Urban One, Inc.
Q1 2019 Earnings Call Transcript

Published: 10 May 2019

[Operator:]

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 with certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs and other reports periodically filed 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

[Alfred C. Liggins:]

Thank you very much, operator, and welcome to our Q1 conference call. Also joining us today are Michelle Rice, the General Manager of TV One; Jody Drewer, the CFO of 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 via our digital division due to a new strategy. TV One ad sales numbers performed well. Ratings in Q1 at TV One had 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'll give you more detail on the numbers.

[Peter D. Thompson:]

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 the 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's $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 the breakout by segment can be found on Page 7. Radio segment net revenue is down 7% in the first quarter. National ad sales were down 9.8% primarily due to 2 nonrecurring national ad campaigns from first quarter 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

[Alfred C. Liggins:]

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, 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 now. 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:]

[Operator Instructions] And our first question will come from the line of Ben Briggs with INTL FCStone. Your line is open.

[Ben Briggs:]

Good morning, guys. Thanks for opening the call and for taking the questions. 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?

[Peter D. Thompson:]

Ben, yes, that's still about the number. There's a variable in that because we've got an excess cash flows 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 have a $19 million bump there. And then you've got the regular quarterly $3.6 million of ammo 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.

[Ben Briggs:]

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 there other costs for that? I know you said it was about $200,000 of cost, 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?

[Alfred C. Liggins:]

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 BI-LO, 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 that 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 of 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 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.

[Ben Briggs:]

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

[Alfred C. Liggins:]

You know what, it'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 until we were at how many subs, that's a question, 30 million?

[Peter D. Thompson:]

It was like 30 million or 40 million.

[Jody Drewer:]

About 30 million.

[Alfred C. Liggins:]

Yes, yes. We didn't get ratings for TV One until we were at like 30 – with the 40 million?

[Jody Drewer:]

30 million.

[Alfred C. Liggins:]

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.

[Ben Briggs:]

Where are you on subs at CLEO right now?

[Alfred C. Liggins:]

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.

[Ben Briggs:]

That's very helpful. And the 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?

[Alfred C. Liggins:]

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 are 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.

[Peter D. Thompson:]

Yes, as I recall.

[Alfred C. Liggins:]

A big number of 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 is 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 the 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 in our comments space, they said like 4% in Q2, 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, debt covenants, we feel like we're in great shape against those. Investors who bought our securities all have models in 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.

[Ben Briggs:]

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 could you expect to look the same as it did in the last cycle? Better? Worse? Any guidance?

[Alfred C. Liggins:]

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

[Peter D. Thompson:]

I mean I looked at some data going back, if you want to look at '16, for example, we did $7.9 million; $4.8 million, but that was in the fourth quarter; and we've 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. Yes.

[Alfred C. Liggins:]

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. I'll call it.

[Ben Briggs:]

Okay. All right. That's been very helpful. I appreciate it. Thank you guys.

[Alfred C. Liggins:]

Thanks.

[Operator:]

[Operator Instructions] The question will come from the line of Tom Klamka with Guggenheim. Your line is open. Mr. Klamka, your line is open.

[Tom Klamka:]

Sorry, I was on mute. 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?

[Peter D. Thompson:]

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 still finalize in 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 $100,000 in TV One and a little bit in Reach and digital sites for the quarter, kind of $950,000 impact in radio, a couple of $100,000 in TV and $70,000 each in Reach Media and digital. That's how that $1.3 million breaks out.

[Tom Klamka:]

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?

[Alfred C. Liggins:]

I think I feel like that, yes, there's 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 the quarter, and that 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. For 6 months, it was down like 11%. It improved during 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 number one or two or something like that, 25 to 54, and beating our primary competitors, and our hip-hop stations 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 or I don't know how many years I was having this conversation. I was having a 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 spaced out and the whole bit. But cash flow in Baltimore has been halved over the last 6, 7 years just because the markets 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, 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. 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.

[Tom Klamka:]

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?

[Peter D. Thompson:]

About a similar amount. It's a little tricky to quantify, 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 out 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 into the incident. But all told, we think $500,000, $600,000 is our best estimate.

[Tom Klamka:]

Okay. Thank you very much.

[Operator:]

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

[Alfred C. Liggins:]

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

[Operator:]

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.