarter, our total revenue increased 12.1% to $62.3 million. Operating expenses on a recurring basis increased 16.9% to $56.4 million and adjusted EBITDA decreased to 4.3% to $10.7 million. For reference, we had approximately $700,000 in political revenue for the first quarter as compared to $200,000 last year and $900,000 in 2012. Through the first three months our political revenue is pacing at 77% of our highest political was in 2012, when we had $5.5 million. So we are happy with the way they are starting and it's also the decline from 2012 has to be expected given that it's a mid-term election as compared to a presidential year. Net broadcast revenue increased 5.4% to $45.6 million. Broadcast operating expenses increased 5.5% to $31.2 million which result in efficient operating income of $14.4 million or 5.2% increase. On the same-station basis, net broadcast revenue increased 5.2% and SOI increased 5.2%, the same-station results include broadcast revenue from 98 of our radio stations and our networks operations and represents 99.7% of net broadcast revenue. I think a quick look at and break down some of our revenue by format. 40 of our radio stations are in foundational Christian Teaching and Talk format. These stations contributed 45% of total broadcast revenue and increased 4% for the quarter. Advertising revenue was up 9% while block programming on this format was up 3%. We have 27 stations in News Talk and they increased 16% for the quarter, due to increase in political revenue. Overall, these stations contributed 17% of total broadcast revenue. Revenue from our 12 Contemporary Christian Music stations contributed 21% of total broadcast revenue, and decreased 2% for the quarter. We have seven stations that have programmed in Spanish language Christian Teaching and Talk and revenue on those stations grew by 4% and that format is 2% of our total broadcast revenue. And rounding out a main format we have 10 stations in a business talk format and this will now contributed 3% of total broadcast revenue increasing 2% for the quarter. Network revenue increased 17% and represents 9% of total broadcast revenue. Publishing revenue increased 44% to $3.8 million and represents 6% of our total revenue. And revenue from our Internet and e-commerce business has increased 33% to $12.9 million and now represents 21% of our total revenue. Profit was up 8% but was impacted by the Easter timing as Ed already discussed. If we exclude the impact of the timing of Easter profit instead of being up 8%, it would have been up 17%. During the quarter, we repaid $2.3 million of our Term Loan B at March 31st, and $289 million outstanding on the Term Loan B and $2.3 million on the revolver. Our leverage ratio was 5.52 compared to the covenant of 6.50. And interest expense for the quarter declined 34% to $3.8 million from $5.7 million last year. With respect to next quarter, second quarter of 2014, we are projecting total revenue to increase 13% to 15% over second quarter 2013 total revenue of $60.1 million. We are also projecting operating expenses before gains or losses on the disposal of assets. Impairment losses and stock-based compensation expense to increase 16% to 19% compared to the second quarter of 2013, operating expenses of $49.7 million. Without the acquisition of Eagle, we would be projecting our revenue to increase in the range of 5% to 7% and our expenses to grow 6% to 9%. And this concludes our prepared remarks and we would now like to answer any questions and I will turn it back over to you operator.

[Operator:]

All right. Thank you. (Operator Instructions) And we have our first question from Michael Tanzer with DG Capital.

[Michael Tanzer:]

Hi, guys. Hi, Ed, how are you?

[Ed Atsinger:]

Very good. Thank you, Michael.

[Michael Tanzer:]

It was really great to see some of the robust revenue growth considering what your peers are doing on the broadcast side. My question – really my first question is with regard to the G&A reported on the income statement in your press release. What was the substantial increase due to and going forward what do you think it's sort of a reasonable run rate to think about?

[Evan Masyr:]

When you are looking at G&A, are you talking just corporate expenses or are you looking at all of our operating expenses?

[Michael Tanzer:]

I guess, I will get to the general operating expense, but I was just talking about corporate expenses to $6.83 million versus the $5.8 million you reported in the 2013?

[Evan Masyr:]

There were couple of key drivers on that expense growth part of it was the new hires that Ed had mentioned of Frank Wright, our President and Chief Operating Officer and Tony Calatayud, who is our President of Salem Espanol. Additionally, we became an accelerated [driver] (ph) this year, and so our auditors had to test our internal controls. So we had an increase in expenses related to audit fees in the quarter, those were kind of the two big drivers of that expense growth.

[Michael Tanzer:]

And do you think, I mean, the two new employees that you hired were those sort of like signing bonuses or something like that or can we just sort of take the 6.8 number to annualize it and that sort of lift the ongoing [class] (ph)?

[Evan Masyr:]

I think 6.8 is a little high. There were some other things, we have annual managers meeting for example the two first quarters, so first quarter expenses are always a little bit higher, and I don't think you are going to see that swing percentage growth the rest of the year. As we look, as I look at Q2, I don't see that same large growth in corporate expenses in Q2 as we did the first quarter.

[Michael Tanzer:]

Okay. And then just on broadcast operating expenses and Internet operating expenses, I know we have asked this question from your guys before, but are we going to be able to perhaps see operating leverage and increases in EBITDA anytime soon?

[Evan Masyr:]

Yes. If you look at guidance for Q2, it looks like we are getting close there. Depend somewhat on the release of some of these books and how that plays out. I do think the latter half of the year, we expect to see some operating leverage little but surely it all depends on the overall economy and where things are but at this point we see things will get there this year.

[Ed Atsinger:]

If we have a good political year that will certainly help. And we are hoping we will and it's gotten off to a decent start.

[Michael Tanzer:]

Okay. Great. And then just one more question for me. When you look at your CapEx budget, excluding some of these acquisitions that you are doing, what will be sort of the budget for the year and then is $7 million or is it $10 million on an ongoing basis that you think is will be appropriate long-term rate?

[Evan Masyr:]

The CapEx budget that I think is the more normal CapEx number for us is about $8 million a year. This year 2014, I expect it to be somewhere closer to $10 million and that's because we have this new situations where we are having to move for example in the San Francisco through eminent domain or building those was taken and so we had to move into how CapEx associated with that. We have a similar situation in Seattle where the building where the leases been sold and new owners basically shoeing us out of there. And we also have a situation in Miami where a transmitter site in the Everglades has been taken through with the domain, so are going to have to relocate there. So we have a few situations where CapEx will be elevated this year, in more normalized numbers probably somewhere in that $8 million range, but it will probably be in the $10 million range in 2014.

[Michael Tanzer:]

Okay. I think that's it for me. Thanks very much.

[Evan Masyr:]

Great. Thank you, Michael.

[Operator:]

(Operator Instructions) Our next question comes from Michael Kupinski from Noble Financial.

[Michael Kupinski:]

Hi. Pardon, if you have addressed this question, but I was just wondering, did you have political advertising in the last quarter?

[Evan Masyr:]

We did. Political in the first quarter was $700,000 approximately last year in 2013; in the first quarter was $200,000.

[Michael Kupinski:]

Okay. And then in terms of the radio stations, what do attribute the outperformance of the radio stations, (indiscernible) current programming and so forth. But, where do you introduce the outperformance, were ratings exceptionally strong, or your sales force doing a much more effective job and then obviously because of the variance of what we have seen with the rest of the industry are far ahead of like the other window peers are doing, I mean can you shed some light on, when do you think things are going right?

[Dave Santrella:]

Well, first off, we are pretty intentional about sales effort. This is Dave Santrella by the way. We were pretty intentional about our sales effort. And we have some pretty regimented activities that we do on a weekly basis. Transactional business is actually pretty soft. So our more rating based radio stations remain pretty stable in the quarter. We are one of the beneficiary of additional revenue because transactional business was soft. Most of our growth came from as Ed mentioned the movie business; education business is very strong for us. A lot of ancillary direct retail business and then a fair amount of sports programming as well.

[Michael Kupinski:]

Okay. Those are all the questions I have. Thank you.

[Operator:]

(Operator Instructions) And as we have no further questions, I would like to turn the call back to Ed Atsinger for closing remarks.

[Ed Atsinger:]

All right. Thank you, operator. And again, thanks to all of you for joining us. We look forward to visiting with you when we report on second quarter earnings later this year.

[Operator:]

That does conclude today's call. We appreciate your participation.