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Radio One, Inc. (NASDAQ:ROIAK)

Q2 2013 Earnings Conference Call

August 13, 2013 10:00 AM ET

Executives

Alfred C. Liggins, III – Chief Executive Officer, President and Treasurer President - TV One

Peter D. Thompson – Executive Vice President, Chief Financial Officer

Analysts

Aaron Watts – Deutsche Bank

Lance Vitanza – CRT Capital Group

Davis Hebert – Wells Fargo Securities

Patrick Fitzgerald – Robert W. Baird & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Radio One Second Quarter Conference Call. I have been asked to begin the call with the following Safe Harbor statement. During this call, Radio One may share with you certain projections or forward-looking statements regarding future events or its future performance.

The Company cautions you that certain factors including risks and uncertainties referred to in the 10-Ks and the 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 August 13, 2013. 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. If 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.

Any audio replay of the conference call will also be available on Radio One’s corporate website at www.radio-one.com under the Investor Relations section of the webpage. 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 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, the Company’s Chief Financial Officer.

I would now like to turn the conference and the call over to Mr. Liggins. Please go ahead sir.

Alfred C. Liggins, III

Thank you very much, operator and welcome everyone to our second quarter results conference call. As you saw in the press release, we had a pretty strong quarter from an EBITDA growth perspective. We’re going to go into some more detail than usual about the different business segments after Peter goes through the details of the numbers. We’re really happy and we think that you will be pleased with the direction of our business.

Peter D. Thompson

Thanks, Alfred. Net revenue was approximately $119.6 million for the quarter ended June 30, 2013, an increase of 13%. A sizable part of the increase is due to the timing difference of two of the company’s events, the Tom Joyner Fantastic Voyage and the One Love Gospel Getaway, both taking place in the second quarter of this year compared to the first quarter of last year. Normalizing for the event timing difference, our consolidated net revenue was up approximately 5.7%.

Radio division produced net revenues of $58.8 million adjusting for the impact of moving the syndicated programming out of the Radio Broadcast segment, and into Reach Media segment, Radio was up 0.4% year-to-year. However, excluding ticket sales from the 2013 One Love Gospel Getaway, the radio division net revenue was down 0.6% from last year. Reach Media had net revenues of $18 million in the quarter which excluding event revenue from the 2013 Tom Joyner Fantastic Voyage, adjusting for the syndicated programming change was down 7.2% year-to-year.

Decline was primarily due to one-time only affiliate termination fee of $471,000 that occurred in the second quarter of 2012 did not recur. We recognized approximately $37.7 million of net revenue from the Cable Television segment in the second quarter, an increase of 17% over Q2, 2012.

Affiliate revenue was on plan and up 8% versus prior year, advertising revenue was up 26% versus prior year. The Internet division had net revenues of $6.4 million up 45.5% year-to-year, partly driven by a new studio agreement with Russell Simmons’ GlobalGrind site, for which we now provide sales and product support services.

All revenue categories for the Internet division posted growth for the quarter. Our four largest Radio clusters performed as follows. Houston net revenue was up 5.8%, Atlanta was up 2.8%, Washington DC was up 7.4%, and Baltimore was down 1.8% year-over-year.

Cleveland, Richmond, Columbus, St. Louis and Charlotte clusters posted revenue growth year-over-year, while our Philadelphia, Detroit, Indianapolis, Dallas, Cincinnati, and Raleigh clusters posted net revenue declines over last year. Local revenues for the quarter was down 5.7% and national revenue was up 11.8%.

Our top five advertising categories were retail at 16% of the total, which was up 10% year-to-year; food and beverage at 14% of the total, down 4% year-to-year; telecom was at 13% of the total, up 9% year-to-year; entertainment at 11% of the total, down 16% year-to-year; and financial at 10% of the total, which was up 7% year-to-year; auto was our sixth largest category and was down 7% year-to-year.

Cable subscribers as measured by Nielsen finished the quarter at $57.1 million, compared to $57.4 million at the end of June last year. Operating expenses excluding depreciation and amortization, impairments and stock-based compensation increased to approximately $81.9 million in Q2.

The increase is primarily the result of the timing difference of the One Love Gospel event and the Tom Joyner Fantastic Voyage, excluding the expense from the 2013 One Love Gospel Getaway, Radio division expenses were well controlled and decreased 0.9% year-over-year.

Expenses at TV One increased 13.9% in the second quarter, primarily due to accelerated programming amortization reflecting the airing patterns of original shows and sales commission payable on increased advertising revenue. On a cash basis, we spend $19.3 million on content assets during the quarter, of which $14.1 million was on original program.

Excluding $6 million of expenses from the 2013 Tom Joyner Fantastic Voyage, Reach’s operating expenses decreased by 14.5% primarily as a result discontinuing the management fee to Radio One. Excluding the management fee and related expenses, Reach’s operating expenses were down 6%. The Internet segment’s operating expenses increased by 21% driven by higher partnership revenue shares and higher cost of sales.

For the second quarter, consolidated station operating income was approximately $45.7 million up 10.4% last year. Adjusted consolidated EBITDA was $37.7 million, an increase of approximately 19.5% year-over-year. Interest expense decreased approximately $22.4 million for the second quarter. The Company made cash interest payments of approximately $21 million in the quarter.

There were non-cash impairment charges of $9.8 million to reduce the carrying value of Cincinnati, Cleveland and Philadelphia Radio broadcast licenses. Net loss was approximately $14.2 million or $0.29 per share compared to net income of approximately $42.7 million or $0.85 per share for the same period in 2012.

For the second quarter capital expenditures were approximately $3.6million compared to $3.8 million in Q2, 2012. Cash taxes paid were approximately $73,000, the company received dividends from TV One in the amount of $4.1million in Q2. As of June 30, 2013 Radio One have total debt net of cash balances of approximately $776.6 million.

For bank covenant purposes, our total net debt was approximately $683.1 million and our LTM bank EBITDA was approximately $92.7 million, giving a total leverage ratio of approximately 7.37 times, and a senior leverage ratio of approximately 3.84 times.

Company’s cash and cash equivalents by segment are as follows. Radio One Internet approximately $17.3 million, Reach Media approximately $3.4 million, Cable TV approximately $19.5 million. In addition to cash and cash equivalents, Cable Television segment also has short-term investments of approximately $3.2 million and long-term investments of approximately $72,000.

During the quarter the Company repurchased 24,419 shares of Class A common stock in the amount of $57,306 and 1,166,300 shares of Class B common stock in the amount of $2,673,723. The Company has now exhausted its general restricted payments basket of $15 million.

And with that, I’ll hand back to Alfred.

Alfred C. Liggins, III

Thanks Peter. Things are working well across all divisions at present. As I said in the press release, our diversification strategy is absolutely working. Our total leverage ratio was down to 7.37 times this quarter and that’s down from 8.44 times, when we did the bank refinance in March of 2011 as some of you might remember, we hit a rough patch particularly in the Radio business in the back half of 2011 and got back on track in 2012 and we’re looking like we’re going to have another year of growth in 2013.

We see leverage continuing to drop throughout the year and we expect our leverage to be below seven times by year-end. Radio is pacing well for Q3 against some tough political comps. Ratings are strong at a number of our most support stations in our biggest markets, and also as you may have seen that some of the Radio trades, the big markets are actually more healthy than they’ve been in the long time and we’ve got a fair amount of exposure to those markets.

In a nutshell, we continue to feel very bullish about our ability to grow our local radio business, which is the locomotive of the Company and my hat is off to our radio team and we Corporate appreciate their continued focus and performance.

I want to give a note to also Reach Media, as you know at the end of last year, beginning this year, we did a deal where we bought up to 80% of Reach and consolidated our corporate sales division and our syndicated shows in with them, creating really a giant network radio platform that had a number of personalities not just a Tom Joyner Morning Show, and that’s going extremely well.

And something that those of you followed the Company should know is last year Reach lost money and this year we expect that to rebound where Reach will probably do north of $5 million of EBITDA, which was something that you probably don’t have in your projections to take note off.

So we’re pretty happy with that trajectory and we continue to see that being a growth business, we just announced a new afternoon drive show with the comedian DL Hughley. So we’ve got lot of new things going on at Reach including the creation of Reach Internet, which is (inaudible) which is our answer to a non-personality branded aligned network that allow us to compete at lower price points with some of the other players out there.

So we’ve got a number of products. We’ve got higher value, higher CPM personality products and now we’ve got a lower-priced just inventory based line network product with Reach Net. So Reach Media is a growth story for us at present.

Interactive One, we believe has hit an inflection point between their direct advertising sales, their alliance partnerships and their new studios businesses. They have enough revenue streams to be solidly break-even. The goal now is to layer on more partnerships in studio deals to build more revenue scale and EBITDA growth.

The studio business is where we provide tech, operations, advertising and traffic support for third-party websites and exchange for revenue shares. So we’re leveraging the 10 million plus users that we created and the team that has built all that and driven all that and doing that for other people to further gain scale and now EBITDA growth. We think the studios business is a great hedge against the volatile display advertising market.

The Internet is a strange, strange land in terms of trying to predict where it’s going and what revenue and profitability are going to be like. But I set out a goal for those guys and said, “Look, let’s just get a strategy where we know we’re going to break-even.” We know we’re going to make at least $1 and then we can stick a periscope up and see where we can sail the ship or the submarine towards the island that’s got the most buried treasure and I think that we’re in that place. So hats off to the Interactive One team.

Lastly, TV One is on a ratings roll in 2013 with 50% more original programming in Q2 2013 versus Q2 2012. We’ve seen great success with new shows like R&B Divas Atlanta, followed by R&B Divas LA and also Fatal Attraction. But we also switched to a mirrored prime-time schedule. So we run the same prime-time programming from 8 p.m. to 11 p.m. and then we do it again from 11 p.m. to 2 a.m. And we’ve seen substantial jump in ratings particularly in the 11 p.m. to 2 a.m. slot. That’s because people on the West Coast get to see more of our original programming and it’s one of the things that’s also contributed to significant ratings lift.

Prime-time ratings in the 25 to 54 demo are up 20% in Q2 2013 versus Q2 2012. We heard a number of cable operators say that, Cable programming operators saying that flat is the new up of our TV One. This year is up. We’re not flat and we think we still have substantial headroom and ability to grow our ratings there as well.

TV One will post another strong year of EBITDA growth in 2013, finishing the year between $46 million and $48 million of EBITDA and that’s up from $40 million in 2012.

Our continued focus is improving operating performance. So that leverage levels will continue to fall and we’ll be in a position to refinance our restructured 12.5% notes and significantly lower our interest rate levels. Our leverage is getting very close to where Cumulus’s is; and if we can refinance at the rates that they currently trade at, it will result in substantial increase to our 2014 free cash flow.

We could ask the questions all the time from investors how do we think about refinance? How do we think about refinancing? And we think about all the time in fact right now, it’s the single most important thing that we think that we can do to add value and that’s our focus.

So I would like operator, open it up for Q&A.

Question-and-Answer Session

Operator

Ladies and gentlemen, we now begin the question-and-answer session of our conference (Operator Instructions). Our first question will come from the line of Aaron Watts of Deutsche Bank. Please go ahead.

Aaron Watts – Deutsche Bank

Good morning, guys.

Alfred C. Liggins, III

Hello Aaron.

Aaron Watts – Deutsche Bank

Alfred, just curious as I think about core radio, I think you were up around 5% in the first quarter. You came in basically flat in the second. Third quarter seems a little bit better. What do you think is driving the choppiness or the volatility there? Where you can have one good month, one bad month, one good month, and what do you think it takes to steady that up?

Alfred C. Liggins, III

I mean look the radio market itself is choppy. Nobody can sit here and say, that they know for sure where it’s going. Saga, I guess, Ed Christian’s coined this MSG moderately slow growth or sluggish growth something like that. And when you’re dealing with market that are flat to up one, two or whatever, variances and operating performance can swing that number up or down pretty easily.

I would say, for us, we were surprised by June and our large markets actually performed, our four biggest markets actually performed actually pretty well. And we’ve got some turnaround areas that drug us down. Cincinnati was one of those, where we had switched out of one of the urban formats into a sports format and that’s been a huge drag on us.

So the Cincinnati revenue picture for us is like 25% down year-to-date. And we recently abandoned that effort and cut a bunch of expenses and went to an R&B oldies old-school format. And we think that we’re going to get a nice ratings pop back, because basically we ran the ratings to zero doing sports.

There really wasn’t any appetite for in all sports station. In Cincinnati that didn’t have play-by-play and maybe there was an appetite, but we decided not to stick around to find out. And our ratings in Detroit have been soft in the first half of the year, but we made some promotional marketing moves in that market, which caused the ratings to increase over the last three months.

So I think that things like that kind of contribute to us, not necessarily. If those two things hadn’t been there we would have posted positive radio growth again. But we’re on top of that, but we fixed it and we’re pacing, we’re giving you a low single-digits number. But actually today, we’re pacing better than low single-digits for Q3. We’re saying this it’s going to be low single-digits and we’ll see where it comes out.

I guess long story short, yeah, I’m not concerned about our ability to grow our radio business this year. And I think that we’ve got significant headroom to continue to do that, even if the market is flat.

Aaron Watts – Deutsche Bank

Okay. Now that’s really helpful. And then, I guess we have seen a lot of activity on the television station side in terms of consolidation. How do you think about that in the Radio world? Do you think consolidation would be beneficial? Do you see Radio One being a participant in that as a buyer or even seller?

Alfred C. Liggins, III

We don’t really care if there is further deregulation from a business standpoint. And the reason is because we’re not up against. There is only one market I think that we’re up against the Kasten, that we can’t own more station. And we would love to be able to consolidate more urban stations in markets where we are a head-to-head competitor with folks, like a Dallas.

But you’ve got to do it at a price point that makes sense and when those opportunities come up, we plan to take advantage. If they don’t come up in the near-term, then we’ll wait and they don’t come up with the right price, then we will wait. We don’t need more radio stations to build a nation platform we have one. What we need to do is to figure out a way to grow our EBITDA and create value for the shareholders.

Now from an asset value standpoint, I’d love to see more deregulation because the more people that can actually own in asset creates more demand for that asset, which raises the price. So I would be up for increased for an ownership, I’d be up for more deregulation just because it make assets more valuable.

My sense is though that the current political environment, there is zero appetite for more media consolidation, more radio consolidation. I think people feel like the media companies are big enough. However, there will come a day when the argument that the Internet has really disintermediated the entire media industry and the old rules of looking at concentration, don’t apply anymore. And then I think that there’ll be another discussion about what is an appropriate level of consolidation.

Aaron Watts – Deutsche Bank

Okay, okay. That’s helpful. And actually on that point, maybe taking that a step further, how are you thinking about kind of streaming radio at this point? When can that become an actual kind of material revenue driver for you? And do you see that as kind of more additive to your terrestrial business or is it more of a defensive move at this point, just with some of the competition that has popped up?

Alfred C. Liggins, III

My personal opinion I look at it as essentially just a migration of your existing audience to listening to your product on a different platform. Before the Internet, everybody who wanted audio, the radio, and now so we had 100% of that audience, and then it went to satellite and then it goes to Pandora.

And so when we look at people shifting to receiving audio or radio stations online, I don’t view it as additive. I view it as unfortunately us to having to spend extra technology cost just to follow who our audience is. Again at one-time free satellite radio had 100% other than TV to actually eight tracks and cassettes and then CDs, we had 100% of the audio delivery market.

Aaron Watts – Deutsche Bank

Okay. Last one for me, and I appreciate you taking all these. Just shifting to the TV side of things, a very visible battle going on right now in some big cities between Time Warner and CBS. As you kind of take about your subscriber fee negotiations going forward as a single kind of network owner does the landscape get more difficult if the cable companies have to kind of pay these very big increases to CBS and the other broadcast networks, maybe just your thoughts on that?

Alfred C. Liggins, III

Yeah. I do think it’s more difficult. I think that we’re in a unique position being a minority owned niche targeted service. I think that diversity in voices at least in this country will always be a discussion point and a consideration. And I think that we were created and successful under the argument that there needed to be diversity of voices, there need to be more than BET and the cable industry bought that, and they gave us carriage.

We’re performing against our partners, we actually have pretty good ratings for a network that’s in 57 million homes and we’re continuing to get better and improve on that by improving our programming. And so yes, a more difficult conversation, but it was a difficult conversation when we launched.

And so we’ve also never been of the mindset that we’re going to be a cable network that’s going to be a demand huge rate increases. But I’m just happy to be in a business, where at least the mindset of the industry is that programming costs go up every year. They don’t like that at what rate that they go up. But at least there is an expectation that they rise because networks continue to spend more money on original programming.

By the way, the cable and the satellite operator, they raise your price every year as programming costs go up. So conversely to the radio business, we’ve all been looking for ways to reduce our expenses because of the top line for the industry has been growing. The top line for the cable industry, cable advertising industry is continuing to grow and so a more challenging environment, but a better environment to be than many other media segments.

So the two fastest growing area is online and cable. We’re well positioned in and hopefully we could continue to get bigger in those areas. We’ve had some preliminary discussions with distributors over the last year and there is nothing in those discussions that we need to belief on that we’re in danger of losing any carriage. And I think ultimately be the negotiation will be around what kind of fee increases, we can get for the service that we provide.

Aaron Watts – Deutsche Bank

All right, perfect. Appreciate all the thoughts.

Operator

Our next question will come from the line of Lance Vitanza of CRT Capital Group. Please go ahead.

Lance Vitanza – CRT Capital Group

Hi, thanks. I had questions on Radio, on Cable and on Reach, if you’ll bear with me. But just on the Radio side, it looks like you saw very big divergence between local and national performance. And I’m wondering if that’s continuing into Q3?

Alfred C. Liggins, III

The answer is, yes. And that’s something we’ve got our eye on that we’re concerned about. We’ve had strong ratings growth. National is first and the easiest to monetize ratings growth. We’ve got our Regional Vice President team focused on issues surrounding local, local in and itself is not a strong industrywide as national.

But yeah, it’s a concern that we’re focused on, but I’ll take it right now. And we’re trying to get out ahead of it, because national could slowdown and but I think again part of our national growth, as we are outstripping the marketplace by a lot is the fact that our ratings throughout.

Lance Vitanza – CRT Capital Group

Got it. And then just to confirm the pacing that you talked about earlier that is on a total revenue basis. They’re not adjusted for ex-political right?

Alfred C. Liggins, III

No.

Lance Vitanza – CRT Capital Group

Great. And then on the Cable side, could you remind me what percentage ownership you have currently?

Peter D. Thompson

(Inaudible)

Alfred C. Liggins, III

51.3%.

Lance Vitanza – CRT Capital Group

Okay. So the increase in revenue and EBITDA, that didn’t have anything to do with changes in your ownership position or consolidation and so forth?

Alfred C. Liggins, III

No, that’s all organic.

Lance Vitanza – CRT Capital Group

Okay, great. Any plans to increase your holdings? Or how do you think about whether or not you might want to do that? Are there any sorts of put call dates coming up that we need to know about?

Alfred C. Liggins, III

There is a jump fall at the end of 2014. With Comcast, one of us would have to trigger. So my sense is we talked off and on with Comcast about buying the other half of TV One. But there is always something in a way, whether or not it was our balance sheet for the markets at the time, and then our ability to renew our distribution agreement early was problematic, primarily because of some forces outside of our control.

So my sense is that our distribution deal with them is essentially up at the end of 2014. I think its early January 2015. So we’ll have to enter into some negotiation between now and then as a normal course of business and negotiate some contract renewal and I think that there will be a discussion, a buy/sell discussion at that point in time.

Don’t know something was going to happen. We love to increase our exposure to the cable business. But again there is other factors, price current condition to the capital markets, cost to capital that we can avail ourselves too at that time. But it would be our goal to figure out a way to increase our exposure to this and the fastest, most certain way to increase our exposure is to figure out a way to own more TV One.

Lance Vitanza – CRT Capital Group

Gotcha. And then you’ve mentioned that if you were able to refinance at more attractive rates obviously there would be a lot better cash flow. Would you imagine that a significant portion of that increased cash flow would be funneled back into TV One to increase the rate, which you’re developing original content?

Alfred C. Liggins, III

That’s a good question, I mean we certainly I think the name of the game in the Cable TV business is to figure out a way to increase your slate of original programming. Ultimately content is where we’ve got to move to as a Company because the distribution systems are going to be numerous and who knows with the new ones are going to be and who knows what is the monetization model will be at the time. So we’ve got to really focus on becoming more of a content company and that would mean investing more in original programming.

But as always yet to do responsibly right, we have obligation to create shareholder value as well. So we need to make sure that our EBITDA continues to increase on an annual basis and a couple of things that’s our overall EBITDA. So we’ll continue to invest in original programming in TV One as we have been and then increasing the number of hours and we’ll do it responsibly.

But if radio all of a sudden is much stronger in online, Interactive One is making more money, maybe that changes how we look at investment at TV One, maybe we can push the accelerator a little harder because we’re growing our cash flow from other areas of the Company. So I think it’s a balancing act and we’ve been able to manage it thus far. Manage our covenants, manage the dividends we need, but also get TV One enough investment to increase original programming to growth rates.

Lance Vitanza – CRT Capital Group

Okay, great. And then just lastly on Reach, there is a minority interest there as well, is that right?

Peter D. Thompson

Yes, 20%.

Alfred C. Liggins, III

20%.

Lance Vitanza – CRT Capital Group

20%. Okay. Thank you, both.

Operator

Our next question will come from the line of Davis Hebert, Wells Fargo. Please go ahead.

Davis Hebert – Wells Fargo Securities

Good morning, everyone. Thanks for taking the questions. I wanted to start with Reach. Can you talk about what drove the delta in the cash flow on the Fantastic Voyage? And I believe I heard you mention, Alfred, you said $5 million of positive cash flow from that segment this year.

Alfred C. Liggins, III

Yes.

Davis Hebert – Wells Fargo Securities

I just wondered if you could talk to how sustainable that is on a go-forward basis.

Alfred C. Liggins, III

I will let Peter answer the Delta question and then I’ll see your sustainability.

Peter D. Thompson

So, in round numbers the Tom Joyner Fantastic Voyage is about $7.2 million of revenue and about which is probably $6 million of expense. So it’s close to a $1.2 million of profitability. So that’s kind of much of the Delta related to that, and then the other thing year-over-year was we’ve got an affiliation agreement New York was terminated in Q2 last year having got just under $0.5 million payment from that which didn’t occur this year.

So they were the two things that you would need to normalize for in figuring out the Delta.

Davis Hebert – Wells Fargo Securities

Okay. And then Fantastic Voyage, can you help us with what that did in cash flow in 2012?

Peter D. Thompson

Similar amount $1 million but it was in Q1.

Davis Hebert – Wells Fargo Securities

Right, right, so there was a timing difference. Okay. And then with you owning 80% of Reach, is that now a restricted subsidiary as defined under the credit agreement?

Peter D. Thompson

Yes, it is in fact it’s treated essentially as a wholly owned restricted subsidiary and both the credit agreement and the indenture and I signed up as a guarantor.

Davis Hebert – Wells Fargo Securities

Okay, got it. All right, so that – sorry, Alfred, go ahead.

Alfred C. Liggins, III

Next part of your question is how sustainable is it it’s very sustainable actually it’s beyond sustainable, it’s substantially growable. I am really excited about the upside at Reach Media.

Peter D. Thompson

Ane one other thing is obviously, Davis as we moved over some successful shows into Rickey Smiley and Russ Parr and those in the Yolanda Adams and those shows on a standalone basis is profitable. So we actually kind of moved to profit that would otherwise have fallen in the Radio division into Reach.

Alfred C. Liggins, III

And Reach Media now is it’s the African/American Network platform. We essentially have every syndicated show in the marketplace. Every substantial syndicated show in the marketplace except for Steve Harvey. Yeah, I think that we just had an offsite and I think that David Kantor laid out like a little fact towards where we have six of the eight top black syndicated shows.

And that’s a good place to be, because we have inventory on other people stations because they want to carry our programming, which is value. There are a lot of networks out there that do comp deals, where they pay people for their inventory and they resell it, that’s not a really great business model. It’s a much better business model when you got personalities and programming content that people want and Reach has that. So there is a lot of upside at Reach Media.

Davis Hebert – Wells Fargo Securities

Okay, great. That’s really helpful. And then moving to TV One, you talked a little bit about the Comcast agreement coming up for renewal in early 2015. Can you remind us, I believe you’re under penetrated on Comcast systems? Can you remind us where you stand on that?

Peter D. Thompson

Yeah, we’ve got 13.6 million of their total subscribers. I’m not sure if they had 20 million, 21 million or 22 million current subs.

Davis Hebert – Wells Fargo Securities

Yeah.

Peter D. Thompson

But whatever their number as we’ve got $13.6 million of it.

Davis Hebert – Wells Fargo Securities

Okay. So I imagine that would be a point of discussion as you negotiate that agreement.

Alfred C. Liggins, III

No, it’s going to be a happy point of discussion.

Davis Hebert – Wells Fargo Securities

Okay.

Alfred C. Liggins, III

We’ve been lobbying for as we do with all of our operators just because there are partners that are no different. We think that this is a quality service. We think that we provide something to the African/American community that not being provided. We’ve got more things coming at TV One including the launch of a morning news program called News One Now featuring Roland Martin’s. So it’s going to be our answer to the today’s show.

This is going to be the first time Company is actually has made this kind of commitment to the black news space and we’re committed to African/American community and we’re giving them things that other companies don’t see as incredibly profitable.

We ultimately do think they can be profitable, but more importantly yet to service and we think that the fact that we do things like that, we should indicate that we deserve as wider distribution as any of the networks owned by majority of the companies like Viacoms, BET, and VH1 and so that’s our argument to all of our distributors and we’ll be making that argument to Comcast as well.

Davis Hebert – Wells Fargo Securities

Okay.

Peter D. Thompson

I just want to slightly correct some of that I said earlier on. Our ownership percentage of TV One as of June 30 was indeed 51.3%, a subsequent of that we’ve bought out about 1% of the shares from the previous CEO Johnathan Rodgers. So as we see today, our ownership interest is up to 51.87%. So I just wanted to clarify it.

Davis Hebert – Wells Fargo Securities

Okay. And then I think the previous guidance you’ve given in the past on TV One dividends has ranged from $15 million to $20 million. Do you feel like you have more certainty into that number? Especially, I think year-to-date you’ve received $12 million, just wanted to know if there is an update there.

Peter D. Thompson

On dividends is that?

Davis Hebert – Wells Fargo Securities

Right, correct.

Alfred C. Liggins, III

Yeah, I think it’s in the kind of $18 million range, correct?

Peter D. Thompson

It moves depending on what we feel we need to take out to sort of manage covenant cushion and we’ve got some plenty of cushion at the moment, so…

Alfred C. Liggins, III

We’ll use that dividend flow absolutely. Now we know what’s going to be substantial. We know it’s sustainable. We manage the timing to make sure that it gives us the best sort of advantage versus covenant compliance.

Davis Hebert – Wells Fargo Securities

Okay. Last question for me, and I appreciate you taking the questions. You mentioned potentially refinancing the senior sub notes. Would the conversation also include the bank debt as well or you…?

Alfred C. Liggins, III

Well, that’s a good point because obviously if you are able to drop your senior sub notes from 12.5% to 8.5% then your bank debt shouldn’t be 7.5%. So the potential upside for a total recapitalization on free cash flow is tremendous. I think that we need to make sure, we know where we fit in terms of any potential TV One buyout, before we take out or refinance the first half, I mean the front part of the capital structure, because, which you don’t want to do is refi everything in Q1, the whole capital structure then find out you’re going to do a deal on TV One and then blow all of that up to buy in TV One and $20 million of fees unnecessarily. So right now we’re really kind of thinking about the senior sub notes in the near-term and keeping our powder dry on the front end.

Davis Hebert – Wells Fargo Securities

All right. Thanks for the color. I appreciate it.

Alfred C. Liggins, III

Thank you.

Operator

Our next question will come from the line of Patrick Fitzgerald of Baird. Please go ahead.

Patrick Fitzgerald – Robert W. Baird & Co.

Hey, guys. Nice quarter. When do you renegotiate most of your non-Comcast TV One MSO agreements?

Alfred C. Liggins, III

Time Warner, Cox and Comcast, all basically come up with the same time at end of next year, and then the following year, DIRECTV and Verizon come up, and then the year after that AT&T.

Patrick Fitzgerald – Robert W. Baird & Co.

So, end of 2014 for the first three that you mentioned, then end of 2015?

Alfred C. Liggins, III

Correct.

Patrick Fitzgerald – Robert W. Baird & Co.

Okay. I believe you said in the past there were some concerns of refinancing TV One because of where those sub fees will go. What is your current thinking on that?

Alfred C. Liggins, III

For the subsidies…

Peter D. Thompson

Renewal risk, I think we hadn’t really dealt into that yet with the bankers. But just of the top of my head, I think that at today’s leverage level for TV One. I think we probably could refi those notes, because TV One’s EBITDA could drop a fair amount and it’s still be in the service to $120 million of debt that it’s got, so it could be a lower performing asset than it currently is and will be, because it’s going to grow again next year and still support that debt.

So I definitely think you could refinance it and I think by the time when you start to look at refinancing those we will have more clarity on where we’re at with renewals and if we were financing it as a consolidated entity, I think that you look at it differently as well, because people going to look at okay how well is the radio business performing?

How sustainable is that cash flow, what is it doing? And then they will make some sort of risk analysis on what renewals would be like and cash flow could potentially be down by X and the company still service for debt and I think that the answer is yes in all those scenarios. So we’ve had a number of bankers come to us actually I had the senior vendor currently to TV One about six months ago come to us or may be nine months ago and wanting to actually give us more money to buy out Comcast irrespective of the renewal risk, yeah but we can’t do that because there is a debt cap that is instituted from our restructured notes and also exist in our TV One credit agreement that limits the amount of debt there. So I know at least one vendor who was willing to take a lend again the renewal risk.

Patrick Fitzgerald – Robert W. Baird & Co.

But those bonds are callable at 1.05 right now, aren’t they?

Peter D. Thompson

But it drops down to 102.5 in February, I think.

Patrick Fitzgerald – Robert W. Baird & Co.

Okay. So if I understand you correctly, you are pretty comfortable with the sub fees that you’re getting now in terms of when you renew them that they will be at the same level or potentially even higher?

Alfred C. Liggins, III

I mean I certainly don’t I guess the safe answer is I can’t sit here and guarantee that every operator is going to give us a rate increase. I can tell you that conversations that I’ve had with some large operators one in particular that conversations centered around some modest rate increase, it was their expectation they gave us hey we’re trying to get our programming costs down to an annualized growth rate effects it wasn’t we’re trying to reduce our programming costs where from where they’re at and I want you to be a contributor to it. So that was for me a positive sign, certainly if I was an operator, I negotiate from the standpoint, I don’t want our programming cost to go up at all, I would say that it should be flat.

My argument would be that for a network with our ratings you already pay us less than you pay other networks. Particularly other mainstream majority on networks and by the way, our ratings also happen to be up. So we have a larger audience and we deserve some sort of increase and I’m sure that the argument somebody could make the argument up, your sub fees should go down and then I was like I would make the argument then why should our sub fees go down when you’re not asking Viacom? Are you just picking on us, because we’re a small minority owned independent network and that’s can argument that I think has some legs.

The other thing is that look, we were created for a specific mission, providing diversity of Programming for African/American. The industry bought into that. And I think that it would be disingenuous for the industry turnaround and pick on us because we were independent and small minority owned and that’s why they actually supported this in the first place and lastly we’re not an entity without voice, we do have close to 20 million Radio listeners online.

So we would ever sort of need support, get into sort of public skirmish like CBS and Time Warner are undergoing or have going now. It’s not like we’re without the ability to highlight the issues, tell our story, marshal support.

Patrick Fitzgerald – Robert W. Baird & Co.

Great. That’s great color. And then just in terms of sub fees versus advertising in the quarter, what was that at TV One?

Alfred C. Liggins, III

50/50.

Patrick Fitzgerald – Robert W. Baird & Co.

50/50, okay. Thank you very much.

Alfred C. Liggins, III

Welcome.

Operator

There are no additional questions in queue at this time.

Alfred C. Liggins, III

Great, thank you folks for tuning in and we’ll talk to you next quarter.

Operator

Ladies and gentlemen it does conclude our conference call for today. On behalf of today’s panel, I would like to thank you for your participation in today’s Radio One teleconference call. Thank you for using AT&T. Have a wonderful day. You may now disconnect.

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