Urban One, Inc.
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Urban One’s Year-End Conference Call. I’ve been asked to begin the call with the following safe harbor statement. During this call, Urban One may share with you certain projections or forward-looking statements regarding future events or its future performance. The company cautions that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs and other reports periodically filed at 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 6, 2019. 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.urban1.com. An audio replay of this conference call will also be available from on Urban One’s corporate website at www.urban1.com, i.e. in the Investor Relations section of the web page. The replay will be made available on the website for seven days after the call. No other recordings or copies of this call are authorized or may be relied upon. I’ll now turn the conference over to Alfred C. Liggins, Chief Executive Officer of Urban One, who is joined by Peter D. Thompson, Chief Financial Officer. Please go ahead.

[Alfred Liggins:]

Thank you, operator, and welcome to our year-end fourth quarter results conference call. I’ve got a number of other people here with us today, Jody Drewer, the Chief Financial Officer of TV One; also Karen Wishart, who is the Chief Administrative Officer; and Kris Simpson, who is our Deputy General Counsel. Very happy with the quarter’s results and the year- end results. We had guided that we were going to come within the $140-ish million range of EBITDA, we were able to do that. I think generally, expected was that Q4 was going to be a very good quarter for political, people knew that. We actually have ended up having a much better quarter on our radio business than, I think, most people thought, really proud of the radio guys. Also, there was a rebound in TV One ad revenue as well. I’m going to talk a little bit about the trends at TV One, but the ratings are stabilizing, going in the right direction and that started with their ad revenue in Q4. And so, generally, very pleased. I’ll give an update on National Harbor as well. I’m going to turn it over to Peter and let him get into the details of the numbers.

[Peter Thompson:]

Thank you, Alfred. Net revenue was up 4.1% for the quarter ended December 31, 2018 at approximately $113.5 million. The breakout revenue by source can be found on Page 5 of the press release and a breakout by segment can be found on Page 7. Radio segment net revenue was up 16.5% in the fourth quarter. The markets in which we operate were up by 2.1% for the quarter. And 10 of our clusters outperformed their respective markets, according to Miller Kaplan. Net political revenue in the Radio segment was $4.1 million compared to $800,000 last year. Advertising sales were up in all categories, except for retail and food and beverage. Also, the government, public sector and the automotive sector saw the most significant growth in the quarter and auto was up 22%. For Q1, our radio stations are currently pacing down mid-single digits. There are two material nonrecurring campaigns for Walmart and for MetroPCS in the first quarter of the previous year and that accounts for about $1.8 million, which represents a 4% decline. Excluding these two accounts or normalizing for these two accounts, Q1 is pacing slightly up year-over-year and Q2 is pacing up high single digits. Net revenue for Reach Media was down by 5.9% for the fourth quarter. Expense savings primarily from contractual talent compensation and from staff reductions resulted in adjusted EBITDA growth in the quarter of approximately $0.5 million. Net revenue for our digital segment decreased by 21.9% in fourth quarter, driven by lower direct sales at iOne digital due to decreased advertising demand in the digital publishing market generally and client attrition among other factors. We’ve since realigned our digital sales strategy to focus on higher CPM premium direct sales, which will allow us to reduce traffic acquisition costs significantly. We recognized approximately $45.9 million of revenue from our cable television segment during the quarter, an increase of 1.6%. Cable TV advertising revenue was up 9.3%, driven by conversion of promotional time to commercial time and a shift in inventory mix to include more direct response business. Cable TV affiliate revenue was down by 2% driven by a 5% increase in rate, offset by a 7% decrease in paying subs. Cable subscribers, as measured by Nielsen, finished fourth quarter 2018 at $57.7 million, which is unchanged from the end of the third quarter. We recorded approximately $1.9 million of cost method income for our investment in the MGM National Harbor property for the quarter and $7.0 million for the year, which is equal to 1% of the net gaming revenue reported to the State of Maryland. This is an increase of 19.8% from the fourth quarter of 2017. Operating expenses, excluding depreciation, amortization, impairments and stock-based compensation, increased by 3.6% to approximately $80.0 million in fourth quarter. Operating expenses included a noncash credit adjustment of $1.4 million to the CEO’s Employment Agreement Award, which is excluded from adjusted EBITDA. Radio operating expenses were up 12.9%. The increase in the radio SG&A expense line is driven primarily by revenue-related costs, such as sales incentive compensation and event expenses. Radio programming and technical expenses were up due to investments in on-air talent in certain markets. Reach programming and technical expenses were down by $1 million, driven by savings in talent and staff compensation. Reach SG&A expenses were also down due to lower event expenses. Corporate SG&A expenses at Reach were up due to the staff bonus accrual. Operating expenses in the digital segment were down by 5% with lower cost of revenues and operating expense savings. Cable TV expenses were up by 20.3% year-over-year. The program and technical expenses were up due to higher content amortization compared to a favorable true up in the fourth quarter of 2017. SG&A expenses were up due to the timing of certain marketing campaigns and also corporate expenses were up due to the staff bonus accrual, which was not paid in 2017, but will be paid in respect to 2018. Corporate SG&A expenses were down due to a noncash favorable variance of $6 million for the CEO’s Employment Agreement Award. Normalizing for this and other adjusted EBITDA add backs, corporate SG&A expenses were actually up by $2.4 million, which was driven by the corporate bonus accrual, which did not occur in 2017. That was partially offset by lower salary expenses as a result of ongoing cost saving efforts. For the fourth quarter, consolidated broadcast and digital operating income was approximately $44.6 million, up 0.5% from $44.3 million in 2017. Consolidated adjusted EBITDA was $35.3 million, a decrease of 8.8% year-to-year. Interest expense was approximately $19.2 million for the fourth quarter compared to approximately $19.3 million for the same period 2017. The company made cash interest payments of approximately $27.1 million in the quarter. The company closed on a new $192 million unsecured credit facility and a new $50 million loan secured by its interest in the MGM National Harbor property. Those funds along with cash from the balance sheet were used to repurchase $243 million of our 2020 notes and also to pay down $20 million of our 2017 credit facility. In total, the company reduced debt by $54.4 million in 2018. Another $24.4 million of principal paydowns will be made by the end of the first quarter 2019. And we anticipate paying down a minimum of approximately $40 million of debt principle in 2019. The company recorded a noncash benefit for income taxes of approximately $127.8 million in the quarter and received a net cash tax refund in the amount of approximately 101 – 131, pardon me, $131,000 in the quarter. The large benefit – noncash benefit relates to the release of valuation allowance and provisions that we had made related to our net operating losses. Net income was approximately $116.9 million or $2.62 per share compared to approximately $121.3 million or $2.63 per share for the fourth quarter 2017. The fourth quarter capital expenditures were approximately $709,000 compared to $2.9 million in CapEx in the fourth quarter 2017. The company repurchased 914,086 shares of Class D common stock in the amount of approximately $2 million. Company also executed a stock vest tax repurchase of 13,162 shares of Class D common stock in the amount of approximately $13,162 shares of Class D common stock in the amount of approximately $27,000 to satisfy employee tax obligations in connection with the 2009 Stock Plan. For covenant purposes, pro forma LTM EBITDA was approximately $140.1 million. Net senior leverage was 4.73 times against a covenant of 5.85 times. Net debt was approximately $914.6 million compared $140.6 million of reported adjusted EBITDA for a total net leverage ratio of 6.50 times. And with that, I’ll hand back to Alfred.

[Alfred Liggins:]

Thank you, Peter. And as was announced before, and as Peter just mentioned, we did get our subordinated notes refinanced in Q4. It was not a pretty time because you guys all know what Q4 of 2018 was like in the financial markets, but we were fortunate to have The Carlyle Group leading that effort and standing behind the company to pull it all together in the face of a very, very, very turbulent market. And we’re super happy with it. The facility requires us, and we’re focused on to continue to pay down our debt and that’s where we feel that we create the most value for all stakeholders, and we’ve been focused on that for the last couple of years and remain committed to that. Part of that financing was using our investment in MGM National Harbor, which has turned out to be a great deal for us. It continues to do well. Gaming revenue in 2018 was up nicely to approximately $700 million, netting the company about $7 million in distributions. But even more importantly, the 2018 EBITDA, according to public disclosures from MGM, is about $195 million, which is actually ahead of any numbers that we had when we were in the investment mode. And at the full maturity of our put, which will be five years from our initial investment, we got to put it about seven times on that and makes our investment there worth about $90 million. So we’re super happy with that. And gaming revenue in January and February of 2019 continued to grow at National Harbor, so very happy with that. TV One, as I said before, is also seeing rating stabilization and, actually, some growth in Q1. We’re two months into Q1 now. And unlike last year, most of our original premieres and our big tent-pole, the Image Awards, are coming in March. So we still got another month of more programming momentum coming. Ad sales was up nicely in Q4. We estimate delivery in Q1 to be up low single digits and ad sales in Q1 to be up similarly. We also launched our new millennial women of color lifestyle network, CLEO in January. We’re currently carried on Comcast and Charter. We’re having serious discussions with the other major distributors at the present time and are getting positive feedback. Jody Drewer, who’s Chief Financial Officer of TV One, is here to answer any specific questions that folks might have about that particular division. With that operator, I’d like to go to Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Michael Kupinski with Noble Capital Markets. Please go ahead.

[Michael Kupinski:]

Thank you and thanks for taking the questions. I know on the last quarter, you indicated that radio pacings were up 20% and 10% ex political. So it’s amazing that you came in really close to those numbers. Can you just talk a little bit how the stations performed in December, which was outside of the political influence?

[Alfred Liggins:]

Peter is opening his book now.

[Michael Kupinski:]

Yes.

[Alfred Liggins:]

Bear with us for a minute.

[Michael Kupinski:]

Yes. No problem. And while you might be looking that up, can I ask just another quick question?

[Alfred Liggins:]

Sure.

[Michael Kupinski:]

In terms of your Q2 guide or pacing information, I suppose that’s the way to look at it, did that – was that excluding the Walmart and MetroPCS, or was that including it?

[Alfred Liggins:]

Those accounts were in – weren’t in Q2. So they weren’t – they are not relevant to that pacing at all.

[Michael Kupinski:]

Got you. And then how significant was Houston to your entire group in the quarter? Is that still performing really well?

[Alfred Liggins:]

Houston had a pretty good year last year. It’s softer in Q1, and I don’t remember off the top of my head where it is individually in Q1, but it’s softer in Q1 than it was last year, kind of digging into that to see what’s happening. The ratings position is actually pretty good. Our ratings position has been improving there, so one of the markets that actually is rebounding big in Q1. Last year, Atlanta was a gigantic drag on the company. I mean, it’s – I’m always at a loss to explain why markets go up, down or sideways, but through June of last year, Atlanta as a market was down like 11%. And we’ve got a good ratings position. Now it improved in Q3 and Q4, but still – forgot the market ended up down 6 or 7 or something like that.

[Michael Kupinski:]

And I know you were having problems with Philly too, right, at one point…

[Alfred Liggins:]

Yes. Philly is a work in progress. But I just want to finish the point about Atlanta. In Q1, Atlanta is on fire. So hopefully, that market rebounds and, look, it’s a big market for us, Atlanta, Baltimore, Washington and Houston. So they have been slow. Washington and Atlanta are doing well for us. Baltimore is kind of treading water, it’s down, but it’s not abnormally down, and Houston is worse than we thought it was going to be. Your question about…

[Peter Thompson:]

December was up 1.5% roughly.

[Michael Kupinski:]

Got you. And then Alfred, I didn’t mean to over speak on your earlier comments, but on Philadelphia, I know that was underperforming. Is it – what’s going on in Philadelphia? Is it an economic issue? Is it some tweaking of performance that needs there or what…

[Peter Thompson:]

Yes. I mean it’s really for us a product issue. We’re subscale there. We’ve got one full market signal, two Class A stations that have lower power that sit in the middle of the city and we haven’t been able to get our ratings position and ratings traction in that market to build a big enough revenue base to produce any significant cash flow. We’ve been investing. We’ve got a new format that we launched, a classic R&B format. We launched it in December, R&B of the 1970s and 1980s, that improve – and we got out of an inspirational format there. So we’re hopeful that we’re going to get some ratings traction there. Our ratings are up. They are on that station modestly. But Philadelphia is – continues to be a work in progress. And quite frankly, it’s one of the markets, I mean, for all practical purposes, we do no cash flow there. And so that’s a market if we can figure out how to improve our ratings position, that – it’s all upside. I mean, it’s a big market, but we have challenges there and have had it, but it’s one of the two – it’s probably the number one that we’re focused on. And there is a couple of others, Charlotte being one of them, where our ratings are pretty good, but we’re not converting like we should, but Philadelphia, it’s a top 10 market and we don’t have any cash flow there. It doesn’t make any sense, so.

[Michael Kupinski:]

Got you. Thank you. That’s all I have. Thanks.

[Operator:]

[Operator Instructions] Our next question will come from the line of Ben Briggs with INTL FCStone. Please go ahead.

[Ben Briggs:]

Good morning guys and thank you for taking the questions. Congratulations on launching the CLEO television station in January. I just wanted to kind of ask again, any question – any details there you can provide on the costs that’s going to cost to start that up? And are you still expecting it to be EBITDA neutral for the year as you mentioned that it would, I think on the last call? And I’ve got a couple of follow-ups after that.

[Alfred Liggins:]

Yes. That’s the game plan. Ad sales are coming in slower than we thought. If you look at CLEO and TV One as a combined P&L and so what did you say…

[Jody Drewer:]

That will be about new…

[Alfred Liggins:]

Yes. And I’m talking to Jody, the CFO. But the game plan is for it to still be EBITDA neutral. We’ve launched with some good original programming, but we also had a bunch of stuff either under license already from TV One that fit the CLEO demo that we weren’t actually using on TV One. We also have a library of lifestyle-oriented programming from TV One’s earlier days. So we’re going to manage that expense investment as we grow our distribution, but we got a pretty good product on the air right now. And we’ve gone out and we were able to pitch it to distributors. We can pitch it as, "Hey, this is live now. This is what – this is on the pitch tape." And I feel good about the response and the quality level, and it’s within the whole expense paradigm of it being EBITDA neutral for us for this year.

[Ben Briggs:]

Okay, all right. Thank you. That’s helpful. Any new shows coming to TV One in 2019 that we should be aware of that…

[Alfred Liggins:]

Yes. We actually are – our big programming bet this year that we announced just recently at TCA in Los Angeles is a nightly talk show with D.L. Hughley. D.L. Hughley is an African-American comedian, actor that we are in business with because we syndicate a radio show with him. He does Afternoon Drive in – on about 65 radio stations and it’s a nice business for us. We’ve been in business with him for probably four, five years now. And so we know him. He is a very talented guy. The show is done out of Los Angeles. So it kind of lends itself to be a starting point platform for a late night topical celebrity-driven type show and it is launching the week of the 18th – the week of March 18 at 11

[Ben Briggs:]

Okay. That’s great color. Thank you. And then the last one I have here is, a real bright spot this quarter was the political revenue that came in for the midterm elections. I know we’re early in the presidential election cycle, but I was curious if you maybe had anything to say on that, how’s that shaping up?

[Alfred Liggins:]

More people, we want more people in the race, yes. Look, 2018 was great. We have a unique position with our target. I think African-Americans are becoming more and more important. They’re going to be very important in the primary and then in the general. Our radio footprint also is uniquely positioned in a lot of battleground states. So we’re all over Ohio. We’re in the two largest markets in North Carolina. I didn’t expect Texas to be a battleground state, but it kind of was in that last Senate race. We’re in Pennsylvania. We’re in Richmond, Virginia, and Washington, D.C., which has Northern Virginia. So the more people that get into the race, the more important our audience is going to be. And 2020 is – I mean, it should be another juggernaut in terms of political spend. So I’m really – I feel good about the economy so far in 2019. Actually, feel pretty good about what I’m hearing from the other radio guys how their business is doing and what they’re reporting because you get through 2019 with positive economic momentum, and then for us going into 2020, which you know is going to be a big year political wise, we got some good runway the next couple of years. And then, for TV One, CLEO and some of our affiliate fees at TV One start to kick up in 2021, I think, we got this path to continue with our stabilized and growing EBITDA and debt pay down. So, I’m feeling really good right now.

[Ben Briggs:]

Okay. Okay. And then I’ll just sneak one last one in here. Any guidance you’re going to give for EBITDA for 2019 yet?

[Alfred Liggins:]

Not yet. It’s too early. We want to wait, given how much political we did, given we got a big bet on a new programming deal at – a new programming launch at TV One. We got some turnaround stuff like Philadelphia that is early and we’re waiting to see how our ratings are.

[Peter Thompson:]

And then Atlanta as well, same story, right.

[Alfred Liggins:]

Yes, I want – we’re going to hold back until we got more visibility before we speak to that. So it’s just – we’ve got a number of things in flux. However, we’ve got an internal plan, as we always do, to not disappoint the market’s expectations because I’m sure there is an expectation out there of what people think we’re going to do, and we know what that is and we got a plan for it.

[Ben Briggs:]

Okay. That’s all very helpful. That’s all I got. Thanks guys.

[Alfred Liggins:]

All right. Thank you.

[Operator:]

[Operator Instructions] And allowing a few moments, we have no further questions in queue.

[Alfred Liggins:]

Great. Thank you, operator and thank you everybody, for tuning into the call. We’re always available offline. We appreciate your continued support of the company, and we look forward talking to you again next quarter.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference. I want to thank you for your participation. You may now disconnect.