Emmis Communications Corporation (NASDAQ:EMMS)
F1Q 2014 Earnings Conference Call
June 28, 2013, 09:00 AM, ET
Kate Snedeker - Investor Relations
Jeff Smulyan - Chairman, President, and Chief Executive Officer
Patrick Walsh - Executive Vice President, Chief Financial Officer and Chief Operating Officer
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. This call is being recorded. If you have any objections, you may disconnect at this point.
I would like to turn the call over to Kate at Emmis. Ma'am, you may begin.
Thanks, [Bill]. Good morning, everyone. Thank you for joining us for today's Emmis Communications' conference call regarding first quarter earnings. I want to extend a special welcome to all the Emmis employees who are joining us and listening in this morning.
We'll begin in just a moment with opening comments from Emmis Chairman and CEO, Jeff Smulyan; and Pat Walsh, CFO and COO. After opening comments from Jeff and Pat, we'll respond to the questions submitted via email to firstname.lastname@example.org. A playback of the call will be available until Friday, July 12 by dialling 402-220-3509.
This conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to Emmis' public filings with the SEC for more information on the various risks and uncertainties. Additional disclosure related to non-GAAP financial measures have been posted under the Investors tab of our website, emmis.com. Jeff?
Kate, thanks. This has really fun earnings call for us to have because it's been good news not only from our standpoint, but also from the standpoint of a larger industry. We were up 7% this quarter, little bit over 7%, I think that's the best quarter we had in a long, long time.
More than that, our markets were up 5% and I haven’t seen markets up 5% in the American Radio Industry in quite some time. So we think it bodes well. We are thrilled. We keep outperforming. Our months in this quarter were up 8%, a little over 8% and up 6%. It's -- we think it bodes well not only for the company, but for the industry.
We are seeing pacing up about 6% in our second fiscal quarter. So again the signs are very, very encouraging. For us, we are also very happy that our NTR, our local, our digital platform up significantly and our national was up. So we feel like from an industry perspective, from an MS perspective we are thrilled that we keep outperforming our markets in our industry, but the industry is clearly on an uptick and I think people are finally starting to rediscover American Radio and that's good for all of us.
Our Publishing division was flat, but we are seeing a significant improvement in pacing in the second quarter and operationally and we always said that if we can create content that matters to people, that has been the secret to our success for every one of the now nearly 32 years I think next week that this week company has been in business and we've done it again.
In this quarter for the first time we had the first and second ranked stations in Indianapolis, that's the first time ever that one company has had the top two stations in this market. KC-95 has moved back to the top in St. Louis with adults and our Austin cluster delivered a remarkable 41 share and that's before we added Latino 102.7, which is our Spanish language CHR and we just saw its first ratings yesterday and they were really amazing.
So between that and the performance that we've had in New York, Terre Haute, Los Angeles, we just feel like we are in a wonderful place. In addition to our content, HOT 97 the Service to America award and Crystal Awards in this quarter again demonstrating that if we produce content that matters and we make a difference in our communities, we win as a company.
The same with our Publishing Group. We won not only National Magazine Awards again this year, but also dominated the City in Regional Magazine Contest, which we do every year for producing really significant editorial content that matters in the lives of our readers.
So we couldn’t be prouder that the balance sheet at Emmis is very strong. We now have a leverage of down to 3.2%. We now find that with our cost of debt well below 5% that we will deliver a significant deleveraging over the course of the year. We got kind of shoot for the time may be within the next year when our leverage is under two times, which for those of you who follow this company would have been unheard of as long as 12 to 18 months ago.
So we fixed our balance sheet. We are ready to do exciting things and along the lines of exciting things, I could not be more excited about where we are with the cell phone project. I am not going to talk specifically about our agreement discussions with Sprint, but I do want to talk about the remarkable outpouring of support we've had from the American Radio industry.
From the very largest broadcasters to the very smallest, support has been nearly unanimous. I think I had one broadcaster in the top 75 group that said I don’t want to support this and I personally talked to probably 60 to 65 of those groups. The support has been remarkable. It's been very gratifying. I think we are on the verge of a game changing event in this industry. I can’t announce specific times, but stay tuned, we will be able to announce industry support and then as we are done with our contractual 1arrangements, we will be able to announce when all this comes together, but the first step in that process is coming together, which we are -- now have clearly demonstrated that we've done.
The second step is when we launch phones, if this industry could be united, and this industry can give a product which is compelling to consumers, to consumers then we think it will change our business forever and as you know, we've developed the next radio application at the behest of the National Association of Broadcasters. It's an open standard. It's free to every single broadcaster and we are providing free logos, so that the look when consumers see this new radio in the cell phone, it will be interactive and engaging and if we launch and consumers love it, we think it will lead to us openly getting in over 300 cell phones.
So with that, and we will take questions later on that, but just wanted to give you an overview, I could not be proud of where this company is. I could not be proud of where this industry is. Better days are ahead. Pat?
Thanks Jeff. Good morning, everyone. As Jeff alluded to in his opening remarks, our first quarter operating results reflect our continuing strategic focus on developing great local, on air digital and social content, coupled with building a talented well-trained local sales force.
For the first quarter ended May 31, 2013, we increased operating income compared to the prior year by nearly $6 million or 527% and took that increase and more to the bottom line by increasing that income by $8.8 million. As has been the case in recent quarters, we encouraged those on the call to refer to the Investor section of our website at emmis.com for additional details of financial disclosures.
However, we are very happy to report that our financial statements have very nearly anniversaried all of the various deleveraging transactions executed over the past several years and should prove easier to follow for investors in the coming quarters.
During the first quarter ended May 31, 2013, we reported net revenues up 3.3%. Pro forma for the 98.7 FM LMA and New York radio net revenues grew 7.3%. Revenues in markets where Emmis compete grew a healthy 5.1% in the quarter with our largest markets New York and Los Angeles posting plus seven and plus five quarters respectively.
Our Los Angeles station Power 106 continue to top streak with an up 14 quarter outpacing the LA market. Our market-leading cluster in Austin posted an up nine quarter with market share growing to nearly 41% and our St. Louis stations also beat their market with an up six quarter. As Jeff alluded to, National was up 4%, local up 7%, NTR up 7% and our industry-leading digital platform grew 24% during the quarter.
Given our continuing emphasis on local sales, all segments outpaced our market competitors except National, which we were heartened to see grew 12% in our markets. Taking a quick look at our monthly trends we were up 8% in March, up 8% in April and up 6% in May. During the first quarter our number of minutes sold increased 2% compared to the prior year with our average minute rate increasing 3.5%.
Automotive was once again our largest category representing 12% of revenues with the category growing a robust 11%. Wireless, an increasingly important category to us at Emmis, saw revenues increase 36% during the quarter with other top 10 categories such as Entertainment, Healthcare and Grocery exhibiting double-digit growth. Beverage and Home Improvement showed single-digit growth, Financial and Quick Serve restaurants showed modest declines and Media was up double-digits.
We are placing a particular emphasis on the Healthcare category, which we think will play an important part in our fiscal third and fourth quarter performance due to the rollout of the Affordable Care Act. Radio revenues are currently pacing plus 6% for our second fiscal quarter.
Revenues in our Publishing division excluding barter were flat during the quarter as strong double-digit growth at Atlanta, Indianapolis, Cincinnati and Orange Coast was offset by revenue declines in Texas and Los Angeles. Publishing revenues are pacing up double-digits in Q2 as our top two magazines returned to stronger growth.
In terms of station operating expenses and excluding depreciation and amortization, Q1 expenses were down 7%. Pro forma for our station transactions radio station operating expenses excluding non-cash comp were up 2.7% in Q1. The increase was largely due to our operation in New York taking on additional fixed cost due to the divestitures, but this impact should anniversary in Q2.
Publishing expenses were up 3.7% in the quarter. Our corporate expenses were down 12% in Q1 on lower legal cost associated with our preferred stock litigation. At 5-31-13, the company had $66 million outstanding under senior credit facility with a weighted average cost of borrowing of 4.5%. Also on our balance sheet is $78 million of 98.7 FM non-recourse debt related to the WRKS transaction.
This non-recourse debt will continue to amortize to zero with payments from the 98.7 LMA over the term of that LMA. I recommend that investors reference the leverage calculation on our website, which reflects leverage as just set at 3.2 times EBITDA as defined in our credit agreement, which excludes both the non-recourse debt and the related LMA payment.
Based on present forecast, we expect leverage to fall below an important 2.5 times threshold by the end of the fiscal year, which will further reduce our interest spread over Libor and enable potential restricted payments. As a reminder we finished FY ‘13 with approximately $66 million in accumulated net operating losses, which should continue to show profits from federal taxes for the foreseeable future. We spent $1 million on CapEx in Q1 and expect to spend for the full fiscal year to be approximately $3 million.
One final item, I received several questions after the 10-K was files as to whether share issuances and dilution in FY ’14 would be similar to the past fiscal year? We expect to reduce the amount of shares issued to employees and directors in fiscal ’14 as our improving financial condition affords us the opportunity to pay these expenses in cash rather than stock.
We think we have the right operating strategy and we are proud to add Q1 to our sustained track record of solid growth and financial results. We are heartened by the improving advertising environment in our markets, our ratings and our competitive position. Coupled with the forthcoming launch of our FM smartphone application next we are excited about the coming months and years for Emmis and the radio industry.
So, with that, Jeff, we just had a handful of questions about that lower volume and last year. So why don’t we jump into those too?
With radio growth accelerating in Q1 is it the auto and wireless cycle or something else that's driving the improvement for radio and do you think this improvement is sustainable?
I think it is Pat. I think this industry was over sold or under-allocated. People I think abandoned radio. I think a lot of major advertisers both national and regional and local have said, wait a minute, we stopped buying radio because of the perception that radio was not around anymore and you see the audience figures in times that listening figures this industry still reaches 93% of the population. I was like to quote 6% plus a year which is about 275 million Americans a week.
So it is of [hybrid] industry that people I think are rediscovering and you know the nice thing we've had for all years is that radio works and because it works, all of a sudden advertisers are going, wait a minute, we threw kind of radio out because we said, well we don’t want to buy newspapers anymore. We don’t want to buy directories anymore and I think they are rediscovering it now.
Just national and our markets was up 12 during the quarter, we've seen a number of announcements from CBS, Clear Channel, Arbitron, with research initiatives, business development initiatives, media mix modelling initiatives, do you think that's playing any role in this development?
Absolutely. I think Clear Channel has done some great things. I think CBS has done great things. We've said through the media mix modelling discussions with Arbitron. We are very pleased with that because as they wisely point out, if we are not in the media mix modelling, we are not going to get bought by a lot of advertisers and we discovered that when we do proper media mix modelling, I don’t want to get too technical here, but the radio shows up remarkable well. so I think all those brought in good things for the industry.
Change gears we had a couple of questions on these subjects, but investors were looking for an up data not too major litigation matters Hungary and the preferred and folks are obviously wondering when they can expect a resolution of these matters?
Well, I think the Hungary process is moving, but it's very slow. A hearing on jurisdictional issues is scheduled for December. Assuming, we prevail our hearing on substantive claims will be 2014. We feel very good about this case. We always have. I think anybody who studies what's going on in Hungary in the last three years understands that we have the unfortunate situation where we were really a poor runner to the problems that are recurring in that country almost daily now.
As to the preferred, again we feel great about the case. The preliminary ruling from Judge Parker was in our favor all up the way and we move for summary judgement. If our motion prevails, we expect to replenish to appeal the decision to the Seventh Circuit. If we are not always successful in our move for a summary judgement, a trial will be scheduled to occur next year, but we've always felt good about both these cases.
Again totally different subject matter, but folks are curious your thoughts on both Apple and Google launching radio streaming services during the quarter, what's your impression having taken a look at those and how do you think those launches impact the NextRadio rollout?
I don’t think they do. Listen, every time any -- that it spends any time with anything, whether it's watching TV or picking up a newspaper or listen to a Pandora, it's time where listenership is fragmented. The American public or the global public has tremendous different opportunities. The fact that radio has held up as well as it has and time spent listening and cumulative audience is remarkable.
What Google is doing and Apple is doing really far more along the lines of personalised view of collections. We've had that forever. As I have said, we had with 8-tracks in the car and cassettes and CD players and MP3s. We've always felt we need to be in that arena in terms of streaming, but we've also felt that the future of our industry relies in our own spectrum because that spectrum doesn’t cost consumers anything and I think that's been the key.
Jeff you mentioned it in your opening remarks, but folks were just interested in any additional thoughts you have on NextRadio and what role it's going to play financially in Emmis' future?
Well, let me say and I am going to spend a minute or two talking because we are getting close to a pretty significant time here. This started really over -- about five and half years ago when a group of people in the industry asked me to sort of explore the value of having radio on smartphones or cell phones in those days.
It became sort of a passion. It became something that I believe in fervently, knowing that in the rest of the world you buy a smartphone or a cell phone and there is a radio that's turned on. I just got back from Europe yesterday and you see them everywhere.
In this country, we learned that if that was not the case. The largest carriers had said leave those chips out, when they ship to the United States as time evolved and we to smartphones, the chips were already built in. They were part of our multiple chipset.
It has been a fascinating journey. We've talked to probably a 150 members of Congress. We've testified before FCC and congressional hearings numerous times. We've met with regulators. We've met with broadcasters. We've met with wireless carriers. We've met with manufacturers.
We believe strongly that once people saw what we could do at a time when people started getting bills for their data that there will be a great opportunity here. Three years ago, we had an advisor who said to me, when data metering comes to place, you will win this issue. I had no idea what data metering was and I learned today that probably 90% of all Americans know, but what it means is if you listen to HOT 97 or a Pandora or iHeart or any radio stations through the data network, you are piling up data usage.
Up until the last year, data usage was unlimited. The American public spent $30 a month for that data. In the last year because of the explosive growth of data, AT&T had seen daily usage go up 21,000% in the five years since the introduction of the iPhone. These data charges are exploding.
When we introduced radio into a smartphone, it doesn’t go through the data network, it goes through our tower. You have to think of this as just putting a little transistor radio in your cell phone and you avoid the data networks and you avoid the data charges. We think that will be a game changer for Emmis. We think it will be a game changer for the industry.
Somebody said how will we market this? We said we think we market it as free and we market it as cool. And the cool part is the interactive software that we built in. The reason that we did this is along our journeys, Kevin Gage and the NAB said, I don’t think it's enough to just have a standard radio tuner in a smartphone. I think it has to be interactive. It has to be visual. So the NAB strongly recommended that this be built.
We stepped up led by Paul Brenner and our remarkable team at Emmis. We held up our hands where nobody else would and we said we will build that. We build it. It has been by every measurable standard at homerun. I urge every broadcaster in America to look at it. I think it's a NextRadio.com.
It you can do that, you will understand why cell phone manufacturers, why wireless companies, why consumers, why broadcasters, why regulators who have seen it, love it. It's interactive, it's engaging and it is something that we think is a game changer. When load this into a phone, people can have an interactive experience. They can see AVImark, they can see the station's logo, there could be enhanced ads it’s an entire ecosystem that's built.
I am proud that we built it. Hopefully,-- we spent a tremendous amount of money. Hopefully if all this works, it will be nicely profitable for Emmis, but the most important thing is we think it can revive the American radio industry and our goal was to build a system where every broadcaster could go in free and every broadcaster would have access equally into an ecosystem that we think can change our industry now have rambled a lot and want to cover a lot of ground.
Thanks Jeff. I think that gives everybody an up-to-date look on where we are. The last question that we had, investors wanted to know as we continue to de-lever and approach this 2.5 times threshold in our credit agreement for restricted payments, is your intention to continue to focus on debt repayment or are you considering M&A, if you get the 2.5 times will you consider a share buyback or dividend.
Yes. I think we are -- you know we are considering. Obviously de-levering the balance sheet is critical to us. We won’t stop at 2.5 times. As I said, my fondest wish is that by the end of our fiscal year when may be under two times, we don’t know yet, but we do know that there are a lot of shareholders who like dividends. We also know a lot of shareholders like stock buyback.
We also know that we've been approached by capital providers and there may be some interesting M&A that we may or may not participate in. It might be managers. It might be equity contributors as well as managers. So the nice thing about where we are is we get very close to announcements on the smartphone initiative and I think we are very close and we think that will be a watershed moment for our industry.
Is that we have a lot of options and we think we've assembled a team at Emmis that is capable of exploring those options as they've been capable of really leading us through some of the most remarkable financial turmoil certainly in the last 70 years. So I couldn’t be more excited and I can’t tell you how thrilled I am about the look of our people and I can’t say how thrilled I am about the radio industry coming together to the launch of FM chips in smartphones.
Just a reminder, a playback of the call will be available until Friday, July 12, by calling 402-220-3509. Jeff did you have anything else?
No, just to thank all the Emmis people again for a wonderful quarter. This journey gets more and more fun now after some tough years. Thanks everybody.
That concludes the conference. Thank you all for joining. You may now disconnect.
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