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Executives

Allison Bennett - Director of Corporate Communications and Media Relations - Crown Media Networks

William J. Abbott - Chief Executive Officer, President and Director

Andrew Rooke - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Charles L. Stanford - Executive Vice President of Legal & Business Affairs and General Counsel

Analysts

Michael V. Pace - JP Morgan Chase & Co, Research Division

Peter Okin

Lawrence M. Stern - Stern Capital, LLC

Crown Media Holdings (CRWN) Q3 2013 Earnings Call November 1, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Crown Media Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Today's presentation includes forward-looking statements regarding the company and its performance. The forward-looking statements may concern, for example, expected financial positions and operating results, its business strategy, its operating and financing plans and other matters. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in or implied by any forward-looking statement and should be considered in conjunction with the cautionary statements included in our press release and our most recent reports filed with the Securities and Exchange Commission, including our most recently filed annual and quarterly reports. Any forward-looking statements are made only as of the date of this conference call, based on information known today to the company's management. The company is not undertaking any obligation to update any forward-looking statements. I'd like to turn the call over to Allison Bennet. Allison, please go ahead.

Allison Bennett

Thank you, and good morning, everyone, and welcome to Crown Media's Third Quarter Conference Call. With me today are Bill Abbott, President and Chief Executive Officer; and Andy Rooke, Executive Vice President and Chief Financial Officer. Bill and Andy will comment about the operating results and financial performance for the 3 and 9 months ended September 30, 2013, and then we will open up the call for questions. I would like to remind everyone that our press release, which contains information on non-GAAP measures, was distributed this morning and is available through the Investor Relations section on our website at ir.crownmedia.net.

In addition, our 10-Q will be filed today. Now I'd like to turn the call over to Bill.

William J. Abbott

Thank you, Allison. Good morning, everyone, and thank you for joining us today. We have positive results to report from the third quarter and year-to-date and have experienced solid growth in advertising revenue and subscriber license fees, driving a 10% increase in third quarter total revenue as compared to 2012. Now I would like to review the quarterly and year-to-date operating highlights.

In the area of content and ratings, third quarter was a pivotal time for Hallmark Channel with the debut of Cedar Cove, our first original scripted series. From the series' launch on July 20 to its October 12 finale, Cedar Cove averaged a 2.0 household rating, making Hallmark Channel the #1 network in cable during the Saturday 8 to 9 time period.

The high level of anticipation and enthusiasm for the series was demonstrated by viewers' engagement on social media during its debut. Viewers twitted, posted, liked and checked in on a variety of platforms, making Cedar Cove's world premier the most talked about primetime television program overall and #2 in cable on social media, according to Trendrr Research for Saturday, July 20.

The show sustained strong ratings throughout its limited 13-week run and closed on a high note, delivering a 2.2 household rating and more than 3 million unduplicated viewers. The final episode was the highest-rated premiere episode of the season among women 25-54 and adults 25-54 delivery and rates as the top program on cable for Saturday outside of sports. During third quarter, Hallmark Channel premiered 7 new original movies, all of which benefited from the strong lead-in by Cedar Cove. Hallmark Channel's highest-rated movie of 2013, Second Chances, premiered on July 27, following the first 1-hour episode of Cedar Cove, and garnered a 2.5 household rating with over 2.8 million total viewers.

In addition, Second Chances ranked as the #1 telecast of the day, as well as the #1 cable movie of the day and the week. Similarly, the September 14 debut of original movie Garage Sale Mystery delivered a 2.1 household rating with nearly 2.3 million total viewers and was the #1 rated movie among households of the day and week on cable. Boosted by the season finale of Cedar Cove, the October 12 premiere of Signed, Sealed, Delivered, starring Eric Mabius and Daphne Zuniga, scored a 2.5 -- 1.5 household rating and reached nearly 2.9 million total viewers. Signed, Sealed, Delivered was also the #1 cable movie of the day and the #2 movie of the week.

Created by Martha Williamson, master storyteller and executive producer of the long-running and much-loved network series Touched by an Angel, Signed, Sealed, Delivered was recently greenlit as Hallmark Channel's newest original series with its 10-episode run scheduled to premiere in 2014.

Third quarter's positive rates will look to carry over to the fourth quarter, with the 2-hour pilot for upcoming scripted series When Calls the Heart and the premiere of original movie The Good Witch's Destiny, the latest installation in the Hallmark Channel's Good Witch series. Attracting an audience of over 3.2 million unduplicated viewers, When Calls the Heart debuted on October 19 as the #1 cable movie of the week, as well as day, with a 1.7 household rating. 1-hour episodes of When Calls the Heart, starring Lori Loughlin, will kick off in January of 2014.

The Good Witch's Destiny premiered on October 26 to great fanfare, with nearly 3.9 million total unduplicated viewers tuned in to catch Catherine Bell's reprize of her role of Cassandra Nightingale. The sixth installment in the popular Good Witch franchise, the Good Witch's Destiny delivered a 2.4 household rating and has become the Hallmark Channel's most watched original movie for 2013 to date among the network's core demographic of women 25-54. Among the women 25-54 rating, the original movie was the #1 ad-supported cable program of the day and #2 movie of the week. We are excited for the official launch of Hallmark Channel's signature holiday programming franchise, Countdown to Christmas, in the fourth quarter. The popular holiday franchise has been moved up to November 2 based on the high ratings and positive response to our early November holiday preview weekends over the past couple of years. This year, Countdown to Christmas will commence with tomorrow's premiere of The Thanksgiving House, the first of the season's 12 new holiday titles, followed by a lineup of fresh originals every Saturday and Sunday during December 15. Hallmark Channel's Countdown to Christmas will include more than 1,200 hours of around-the-clock holiday peak programming through January 1, concluding with the network's annual broadcast of The Tournament of Roses Parade. On the Hallmark Movie Channel side, the network continues to demonstrate year-over-year growth with double-digit increases in ratings for the period and year-to-date compared to 2012.

The network's most recent original movie, The Mystery Cruise, which debuted on October 5, attracted over 900,000 unduplicated viewers. We expect Hallmark Movie Channel ratings to grow and progress on par with the network's continued carriage expansion. As we move into the holiday season, we also anticipate a positive impact of HMC's ratings will result from the launch of the network's own seasonal programming initiative, The Most Wonderful Movies of Christmas. Designed as a contemporary but distinct holiday programming destination, The Most Wonderful Movies of Christmas will feature the network's first-ever original holiday movie, Christmas with Tucker, starring James Brolin. Focusing more on the traditional time-honored aspects of the holiday, The Most Wonderful Movies of Christmas will present Christmas Classics Thursday, a weekly showcase of some cherished, all-time holiday favorites, including Holiday Affair, Christmas in Connecticut, It Happened on 5th Avenue, The Bishop's Wife and Babes in Toyland. The Most Wonderful Movies of Christmas rolls out Monday, November 11, with holiday programming airing each week Monday through Friday from 9:00 a.m. to 11:00 p.m.

With separate holiday offerings, we have strategically branded and scheduled each campaign to ensure their individual success and alleviate cannibalization and duplication of content. On the distribution front, Hallmark Channel's universe estimate is now 88 million homes for October 2013, a decrease of 1.5 million homes from the October 2012 universe estimate. From September to October, Hallmark Channel held the sixth largest month-to-month subscriber increase out of 113 measured cable networks.

The carriage of Hallmark Movie Channel continues to grow at rapid speed, propelled by new launches and positive repositioning. Hallmark Movie Channel is now in 53.7 million homes, an increase of 5.6 million households at an average of 469,000 monthly subscribers since October 2012. In addition, the network had the third largest subscriber increase of all cable networks between September 2013 and October 2013.

Since its launch in April of 2010, Hallmark Movie Channel has added 19.5 million new subscriber homes, representing an increase of 57%, the third largest percentage increase of any cable network in the same timeframe. In advertising sales, third quarter was strong for ad sales, with total advertising for Crown Media Family Network's marketing and growth of 14% compared to the same period of a year ago. Leveraging its strong programming schedule, which included the successful launch of Hallmark Channel's first-ever original scripted content series, Cedar Cove, and the 7 new original movies, the ad sales team was able to secure scatter volume at a 20% increase versus the same weeks in 2012.

Both Hallmark Channel and Hallmark Movie Channel saw double-digit CPM increases, with Hallmark Channel up 40% and Hallmark Movie Channel up 31% versus their respective upfront [indiscernible]. In the fourth quarter, we look forward to bringing Hallmark Channel's ever-popular Countdown to Christmas and Hallmark Movie Channel's inaugural holiday edition of The Most Wonderful Movies in Christmas to the advertising marketplace. All holiday campaigns will be supported by a comprehensive publicity, social media and marketing campaign designed to elevate Crown Media Family Network's visibility in the advertising space and capitalize on the strength of our brands during this critical season for our business. Hallmark Channel's family-friendly holiday programming has consistently been of high value to advertisers, and we are confident that our fourth quarter schedule for both networks will continue to attract strong advertising revenue. Now I'll turn the call over to Andy to review the financial results.

Andrew Rooke

Thank you, Bill. As Bill mentioned, third quarter 2013 reflected the success of our original series Cedar Cove and the continued growth of Hallmark Movie Channel. We increased advertising revenue by 10%, in large part due to increases in Hallmark Movie Channel audience growth. Over the last year, we have increased Hallmark Movie Channel distribution by 10% with new launches on and positive repositions by Time Warner, Cox and other distribution partners.

This, together with an increase in our ratings and CPMs, has led to a 20% increase in our key audience demographic of women aged 29-54 and a 29% increase in revenue from Hallmark Movie Channel.

Quarter-over-quarter, our subscriber fee revenue also increased $1.2 million due to contractual rate increases for carriage of Hallmark Channel.

For the 9 months ended September 30, 2013, growth in distribution and ratings, particularly on Hallmark Movie Channel, led to a 5% increase in advertising revenues to $197.5 million. Year-to-date, our programming costs are similar to those incurred in the 9 months ended September 2012, although given the mix of programming and the timing of our first original series, Cedar Cove, programming cost increased just over $4 million or 14% quarter-over-quarter. Other costs and services for the quarter increased just under $1 million due to a bad debt provision relating to the bankruptcy of the advertising agency ASL Media Inc. and increases in employee consulting and playback expenses. Selling, general and administrative expenses increased 12% over third quarter of 2012 to $15.7 million and, for the 9 months ended September 30, 2013, have increased 8% to $46.7 million due largely to increases in employee costs. Marketing expenses increased $3.5 million for the third quarter of 2013 and, year-to-date, have increased $4 million due to the marketing of our original series. The increases in programming, SG&A and marketing in the quarter have led to an 8% decrease in adjusted earnings before interesting -- interest, taxes, depreciation and amortization, or EBITDA, to $28.7 million from $31.3 million a year ago.

However, for the first 3 quarters of 2013, EBITDA has increased 5% year-over-year to almost $104 million, representing 40% of revenue, a similar margin to that achieved in 2012. Interest expense decreased $1 million for the quarter as compared to the same period of 2012 due to the decline in the outstanding balance on our term loan and the reduction in the interest rate from 5 3/4% to 4% following the amendment in March of this year. Interest expense on the term loan was $2 million during third quarter 2013 as compared to $3 million during third quarter of 2012. Year-to-date interest expense has decreased $2.5 million for the same -- similar reasons. Our provisions for income tax of $6.1 million and $6.6 million for the quarters ended September 30, 2013 and 2012, reflect effective tax rates of 38% and 36%, respectively. We expect to use available NOLs to offset our 2013 federal tax liability and have not or expect to make any significant tax payments during the year. In the first 9 months of 2012, we paid Hallmark Cards $10.5 million in satisfaction of obligations under the then-in-effect federal tax sharing agreement. Year-to-date, our provision for income tax increased $2.5 million over the same period last year.

The increases in adjusted EBITDA and the decrease in cash taxes has led to an increase in cash flow provided by operating activities of just over $14 million to $34.5 million from $20 million a year earlier. We have used the cash generated from operations primarily to reduce the principal balance under our term loan to $154 million from almost $188 million at December 31, 2012.

This reduction in debt, together with our increased earnings, has reduced our leverage ratio to 3.3x adjusted EBITDA as of September 30, 2013, compared to 3.6x at December 31, 2012. We are pleased with our results for the third quarter and look forward to our fourth quarter holiday season. We expect to increase our investments in programming and marketing throughout the rest of the year to continue driving revenue and earnings growth and are happy to reaffirm our previous guidance of mid to high single-digit growth in both revenue and adjusted EBITDA for the full year 2013. With that, I will turn it back to Bill.

William J. Abbott

Thank you, Andy. Crown Media has marked notable growth across the business during third quarter, including ad sales, distributions and ratings. The overwhelming success of our first scripted series is a clear indication that we have laid a solid new foundation to further expand our programming and redefine our business and profile in the cable universe. As we move into the fourth quarter, we are optimistic about the prospects for our business and expect to close out a highly successful 2013. At this point, I will turn these proceedings over to the operator to assist us in facilitating the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mike Pace of JPMorgan.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Bill, just wanted to -- in your prepared remarks, you gave a subscriber stat for the Hallmark Channel. Can you just repeat that? I didn't know if I had 86 or 88, and I guess there's difference -- a meaningful difference between the 2 because I'd be wondering what happened if we were up at 88.

William J. Abbott

It is 88. Nielsen calculates these things. We've been consistently in that 86, 87, 88, 89 now for quite a while, and it fluctuates from time to time, but no real material difference in terms of operation of the business at any of those levels.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay. So that's a Nielsen number. There's not a lot of movement between you and your affiliates, I guess. Is that the right way to say it?

William J. Abbott

That's correct.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Okay. And then, I guess you talk a lot about ratings and viewership stats, and I guess just to try to put it in perspective, I mean, how much better -- or this, maybe the Cedar Cove example, is this a lot better than what you would normally have in that slot with original movies? And then can you just talk about the costs of your original series compared to movies, et cetera?

William J. Abbott

I'll talk about the ratings and then I'll turn it over to Andy to talk about the cost side. Certainly, we're very encouraged by the opportunity that we have with original series. We have seen clearly from feedback from our viewers and certainly through the ratings that this is content that is sought after, that is high in demand and is very, very unique, quite frankly, for the television landscape. And we think that we have a great opportunity to continue to carve out a significant differentiated position with original series. The ratings were significantly higher than what we would typically air in those time periods, that Saturday 8 to 9. So certainly, on a one-off basis, there's a lot of gains that we get out of that one hour of programming vis-à-vis anything else we would air. So we are very, very pleased with, overall, with the launch, with our first effort there, and we think that we have a formula for success that will be quite beneficial moving forward. I'll turn it over to Andy to talk about the economics.

Andrew Rooke

Thank you, Bill. As far as the costs of our original series are concerned, they are very similar on the cost per hour of programming as what we've been paying and we see on our original movies. Given a lack of experience with them at this point on a financial basis, the amortization is accelerated more quickly than we amortized the cost of the movies.

Michael V. Pace - JP Morgan Chase & Co, Research Division

Understood. And then, Andy, just to confirm, it looks like you paid down some debt in the quarter, and you said that was term loan. I want to confirm that. And then just again, going forward, should we expect to see the same thing with free cash flow?

Andrew Rooke

That is correct. We paid down some of the term loan this quarter, and our fiscal policy continues to be using cash to pay down our debt.

Operator

[Operator Instructions] Our next question comes from the line of Peter Okin of Stifel, Nicolaus.

Peter Okin

It looks like you had a great quarter. Cash flow is good. Adjusted EBITDA was good. It's a record quarter, right, Andy?

Andrew Rooke

It has been a good quarter, yes.

Peter Okin

So as a shareholder who got involved over 6 years ago, when the stock was at 6, you guys have continually putting up record numbers. When do -- does a shareholder maybe get some sort of relief or exit plan from this hostage-taking that took place when you guys refinanced and diluted the shareholders from years ago?

Andrew Rooke

Peter, I think the increases in stock price over the last year speak for themselves, and I have no comment on the rest of your comments.

Peter Okin

Well, at the end of this year, you guys are able to sell the company without giving the shareholders $0.50 more. Is that something that comes into your plan? Are you planning on being an independent company with just one channel?

Andrew Rooke

We have no comment.

Peter Okin

Why don't you have any comment? Do you guys realize that you're a public company and you've diluted shareholders? And -- as well as your stock price has done this year, people who got involved 6 years ago are way behind the 8-ball unless they've doubled and tripled up. So what -- you guys are a public company. Do you realize that? Isn't that why you have calls, though? But is that why no one's out here? Because, you see, the problem is, as well as you guys do, nobody cares.

Andrew Rooke

Peter, you're asking us to comment on the intent of your other shareholders, and that is not something I'm in a position to do, so I appreciate your...

Peter Okin

Andy, you know what, I give you credit for actually buying stock, but why doesn't a guy like Bill buy stock? Why doesn't anyone other than you? I give you credit, Andy. You went in. You came into this company. You've been a straightforward guy. You bought stock. But a guy like Bud Abbott there doesn't buy any stock. Why -- all he does is get gifts from the company of excess salary and what have you. It doesn't make any sense. Like you guys -- where is the shareholder value being created? Why don't you guys just sell this thing already? You guys could get -- isn't that something that you guys would look at, the board looks at? And for the shareholders from years ago, it's still way underground.

Andrew Rooke

As I mentioned, Peter, I think the stock price speaks for itself, and...

Peter Okin

Yes. Another -- I guess this is just another waste of 26 minutes of mine. But have a good day, guys.

Operator

Our next question come from the line of David Stanlen. [Operator Instructions] Our next question comes from the line of Lawrence Stern of Stern Capital.

Lawrence M. Stern - Stern Capital, LLC

Following up on Peter's comments, the majority owner filed an 8-K back a few days prior to the Annual Meeting. Can you talk to us about where management or where the board is trying to drive this thing since the independent directors -- no one from the board will have conversations and there's no effort by management to actually, from a fiduciary perspective, increase the value of the stock via talking to anyone on the Street?

Charles L. Stanford

Lawrence, this is Charlie Stanford. Hallmark filed a 13D, and that is the only statement that it is -- intends to make about its intentions. And it's free to disclose or not disclose what its plans are as an investor. We've been pretty transparent about what our plans are for the company. We intend to continue to improve ratings, programming and results. We hope that benefits all the shareholders. It certainly has in the last year. The stock has increased in value over 100%. So I think...

Lawrence M. Stern - Stern Capital, LLC

It all depends on the timeframe that you're starting from. It all depends on the timeframe that you're starting from, Charlie.

Charles L. Stanford

Well, that's the case with all companies. I mean, timing is everything. But I think we've been pretty transparent on what our intentions are. This management team is devoted to improving our results, making us a stronger company and a better asset for all the shareholders, and that's what we do here. But more than that, we can't -- you're entitled to your views, and I certainly do listen to you, but we just...

Lawrence M. Stern - Stern Capital, LLC

My views are that in 60 days, the lockup expires, so that when we roll into 2014, does management plan on using any excess cash to support the share price of this company in its fiduciary responsibility to increase value for all owners of the business, not just the 90.3% owner of the business?

Charles L. Stanford

And again, we feel that we're doing that in our efforts to improve programming, ratings and the financial results of this company. That's the most effective thing that we can do as the management of the company, and that's what we're devoted to doing.

Lawrence M. Stern - Stern Capital, LLC

Has the board and management had a follow-up meeting since the 8-K was filed in which they had conversations with the majority owners, since there's no ability for any shareholder in a public forum to have conversations with Crown management? I've only left 25 messages for Mr. Abbott to have a follow-up phone call over the calendar year 2013, none of which have been returned.

Charles L. Stanford

As you know, we disclose information that we're required to disclose. We disclose it to all shareholders. It's -- we -- one-off conversations, they're not something that really is fair to the other shareholders, I think, so we're trying to...

Lawrence M. Stern - Stern Capital, LLC

I truly wish that Mr. Herb Granath listens to these calls and the views of the minority owners of the business that have just been totally left in the dark.

Operator

[Operator Instructions] I'm showing no further questions at this time. I'd like to hand the call back over to management for any closing remarks.

William J. Abbott

Thank you for joining us today. We look forward to our next call after the fourth quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.

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