Urban One, Inc.
Q3 2014 Earnings Call Transcript

Published: 12 Nov 2014

[Operator:]

Good morning, ladies and gentlemen. I've been asked to begin today's Conference Call with the following statement. During this 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 and 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 September 30, 2014. 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 November 12, 2014, until November 14, 2014. Callers may access the replay by dialing 800-475-6701, international callers may dial direct at 320-365-3844, the replay access code is 337345. Access to live audio and a replay of the conference call will also be available on Radio One's corporate website at www.radio-one.com. The replay will be available on the website for seven days after the call. No other recordings or copies of this call are authorized or maybe relied upon. I will now turn the call over to Alfred C. Liggins, Chief Executive Officer of Radio One, who is joined by Peter D. Thompson, Chief Financial Officer. Mr. Liggins?

[Alfred C. Liggins:]

Thank you operator, and welcome everybody to our third quarter results conference call. Earnings are out, you've seen the press release in my quote, we've guided in radio for some time now to a very tough quarter. We'd say we are going to be down or we are pacing down high singles we came in minus eight which is actually better than we have been pacing throughout the last three months. And there is was a confluence of events there it's kind of like a perfect storm as I said in the quote, with significantly down markets in a couple of our biggest markets like Atlanta and Washington and Baltimore, but also soft ratings and then also in Houston which was a flat market that we have taken a format competitor in January. And so the good news is that we are rebounding strongly in Q4, pacing’s are at minus 1.09 yesterday have improved to minus 1.06. But also we have done some significant programming things to change our trajectory most notably a change of format of our new station in Houston. We've taken that station all news three years ago in November and while it was valiant effort and we tried it hard and we think we put all of the right class A resources against that, we just couldn't get any real significant ratings traction and that's also kind of the history of these all news FMs in New York, in Philadelphia and Chicago, Atlanta, Washington a great idea, but in practice it really hasn’t proven out to be a winner and we are losing about a $1.5 million a year on that and so switch through music format, a classic hip-hop format and wipe out those losses in the music format and the early returns on it are actually substantial. Earlier this week we’ve got our first full week of ratings for the classic hip hop station called Boom. And a week before we were doing about a 1.09 share, 12 plus with odd news and the first four week of Boom we had a fore share in a rank that's I think 6.25 to 6.54 so I think that we are going to see a substantial immediate turnaround in Houston and ratings are starting to improve and pacings are improving prices like Atlanta. But there are other bright spots in the company that during Q3, the rest of the portfolio is pacing up plus 1.5 and in markets like Detroit and Charlotte and now Philadelphia as well, we think will help offset some of the softness in the Washington and Baltimore. So we feel good that we bottomed out and we are coming out of this [trough] and Peter is going to go on to some detail and then we are going to talk a little bit more about TV One and Interactive One and where we are at with those two businesses. Peter?

[Peter Thompson:]

Net revenue was approximately a $112.2 million for the quarter ended September 30, 2014, a decrease of 5.3% year-to-year. The decrease is primarily a result of lower advertising sales revenues for the radio division including Reach Media. We recognized approximately $39.5 million of net revenue from the cable television segment in second and third quarter, an increase of 4.5% over Q3 2013. TV One affiliate revenue was up 6% from prior year while advertising revenue was up 2% from prior year. Net revenue for the internet division decreased by 4.9% year-to-year although some nice expense savings that offset that and actually made the more profitable in the third quarter. Our Charlotte, Dallas and Detroit clusters have the most significant revenue growth in the third quarter. Our revenue declines will concentrated in our four big clusters. Three of our four largest clusters saw speed declines in market revenue. According to Miller Kaplan, the Atlanta market was down 10.4% for the quarter, the Washington DC market was down 7.1% and the Baltimore market was down 4.1% year-over-year. Those week markets coupled with some rating challenges in those three markets that drove 70% of our net revenue decline and while there is no single reason for the market softness we looked in detail and we’ve made some changes to some sales and programming elements to address the ratings that Alfred was alluding to. I guess most notably our largest cluster in Houston had a 15% decline due to the competitor that we picked up this year. The format changed from news to classic hip hop is already seeing promising initial ratings as Alfred just reported. Along with an increase in revenue a lower operating cost on the Boom format will yield significantly higher EBITDA going forward than we were previously driving from the news format which was loss making. The third quarter local revenue was down 12.7% and national was down 7%, political revenue was approximately $507,000 mainly from our clusters in Michigan and North Carolina and this was a decrease from approximately 584,000 generated in the third quarter of 2010 the last midterm election year and it was also significantly less sequentially, we took $900,000 of political revenue in the second quarter of this year. Our full year political revenue probably be is like to be around $4.5 million and as Alfred also mentioned today’s pacings for the fourth quarter are minus 1.6%. October was flat, November is currently pacing minus 5 and December is pacing plus 1.6. Cable subscribers as measured by Nielsel finished the quarter at 56.4 million compared to 57.1 million at the end of September last year. TV One currently has 50.8 million billable subscribers. Operating expenses excluding depreciation and amortization impairments and stock based compensation increased slightly to, approximately $83.4 million in Q3 from approximately $83.3 million in the same quarter in 2013. Expenses were generally well controlled with reductions Reach Media and our online division. Operating expenses in the Radio division increased by 1.4%. For the third quarter consolidated station operating income was approximately $38.6 million down 13.8% from last year. Adjusted consolidated EBITDA was $28.8 million a decrease of approximately 18.0% year-to-year. Interest expense was approximately $19.4 million for the third quarter down from approximately $22.3 million from the same period last year. Decrease in interest expense is primarily due to the lower interest rate associated with the 9.25% senior subordinated notes due 2020. Company made cash interest payments of approximately $26.3 million in the quarter. Net loss was approximately $13.2 million or $0.28 per share compared to a net loss of approximately $13.2 million for the same period in 2013. For the third quarter capital expenditures were approximately $1.3 million which is the same as Q3 of 2013. Q3 cash taxes paid were approximately $117,000. Company received dividends from TV One in the amount of $8.9 million in the third quarter and there were no share repurchases during the quarter. Company’s cash and cash equivalence by segment are as follows, radio and internet approximately $32.7 million, Reach media approximately $3.4 million and cable television approximately $19 million. In addition to cash and cash equivalence the cable television segment also have short term investments of approximately $2.1 million and long term investments of approximately $803,000. As of September 30, 2014 Radio One has total debt net of cash balances of approximately $765.8 million, for bank covenant purposes our total net debt was approximately $670.5 million and our LTM bank EBITDA was approximately $89.5 million giving a total leverage ratio of approximately 7.49 times and a senior leverage ratio of approximately 3.75 times. And with that I will hand it back to Alfred.

[Alfred C. Liggins:]

Thank you, Peter. So the Radio division we do believe is rebounding. Reach Media also had a tough Q3 and they are rebounding in Q4 as well. They are set up very nicely for 2015 to have substantial EBITDA increase because we've put in place contractual cost reduction that are very, very significant also centering around some of our big talent contracts there. TV One is fairing quite nicely particularly given the headwinds that are in the cable network industry right now. It was the first negative upfront in quite some time, TV One ended up with the upfront minus low-single digits, minus 2, minus 3, but up plus 1 in CPMs which we thought was a very good performance given the headwinds in the industry. Also what's happening in the cable industry and you've heard it from Discovery, and you've heard NBC, Universal and Time Warner as well that ratings are down and they are down significantly. I think that's not all organtic audience loss, Nielsen hasn't figured out a way to accurately track a lot of the viewership that's happening on mobile devices yet, so I think that's part of the problem. But the good news for TB1 is that we are not down anywhere near as much as our competitors. The big incumbent networks turn to be taking it more on the chin. And so as an example, year-to-date total day household ratings for TB1 are flat year-to-year at about 0.18. And in demo, 25 to 54 demo were down slightly at minus 8% and that's a great performance given some of the big double digit numbers that occurred from some of the larger networks. And also from a sequential standpoint our Q3 2014 ratings at TV One versus Q2 2014 for total day are up 9% in household and plus 14% in demo. So we're pretty happy with their performance this year. They are tracking to get pretty close to their budget that we set for them for 2014. Distribution deals, again moving along quite nicely. We have signed extensions with charter and Cox to give us more time to get those long form of renewals in place. So we just signed six month extension so just to give us some more breathing room in order to get the right deals with those two operators. Given that we are in the process of trying to get larger deals done. Comcast our largest -- will be our largest distributor once they complete the Time Warner merger. It is basically done but not signed and the reason it's not signed yet it's pending our ongoing conversations with Comcast about a buyout of TV One and we've got Jump Ball that comes at the end of 2014. So we have ongoing discussions with them that we are in the middle of now about a buyout for or not a buyout and we expect that those discussions will be concluded soon and we will know what we are doing and either way we will end up signing the new distribution deal which we are quite happy with. And we also in discussions with AT&T and Time Warner about renewals even though Comcast will take over Time Warners, where we still have to deal with that fact that their current deal is up at the end of 2014. Interactive One while the revenues were down mid-single digit in Q3, their profitability was up substantially in Q3 and they are on track to make considerably more money in 2014 than they did in 2013. So we are happy about that as well. So with that operator, I would like to turn it back over to you and start taking questions from those on the conference line.

[Operator:]

Certainly. (Operator Instructions). And we will first go to the line of Aaron Watts with Deutsche Bank. Your line is open.

[Aaron Watts:]

Got a few. Alfred, I guess when I think about the minus 8% transfer radio in the third quarter moving to kind of down around 2% pacing for the fourth quarter and you feeling good about things heading into 2015, what would you say are the biggest drivers of that? Is that your market that you said were weak?

[Peter Thompson:]

Yes, so Atlanta and Washington were down high singles, I think which one was down 10? Atlanta and so there are handful of big markets I mean one of the things that you see is, you seen radio companies reporting quite frankly not so bad kind of flattish, kind of Q3 and not so bad Q4 pacing and I think the big markets are get hit harder than the middle to the smaller markets, [Cumulous] reported that the biggest driver of their down performance was New York and Washington DC and Atlanta I know as I guess said market is down 10, I just ultimately don’t see that persisting forever I mean we’ve been in Atlanta for a very long time in Washington and you don’t see minus double digit number like that or even high singles unless it was something like the recession and people ultimately tend to place their dollars the majority of their dollars in the larger market. So, I think the backdrop for me is that the industry isn’t falling apart, I’ve always said this is a flat industry and these handful of big markets that we’re in are haven’t a tough way to go. Now, Houston and I think Dallas too, but Houston is like was flat in Q3, is that correct?

[Alfred C. Liggins:]

It was plus 0.9% is a market so it’s essentially flat.

[Peter Thompson:]

Okay, so essentially flat and they are top 10 market is well right. So I’ve never been able to figure out why markets specifically are up and down but I just don’t see a persisting over the long term. Now even with that we underperformed those down markets so I think that we’re doing things to change that performance, but I’m feeling better about it because one, I think that we’re going to have a big win in Houston and really the biggest driver of our down performance was Houston by far, we’ve lost millions of dollars of cash flow there, we’re fixing that. And we’re going to have a big win there and so I think we got enough upside in other places like Detroit and Philadelphia and Charlotte, we also -- I didn’t mentioned this we just also want to start classic hip hop format in Philadelphia last Friday and Philadelphia is actually starting to pace in the right direction for the company and that’s before we’ve launched this new format which I think is also going to get some traction there as well and then Reach Media, as I explained earlier is going to rebound big going into 2015. So, I’m not good at predicting the future, but I had to bet, I don’t see Atlanta being down another 10% next year and all of these other things that we’ve got going in the Radio business I think are going to help us so that’s why feel good about it.

[Aaron Watts:]

Alright and I guess I know you said it’s always hard to read too far into this but if you have to take a stab at why these big markets specifically are hurting, do you think it’s certain verticals like auto moving away for right now is it traditional media dollars weakening --?

[Peter Thompson:]

If I have to take a stab at it I think its money moving to digital or other platforms. But I don’t know for sure and I think if you’re going to spend more money in digital and you’re probably going to focus on making those shifts in the larger markets first before you get to some place like Charlotte, so if you’re going to take a stab at a digital campaign we probably do it in a New York and Atlanta. But you’d also do it in Houston and that’s not down anywhere near like Atlanta and Washington and New York or so, that’s what I think but I have no clue whatsoever. And it could just as easily rebound next year.

[Aaron Watts:]

Alright.

[Peter Thompson:]

How about this -- other thing so I asked I was meeting with the CEO of Group M yesterday one of the largest buying agencies in the country and we’re talking about the cable up front and I said look, how much did you think there is up front being down is a shift to digit because that’s been a big conversation and it’s still is it really going to digital video and other digital? He says, you know what, I think it’s a little bit of it. But I don’t think that really is the vast majority of the driver I think people are just being more cautious about sitting on the sideline and where they’re putting their money, they don’t have perfect information either because even though they’ve got a sweet of clients, those clients have other relationships with other agencies and even they are not under the hood with how those clients are allocating their budgets or if those clients have extra money still sitting on the sideline and waiting, but it makes me feel better about this whole idea of the shift to digital and maybe it's just sort of the luck of the draw, it has never happened in the history me running this company where we have all four of our big markets take this kind of hit at one time. And so that's why I believe it's an anomaly.

[Aaron Watts:]

That's helpful color. Now just as we think about going forward and modeling, Houston sounds like you may have a bit of a faster turnaround maybe for you what's the realistic timeframe if you are seeing improved ratings with some of the changes you've made for your company. Specifically, when do you think we start to see a turnaround in the revenues?

[Alfred C. Liggins:]

Houston is pacing positive for Q1 right now. So we are seeing -- now that's not just Boom right, our other two stations were doing better. Boom has helped it and we are going to eliminate -- Boom is going to accelerate it. But I think if you are going to start to see that turnaround come through in Q1.

[Aaron Watts:]

Okay. Is it fair to assume that because the biggest markets for you are a little weaker that, we should think about margins being hit a little bit over the next couple of quarters in the radio business?

[Alfred C. Liggins:]

No. I mean I don't think -- I don't know that Atlanta is going to be weak in Q1 2015. I don't know that Washington is and I feel like Houston is going to be better, Deteroit is going to be better, Philadelphia is going to be better, Charlotte is going to be better. So -- and we are going to keep a tight range on expenses, so I wouldn't make that assumption at all.

[Aaron Watts:]

Okay, last one from me I appreciate you taking all these. Just you commented about kind of the Jump Ball coming up with Comcast for TV One. As we think about kind of broad strokes how that might happen if that was -- if you were to reach an agreement with your leverage at 7.5 times now, how should we think about financing that and how it fits in with the rest of the group?

[Alfred C. Liggins:]

We are looking at that now, we are looking at financing alternatives as we speak. So I don’t want to go into specifics right now because there a number of ways that we could finance and obviously it all depends on price. Put it this way, if we don't come to terms on price, then we will just stay partners. Comcast is not a buyer today given they’re in the middle of big regulatory transaction as it is. So we either are going to come to a price that we can finance and both parties still is fair we are going to stay partners. And once we know which way we are going to go, then we will focus on our capital structure. And again this is all real time.

[Operator:]

Thank you. Our next question comes from the line of Lance Vitanza with CRT Capital Group. Your line is open.

[Lance Vitanza:]

Hi, guys. I guess I had two sort of follow ups to Aaron's questions. The first on sort of the weakness that you saw in your key markets. Just to be clear, can you give us some sense for what the overall across the spectrum of media what advertising was like in those markets. I mean I assume that it was down a lot less than the down 10 in Atlanta, down 7 in D.C. and so forth, but do we know that yet?

[Alfred C. Liggins:]

I don't understand the question.

[Lance Vitanza:]

I guess the question -- I'm trying to confirm whether or not advertising dollars moved away from radio or to the extent to which that happened?

[Alfred C. Liggins:]

So I thought that was it. I have no idea. I mean I'd have to deeper digging to see how radio, I mean excuse me, television fared and the other medium's but we haven't done that research yet.

[Lance Vitanza:]

Okay, I mean is there anything about the economies in those regions that would lead you to conclude that advertising would be a little bit softer? I wouldn't think so necessarily.

[Alfred C. Liggins:]

There’s crane everywhere in Washington D.C. I mean it's [indiscernible]. Again, you got Washington, Atlanta and New York that have been hit hard. I mean three very different places. So I don't know.

[Lance Vitanza:]

Okay, and then I guess with respect to TV One, I mean I think we all appreciate the intrinsic value there, but given the stock price not reflecting real value of the Company right now, given the leverage, it seems like to your point, it seems like maybe the best outcome at this time might be to just stay as partners and then revisit this when you've got some wind in your sales and a better currency to use, is that fair?

[Alfred C. Liggins:]

You know what? That could very well be the outcome and we'll see. I mean clearly with the stock price at this level, we're not going to sell common equity to do it but again, there are a number of ways to finance this and there are a number of ways to raise equity in doing it. It doesn't all have to be done with the current publicly traded Radio One common equity. So we're exploring all of those options now.

[Lance Vitanza:]

I think my last question would just be on the non-core side. If you could give us any update on the casino project?

[Alfred C. Liggins:]

They broke ground. They are building it and we still haven't put in our additional $5 million. We're waiting for the State of Maryland to determine whether or not they believe that we have to become licensed as part of that investment and when they let us know what that outcome is, then it will dictate what the timing of that initial investment is.

[Lance Vitanza:]

Just to be clear though if you do need to become licensed that doesn't present more than just a timing issue for you guys?

[Peter Thompson:]

Correct. As far as we know.

[Alfred C. Liggins:]

I was about to say, I'm not so sure what in my background that they might find offensive. They might find something but it certainly won't involve any sort of prior conviction of a felony.

[Lance Vitanza:]

Okay, all right. Thanks guys.

[Operator:]

Thank you. (Operator Instructions) And we’ll go to the line of David Farber with Credit Suisse. Your line is open.

[David Farber:]

Good morning, how are you guys.

[Alfred C. Liggins:]

Good and you?

[David Farber:]

Good, thank you. Number of my questions have already been asked but just a couple of follow ups. I was just curious if you are maybe somewhat quantitatively if you would, some of the things I think you were speaking about in your prepared remarks on the cost side is there anything you guys have been doing or thinking of doing as revenue has been of little bit muted obviously into the next 12 to 18 months, any thoughts you could share there and then couple of follow ups.

[Alfred C. Liggins:]

Yes, absolutely I mean we got an eye on cost and cost levels and I think we’ve always done a really good job of managing our cost and being draconian and when we needed to be draconian and we’re going through that process as we speak so.

[Peter Thompson:]

Yes, it is uppermost and at the most.

[David Farber:]

Is there any sort of dollar amount you guys would be willing to share or help us to understand what the magnitude could be?

[Alfred C. Liggins:]

No, not at this point in time.

[David Farber:]

Understood, okay and then just on the Comcast issue with respect to TV One. Anything directionally in terms of renewals or additional thoughts there on how you see that business playing out over the next --?

[Alfred C. Liggins:]

Yes, I said earlier we’re all but -- we’re done with the negotiation for the Comcast renewal and it just hasn’t been signed and it’s sitting waiting to be signed pending the outcome of our Jump Ball to all discussion. And we’re very happy with it, it’s a long term deal we’re happy with, our rates, were happy with the distribution commitment and we’ll -- there is going to be -- when we do announces it, there will be some parameters around what we can say about it because these agreements are confidential but I’m sure that if we’re buying them out we’re going to have to say something more specific about it, because it would be wrapped into our financing. If we’re not buying them out, we probably -- we’ll just give more general high level stuff.

[David Farber:]

Okay, that’s helpful and then just lastly to the extent that you guys clarity at the end of the year on TV One, does that present some financing alternatives away from TV One in terms of the restricted group do you think about that going to happen either ways? How do you think about some of the reprising options that could be with the company over the next year or so and as TV One needs to happen one way or the other for you guys consider that in terms of either the bank or TV One debt outstanding, things like that? Thanks.

[Peter Thompson:]

I think it’s a great question. I think we can bifurcate and obviously we need to, in the not to distance future we’re going to need to refinance out the Radio One firstly and so we can’t now thinking about that independent of the acquisition of TV One. So, we’re looking at paths which leave TV One where it is as an unrestricted sub and there is a couple of ways we think that can be done and then we’re looking at path which brings it in to the restricted group and deals with it that way. So I think at the moment all options are on the table and it’s a kind of real time discussion we’re having with our advisors, but obviously we’re mindful of covenant compliance, the revolver facility that we have comes due in the March next year. So, we really in the pretty near future I want to get that refinancing risk kind of taken off the table.

[Alfred C. Liggins:]

Yes, this was taken up 90% of Peter and mine’s time right this second. It’s like all we’re are focused on.

[David Farber:]

Got it, okay, that’s helpful, appreciate the thought, that’s it for me thanks.

[Operator:]

Thank you. (Operator Instructions) And we will go to the line of [indiscernible] with Federated Investors, your line is open.

[Unidentified Analyst:]

Hey guys I’ve got one covenant related question. Can you remind us what the bank leverage covenants are to maintenance covenants and when they’d be stepping down and how you feel about that with recent third quarter and even the negative pacing going into the fourth quarter? Thanks.

[Alfred C. Liggins:]

Great question -- and I obviously highly focused on that so we got set downs coming up we’re currently total leverage covenant at the moment is 8 times in Q4, steps down by half a turn, 7.5 and then as a full turn to step down in Q1 of next year and that’s really a legacy to -- in fact we bought ourselves a couple of years relief and that's coming to an end. So we got these pretty aggressive step downs that were part of the original credit agreement. So in Q1 6.5 times is going to be the benchmark. And that's pretty hefty step down. So we have a path to remain in compliance obviously. So it doe involve some cost cuts and it involves probably being -- probably taking more dividend out of TV One. So there are various levers that we have, that will help us remain in compliance. Then looking ahead through the next -- through the end of next year, the next big step down we’re looking at is total leverage going to 6 times in the fourth quarter 2015. I think it's safe to say we would have refinanced out by that point, but we are projecting out and showing various ways in which we will remain compliant with those step downs in the future.

[Operator:]

And at this time, I am showing now further questions. Please continue.

[Alfred C. Liggins:]

Thank you Operator and thank you folks as usual. Peter and I are available offline to answer any additional questions. Thank you.

[Operator:]

And ladies and gentlemen that does concludes your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.