Urban One, Inc.
Q2 2023 Earnings Call Transcript

Published: 7 Dec 2023

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Urban One's First Half 2023 Conference Call. 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. Everyone 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 December 7, 2023. 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.urbanone.com. A replay of the conference call will be available from 12:]

00 Noon today running through midnight at December 14. Callers may access the replay by dialing 1-866-207-1041; International callers may call 402-970-0847. The replay access code is 3718185. 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.:]

[Alfred Liggins:]

Thank you very much, operator, and welcome everyone to our first half conference call for 2023. With me also in addition to Peter D. Thompson, is Kris Simpson, who is our General Counsel; and Jody Drewer, who is our Chief Financial Officer at TV One.

[We've released our earnings. We've got the Q1 and Q2 commentary. Radio in the first half of the year was decent and is showing softness in the second half of the year. The cable television business struggled in the first half of the year due to ratings and churn in ADU Q1, in particular. However, that has actually stabilized going into the back half of the year. So, they flip-flopped. Our digital business is actually moving along as planned and is surprising to the upside in Q4. And with all of that, we are comfortable continuing to reaffirm our full year EBITDA guidance of the range of $125 million to $128 million of EBITDA.:]

[This is also the first call we've had with our investment in MGM being fully monetized, and it's shown in our cash balance, and we have been to one large investor conference and gotten a lot of questions about what are our plans for our cash now that our Richmond referendum for the casino investment failed to pass for the second time. And so we're thinking through all of those things now. And certainly, debt paydown is something that is a top consideration. And so we're going to be happy to talk more about that in Q&A, if anybody wants to get a bit more granular on it.:]

[With that, I want to turn it over to Peter, so he can go into the specifics on the numbers, and then we'll open it up to Q&A, and you go from that.:]

[Peter Thompson:]

Thank you, Alfred. So for the first 6 months, consolidated net revenue was up 3.8% year-over-year. The Indianapolis radio acquisition added approximately $7.6 million, and the Reach cruise event generated $10.1 million in the second quarter but was absent from 2022. So normalizing for those 2 items, net revenue was down 3.9% or down 3.2%, excluding political advertising. Net revenue for the Radio segment increased 8.3% year-over-year, the decreased 1.3% on a same-station basis. Excluding political, net revenues increased by 1% on a same-station basis.

[According to Miller Kaplan, and on a same-station basis, our local ad sales were down 4.6% against a market that was down 2.7%. And National ad sales were down 2.4% against the market that was down 7.7%. The radio spot markets were down 1.6% in Q1 and down 6.8% in Q2. Spot markets were down 7.5% in Q3. And we finished Q3 down 0.6% overall, down 14.4% on a same-station basis and down 12% on a same-station basis, excluding political. For Q4, we're currently pacing down 11.6%, all in, down 21.2%, same station and down 10.1% same-station ex political, with national down 26%, local down 2.1%. So we definitely experienced some softening in market revenues for the second half of the year, although Q4 local has improved sequentially over Q3.:]

[Net revenue for Reach Media was $31 million for the first half of the year, and that included the $10.1 million for the Tom Joyner's Fantastic Voyage cruise event compared to $21.1 million last year. Adjusted EBITDA was $8.1 million, including $1.75 million from the cruise and was down from $8.6 million last year. Advertising revenue was down for the first half of the year and affiliate station compensation expense was up. Net revenue for the Cable Television segment was $102.1 million for the first half of the year, a decrease of 6.8%. Cable TV advertising revenue was down 5.8% or $3.5 million with an unfavorable rate volume impact of $2 million and an additional $1.3 million of ADU deficiency.:]

[P25-54 prime delivery was down 31% from Q1 and down 21% in Q2. Cable TV affiliate revenue was down by 7.8% or $3.9 million, with favorable rate increases of $2.2 million, more than offset by $5.3 million of net churn and $800,000 of increased launch support. Net revenue for our digital segment increased by 1.8% for the first half of the year, which includes $1 million of revenue from the Indianapolis acquisition. Direct sales from our National New York office were down as advertisers pulled back somewhat on marketing budgets due to recession concerns and fewer advertisers committed to like History Month and the June team efforts compared to a year ago.:]

[Streaming revenue from our radio station inventory was up. However, increased traffic acquisition costs, sales and marketing expenses offset those revenue increases and adjusted EBITDA was $9.9 million for the first half compared to $12.3 million for the same period last year. For the 6-month period ended June 2023, consolidated adjusted EBITDA was $67.8 million, down $21.7 million or down 24.3% from last year. $4.1 million of the decrease is from the sale of MGM. The Indianapolis acquisition added about $1.8 million, but Radio and Reach segments were down by $1.1 million combined. Digital segment was down by $2.4 million and Cable TV was down $13.8 million due to the advertising revenue decreased subscriber churn and some increased content amortization costs. Cable subscribers for TV One, as measured by Nielsen, finished Q2 '23 at $45.1 million compared to $46.5 million at the end of 2022. CLEO TV had 42.5 million Nielsen subs.:]

[Operating expenses, excluding depreciation and amortization, stock-based compensation and impairment of long-lived assets increased to approximately $172.8 million for the 6 months period ended June 30, up 16.2% for approximately $148.7 million incurred for the comparable period in 2022. There was an increase of approximately $8.3 million related to Reach's cruise event, $1.2 million in other radio event expenses, $4.6 million in cable TV content amortization, $5 million in employee compensation expenses, $3.8 million in contract labor, talent costs and consultant fees, $2.7 million in corporate professional fees, $2.2 million in variable expenses and $1 million in travel, entertainment, marketing and office expenses. These increases were partially offset by a decrease of approximately $3.3 million in the employment agreement award expense and also a decrease of $1.6 million for corporate business development costs.:]

[Approximately $5.9 million have those increased expenses related to the Indianapolis radio acquisition, and that's included in the total that I just mentioned about. Radio operating expenses were up by $6.4 million, with the Indianapolis plus to adding about $5.4 million of that increase. Atlanta's Birthday Bash event added about $1 million of expense. Reach operating expenses were up $10.4 million, with $8.3 million of that from the cruise, $1.2 million of additional affiliate station compensation and $750,000 in additional talent compensation.:]

[Operating expenses in the digital segment were up by $3 million, driven predominantly by variable expenses related to traffic acquisition and audience extension, which were up by $1.3 million and also add production and marketing, which was up by $1.6 million. Cable TV expense was up by $6.4 million with the content amortization the largest part of that up by $4.6 million. Operating expenses in the Corporate and Eliminations segment were down by $2.2 million, including a favorable variance of $3.3 million for the noncash TV One employment award charge and $1.6 million for reduced corporate business development, which was offset by increases in professional fees and some employee compensation.:]

[Impairment of goodwill, intangible and long-lived assets was $38.9 million for the first half of the year. $16.8 million of that was associated with the sale of KROI-FM, the radio broadcasting license in Houston and noncash impairment charges of $22.1 million were recorded for radio broadcasting licenses primarily in the Philadelphia market. On April 21, 2023, Radio One Entertainment Holdings closed on the sale of 100% of the MGM National Harbor interest, company received approximately $136.8 million at the time of the settlement of the put interest representing the put price. Other income net was $96.5 million for the first half, primarily as a result of the gain on that sale.:]

[The company repurchased $25 million of its 2028 notes at an average price of approximately 89.1% of par in the first quarter, resulting in a net gain on retirement of debt of approximately $2.4 million. Total gross debt balance is now $725 million, down from $825 million at the start of 2022. Interest expense decreased approximately $28 million for the fourth quarter, down 11.8% from last year due to the debt paydowns. The provision for income taxes was approximately $22 million for the first half, and the company paid cash income taxes in the amount of $1.3 million.:]

[Net income was approximately $67.4 million or $1.42 per share compared to $32.8 million or $0.64 per share for the first half of prior year. Capital expenditure was approximately $4.1 million in the first half. And the company repurchased 274,901 shares of Class D common stock in the amount of $1.4 million. As of June 30, 2023 gross debt was $725 million, ending unrestricted cash was $230.7 million, resulting in net debt of approximately $494.3 million compared to $143.5 million of LTM reported adjusted EBITDA. Pro forma for the MGM sale, LTM adjusted EBITDA was $139.1 million, giving a total net leverage ratio of 3.55x at the end of the period.:]

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

[Alfred Liggins:]

Thank you, Peter. Operator, can you open up for questions?

[Operator:]

[Operator Instructions] We go to [ Brad Kern with Fort Baker ].

[Unknown Analyst:]

First one I had was how do you think about the IRR on open market debt purchases versus other use of cash proceeds? Do you think that the sort of a 12%-ish IRR is a high enough return to justify cash deployments there? And when you think about your cost of capital, how do you think about the way that you would deploy that, that cash when you think about returns?

[Peter Thompson:]

Yes. Look, the other -- historically, we have looked at just sort of what that yield to worst is, and that's where you're seeing that 12%. But in today's environment, the fact of the matter is we're earning about 5% on our cash right now. So it's a delta between that 5% and that 12%. So it's not quite the double-digit return, but a couple of things.

[First of all, finding places to put money to work at a 20% IRR is hard, right? Like we've done 2 radio acquisitions in the last year. And we like to pencil out our cash investments in the 20s, and we feel good about that, particularly the Houston one, in particular, was really strong. However -- and we think that our casino investment would have been something in the 20s, albeit that would have been a long return of capital process. We wouldn't have been seeing cash coming through the door off to that like you do from a radio acquisition. So that's kind of how we look at it. But irrespective of that, we want to get our debt down, right?:]

[I think that we're not -- we're probably looking at -- we've historically done our open market purchases in like kind of blocks of 25 million authorizations, right, and kind of weighted into it. I suspect that we'll probably do take a similar approach. But we're going to pick a quantum that we'd like to pay down and go after it, and continue to look for other opportunities to own -- excuse me, to earn 20% plus on our money, but I've talked to a lot of people out there that are investors, professional investors find those opportunities in today's environment, it's tough. So -- but we keep looking.:]

[Unknown Analyst:]

Yes. That makes sense. I appreciate that perspective. I mean, how committed, as you look around for those types of 20%-plus return or whatever opportunities, how committed are you to the media business to radio and TV versus other diversifying ventures? And clearly you've shown a case for gaming. Like what are you considering?

[Alfred Liggins:]

Yes. I mean, look, we were in the radio business only, right? And then we got into the syndicated business when we bought Reach Media, then we created TV One and got into the cable television business, and we created Urban One -- excuse me, Interactive One, and we got into the digital business, and we're a publisher for the most part, right? We're not like the other radio companies where the bulk of our business is podcasting or are streaming. And then we've got into the gaming business. And so we generally like to look for businesses that are tangential to the assets that we have, meaning that the assets that we have, have the ability to make us be more successful or can help us enter those businesses or actually be successful in those businesses than we might otherwise be. And it's worked out, right?

[I mean we got into the gaming business with MGM, because we were a media company based in Washington, D.C., and they were building a resort casino here. So that's kind of the stuff that we look at. So we're open to looking at other businesses, but we like to have a competitive advantage in some skill set. I generally do not want to -- I wouldn't want to do anything where we're just out of our depth of knowledge, right? To me, that's a high degree of execution risk, your gambling, et cetera. And so that's -- that's kind of how we look at it and those but there could be some consumer-based businesses. I mean, if there is a -- I mean if you had a one-line digital urban apparel retailer opportunity, right? That's something -- it's -- and I'm just talking off the top of my head now. That's something where our marketing platform could be helpful even though we're not in that business.:]

[I'm not saying -- we're not looking at any business like that, but that's an example of something that's not in our core business where we would probably take a long hard look at. But I can also tell you, though, as it relates to our other -- our core businesses, we have to figure out what we're doing strategically in an ever-changing environment, right? How do we get some advantages, some scale advantages, some programming content advantages in our TV business. The radio acquisitions that we made were very synergistic because we're consolidating in markets. So I think you got to continue to look at how do you, how do you fortify those businesses as the ecosystem continues to change, because we're going to be in those businesses, right?:]

[And so you've got to figure -- we got to figure out how to flourish. But we try to be really careful about what we do. I would say that our #1 priority is, is to be in a defensive posture from the standpoint of making sure we continue to delever. And if we can get an opportunity where we think we can earn a 20% return pretty confidently, then we'll take a hard run at it. The casino investment, even though it didn't -- it didn't pay back for a while. We're pretty confident that if we spent $560 million building it that it would return $100 million of EBITDA, and we would get that kind of return. Now based on what we knew about the Central Virginia market. So...:]

[Unknown Analyst:]

Got it. And so you just touched on this, but you've mentioned in the past that you're looking for efficient opportunities to achieve more efficiency in the linear television business, given the challenges there with sort of melting subs. So how are you thinking about that?

[Alfred Liggins:]

I don't have the answer yet. We were one of the 4 or 5 parties that we're interested in, the BET Media Group, when it was being shopped in a process. We made an offer. Our offer was not at the level that Paramount wanted to trans back that. And I don't -- evidently, nobody made an offer at that level. This reason they stopped the process. But there would have been a great deal of synergy there, right, from a programming cost standpoint, advertising sales standpoint. And so we looked at that.

[Quite frankly, we also then kind of just pivoted our attention to this Richmond referendum. And yes, that election was November 7 and now failed, so we're now coming up for water, -- excuse coming up for air. We're in the middle of doing our budgets for next year. We haven't -- we didn't have a bunch of M&A idea projects just sitting on the sideline that we were considering simultaneously as we were during the referendum effort. And so now we're getting our budgets done, look at paying down some debt and then figure out what the opportunities are. So that's -- so there's nothing on deck this moment.:]

[Unknown Analyst:]

Makes sense. Maybe just a higher-level question. You have 4 different classes of shares. I think that when you're looking at the overall capitalization of the business and declining multiples in your core businesses, the enterprise value multiple, and it's tough to even see what those are in the space right now, given all the stress across some of your peers. You guys are in a pretty nice position relative to them. But how do you think about that -- I mean, is there value in having those that sort of controlling voting shares? Or do you think that you could potentially achieve a higher valuation where you just to collapse those to just one share class and simplify that? Like is that a remnant of maybe a prior outlook on the world? Or is that something that you view as important going forward to have that sort of 4 different share classes with different...

[Alfred Liggins:]

Yes. Yes. So look, you say does it have value? The answer is, yes, it does have value, particularly in this environment. We're a minority certified African-American controlled company. At times, we've been African-American owned, which is also a different designation because identifiable African-American ownership has been over 50%. The family controls about -- owns about 50% of the economics of the company. But we've benefited greatly from the minority certification being out there, and we've been certified for a long time. So I do think that there's absolutely value there. There are lots of companies that want to do business with minority-owned companies and controlled minority controlled companies for their diversity efforts. But here's what I can also tell you.

[If we flattened the share structure and had one class of shares, I've got 0 confidence that investors are going to pile into our stock and give us any sort of multiple uplift, just not going to happen, right? I'm not seeing it in any companies across the sectors that we're in, whether it's radio companies or whether it's cable network companies, I don't think the mid-single-digit multiples of radio and cable television programmers has anything to do with their share structures, right? It has everything to do with people's view on those industries.:]

[Unknown Analyst:]

Okay. That's interesting. I mean I just think from a defensive stance, when you think [Technical Difficulty] while the equity multiple may not be explosively higher on that alone. I mean there haven't been -- there's been a lot of research on discounts for controlled businesses. And when you're a levered business that people are looking at LTV, I would think you'd want to do anything you can to keep as much cushion as possible. And then lastly...

[Alfred Liggins:]

Yes, we create cushion by paying down our debt or issuing equity, and we've never had any problem issuing equity. I mean, we don't have them in place now, but in the past, we've had our ATM programs in the place and in place, and I forgot, was it '20 or '21, I forgot, it was 1 year, no, in '21 we're fairly active issuing -- I think we show almost $50 million worth of equity. Yes. When our stock got some significant lift from being an African-American focused and control of the company because of the whole sort of mean from -- there was a moment in time where our stocks companies like ours were running. We took advantage of it. And so if we need more equity capital, we're willing to issue shares to give ourselves more cushion.

[Unknown Analyst:]

Okay. And then on -- so then the financial question. For 2024, do you have expectations yet for what the contribution of political advertising might be and your ex political EBITDA kind of range for looking a year ahead.

[Alfred Liggins:]

Yes, we're going through it right now. We're in the middle of our budgets. It won't be as robust as '22, because we had the Georgia Senate runoffs there, and we got a lot of money for that. But we think political for our radio business will give us probably some sort of double-digit millions of, let's call it, $10 million of revenue. And again, that's the early start on our budget. And it was -- it was kind of like 18 in '22, but we got literally $6 million in Atlanta alone in '22, largely due to the Senate races.

[Peter Thompson:]

That was in '20. 18 in '20, of which 6 was in Atlanta, and then we did 13 in '22.

[Alfred Liggins:]

13 in '22. Yes. Thank you for clarifying, of which 4.5 was in Atlanta, so still half was in Atlanta, the 6 in the previous cycle in Atlanta.

[Operator:]

And next, we can go to Matt Swope with Baird.

[Matthew Swope:]

Alfred and Peter, maybe just to continue on some of the same themes. Alfred, where would you like your leverage to be? You've given us some numbers in the past, but where are you comfortable where you think you're sort of out of harm's way regardless of what the economy does.

[Alfred Liggins:]

I don't know because harm's way keeps changing, right? I would say that I like our leverage with a 3 handle on it. I think we're probably going to finish the year at, call it, 3.8 something like that. And I'd like us to march and get down into the low 3s so. But I don't -- I've got no interest in levering up the company to take a swing at. Yes, something that I think is good. There was a time when you could lever up these companies and make the assumption that your leverage is going to come down really quickly and therefore, you can take some execution risk on something. But that's when you're dealing with businesses that are growing on a consistent basis, meaning that the macroeconomic profile of these businesses, the market is growing. And that used to be the radio business, and that used to be the TV business and you could count on that. Those aren't those business -- these aren't those businesses any longer. So we're of a mindset that we wouldn't do that. So that's the reason I kind of started off the conversation today talking about we are looking at debt pay downs.

[Matthew Swope:]

I appreciate that. And you guys have definitely done about as good a job as anybody in the industry at that.

[Alfred Liggins:]

I appreciate it. I mean, look, we got a lot to lose. The family has a lot to lose if you have a misstep, right? And we're 40-plus years old. And so where -- sometimes the equity holders are aligned with the debt holders, but we are aligned with the debt holders in this instance because it's really about being safe and preserving your viability, right?

[Matthew Swope:]

Sure. No, that makes sense. And as you think, Peter, about the buyback part of this, I guess a couple of questions. With all the -- I guess could -- one would be, could you give us a cash update as of where it is today? But then 2 would be, what's the minimum cash you need on the balance sheet? At times, it's been like $5 million or $10 million, right? Do you need to have more cash on the balance sheet than that?

[Peter Thompson:]

Look, we were talking about that a week or so ago. I think probably [ 50 ] is a decent number. Could it be lower than that? Yes. We've got some lumpy payments from a coupon standpoint. Obviously, that goes down if we buy back debt. But obviously, the semiannual coupon is chunky. And then some of the TV One programming deals can be somewhat chunky. Probably a range is [ 30 to 50 ] in terms of what we really need on the balance sheet. So obviously, we've got a lot more than that. Cash on hand today, I think it was $227.5 million approximately. And that is obviously after we've made the Houston acquisition, which was $27.5 million. So that's where we're at on that.

[Matthew Swope:]

As you think about...

[Peter Thompson:]

Go ahead.

[Matthew Swope:]

I was going to say, as you think about the bond buyback possibilities, given that kind of -- that you could do something like [ 150 or 175 ] or even just going off the numbers you just said, does it make any sense just to do a broader tender for a much bigger number? Are you restricted at all, by the fact that you haven't put your 3Q out yet, like you have to get some fees before you can do some of this.

[Peter Thompson:]

Yes. Look, we -- if we were doing open market repurchases, I think we would need to do it after Q3, unless we transacted with someone who signed a big boiler. So we were protected in that sense. So there may be an opportunity to go and find a block and sign up with a sign up with a big boiler and do sooner than later. Framing that, we'll file Q3 before the end of the year and then we'll put a plan in place. I think as Alfred was saying, our kind of [ historic ammo ] has been to authorize blocks $25 million and have -- go out in the market and find us blocks. So I think we'd probably take that path.

[To your point, if we were going to do $150 million, then I think we would probably look at the tender, I don't think we're going to go that. I don't think we're going to go that route, not decided yet, but I think Alfred's direction saying blocks of up to [ 25 ], and see where we're at.:]

[Matthew Swope:]

Got you. No, that's certainly helpful. And then Alfred, is the casino idea dead at this point? Or I know at times you looked at places other than Richmond. Would you look at something else again?

[Alfred Liggins:]

Yes, absolutely. I mean, we -- it's a great business. We made a lot of money on our MGM investment. We made like 4.5x our investment. There's risk, right? You can overbuild -- interest rates are higher now, like so that was going to put pressure on the returns. And it's a political process, right? And we think that when gaming -- in fact getting gaming licenses are is a political process and we think we have some advantages there as -- I mean I think we're really the only sort of African-American-owned organization that's really focused on investing in this industry that I know of on a significant level.

[So yes, we would absolutely look at other stuff. I don't know what's going to happen. That fit license is going to go somewhere in Virginia. We haven't gotten focused yet to see if there's any way that we can participate on any level. I don't know which city it would go to and who the players would be there's potentially iGaming that's going to come to the State of Maryland. It's been -- it's public knowledge that legislators there are looking to try to move a bill out of the general assembly this session. And that's very different than sports betting, because sports betting is not profitable, but iGaming is -- had no idea how they're planning to administer the iGaming structure and licenses.:]

[So what I'm seeing is that what they'll probably do is send out a bill that would actually put the question on the ballot. So pass a referendum to get passed and then figure out what the structure would be. By the way, our deal with MGM didn't give us access to any online activities or revenue. So no online sports betting. If iGaming came, we wouldn't have participated in it. Only the bricks-and-mortar operation, would we -- do we have any sort of like claim. And so that was yet another reason to go ahead and monetize. So yes, we would look at other stuff, but they're not -- those opportunities don't grow on trees. And...:]

[Matthew Swope:]

Got it. And maybe just a last quick one for Peter. With the Houston radio sale, that's in your divestiture trust to Spanish broadcasting, we saw that you extended the time line on that. Is there any pressure on that deal? Does that have any other impact on anything else you're doing in Houston or any other issues?

[Peter Thompson:]

There's a finite amount of time that the trust is authorized by the FCC, but it was -- it gave us a 2-year window to get that done. So the extension that we -- so one station has already been sold and closed on -- with EMF and the time line that we extended for the second station for Spanish broadcasting. I think the schedule is for it to all be wrapped up by July or something like that. So well within the -- it's well within the first year, right? So -- but there is a 2-year window that we have with the trust, but we suspect that it will be closed out well in advance of that.

[Matthew Swope:]

And theoretically, you could extend it a little more if you wanted, even.

[Alfred Liggins:]

Yes, you could.

[Operator:]

And next, we can move to [ Kenta Shimojo with Wellington ].

[Unknown Analyst:]

And not to rehash Matt's question, but I appreciate you're still digesting the Richmond outcome. I'm just kind of curious if you have any thoughts as to timing for that is license or any kind of milestones or mile markers that investors should be looking for in terms of when that gets revisited?

[Alfred Liggins:]

I mean, it's a process that's going to probably play out in the general assembly this year. Again, we're nowhere in terms of whether or not we're looking into it, right? We haven't -- we really just kind of came up, like I said, for air after. And so -- but I assume that something will happen in this session. I do know that there is a group of folks that want to propose. And I know that there's a state senator that is going to propose a bill to put it somewhere in Northern Virginia, like Reston or Tysons. So you got the Northern Virginia, there's going to be a push for Northern Virginia. I'm hearing at the city of Petersburg is interested again and would like to try to get it there as they did last go around, but we wanted a second vote in Richmond, and so we lobbied against that. So I just don't have -- I don't have any information on what the state of play is other than people are positioning themselves for this legislative session. And I don't know what's going to happen. But I suspect that you'll see a direction one way or the other coming out of this legislative session.

[Unknown Analyst:]

Appreciate that color. And then just thinking about the adjacent investment opportunities or the prospective opportunities to invest further afield from radio and even gaming that you alluded to. Do you have any additional constraints that you'd be putting on yourselves in terms of like size or maybe a higher IRR threshold or leverage cap just given the sort of additional risk of moving further afield?

[Alfred Liggins:]

We don't think about that. I mean...

[Peter Thompson:]

Like, you look at each deal on its merit, right?

[Alfred Liggins:]

Yes. I mean I can tell you that -- I mean, we're not a venture capital fund. We're not sitting here making a bunch of early stage investments in startup companies that we think are going to be 10 baggers, right? We generally have kind of wanted to invest in things that we thought were going to deliver a cash return EBITDA that we could ultimately bring into the company and count, right? I mean because you could look at investments, lots of people in the investment business make money on companies that actually don't make money, right, like and just increasing value because of whatever reason. We've never -- because we come from cash flow generative businesses, we have a bias towards cash on cash returns.

[And so -- so my sense is if you're going to look for a much higher return than 20-plus percent on something, you're probably going into something that's more speculative than newish and early stage, and that's just never -- that's just not how our mindsets have worked around here because of the nature of the businesses that we're already in.:]

[Unknown Analyst:]

Yes. Fair enough. 4 bagger will do. So last one for me. There were a few recent instances of asset sales in the broader industry where noncommercial operators came in kind of picked up pops at pretty interesting multiples. I'm just kind of curious if you have any sticks that are noncore to you that might be seen as strategic to the few non-comps that are out there.

[Alfred Liggins:]

Yes. I mean I've gotten approached recently for one of our markets. I've actually gotten push to a couple of our markets. The problem is, and we've said no. And one of the -- and we thought about it, and one of the problems is does it weaken our position in that market versus something that we might want to do that's going to get us a bigger return, not mentioning the market, but in one of them would make us weaker against the competitor there. And ultimately, we think there's an opportunity to buy the competitor and do really, really well. So I don't really want to take the pressure off of that competitor before they sale -- before they sell.

[And the money is not enough. It's not big enough, right, to make a big -- to make a huge dent. It's kind of like $7 million, $8 million or something like that. And we have cash flow already in that market. So if we peel that asset off, it's also gone to degrade the cash flow in that market, maybe run it to 0. And so you got to lap that if you just use a 5 multiple for radio, which is probably low. If you lose $1 million of cash flow and somebody gives you [ 8 like you're netting $3 million ]. It's not worth it, right? So I mean, we needed the cash for something, then that's a different story. But today, we don't need the cash for it. So -- but yes, we've got a couple of those inbounds. But nobody -- we've got nothing that somebody wants to pay $20 million for.:]

[Operator:]

[Operator Instructions] Next, we can move to [ Marlene Pereira with Bank of America ].

[Unknown Analyst:]

You've answered most of my questions, but just a quick follow-up. The [ 3.55 ] leverage that you mentioned, that's for 3Q. Is that correct?

[Peter Thompson:]

Correct.

[Unknown Analyst:]

Okay. And then by end of the year, you'll be around [ 3.8 ]. Does that actually incorporate maybe some incremental debt reduction or just some moving around in cash? I mean...

[Peter Thompson:]

Well, the fact is...

[Unknown Analyst:]

With the EBITDA, yes.

[Peter Thompson:]

Yes. So, the fact that it's moving upwards between where we're at now and between Q2 and the end of the year, was that the question, or no?

[Unknown Analyst:]

You're like [ 3.55 ] for 3Q. And I was just asking if the around [ 3.8 ] by year-end considers any incremental debt reduction? Or is it just cash moving around a bit?

[Peter Thompson:]

No.

[Unknown Analyst:]

Okay.

[Peter Thompson:]

No, it's cash moving around. And obviously, the back half, as we said, is going to be soft because of the lack of political. So Q4, when you LTM it, and then we roll into Q4, we're going to be missing $8 million of political. So we'll just have a lower LTM EBITDA by the time we roll into Q4.

[Unknown Analyst:]

Got it. And then I think it was the last call, you had mentioned free cash flow maybe in the [ mid-16 million ] area, and that depended kind of where CapEx comes out to, obviously, with a number of moving parts, whether it be Richmond or anything else, are you still thinking about it in that context for the year? And then any comments on CapEx potentially for next year that you'd be willing to share?

[Peter Thompson:]

Yes. I think it's lower than that now. I say there was $5 million of referendum costs. And then as part of cleaning up all the material weaknesses we've had to hire a bunch of consultants and that's kind of $4 million and rising at the moment just to remediate a bunch of the stuff there. So that's -- so those 2 things have been $9 million, $10 million of cash. So I think it's slightly less. Although both of those are onetime only, right? So that's worth pointing out.

[On CapEx, we don't know -- we're going through the budgets, as Alfred said, the one sort of we got a couple of big things we need to consolidate in Indianapolis, and that's going to cost some millions of dollars to put those facilities together and buy new equipment. So I think at the moment, we might be looking at a kind of $10-ish million CapEx next year. We normally run at $7 million. So that would be a little higher for next year, but it's preliminary. And we tend to manage the CapEx in a very tight manner. So there may be some other things that we choose not to do next year if we need to spend the money on the Indianapolis facility.:]

[Operator:]

And next we'll go to Hal Steiner with BNP Paribas.

[Hal Steiner:]

I was hoping, could you just spend a little bit of time talking about the TV network side of the business and maybe just run through like what the -- I guess, focusing really on like the affiliate fees in terms of what could be the timing of any like carriage renewals, is there any big ones and just maybe what your strategy is heading into all that?

[Alfred Liggins:]

Carriage renewals, we just renewed Verizon. They were up in October, and we just renewed them for another couple of years. Our next carriage renewal is not till the end of '25. Right, Jody?

[Jody Drewer:]

In the third quarter of '25.

[Alfred Liggins:]

In the third quarter of '25. So we got a small one -- we got one small streamer that we did a 1-year extension on that we got to come up, but, it's small. But our big deals don't come up to -- the first one is the end of '25 and then the next one is the end of '26 beginning of '27.

[Jody Drewer:]

Yes. And that's 97% of our sub base was locked up through the third quarter of '25.

[Hal Steiner:]

Got it. That's great. Okay. That's very helpful. I guess just, can you maybe give a little color about how you think about sort of just what like your sort of positioning is and sort of the bundle, right? I mean, there is just a lot of talk about that and concern about that and how the bundle sort of evolves. And just if you could give any color about what you think your position is and ability to stay in there would help.

[Alfred Liggins:]

I mean, we feel good about it. I mean, we've always been an independent network. I mean, we've never been part of a big group. And yes, I mean, I think that the environment has changed. But there has also been a move towards more diverse content, which we have. I do think that the fact that we're an African-American owned entity is important. And so, I mean, we've got great relationships with all the operators except for we're not on DISH. Certainly we're not on YouTube TV or Hulu at this point in time. So we got to try to figure that out. But, I mean, I am not going to [indiscernible]. I mean, I know the environment has changed dramatically. But we -- nothing has led us to believe that operators still don't see TV One and now CLEO as valuable, including the renewal that we just did 2 weeks ago.

[Hal Steiner:]

Got it. And I mean, a lot of what you said is what I would've imagined, so I really appreciate that color and some of that affirmation. I guess on the digital side of the business, I get -- obviously slowing a little bit with some of the cyclical pressures, but could you maybe speak a little bit more about just your ability to kind of grow that business and if there's maybe properties out there that could be more targets to easily add in? Any color you could give me there would be helpful.

[Alfred Liggins:]

I'm happy that it's profitable, right? And yes, you're right. There's ad revenue pressures and so -- digital is so tricky, right. So right now, you got ad revenue pressures, but I think we've been doing decently in that slowing environment. The tricky part about digital, and particularly with acquisitions is that the audience sizes change so dramatically depending on how the big platforms of Google or Meta beside to prioritize people's content and change their algorithms. So you could go out and buy something. Very few of these digital platforms have their own natural organic go to their dotcom traffic, right? Like, they're getting their traffic from some other source or platform. I think, I've read something in BuzzFeed's last conference call, when they were talking about their ad revenue being down significantly and why?

[And I think I remember the #1 thing they pointed out was that the big platforms are prioritizing their own content or their own verticals over third-party, and it's reduced their ability to monetize their content. So what does that mean for acquisitions? You go out and you buy something that you think has whatever, 10 million unique visitors and 500 million page views, and then 6 months later, an algorithm's changed, and that's been cut in half, right. That happens. It's happened to us on a smaller scale. But -- and so you've got to be really, really, really careful. We look at digital acquisitions. We look at something every year. In fact, we were nosing around a public company this year that ended up doing a deal somewhere else. So, yes, we want to figure out how to do that to scale it, but it's tricky, so.:]

[Hal Steiner:]

I understand.

[Alfred Liggins:]

And lastly -- and then operator, we're going to just open up 1 more question after that. But -- and lastly, a lot of these digital acquisitions, these guys don't make any money, right? So they want you to -- yes, they want you to -- and remember I said earlier that we tend to be cash flow buyers, right? So they want you to give them a value and they don't make money. It's a problem. BuzzFeed bought this company complex, which was like one of the top urban content publishers in the space, had a big brand for a long time, was doing a $100 million of revenue, they lost $11 million and BuzzFeed paid $300 million for them. And I just like -- we just can never do anything like that.

[Hal Steiner:]

Yes. I understand. If you mind, if I could just ask 1 before you switch to the last question. I was just going to ask on the -- for the terms of the indenture, I think you needed to make an offer to repurchase the bonds, if -- with the amount of excess proceeds. But I guess, your belief would be through doing debt buybacks and maybe any other sort of investments you'll be able to -- you'll fulfill -- you'll have no excess proceeds back -- excess proceeds left by the time it is, you would have to make that repurchase offer. Is that correct?

[Alfred Liggins:]

We don't know, but there is a number of things that we've invested in that count towards those investments that aren't just buying radio assets, right. Like, our Houston transaction counts, there's some programming investments that we make that count. So, we're not sitting there right now with $137 million of investible basket that we got to deal with. It's something significantly less than that already. But as Peter said to me yesterday, we're not going to go out and make a stupid acquisition just so we don't have to offer to buy back bonds at par. That's not going to happen. But to your point, we're probably at something close to $80 million of the $137 million already, like sheltered, if you will, for stuff that we invest in on a regular basis. And I don't know what's going to happen between now and April.

[Operator:]

And our last question here will come from [ Brad Kern with Fort Baker ].

[Unknown Analyst:]

So on the use of cash, you brought in Churchill Downs as a partner, would you be open to being sort of a minority partner in another, whether it's another gaming endeavor or some other sort of minority partner where you're not like -- you're not in control of the investment, but you're sort of either a capital solutions provider, maybe there's even something strategic? How you think about those types of opportunities?

[Alfred Liggins:]

Yes. We would look at something like that. However, we are a bit spoiled because our MGM deal gave us like a cash return off the bat off the top of gaming revenue. So that was one of those unique situations where we put money in and we got money out, like kind of like the first year. And we looked at 1 deal with a small public gaming company, and they wanted us to invest like $20 million or $25 million in it. But, they had us subordinated under a whole bunch of stuff and it was like a really traditional equity investment and they were -- it was -- they were up-valuing it from what their value was. And so, we didn't like it.

[And so, we're spoiled. So we would like -- yes, we would look at being a minority investor. I think that would be one of those situations where if we ended up making a real equity investment and we're sitting behind debt and when -- it is got to be paid down and there is no dividends or restricted payments going out to the equity for a significant period of time where you'd want not a 20% return, you'd want something much higher. But we've seen 2 investments like that, and we passed on both.:]

[Unknown Analyst:]

Okay. Appreciate it. Yes, the discipline makes sense.

[Alfred Liggins:]

Thanks, Brad. Thanks, everyone. Appreciate the time.

[Operator:]

And that does conclude the conference for today. Thanks for your participation and for using AT&T Teleconference. You may now disconnect.