Cumulus Media Inc. (NASDAQ:CMLS)
Q3 2008 Earnings Call
November 06, 2008; 11:00 am ET
Lew Dickey - Chairman, President, and Chief Executive Officer
Marty Gausvik - Chief Financial Officer, Executive Vice President, and Treasurer
Lee Westerfield - BMO Capital Markets
Hello and welcome to the Cumulus Media third quarter earnings release conference call. At the request of Cumulus Media, this conference is being recorded for instant replay services.
Please note that certain statements in today’s press release and discussed on this call, may constitute forward-looking statements under the federal securities laws. These statements are based on management’s current assessments and assumptions and are subject to a number of risks and uncertainties. Actual results may differ from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.
I would now like to introduce Mr. Lew Dickey, Chairman, and CEO of Cumulus Media. Sir, you may begin.
Thank you, operator, and good morning everybody. I appreciate you taking the time today to receive an update on our performance. I’m also joined by our CFO, Marty Gausvik.
We are currently operating in one of the most challenging environments that I’ve seen in 24 years in the radio business. The radio industry however I believe is still fundamentally very sound as evidenced by the record number of people, including young adults who tune in every week and this comes in after rating survey continues to reinforce this. This is in spite of 150 million iPods sold and the widespread availability of pay radio via the satellite.
Consumers demand for free, local, push content has not wavered nor waned. Consequently, our business model of offering access to these large, local, and loyal communities of listeners is not in danger of being replaced by a substitute technology.
That being said, radio has been its own worst enemy when it comes to monetizing these highly valuable communities of listeners. We have been myopic when it comes to prospecting and targeting both local and national advertisers, thereby allowing the market to be defined by a handful of gatekeepers who have consolidated media buying for the major accounts. As a result, price integrity and value based selling have been replaced by often vicious rate cutting to take share from competitors.
In short, the most serious affliction facing our industry is not product based, but rather it’s rooted in the sales cultures which focus primarily on default demand, commonly referred to as transactional business. I believe the cure for this affliction is to revitalize our sales staffs and transform them into organized teams of demand creators, not demand responders. In other words, we need to dramatically increase both coverage and productivity and sell the true value of our media.
Radio is the most efficient media for local businesses that need to keep their brand and their value proposition top of the mind with consumers and this is especially so in challenging economic periods.
Radio’s efficiency driven competitive advantage has three components: (1) is the lowest cost per 1,000, lower than television, lower than newspaper; (2) rifle shot targeting to eliminate waste, which we can offer with our various formats and (3) relatively inexpensive production costs as compared to television, cable or even newspaper.
We need to hammer these benefits home to a broader group of advertisers with more a great deal more of clarity and consistency. It’s tough work and it requires an unremitting commitment from senior management to drive these fundamental changes through their sales organizations. I believe that the ability to successfully execute these fundamental challenges will be the key determinants and the inevitable shakeout in reordering of the media landscape that’s now underway.
Now this morning we are going to update you on our third quarter performance and provide guidance for the fourth quarter. Starting with Q3 results, our pro forma cash revenue as we continue to de-emphasize barter, our pro forma cash revenue for all markets was down 3.6% to $76.5 million. This was squarely within our guidance that we issued 90 days ago of negative 3% to 4%.
Now on the top line of Q3, we had ten markets which posted double-digit revenue increases and three of those ten which actually grew their revenue in excess of 20%. The overall environment however was still very weak, as evidenced by the declining revenue in the likely intuitive categories of automotive, financial services meaning mortgage brokers, telecommunications, home furnishings and of course real estate.
Moving down the income statement, our Q3 pro forma EBITDA was down 8.7% to $25.2 million. However, our free cash flow actually rose 2.1% to $15.8 million due to lower interest expense. As everybody knows, LIBOR has been dropping like a stone and it’s basically been halved and continues to drop, which will continue to renew to our benefit with approximately $300 million of our debt floating. Also as of today, not as of 9/30, but today we are sitting on a cash balance of approximately $73 million.
Looking ahead, we expect the fourth quarter to be down in the 9% to 11% range and of course we are very focused on our operating expenses and we expect those to be down approximately 5%.
Now I’m going to turn it over to Marty Gausvik, who’s going to provide us with more detail and then we’ll open it up for everybody’s questions. Thank you. Marty.
Thanks Lew and good morning everyone. During Q3, net cash revenues were down 4.1% on an actual basis and down 3.6% on a pro forma basis after giving effect to the sale of our Caribbean stations in November of 2007. Station operating income was down $2.8 million or 8.7% on an actual basis and $2.7 million or 8.5% on a pro forma basis to $29.2 million during the quarter.
EBITDA decreased by $2.5 million or 9% on an actual basis and decreased $2.4 million or 8.7% on a pro forma basis, finishing the quarter at $25.2 million. Actual station operating expenses decreased by 2.8% during the quarter and on a pro forma basis decreased by 2% to $50.8 million. We expect station-operating expenses to decline by approximately 5% during the fourth quarter.
For the quarter, total corporate overhead decreased by approximately $0.3 million to $4 million for the quarter. The primary fact contributing to the decline was a reduction in insurance in the other professional fees. We expect to finish the year with approximately $15 million in total corporate overhead. During the quarter we recorded income tax expense of $7.3 million and we estimate our effective tax rate for 2008 to be approximately 43%.
Moving on to free cash flow, for Q3 we produced $15.8 million in free cash flow, compared to $15.5 million generated during the prior year. Free cash flow is defined as EBITDA, less net interest expense, less LMA fees, less maintenance CapEx and less cash taxes. For those of you that calculate free cash flow per share, our weighted average shares outstanding declined by $1.4 million to 41.9 million shares when compared to the prior year.
Moving on to CapEx, capital expenditures for the quarter were $1.2 million and were comprised of $100,000 of maintenance CapEx and $1.1 million in facilities related projects. We expect CapEx to finish the year at approximately $6.5 million to $7 million.
Moving on to the balance sheet, net leverage currently stands at 6.71 times and our covenants are currently set at 7.7 times total leverage and at 1.1:1 for fixed charges. The total leverage covenant steps down to 7.5 times at year-end. In Q2, we announced a share repurchase program of up to $75 million. As of today, the company has repurchased 1,592,000 million shares at an average price of $3.15.
With that I’d like to open up the call for questions. Operator.
(Operator Instructions) Your first question comes from Lee Westerfield - BMO Capital Markets.
Lee Westerfield - BMO Capital Markets
I just want to touch on two topics if I may. The first is, Marty and Lew as you with your station managers look into budgeting for 2009, and recognizing in precision that the market conditions bring on forecasting, how do you guys approach your budgeting process for allowing for flexibility on both cost and optimized revenue? That’s a organizational management question when it comes down to it.
The second question Lew is, I appreciated the comments you made at the outset in terms of the resiliency of the medium. As one of the industry leadership long term, how do you see the industry shaping up its technology platforms in a variety of different ways, presuming and when a recovery occurs and by that I’m really implying both HD radio and also in your RFP for measurements?
Lee that’s a handful. Let me take a shot of it in reverse order here. First of all on the RFP that we have for ratings, let’s address that head on. We expect that process, the RFP process, which we are well into and steeped in at this point, we expect that to come to a formal conclusion within the next two weeks and nothing more to say on that at this time, but we expect that to come to a formal conclusion within the next two weeks.
On as far as the technology platforms, I guess when you think about all things digital, you think about HD as well as internet and what’s going on there; just kind of a hint on a couple of those.
HD, as you know, we are starting to see more automakers adopt it and you’re starting to see the luster come off the satellite and so as time goes on and again as I mentioned in my prepared remarks, consumers still have a demand for push content and for it to be free and local, non-subscription based. Particularly in this environment, pay radio is certainly not a viable business model.
It’s something we believe HD radio long-term is going to provide additional benefits for the consumers; it has been chicken or the egg. Most of the top 100 markets have been converted. So there certainly is enough out there in terms of conversion and product for the manufacturers to start to adopt this platform and this technology, you’re seeing it slowly.
Remember you have the sort of the lemming effect in the auto industry, that as auto makers continue to adopt things, the others don’t want to be left behind because it can be a competitive disadvantage and you’re starting to see the niche players in the auto business start to adopt this and I believe Volvo and Audi and BMW and others are starting to put it in; that’s generally the way the adoption curve goes.
Then what will happen is one of the larger ones will break through and it will reach a tipping point and the rest will start to adopt. That’s really what we’ve always maintained and it has to be done through the automobiles in order for this thing to become widely adopted. So I think that over a period of time it’s going to happen.
Nevertheless, the terrestrial brand, because of the backwards compatibility of the technology, we are not like television where we’re going to have a switchover. All the terrestrial radios out there and there’s 1.2 billion to 1.3 billion terrestrial radios in the United States today and they’re obviously producing tens of millions every year; are going to be valid and functional.
So we got a terrific distribution platform for our medium. The consumption rate, as I mentioned in my prepared remarks, there’s never been more people that have used or listened to radio on a weekly basis, so we certainly have all of those things going for us.
With respect to the internet, again we’ve always viewed the internet as another ubiquitous free digital distribution platform with no barriers to entry. We are content providers in all of our local markets and we are streaming all of our stations now. We will continue to offer our content on the digital distribution platform being the internet and for streaming.
With respect to station websites and using the internet for another stream of revenue in terms of advertising, it’s being done. As you see the same thing with newspaper and local broadcast television and radio, it represents a very small part of our overall revenue. It is growing fast and people like to shine a light on the growth rates, but it’s coming from such a small number.
I think that this stream of revenue ultimately is going to not be as large as people believe, because I think the simple industrial economics, the barriers to entry, are virtually minimal and as we are sitting on this call today, probably 1,000 new websites are created to put more inventory in. So you’ve got in essence unlimited supply of banner ads, unlimited supply of web-based advertising.
With technology, you’ve got the ability to be able to link these various websites into ad networks and offer them up and on top of that the reduction in cost to be able to produce an internet website and get it up and running and get competitive and get inventory, that’s like putting power on the grid, putting inventory into the marketplace, those costs are coming down. So you have got unlimited supply and insatiable appetite just to continue to increase supply.
So we look for cost per 1,000 in that business to continue to deteriorate. While it’s going to be an additional stream of revenue, we certainly don’t want to overstate where we think it’s going to be. In our business, it’s a different story; you do have very high barriers to entry and we continue to reach large and important communities of listeners and we’ve got to do as I mentioned in my prepared remarks, a much better job of monetizing those great communities of listeners that we already reach.
With respect to your first question on budgeting, we are obviously in the throes and just beginning our budgeting process now. We’re probably doing it about a month later than we’ve normally done it, simply due to the uncertainty and the outlook for next year.
I can tell you that in our company we budget by account, by category, by station, so we do it from a bottom up perspective, rather than give our managers a stated target on the top line and ask them to hit that. It’s a very thoughtful approach; we’re trying to develop a revenue budget by market and that’s what we are in the middle of doing right now.
Obviously on the cost side, as Marty indicated, our costs have come down and continue to come down. We’ve got an expense base of $225 million plus in this business. There is always inefficiencies we are looking to eliminate and we’re actually getting a lot of good ideas from the field play frankly in terms of how we can operate more efficiently, and that’s the culture of our company and everybody is pitching in to see how we can run the business as streamlined and efficient as possible.
So we will continue to do that and look for ways to chip away at the fixed cost base as we go forward.
Thank you very much. It appears there are no further questions at this time. I would like to turn the conference back over to Mr. Dickey for closing remarks.
Well appreciate everybody’s time today very much and look forward to speaking with you again in 90 days. Have a nice day, thank you.
This concludes today’s Cumulus Media third quarter 2008 earnings release conference call. Thank you for attending. You may disconnect at this time.
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