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Executives

Lew Dickey - Chairman and CEO

J.P. Hannan - Interim CFO

Analysts

Marci Ryvicker - Wells Fargo Bank

Aaron Watts - Deutsche Bank

Peter Gingold - Angelo, Gordon

Ken Silver - RBS

Cumulus Media Inc. (CMLS) Q3 2009 Earnings Call November 3, 2009 11:00 AM ET

Operator

Welcome to the Cumulus Media Third Quarter Earnings Release Conference Call. Please note that certain statements in today's press release and discussed on this call may constitute forward-looking statements under Federal Securities Law. These statements are based on management's current assessment and assumptions and are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.

I would like to introduce Lew Dickey, Chairman and CEO of Cumulus Media. Sir, you may begin.

Lew Dickey

I appreciate you taking the time to receive an update on performance. I am joined today by our Interim CFO, J. P. Hannan. Today, we’re going to update you on our third quarter performance and briefly discuss our outlook for 4Q.

Starting with third quarter results, our revenue for all markets was down 18.5%, $65.1 million. This was slightly better than the revenue pacing data I shared with you during our second quarter earnings call, which at the time was down approximately 20%. As an aside, CMP's revenue for the third quarter was down 15.9% as the larger markets appear to be gaining traction slightly ahead of the smaller markets.

While we continue to see sequential improvements, revenue weakness for the quarter for CMI, was fairly broad based across most major quarters, including auto, obviously political, restaurants, fast food, home furnishings and recruitment advertising. Auto alone however accounted for 40% of the year-over-year decline in revenue, for the quarter.

In addition, our political comps accounts were tough as we booked 1.3 million of political in the third quarter of 2008. That we obviously comp against this year. Now, our operating expenses for the quarter were again, better than previous guidance. Which we guided anywhere from 15% to 20% down, and expenses for the quarter, finished down 20.9 % or almost 21% reduction over the same period last year.

We continue to make excellent progress in our effort to reengineer the fixed cost model of the business, through the development and implementation of our proprietary technology platform that we have shared with you as of late. Our industry revenues, peaked in 2006 at $21.5 billion. So in 2006, radio was at $21.5 billion industry.

In this year, revenues are forecasted to finish around $15.5 billion, so a decline of $6 billion. We believe it could be from peak to trough back to peak again, it could be 10 years, or maybe 2016 before we reach $21.5 billion again. So, we definitely believe the industry is going to come out of this cycle and continue to grow, but it’s going to be quite some time before we reach the 2006 levels.

So therefore more than ever before, we believe efficiency is becoming the greatest source of competitive advantage in our business today. And by employing state-of-the-art technology to run the enterprise and drive productivity, we believe it is critical to having a sustainable business model.

Not about cutting bodies, but it is rather about resource allocation, systems, and customer focus solutions. For example, we are hired 50 new sellers in the last six weeks. And we’ll hire 50 more before year's end. All without negatively impacting our cost of sales. Again, efficiency and resource allocation driven by our technology platform, is enabling our company to compete in this difficult environment, while positioning us for outside growth as the cycle turns.

We don't know what 2010 is going to bring. We're of the belief that it is going to be positive. I have heard estimates bandied about anywhere from flattish to up double digits and even in the low teens. Again, it's too soon to tell and I don't want to go out and try to make a prediction on that, but I can tell you based on our technology platform and how we have geared our business operationally, whatever the growth rate is, we can expect to exceed that, on the EBITDA line, by a factor of [3x].

Now moving down the income statement, our Q3 adjusted EBITDA was down 20% to $20.1 million. This result in free cash flow for the quarter of approximately $8.7 million. Now, the EBITDA margin is 31% at [9.30], which we believe will outpace many our peers most of them operating in large markets, again due to the technology platform and reengineering of the fixed cost model of the business.

Now, the 31% margin and the decline of EBITDA of 20% is including one time charges, which predominantly are comprised of [Marty severance]. And if we excluded that our EBITDA was down 16.8% and we picked up a point, point-and-a-half on the EBITDA margin line. Additionally, CMP which operates predominantly in the top 10 markets, saw its EBITDA decline of 8.2% giving effect to a 41.5% EBITDA margin, which is the highest in the industry, and more than 1200 bps above the industry mean.

This is in spite of a large percentage of our revenue which comes from top 40 stations and big sports talk stations, which are considerably more personnel and promotion intensive than most formats. Particularly urban or very music intensive formats.

CMP's industry leading margins are a direct result of the implementation of CMI's proprietary technology platform. As of September 30, in CMI we were sitting on a cash balance of approximately $19.8 million of which we used 7.3 to make our required excess cash flow payment as per the credit agreement amendment that we announced on our last call.

We exceeded our minimum EBITDA requirement based on that amendment, by approximately $15 million for the quarter, and are confident that we are on a path to resume our covenant compliance when it returns, at the end of March in 2011.

Now looking ahead for the balance of Q4, we believe that we will exceed the year-over-year revenue and EBITDA performance we just posted in 3Q, in spite of a tough political comp, which we're comping against $3.6 million, at CMI that we wrote in 2008 in the fourth quarter. We also anticipate, further reductions in operating expenses again due to our technology platform, to be down in the 15% to 20% will be our guidance as it was in the last quarter, for the fourth quarter.

Now as everybody knows, it’s been a very challenging year and I really want to commend our team for the hard work and perseverance that they have given our company, and their ability to lead the industry in defending our cash flow as we enter the final quarter of 2009, and we believe we're very well positioned for a cyclical rebound based on the way we're geared operationally in 2010.

I’m going to turn it over to J.P. Hannan, who’s going to provide you with the financial overview and then we will open it up for questions. Thank you, J.P.

J.P. Hannan

From a finance perspective Q3 2009 was fairly straightforward quarter. We continue to focus on the operational strategic initiatives we rolled out earlier in the year. We mentioned net revenue was down 18.5% for the period, resulting in a year-over-year decline in station operating income for the quarter of 4.2 million or 14.4%, to $24.9 million.

Despite this decline, we continue to see improvement in operating margins as we talked about as a result of our focus on cost reduction, stream lining business processes across the company. Regarding our free cash flow for the quarter, during Q3 we produced free cash flow of $8.4 million, compared to $16.6 million is generated the same period during the prior year, decline of $8.1 million. This was related mainly to the decrease in EBITDA during the quarter and increased borrowing cost resulting from our Q2 amendments to our credit agreement.

Our capital expenditures for the quarter, CapEx was approximately $700,000 with the year-to-date total of approximately 1.9 million. We anticipate our total capital expenditures for 2009 to finish just under $3 million.

Moving on to the balance sheet, as a result of the continued operating pressures in the radio industry, this quarter we recorded interim impairment to our broadcast licenses and goodwill totaling $173 million. Our total leverage ratio was 8.57 times at the end of Q3. So, as we discussed on our last call, the covenant suspension period outlined in our Q2 credit agreement amendment suspends this test through the fourth quarter of 2010. The next testing period for this metric, will occur after Q1, 2011.

A minimum trailing 12 adjusted EBITDA level of $60 million must be maintained during the suspension period. As we mentioned on September 30, we had adjusted EBITDA of over $75.4 million on a trailing 12 month basis. Next increase in our covenant test occurs, June, 2010, when the covenant increases to $62 million. Additionally, we have a minimum cash availability covenant of $7.5 million during this covenant suspension period and at September 30, we had cash on hand of almost $19.8 million.

We also touched on in October, we made $7.3 million excess cash flow payment to our lenders for the terms of the amendment. This was in addition to the $1.85 million principal payment we made during the quarter. We continue to deleverage the business going forward.

With that, I would like to open it up for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). First question comes from the line of Marci Ryvicker with Wells Fargo Bank. You may proceed.

Marci Ryvicker - Wells Fargo Bank

First, there has been so much cost cutting in radio and traditional media. How much of these cost cuts do you think are sustainable not just for 2010, but just going forwards is the first question. And then the second question is, can you talk about how you did in the months of September and October specifically?

Lew Dickey

With respect to cost cuts, what we did at the end of last year, and it has really been borne out of this technology platform that we embarked on in development three years ago. But based on the market conditions, we really went back and reengineered the fixed cost component of our business in an effort to try to make our P&L more variable. So, it was not done with an eye towards a temporary or [femoral] cost cut that would survive through the down part of the cycle then we would have to add the cost back in. In essence as I mentioned in the prepared remarks, we have been very focused on resource allocation and trying to determine basically, this business has around a long time. And as a result, there are lot of legacy costs that are embedded in the business. And its amazing, based on the technology platform that we’ve developed, how we’ve been able to, again, reallocate various resources and create a great deal of efficiencies within our operation, that have enabled us to drive the margins that we have without sacrificing the overall quality, either one of our customers.

Its a different way of doing business today, and this is not just in the media business, particularly traditional media business, but even as you see in the large internet companies, Google has reduced hiring dramatically. Yahoo has been cutting staff. So, nobody is unaffected by this. But there is a greater push towards efficiency.

And we have an industry that has been run pretty much the same way for as long as I can remember not being doing this for 25 years and it did not really capitalize on technology, all of the existing technology platforms that are out there for the industry, via third party vendors on an essence, legacy systems that were developed back in the DOS days that are all client server based and don't take advantage of Cloud computing and all of the technological breakthroughs that are available today.

As I say this is a very expensive endeavor for us and we worked very hard on it, but its paying big dividends for us and we expect it to enable us to maintain our cost profile going forward. As I mentioned, we're operationally very, very geared. So I am not going to predict exactly what revenues are going to be next year. We are budgeting positive, no doubt. And we’re going to see a tremendous turn in terms of our EBITDA against revenue, which is going to create the operational leverage that this business is known for.

With respect to the revenue for September, it was clearly the best month of the quarter. Revenue for CMI, overall was down 16% and then October is where we take the headwinds of the political. So, October is anomalous and is not a good comparison. Ex-political, we are doing a little bit better than we did in September. But we face the brunt of the headwinds on political end month of October.

Marci Ryvicker - Wells Fargo Bank

You said, you had $1.3 million in political in the third quarter of last year. How much political did you have in the fourth quarter of last year?

Lew Dickey

I believe I mentioned that. It was $3.8 million of political?

J.P. Hannan

You had it right here.

Marci Ryvicker - Wells Fargo Bank

Is that net or gross?

Lew Dickey

Those are all net numbers.

J.P. Hannan

And the fourth quarter of last year it was just under 3.6.

Lew Dickey

3.6 Marci, I am sorry, not 3.8, 3.6, was in that number of growth.

Operator

Our next question comes from the line of Aaron Watts with Deutsche Bank. You may proceed.

Aaron Watts - Deutsche Bank

Lew, I haven’t heard DOS talked about in a while, it was a nice flashback there. But, just first one from me, volumes are a little bit, I guess out of your control and you have to wait to a certain extent to bring them back. But can you talk a little bit about what you're feeling on the pricing side? Do you feel like the industry may be as gotten a little more religion now in terms of price rationalization?

Lew Dickey

I certainly hope so. I can't control what the other guys do and I certainly wish I could, but I can't. It takes two to tango here and in this instance, we have got a lot more than two. We have got to see some rationalization in terms of pricing, we have been big proponents of this all long that we really want to sell, we really want a price per value and profit not for share. Unfortunately, I say too many radio companies are too reliant on the wholesale business model and not doing enough in developmental work to create demand for the product, rather than just simply responding to default demand. And as a result it had a commoditizing effect on the business, and the way they try and stimulate demand is simply through price and when you have a fixed pool of inventory that makes it very difficult on the business model. We're working very hard to broaden our base of account to create demand and sell value and restructure our sales force accordingly that will enable us to compete in that lane.

You mentioned volume as well. Think about the SARS rate right now is under $10 million. I just heard that as the automakers are gearing up and predicting production and they have got obviously a great deal of [econometrics] that they focus on and market research that they focus on as they have to forecast production and none of it is a science. But nevertheless I have heard SARS rates bandied about of back to 12 million, 13 million, 14 million cars within 36 months.

I am not an expert in that field, so I don't know how reliable those numbers are, but I can tell you it will make a big different. I mentioned at CMI 40% of our year-over-year decline was due to automobile advertising. Think of that as the trough SARS rate. As that improves and we get back to 12 million, 13 million, 14 million vehicles which by the way is still 20% below the peak of 17 million vehicles or 17.5 million vehicles. It is going to bode well and it's going to create more volume and more demand against the fixed inventory that we have.

But it is a question of the industry recognizing the value of its product. There was a survey that just came out, that was done by the Council of Research Excellence and it was conducted by Nielson. It was completely nonpartisan and it was done for video and audio entertainment. One of the things they found in radio as they went through this is that I think it is a critical stat, is that 80% of the 18 to 34 year olds tune into radio now for 104 minutes a day, that’s only five minutes less than the overall average. 90% of those people employed listen to the radio for 2.5 hours a day. The knock was that it wasn't going to reach the younger people and yet, 80% of 18 to 34 year olds are consuming the product for over 100 minutes a day.

And then of the entire employed workforce 90% of those are listening for 2.5 hours a day. The last key finding of this statistic which is important is that 50% of all people who listen to terrestrial radio consume no other digital audio sources.

So, it’s a tremendous reach medium. And now you're looking at that in context of newspapers which used to be the local reach medium, obviously that is no more. This is its business models permanently impaired and even Warren Buffett who was on TV this morning who owns newspapers, basically said they have no future.

So, at one point was $50 billion business. So, you're seeing the newspaper business which is going to be giving back, a lot of local advertising you're seeing the directory business, which was a larger business than radio directory business, or where radio is now it peaked around $16 billion and that business is declining, rapidly and precipitously.

So, between newspapers and directories, [dead-tree] business that was consuming quite a bit of local advertising, those businesses are going away pretty quickly. And so, as the economy can turns and continues to grow you're not going to see the rebound in those businesses. I think it portends very well for electronic media and the relevancy of our medium in the marketplace is going to be very strong.

We just have to do a much better job in the industry of selling the value of our product. It’s not an efficacy issue, it’s been a sales issue. I don't think we have effectively done that. Our programming staffs have done an excellent job of maintaining the relevance of the product in the medium. We just have to do much better job of selling the true value of it and getting out seeing more people knocking on more doors. That is what is going to be required to ultimately improve the pricing model. And I have always been a firm believer and without talking our book, I believe that further consolidation, taking advantage of these technology platforms, and this type of management philosophy with respect to selling value, is going to be essential to improving the overall fundamentals of the industry.

Aaron Watts - Deutsche Bank

I was curious if you had any sort of updated thoughts or status on the performance royalty debate going on?

Lew Dickey

I look its an evergreen problem, I have heard it also talked about is the Whack-a-Mole. As soon as its not done, its going to come up again this, its going to be brought every year. So we are going to be talking about this for a long time. We have deep rooted support throughout Congress, on behalf of the radio broadcasters. We are extremely pleased to have Gordon Smith, Former senator from Oregon, who is now leading the charge and obviously he's a very astute legislator or was and is now will be now be very astute in terms of directing or lobbying efforts in this behalf.

Its clearly a tax on broadcasters and being delivered to foreign-owned record companies and its not something that as it becomes properly defined and explained, its clear that its not the way its been made out to be, in terms of a subsidy for starving artists. Quite the contrary, it’s going to foreign record companies and its attacks on local media. So, with certainly impinge on local media's ability to continue to serve that communities and for that reason the house and senate, as they review this and become more educated on what's really going on here. It's going to become something that will be very difficult for them to gain any real traction other than the few sponsor who are catering to their constituents, which tend to be more Hollywood focused out in Southern California.

Operator

Our next question is from the line of Peter Gingold [ph] with Angelo, Gordon. You may proceed.

Peter Gingold - Angelo, Gordon

That number you guys have listed in your release is that all the term loan. Is there any revolver drawn or is there anything else in that 646 number?

J.P. Hannan

No, there is no revolver drawn currently.

Peter Gingold - Angelo, Gordon

So, just the term loan be that 646.

Lew Dickey

Right.

Operator

Our next question comes from the line of Ken Silver with RBS. You may proceed.

Ken Silver - RBS

Lew, did you give fourth quarter revenue guidance?

Lew Dickey

Ken, fourth quarter we said we expected our revenue and EBITDA performance to be ahead of what we did in Q3 on a year-over-year basis. We were down in essence 18.5 and we were down 20 in EBITDA. I think normalized, what was the number normalized without the one-time charges. But I think we can expect to be inside of those numbers in terms of a rate of decline in Q4 over Q4, the following year. Clearly, we're up against some pretty tough political comps as we indicated and Marci asked, we're up against $3.6 million of political. In spite of that we feel that we're going to improve on the down 18.5 and down 16.8 in essence in EBITDA for the quarter.

Ken Silver - RBS

And the EBITDA estimate is backing out the severance you took?

Lew Dickey

Yes, we took all -- we took all of [Marty] severance and related charges in the quarter, even though they are going to be on a cash basis they’re paid out as per the contract over the course of the year.

J.P. Hannan

There is actually a couple of other part of our overall restructuring a couple of other charges in there. Predominance of it was Marty.

Ken Silver - RBS

You mentioned early in the call about, as it related to CMP, how if the large markets were performing a little better? Can you talk about that further sort of why that is?

Lew Dickey

Well, the large markets tend to lead us in and lead us out of these cyclical downturns. It doesn't appear to be any different this time around. We're starting to see some demand pick-up in our larger market San Francisco, Dallas, Houston, Atlanta. Its picking up there. We’re starting to see some national placed in those markets ahead and some regional business placed in those markets. Before it makes its way down to the mid-size and smaller market. It’s really not out of the ordinary, to expect that to occur, but the smaller markets generally catch up a couple of quarters behind. They are also generally a couple of quarters behind going into it as well.

Ken Silver - RBS

You mentioned the that those consumer reach numbers that you were reviewing before. What was the source of those numbers?

Lew Dickey

Source is called 'The Council of Research Excellence' and it says its comprised of senior research experts from agency, advertiser, television industries, oversaw $3.5 million study that was funded by Nielsen. Primary goal of the study was understand how people were consuming video with a variety of screens available to them and obviously the audio consumption as well. It’s a white paper produced by Nielsen, and in essence designed and overseen by this group of senior research experts from the agency side as well as the TV side.

Ken Silver - RBS

And is there an addition to Nielsen is there an additional update on sort of where you guys are with Nielsen in terms of number of markets?

Lew Dickey

We're in 50 markets with Nielsen. It’s a annual survey, and the surveys have all been completed. We mentioned on the last call that we were extremely pleased with the sample size of the surveys. They actually outperformed their guaranteed levels. And were significantly higher than what we were accustomed to getting in these markets from Arbitron. So, the reliability within particular sells or cohorts is far superior to what we had been receiving in the past. As I mentioned before, its very difficult to do business when you see giant statistical wobbles in day parts or in demographics, when you know that consumption patterns, don't isolate to that great of an extent particularly with absolutely no change in the competitive landscape.

So it's just very difficult to manage your business and to motivate your employees and to and to effectively educate your advertisers on the value of your product when you see massive swings in the so called consumption patterns or market share. So, anybody understands the statistics, the only way to mitigate that, is to have more robust sample sizes in these individual cohorts and that just costs more money. And it just takes greater attention to detail and to quality. We have been very pleased with the survey that respect, which is the most important respect at the end of the day.

We are done operator. And we appreciate everybody's time today. And look forward to catching up again in 90 days. Have a good day, thank you.

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Source: Cumulus Media Inc. Q3 2009 Earnings Call Transcript
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