ACME Communications, Inc. F3Q08 (Quarter End 9/30/08) Earnings Call Transcript

ACME Communications, Inc. (ACME)

F3Q08 Earnings Call

November 13, 2008 5:00 pm ET

Executives

Thomas Allen – Chief Financial Officer, Executive Vice President & Director

Jamie Kellner – Chairman of the Board & Chief Executive Officer

Douglas Gealy – President, Chief Operating Officer & Director

Analysts

Michael Kupinski – Noble Financial

Unidentified Analyst

Presentation

Welcome to the ACME Communications third quarter 2008 teleconference. Copies of the earnings release have been sent to you for your information and reference on this call. If you have not received the earnings release, please call Brainerd Communications at 212-986-6667. If you become disconnect during today’s teleconference, please hang up and dial 973-582-2700 to be reconnected.

At this time all participants are in a listen only mode. We will also be conducting a question and answer session later on in the teleconference. (Operator Instructions) Before I turn the call over to ACME management I would like to note the company’s forward-looking disclaimer. Today’s call will include forward-looking statements in both the prepared comments and in the Q&A session that follows.

ACME cautions that these statements are subject to a number of uncertainties and actual results may differ materially. For a review of the factors that could cause ACME results to differ, please see the company’s earnings release from this afternoon. I’d now like to turn the conference over to Tom Allen, Chief Financial Officer of ACME.

Thomas Allen

Welcome everyone to ACME Communications third quarter 2008 earnings conference call. This afternoon’s call is being simulcast via our corporate website at www.ACMECommunications.com and will also be available for replay on both our website or by telephone as indicated in this afternoon’s release.

With me on our call today are my colleagues Jamie Kellner, Chairman and CEO of ACME and Doug Gealy, our President and COO. After we conclude our prepared remarks we’ll be happy to take your question. ACME issued its third quarter 2008 earnings results after the market closed this afternoon. Our net revenues for the quarter increased 5% on a 1% increase at our continuing six stations and a 67% increase in revenues at The Daily Buzz.

The station group increase was achieved despite a 7% decline in aggregate non-political revenues in our five markets as we grew revenue shares at each of our four largest end user market stations. Cash based station operating expenses for the quarter increased 4% on higher programming payments including our news in Dayton which was launched in August, 2007 and higher promotion expenses to support the early September launch of the CW’s new season schedule.

Cash based broadcast cash flow increased 24% from $517,000 for the third quarter of 2007 to $640,000 for the third quarter of 2008 and on significantly lower corporate expenses EBITDA grew from a -$260,000 in the third quarter of 2007 to $73,000 for the third quarter 2008. For the nine months EBTIDA was $289,000 compared to -$640,000 for the nine month period over 2007.

A couple of other notes on our third quarter results, in connection with our usual quarterly evaluation of program rights we incurred a $320,000 non-cash write down related to programs where we lowered our future revenue expectations. As previously noted corporate expense decreased significantly for Q3, down 28% from $804,000 in Q3 ’07 to $578,000 for Q3 ’08. The decrease reflects reduced executive compensation, insurance and professional fees and travel and entertainment.

We expect corporate overhead expenses will continue to decline following our recent delisting and SEC deregistration. Depreciation and amortization for the quarter was $690,000 compared to $836,000 for the third quarter of 2007 as we continue to reach full depreciation on older assets faster than we add new assets. Capital expenditures for our continuing station group for the third quarter was just $2,000 and for the nine months stand at just $59,000 compared to $1.8 million for the nine months of 2007.

We still expect that our capital expenditures for the full year will be in the $400,000 to $500,000 range with most of that related to the initial payments for the retuning of our digital signals in Knoxville and Dayton and the build out of our digital facilities at our Roswell satellite station. Our loss before income taxes from our discontinued operations for the quarter was $111,000 made up of minor facility costs related to the Decatur assets still held for sale.

We continued to be unborrowed under our revolving credit facility. Our overall cash balances for the quarter increased $51,000 to $532,000 at September 30, 2008 and we have built on that balance during the first 45 days of the fourth quarter. Given the current extremely difficult operating environment and the almost impossible task of predicting revenue flows, management has decided not to provide specific guidance for Q4.

We’re not alone in that decision. We are in the process of finalizing another round of cost cuts both at the corporate and our station level in the face of this adverse climate. One final note, as you all know we recently filed a Form 15 with the SEC to deregister our common stock and we are no longer required to file any quarterly or annual financial reports with the SEC. We will however, be posting those financial results and full financials on our website. The third quarter unaudited financial report will be posted by the end day tomorrow.

I’m going to turn it over to Doug now for more detailed comments on our third quarter results and our outlook for the rest of the year.

Douglas Gealy

Our station group results; station group third quarter revenue increased 1%. Our third quarter local national revenue split was 52% local, 38% national reflecting the political spend on the national side. The local revenue for the quarter was down 5% while national was up 11% again, driven by political. The quarter was positively impacted at our stations with $410,000 in political.

Ex political, our stations are down 3% due to the softness across several key advertising categories, in particular automotive which is down 24% during the quarter. Third quarter station and market revenue performance, our aggregate markets are down 7% excluding political and up 10.7% if you include political. Our regular business is up 4% for the quarter. The total market political dollars for the quarter was $18.6 million.

On a category basis, automotive domestic was down 31%, [inaudible] was down 25%, local was down 15% for again, a total decrease of 24% with automotive. Retail was up 15%, soft drinks down 32%, fast food down 13%, movies down [59%]. Again, we had [more than] $10,000 in political at our stations this quarter.

Corporate expenditures were up 17%, schools and education plus 37%, telecommunications plus 30%, banking was up 10% and Internet spot was 333%. Fourth quarter pacings, we finished October plus 9.4%, November is currently pacing down 13.8%, December is pacing down 14.7% for total quarter pace of 4.7% as of today.

In November sweeps, some good news on the CW front finally. The prime is performing better than last year in sweeps to date with the exception of Fridays where we lost wrestling. The Daily Buzz national ratings continue to grow in all key demographics and our most recent [NSF] Nielsen Report, The Daily Buzz is up 30% in adults 18 to 34 versus last year and up 37% in adults 27 to 54. This continues the growth trend that began with the launch of the new season and this is a very incredible performance for a show that’s been on the air for six plus years.

With that, we’ll open up the line operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Kupinski – Noble Financial.

Michael Kupinski – Noble Financial

We’re starting to see some cancellations of shows from the networks now and I was just wondering if you can give some insight about some of the strength and weaknesses you’re seeing with the CW Network? Then secondly, I was just wondering if terms of the SG&A expenses what are you anticipating that number, if you can kind of give me some guidance on that expense line going forward?

Douglas Gealy

The strength and weakness of the network Monday, basically Gossip Girl has grown incredibly this year Michael which is quite unusual. It kind of reminds me of Seventh Heaven when Jamie continued with that program after a weak first year performance. The launch of 90210 has gone over very well. Super Natural is performing very well. Where we’re having trouble candidly is on Friday where we’ve loss wrestling and they’re repurposing programming at some times due to the economy.

Then of course, the whole lease of the Sunday time slot to an outside studio has not gone too well. But, in general the performance and the branding of the CW has improved.

Michael Kupinski – Noble Financial

You’re not anticipating any particular cancellations of shows at this point from the CW?

Douglas Gealy

It’s interesting you asked me because I actually met with Elizabeth [inaudible] and Hal [Prodder] who run affiliate relations and at this point they’re saying no. There’s been some development that was stopped but there is a full season of Gossip Girl and I believe a full season of 90210 and One Tree Hill has really come back strong.

Thomas Allen

The question on the SG&A line, you saw in the third quarter obviously a slight decline in that number. The expenses that are in that line are pretty much obviously first of all, all the station level corporate is on a separate line so it’s basically our sales effort including staff and commission sales employees along with probably the next biggest piece of that which is Nielsen costs. Our Nielsen costs are pretty much fixed on long term contracts and our sales commission obviously are variable based on our revenues so to the extent we expect to see revenue declines in the fourth quarter or year-over-year which is safe to say we do then the sales commission line should be moving kind of in tandem with it.

We would expect that SG&A line to kind of move slightly lower over the near term especially as we kind of enter into and linger in this difficult economic environment we’re in.

Michael Kupinski – Noble Financial

In terms of what you had indicated in terms of your cost reductions going forward, is it in the SG&A or is it in the program line that you’re anticipating?

Thomas Allen

The programming line is made up almost exclusively of program payments that’s syndicated. Those are as you know long term contracts, generally fixed two years in advance for the shows that are hitting your air so there’s not much we can do about those costs so most of the cost cutting savings you’ll see are in the other cost of services which is basically promotion and engineering and then the SG&A line and obviously on the corporate line as well.

Douglas Gealy

And engineering is a factor of the transition to digital for next year as we’ll be turning off our analog.

Michael Kupinski – Noble Financial

So there will be some savings there?

Thomas Allen

Yes, some utilities savings there probably.

Michael Kupinski – Noble Financial

Have you quantified how much that savings will be?

Thomas Allen

We have a handle on it but we’re not providing any specific guidance on any of the detailed expense line items. It’s a look for us to be looking to lower numbers across the board where we can control the expenses.

Michael Kupinski – Noble Financial

In terms of auto advertising, I guess obviously that’s a troubled category and it’s by no means the only one that’s showing weakness but can you quantify the auto business for me in terms of the total of your advertising dollars and just maybe if I picked on that category going in to this quarter can you give me some thoughts on how that category is performing?

Douglas Gealy

Obviously with all the political in the third quarter it was a smaller percentage but generally we run in the 20% to 22% range. I think going forward they’re going to have to do something to sell cars. If the credit market opens up and the government is yelling at the banks – when you talk to auto dealers you’ve got to have a pretty doggone good credit to be able to borrow at dime today. Particularly in markets like Dayton that has been hit so hard with the plant closings.

Operator

Your next question comes from the line of Unidentified Analyst.

Unidentified Analyst

I see the ramp up in The Daily Buzz, I guess two questions, the first would be in a normalized environment which we’re not for the period prior to September 30^th, where are we in relationship to breakeven on an operating basis? And, what impacts might one expect from the economic implosion since September 30^th?

Thomas Allen

You can kind of get to The Daily Buzz numbers by looking at some of the supplemental tables. The revenue is split out.

Unidentified Analyst

I saw the revenues there, the revenue is very clear.

Thomas Allen

The expenses as well is in table 2, The Daily Buzz production costs, those are the costs related to producing the show. For the third quarter pretty much a breakeven for the year.

Unidentified Analyst

So we’re basically at breakeven here?

Thomas Allen

Two things, one reason why we had such a strong performance year-over-year on the revenue line for the third quarter is because starting last fourth quarter that we got one of our major charter advertisers in so they’ve been in now starting October 1^st for a year and they weren’t in the third quarter of last year.

Unfortunately for the fourth quarter of ’08 they decided to avoid the schedule in October away from the political clutter so we have less revenue from that major advertisers in the fourth quarter of ’08 than we did in ’07 so you will not see the kind of favorable experience in year-to-year revenues for the show in Q4 that we did in Q3. And obviously, that show is equally affected by the very, very soft marketplace.

Douglas Gealy

With that being said, we also have more upfront dollars placed going in to next year than this past year. But of course, the news environment, we’ve got it booked but the networks are not getting any scatter dollars at this point so I’m suspect of everything.

Unidentified Analyst

Well, let’s maybe go over what the thinking about that would be strategically as you look to prepare expenses. I assume that this would be a separate category of focus?

Douglas Gealy

Yes.

Unidentified Analyst

Maybe you could articulate the argument for keeping it going?

Douglas Gealy

Obviously we’ve got a magnifying class on the show. It’s performing very well, we have sold more upfront dollars. In fact, I’m heading out tomorrow to hopefully close another large deal. But, in this environment everything is suspect, everything’s got to be on the table.

Unidentified Analyst

I’m just curious, is there any precedent for – I mean certainly in other parts of I guess the consumer economy in talking to people it’s quite clear they’ve never seen anything like it, even the few who went through the 70s and certainly anybody who was there on the [Kuwait] period where things turned off for a little while which I believe was in 1990. I mean, I’m sure you guys who have sought people out, this is sort of a defuse question but I mean is there any kind of roadmap for what happens in situations like this that you’ve been able to discern?

Jamie Kellner

Let me give just a little bit something because I’ve been doing this since the 70s and been through a number of downturns. This one is, to me, a bit different because I think everybody is confused as to what’s going on. I think there’s sort of general panic. The stock market today to me is sort of indicative, people don’t know whether they’re buyers or sellers right now.

But, the advertising marketplace, one thing that we know that does happen is that when people stop advertising, they lose the ability to move their products. People that spend all this money to market products in this country don’t do it because it’s just a game. They believe that is what drives their brand, that is what protects their shelf space, that is what keeps their factories going and things like that.

We’re going to see a downturn there’s no question, we’re seeing it already but, there is a place where these guys realize they have to spend x amount of money. What Doug mentioned with the car category is it doesn’t make a lot of sense to spend a lot of money to sell a car if you can’t get credit approval for the buyers that come in to the showroom and that’s what’s been happening. So, they’ve taken their foot off the pedal trying to reorganize how they’re selling the cars and how they’re going to be able to provide credit to people.

I think once that happens, once we do get some more capacity for people to buy cars with some credit that have decent credit, I think you’re going to start to see a little bit of a rebound there in the market. But, I think we’re going to have a fairly lengthy difficult time in the advertising business.

Unidentified Analyst

Well obviously Paulson sees some of that to in terms of his change of priorities particularly yesterday. That can’t be a bad thing for this company or any broadcaster.

Operator

At this time there are no further questions. I would like to hand the conference back over to ACME management.

Douglas Gealy

We thank you for calling in. Difficult times, we’re not delisted and we will continue to have these conference calls on a quarterly basis. As Tom said earlier everything will be totally available to you on our website. Thank you for calling in.

Operator

This concludes today’s ACME Communication teleconference. You may now disconnect.

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