Urban One, Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. I've been asked to begin this call with the following safe harbor statement. During this conference call, Radio One will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. Radio One 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 via its projections or forward-looking statements. This call will present information as of May 4, 2017. Please note that Radio One disclaims any duty to update any forward-looking statements made in the presentation. In this call, Radio 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.radio-one.com. A replay of the conference call will be available from 12 PM Eastern Time, May 4, 2017, until 11

[Alfred Liggins:]

Thank you, operator, and welcome to our Q1 conference call. Everyone, I'm joined by Peter, our CFO, as the operator also pointed, but also we have on-hand, again, Jody Drewer, who's the TV One CFO as we get any - more detailed questions during Q&A on TV One's progress. As the press release stated and as we've guided before verbally and also at - to investor conference at the NAB, Q1 is a tough quarter to say the least, mostly driven by Radio and Reach and tough political comps. We are still, as a management team, very committed to producing 2017 EBITDA growth. We're going to discuss kind of the roadmap of how we think we get there. Go into that in more detail after Peter gives more details on the numbers. So with that, Peter?

[Peter Thompson:]

Thank you, Alfred. So net revenue was down 7.1% for the quarter ended March 31, 2017, approximately $101.3 million, and a breakout revenue by source can be found on Page 5 of the press release and a breakout by segment can be found on Page 8. The radio station clusters with the most significant declines was Cincinnati, Cleveland, Dallas, Detroit, Houston, and Philadelphia. Our Atlanta, Indianapolis, Richmond and St. Louis clusters showed positive revenue growth in Q1. The first quarter local revenue was down 5.9% and national revenue was down 8.7% for our radio stations. Political revenue was approximately $276,000 compared to approximately $1.7 million last year. For the radio stations, sales were down in all categories. In order of volume, telecommunications category was down 6.3%, retail was down 1.1%, Services were down 2.1%, Entertainment was down 3.2%, Automotive category was down 13.4%, healthcare was down 9.3% and government and public was down 24.6%, financial was down 6.9%, food and beverage down 1.4%, travel and transportation down 1.9%. Declines really manifested themselves in - as a result of lower average unit rates, which were down approximately 4.3% overall. And the total spot markets in which we operate were down 3.3%. Radio ratings were relatively flat in the persons 12-plus demo for the first quarter. Baltimore, Charlotte, Cincinnati, Columbus and Raleigh showed 12-plus ratings point growth in the quarter. For Q2, our radio stations are currently pacing down in similar percentage amounts to Q1. For Reach Media, the Tom Joyner Fantastic Voyage Cruise took place in April, performed well. So for the same quarter that will help - that will offset the declines in spot advertising business of each. Net revenue for Reach Media. First quarter was down by 26.7% due to weaker demand and lower unit rates. Part of the decline relates to the timing of ad spends from 2 large clients, Walmart and Carmax. Both had significant campaigns in Q1 2016, did not recur in Q1 2017, although Walmart spend will normalize over the rest of 2017. Net revenues for our digital segment decreased 15% in Q1 due to lower direct and indirect sales at iOne as well as lower digital sales from our radio properties. We recognized approximately $48.6 million of revenue from our cable television segment during the quarter compared to approximately $49.5 million for the same period in 2016, a decrease of 1.9%. Cable TV advertising revenue was down 3.7%, driven by a shortfall in delivery for the Image Awards and Game of Dating shows. Cable TV affiliate sales were down 0.3%. The affiliate rate increase was offset by an increase in volume discounts for consolidated MVPDs. Cable subscribers, as mentioned by Nielsen, finished Q1 at $59.3 million, down slightly from $59.5 million at the end of December. We recorded approximately $1.5 million of cost method income for our investment in the MGM National Harbor casino, which is equal to 1% of the net gaming revenue reported to the state of Maryland. Operating expenses excluding depreciation, amortization, impairments, and stock-based compensation decreased by 5.5% to approximately $76.4 million in Q1. Radio expenses were down 4% due to lower music royalty expense and lower revenue variable cost. Reach expenses were down 6.2% due to the lower talent cost and lower bonus and commission expenses. Operating expenses in the digital segment were up 6.6%, driven by investments in our digital sales and products. Cable TV expenses were down 5.5% year-over-year, primarily due to lower content amortization costs, and this helped TV One grow adjusted EBITDA by 4.3% for the quarter. The first quarter consolidated broadcast and Internet operating income was approximately $34.9 million, down from $39.6 million in 2016. Consolidated adjusted EBITDA was $27.7 million, a decrease of approximately 9.7% year-to-year, with Radio Reach and digital adjusted EBITDA down, with cable TV and corporate adjusted EBITDA up year-over-year. Interest expense was approximately $20.3 million for the first quarter compared to approximately $20.6 million for the same period in 2016, and the company made cash interest payments of approximately $19.9 million in the quarter. Net loss was approximately $2.3 million or $0.05 per share compared to a net loss of approximately $2.9 million or $0.08 per share for the first quarter of 2016. For the first quarter, capital expenditures were approximately $1.5 million compared to $1.2 million in first quarter of 2016. Company paid cash taxes of approximately $167,000 in the quarter, and the company repurchased 317,103 shares of Class D common stock to satisfy employee tax obligations in connection with the 2009 stock plan in the amount of $916,000. As of March 31, 2017, Radio One had total debt, net of cash and restricted cash balance as an original issue discount approximately $965.8 million. The bank covenant purposes pro forma LTM bank EBITDA was approximately $129.5 million and net debt was approximately $981.7 million, for a total average ratio of 7.58x and a net senior leverage ratio of 5.06x. We entered into an agreement to purchase 2 stations from Red Zebra at a cost of $2 million. One FM in the Washington, D.C. market and 1 AM in the Richmond market, which will strengthen each of those clusters. Pending closing, we began operating these stations under LMAs as of May 1. On April 18, company completed a refinancing of a $350 million term loan. The new term loan has a 6-year term and is priced at L plus 400 with a 1% floor 99 OID. On April 28, the company acquired certain assets from there, ended the brands and online operations of Bossip, MadameNoire and Hip-Hop Wired for an initial consideration of $5 million, with a further $5 million in potential earn-out payments over the next 4 years depending on performance. This acquisition will strengthen our online business and will be immediately accretive in deleveraging with approximately $3 million of trailing EBITDA. On May 3, the company completed the sale of 14 FM towers to American Tower Corporation. Gross proceeds of $25 million less transfer taxes and fees were received and yielded $24.5 million, and the initial annualized EBITDA impact is approximately $1.75 million of leasing those towers back. And with that, I'll hand it back to Alfred.

[Alfred Liggins:]

Thank you. So we expect a softer ad environment in 2017, particularly in radio, nonpolitical year. It seems like the economy is slowing down a bit. So we're very focused on cost containment and also in revenue improvements at our underdeveloped assets in radio in Detroit, in Philadelphia. Our acquisition in Washington is about simulcasting one of our largest radio stations to cover part of the market that we don't have good signal coverage - that we don't have as good signal coverage, and we think that, that is going to help bolster our position there. Richmond, Virginia is a small sports AM tack-on there, but that should yield positive accretive EBITDA off the back. So little things on the margin that we can do in the radio division to actually improve underdeveloped assets, but mainly cost-containment is the name of the game for Radio and Reach. Reach shouldn't - it's going to be down year-over-year but won't be a disaster, probably down a couple of million dollars from 9-ish million to 7-ish million in terms of EBITDA in 2017. 2017 for TV One, as a guide, last year we did about $76 million of EBITDA, and we expect that to come in a range of $82 million to $84 million of EBITDA this year. MGM is going to produce at least $6 million of additional EBITDA for us. So those 2 growth engines hopefully will offset whatever is happening in radio. iOne is historically about a breakeven proposition division for us. We are making additional video investments to try to grow that audience and grow the revenue with higher CPM digital video advertising, but this acquisition of the Bossip, MadameNoire brands, we think and we hope, we believe is a game changer for us. It's going to add about - approximately $3 million of trailing EBITDA, essentially we're taking their revenue base from 2016 of about $8-ish million of revenue and lumping it onto our platform there. And it's going to produce approximately $3 million of trailing EBITDA. It also gives us more scale there, direct competitor. MadameNoire is a black woman site, Bossip is essentially a black celebrity and entertainment and gossip site. That's the iOne scale. We're in the roughly $20 million comp score unique visitors, facet from MadameNoire add about $6 million of that $20 million. We think that this is an inflection point for that division that would put it solidly in the black. And so as we carefully follow the roadmap that I just laid out for you, the management team here is committed to producing EBITDA growth this year in a tough year, and that's really what we're focused on, blocking and tackling and playing out that hand. So you've got some new information. You've got a TV One guide for this year, kind of a plan for iOne. I think, the tough news on radio is not anything that folks haven't heard from us before, managing that carefully will be the primary focus and moving towards, again, 2017 EBITDA growth. So with that, operator, I'd like to open it up for Q&A from the callers on the line.

[Operator:]

[Operator Instructions] And our first question comes from the line of Aaron Watts of Deutsche Bank.

[Aaron Watts:]

Let me start with the ad environment that you're talking about, Alfred, any sense from your advertising clients on some of the drivers of the softness right now? Are they sitting on their hands, keeping their money in their pocket market? Or are those budgets being allocated to other medium besides radio?

[Alfred Liggins:]

That's a good question. I don't know the answer to that. I think that - I would say about a year ago, there was a lot of chatter about video dollars moving out of cable TV into digital video, and I think that the end analysis on that was that, that wasn't happening at a drastic level. I mean, digital is largely about Facebook and Google. Digital publishers themselves are also having a tough time. I think the ad environment right now is about a softer economy. Car sales are down, big driver, obviously, for ad dollars. I - in preparing for our earnings release, reading the comments from other media companies, I think the theme is similar, whether it's coming from outdoor cable TV, certainly radio, that you're seeing a software environment. I guess the GDP numbers for Q1 come in soft. We've been going at a steady clip now for 8 years or so, and maybe it's time for a breather. So I haven't spent enough time with advertisers to give you a really detailed assessment on if there's ad share shift. But I definitely feel that we've just got a softer economic backdrop right now.

[Aaron Watts:]

Just a quick follow-on on the auto, I think you said down 13.5% in the quarter. How much of that was like maybe 1 big client? Or was that kind of across the board? And kind of what percent of revenue is auto for you now in radio?

[Peter Thompson:]

Yes. So auto is about - for Q1, the whole category for us was $4.3 million. So it's less than 10%. And then within that, obviously, auto dealers is the biggest part of that, that's about $3.7 million, and that was down 13%. And I would say that, that's probably across the board. I mean, it tends to be local dealerships, more than 1 big client driving that. So that's it. it's not a huge category. It's not nearly as big a category for us as it is for some others. But that's the size of it for us.

[Aaron Watts:]

Okay. And then within the markets, I think you mentioned that you had underperformed a little bit in terms of unit rate. But as you think about the competitive dynamics now, anything standout to you? Any bad actors pushing on pricing, or otherwise? And what do you think you need to do to get parity with, at least, market performance?

[Alfred Liggins:]

Look, that's bad actors. I mean, the larger companies in the space, the radio space, definitely are pricing per share. So the bigger you are, the more inventory you have, the better you are able to do that. And it hurts smaller players like us. I think the way that we're going to bring - get to parity with the market is probably more focused on improving our underdeveloped assets because we're not all of a sudden going to become large and have some sort of pricing parity or scale parity with CBS, Entercom, or iHeart or even Cumulus. So we need to spent a lot of time, focused on those assets where we think we can improve. We also need to look at whether - even though it's small, small potatoes, the Red Zebra deal will be additive and accretive. I think, where we can make deals reduce like that, that are low hanging fruit to improve our positions and make them accretive, we need to be focused on that. I said at the NAB that the industry probably needs another round of consolidation to try to stabilize pricing pressures, and I think the balance sheets of the overleveraged companies need to be fixed. So you're not really kind of in free-fall frenzy for ad dollars. We are willing to participate in consolidation, whether it's a rationalization of markets, be it divestiture or acquisitions, it's something that needs to happen. I think at this point in time, it's kind of like the airline industry, capacity needs to be shrunk. The actors need to be healthy. Right now, we're moving in a healthy direction, but we're moving in that direction via diversification. But that doesn't fix the radio business. So we need to keep an - open our mind and be a participant in that some way. But in the meantime, it's really going to be about improving underperforming assets because I don't see our pricing disadvantage on our scale disadvantage going away anytime soon.

[Aaron Watts:]

Okay. If I could squeeze just one last one in, shifting over to the TV side. You mentioned the weakness in the younger-end demographic. Any sense for what the driver was of that? Is that, that younger demographic leaving the platform or what's...

[Alfred Liggins:]

So our big acquisition that was driving, you guys have heard of this, was Martin. And Martin is a base - it's a younger sitcom, and had better 18 to 49 demographic make-ups than the acquisitions that we replaced it with, which were Good Times and Sanford and Son. We're teeing up another acquisition that is - was attractively priced, that we think is going to help us. Can't talk about it right this second, but that particular piece of content is - while it's not what I would call contemporary, it's certainly younger than Good Times and Sanford, which is not an easy hurdle to cross, right? But the fact of matter is, Good Times and Sanford, they're doing good 25 to 54 numbers, there just not doing good 18 to 49 numbers. So that's what drove it. It's the difference in those 2 things, and we've got something that we think - we hope is going to mitigate that.

[Operator:]

Our next question comes from the line of Adam Jacobson of Radio and Television.

[Adam Jacobson:]

It's Adam Jacobson at the Radio and Television Business Report. Wanted to follow up on the questions regarding television, in particular. We've heard a lot of stories about core cutting in the total market. However, when we look at the multicultural marketplace, it's a lot less of a factor. So as we look into 2018 with the upfront season coming up, wondering what guidance you can give in terms of the overall growth and just the overall interest in a niche and definitely, highly focused network in TV One core, for not only African-Americans, but for all consumers that like this particular type of programming?

[Alfred Liggins:]

Yes, our position - core cutting is definitely affecting the larger fully distributed networks that have been around a long times, reason ESPN is getting hit pretty hard. Also those networks happen to be the expense drivers on these bundles too. We have been a mid-pack network and have actually been getting - gaining subs from our distributors. So we have - we've been affected by churn, but we've been adding subs from these deals. So we haven't really seen it - that end of it impact our rating - excuse me, impact our subscribers at a significant level. I think with the additional subs, we've gotten committed to, I think, we're able to get to probably the mid-60s in terms of total subs. We don't have dish. We've been talking to them, we continue to talk to them. If we were able to get dish, we would probably push close to 70. But then I think that's kind of the top-end for TV One. Now, BET, when it got sold to Viacom for $3 billion, had 60 million subscribers. So you can be a successful African-American network at the level that we're at now. They were the only game in town at the time, there's a lot more competition now. I think that other networks have discovered the ferocious viewing habits of African-Americans and are programming to them whether it's a show here or there or a night here and there or multiple nights. Oprah's network has basically turned into an African-American focused network, over 50% of that network is black. So there is significant interest in more content. However, the fact of the matter is there is, call it, 40 million African-Americans in the U.S. This is not an ever-expanding pie. So at some point in time, you're going to hit saturation and then people will have to reevaluate their strategies and how much money and how much programming real estate they want to put into to chasing this demographic. We're going to continue our strategy, our strategy isn't changing. And so we'll see how that ultimately plays out. As far as the landscape for kind of subscription services, OTT services for black folks going forward, there really isn't anybody in the market in a big way doing this yet. There's people talking about it, Bob Johnson has got a movie channel, which has got very few subscribers. My understanding, Netflix actually does not really have a big African-American strategy. I hear that they are thinking about expanding more into this vertical. I don't have a crystal ball to tell you what's going to happen in 2018, 2019, but I do believe this demographic is going to continue to become more and more important to advertisers. I think the love affair that people have with black television content currently is going to end up having a day of reckoning as more content hits and you hit a saturation point, and then people are going to end up having to rethink their strategies because everybody can't get the same viewer. Black people can't watch all televisions for the entire country. And ultimately, what that really says is there is going to be a shakeout or there needs to be a shakeout in a number of channels that there are. I think there's too many channels, period, in the ecosystem. And I think that a lot of these channels that don't really have a position or a reason for being, ultimately, end up going away over time. So for what it's worth, that's my sort of limited view on the future. Around here, we're kind of - the future for us is 2017 and how we're going to get to the end and make good on the claims that we've stated already. You there?

[Adam Jacobson:]

Okay, great. And I dialed in late on the call so I'm just wondering if you can just identify yourself so I get everything correct.

[Alfred Liggins:]

I'm sorry, I didn't - my name, I'm Alfred Liggins, I'm the CEO.

[Adam Jacobson:]

I just wanted to make sure.

[Operator:]

At this time, there are no further questions. [Operator Instructions] And at this time, Mr. Liggins, there are no questions.

[Alfred Liggins:]

Thank you, operator. and thank you, everybody, and we'll talk to you next quarter.

[Operator:]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.