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Executives

Jeff Smulyan – President, Chief Executive Officer

Patrick Walsh – Chief Financial Officer, Chief Operating Officer

Kate Snedeker – Investor Relations

Analysts

Emmis Communications Corporation (EMMS) F3Q 2014 Results Earnings Call January 9, 2014 9:00 AM ET

Operator

Welcome and thank you for standing by. At this time, all participants are in listen-only mode. This call is being recorded. If you have any objections, you may disconnect at this point.

I would like to hand the call over to Ms. Kate at Emmis. Ma'am, you may begin.

Kate Snedeker

Thanks, Phil. Good morning, everyone. Thank you for joining us for today's Emmis Communications' conference call regarding third quarter earnings. I want to extend a special welcome to all the Emmis employees who are joining us and listening in this morning.

We'll begin in just a moment with opening comments from Emmis Chairman and CEO, Jeff Smulyan; and Pat Walsh, CFO and COO. After opening comments from Jeff and Pat, we'll respond to your questions submitted via email to ir@emmis.com. A playback of the call will be available until Tuesday, January 21 by dialing 402-220-3756.

This conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to Emmis' public filings with the SEC for more information on the various risks and uncertainties. Additional disclosure related to non-GAAP financial measures has been posted under the Investors tab of our website, emmis.com. Jeff?

Jeff Smulyan

Kate thanks. This has been an actually very, very encouraging quarter. Consolidated revenues up 3.4% for the quarter [revenue] [ph] led by almost 10% revenue growth for publishing, which is our most important quarter for publishing, which is our Q3.

Radio had a slight growth in a tough quarter. We reported revenues of up 0.4% in a quarter when our markets were down 1.2%, although, in the interest of full disclosure, we were actually a little below our markets in Miller Kaplan, but for the year, we're outperforming, probably more important than this because this is our toughest quarter with the political comps, is that in our fourth quarter we had a very, very good December and pacing for January and February is very encouraging.

So I would say up mid-single-digits, maybe even a little bit better for the fourth quarter is very, very encouraging for us. And along with a series of strong ratings in a lot of our key stations it gives us a renewed health as we go into our fourth quarter. As you know, one of those months is completed and we're now into the second, and December [inaudible] very encouraging.

A couple of other things I want to talk about. This was the quarter in which BTC, a consortium that Emmis developed, led with one of its major milestones which is introducing BTC traffic through Honda Automobiles. That's kind of a milestone. And BTC is one of those examples where we've really created an innovation and used it in partnership with others in the industry. Really good building of business and we're very encouraged by the things we see.

BTC is now spread into Canada and we're excited about that development, but obviously the big story for this company is NextRadio. And the Consumer Electronics Show is on now. Our people are out there. The highlight for us even beyond the launch of the Sprint smartphone is a number of auto makers are now seriously looking at NextRadio as a solution in dash.

We think that's critical because the major battleground for the American radio industry in the future will be preserving our preeminent place in dashboards. And while there are a lot of streaming alternatives, if we can have a rock solid terrestrial distribution model in the dashboard of the future that comports with the interactivity that consumers demand, we think that’s a big win. And again, we could not be prouder that a number of auto manufacturers are looking at the NextRadio model and its interactivity as the ultimate solution for dashboards.

As far as the Sprint project, we could not be more pleased. We have over 110,000 activations, more importantly than that user satisfaction has been great. Over 4.2 on a 5.0 user scale at Google in the Google Play store, people love it. We've been now permitting some research which the NAB will be releasing soon, which shows probably most importantly that what people love is the idea of a portable radio.

And while that may sound strange to so many of us who've been in the business for a long time, we forget that a generation of consumers really haven't had portable radios because we haven't sold walkman in this country. So it maybe that we're filling an interesting user need just by having a portability of an actual over-the-air radio signal, the NextRadio.

We're also finding that there's been international interest, but more important than that, the overall acceptance of the NextRadio experience has been great. Support in the industry keeps building; stations are doing more of interactivity. As you know, sometimes people have asked, is it like herding cats and our industry getting all this done and we've said, sometimes it can be even more challenging than that.

But everybody has come together and we're seeing steady growth in every metric. And we think that this is an opportunity to change the game. And I couldn't be prouder that that game changing experience has come through this company.

Just to close on some legal matters, we had our exit hearing for jurisdiction on our Hungary case. Basically that's a hearing that addresses whether the Hungarian government's actions in the 2000 national radio process constitute a taking of our rights under Hungarian Law. We must prove that a taking did occur in order to prevail an exit.

So this is two-step process. Scott Enright and our team led this hearing. I attended it. We all felt very, very good about that. But, of course, the key in this process is whether the tribunal agrees with us. We'll know that really shortly. And if we prevail, the full blown trial will go on in the next probably nine months or so and we're confident that if taking has occurred we feel pretty comfortable about that, but you never know, [and therefore it would lead to] [ph] significant damages.

The only other question that people always ask [I’ll deal with it] [ph] upfront is the preferred. We were set for a trial in late January, but the court has postponed the hearing. So it could rule on the summary judgment motions from Emmis and the plaintiffs that are currently pending. Court indicated that it would not reschedule the trial until after it decides on summary judgment. As you know, we prevailed in the first round of this process. We feel confident we will continue to prevail.

And so, on all cylinders we feel very good. This is the -- not the end of our fiscal year. We have about two months left. But it's been a very good year. Our radio industry business will be up about 4%, which will obviously beat our markets and beat our industry and we feel like now with a wonderful balance sheet, we'll finish our year, levered I think slightly under 3x that we have the balance sheet that allows us the flexibility to do some exciting things. When you fixed the challenges that we faced, you want to be prudent, but that doesn't mean we're not going to be aggressive in the areas where we think we could find growth.

So we're excited. Again, I want to make sure that I thank the people who allow all of us to sit here and be excited, and that's the employees of this company. They have been innovative. They have been passionate. And they have been stewards of what we think is the most unique culture in the American broadcasting business and we think that's the reason that allows us to outperform.

So with that, Pat, I'll turn it over to you.

Patrick Walsh

Thanks Jeff. Good morning, everyone. As we do on every call, we encourage those on the call to refer to the Investor's section of our website, emmis.com, for additional financial disclosures.

As Jeff mentioned in his opening remarks, our third quarter represents another and a continuing series of quarters where we were able to deliver on our dual strategy of both delivering technical innovation for the radio industry, while also delivering solid operating results.

For the third fiscal quarter ended November 30, 2013, we grew net revenues, operating income and consolidated net income in the quarter that included both the headwinds of economic uncertainty associated with the government shutdown and comping against 2012 political races.

During the third quarter ended November 30, 2013, we reported net revenues up 3.4%. Revenues in radio markets where Emmis competes were down 1.2% in the quarter. Emmis grew net radio revenues 0.4% during the quarter, outpacing the performance in four of our five Miller Kaplan markets with Indianapolis, Los Angelis, Austin and St. Louis, all growing their market shares during the quarter.

Excluding political revenues from both quarters, our net radio revenues were up 4% during the third quarter. For the nine months ended November 30, Emmis markets were up 2.3% and Emmis reported net radio revenues up 3.7% for the same period.

For Q3, national was down 13%, local up 2% and digital up 16%. Our local performance is particularly encouraging as we outpaced our markets which were down 2% during the quarter. This performance is consistent with our continuing emphasis on increasing local direct business and attracting, retaining and training sellers with a propensity for this category of business.

In terms of monthly trends, we were up 4% in September and down in the two months with challenging political comps. We were down 5.5% in October and 2% in November. During Q3 our number of minutes sold decreased 4% compared to the prior year and average minute rates increased 1%.

Automotive was once again our largest category representing 12% of third quarter revenues. Automotive was up 17% during the quarter.

Healthcare was our third largest category of business during the quarter behind only auto and media. It represented 8% of our business and was up 20% over the prior year. We saw increased spend related to implantation of the Affordable Care Act and expect additional radio spend in this category in 2014.

Entertainment and service category also saw gains during the quarter, while media, restaurants, financial services, beverage, wireless and retail all saw declines.

Radio revenues are currently pacing up mid-single-digits in our fiscal fourth quarter, and we're forecasting the quarter will end in the range of up 4% -- up 3% to up 4%.

Our city/regional magazine business had a particularly strong quarter with revenues up 10%. Our largest title Texas Monthly along with Indianapolis and Atlanta showed double-digit revenue gains in the quarter.

The strong results reflect gains from both organic growth in advertising and strategic expansion and custom publishing and events. Similar to radio, publishing is currently pacing up low to mid-single-digits in Q4.

In terms of station operating expenses excluding depreciation and amortization, Q3 expenses were up 3%. Radio station operating expenses excluding non-cash comp and certain cost related to NextRadio and TagStation were actually down 2% in the quarter.

Publishing expenses were up 6% in the quarter as a result of sale commission expenses and event cost related to the strong revenue growth. Corporate expenses were also down during the quarter 2%.

In November 30, 2013, the company had $59 million outstanding under our senior credit facility with a weighted average cost of borrowing of 4.6%. Also on our balance sheet is $76 million of 98.7 FM nonrecourse debt; debt related to our WRKS transaction. The nonrecourse debt will continue to amortize to zero with payments from the 98.7 LMA over the term of the LMA.

I recommend that investors reference the leverage calculation on our website which reflects leverage at 2.89x EBITDA as defined in our credit agreement excluding both the nonrecourse debt and the related LMA payment.

As a reminder, we finished fiscal '13 with approximately $66 million in accumulated NOLs which should continue to show profits from federal taxes for the foreseeable future. We spent $420,000 on CapEx in Q3 and expect to spend $3 million for the full fiscal year.

And that's all we've got in terms of financial remarks. We did have some questions from investors, Jeff, and why don't I knock off a couple of these that are kind of financial related quickly.

Question-and-Answer Session

Patrick Walsh

There was a question on pricing trends and how they compare to pre-recession pricing?

Over the past several years, we've actually seen strengthening in pricing. We've reduced the amounts of inventory, but our average minute rates have actually surpassed pre-recession levels, so…

Jeff Smulyan

And we've -- obviously, one of the goals of the company is to understand dynamic pricing as well as anybody in our space.

Patrick Walsh

There was another question related to revenue growth and our guidance in the fourth quarter and is that coming from political or core?

It's not related to political. We have seen an acceleration during the fiscal fourth quarter in national local events and digital, so kind of organically across all of our core pieces of business we've seen some growth there.

More general questions, Jeff, there were a number of questions on NextRadio. Going forward, folks wondered while we continue to provide metric updates on a quarterly or more frequent basis and can you give us a little more clarity on the partial payments to Sprint that's disclosed in the Q?

Jeff Smulyan

Well, I think that obviously NextRadio, the partial payment -- we have, as you know have had the commitment from the industry to fully fund our [deferred] [ph] payments. There are some timing issues of couple of companies that have not made their payments. Some of our larger industry partners that have not fully paid up, but we're working through that.

I feel very comfortable that -- the biggest challenge in this is creating an inventory for monetization system. We're not [adept in it] [ph] and we were sort of the ones who did it for the industry. Sprint is aware and we're working with them. And leadership in the industry as -- we have to make sure that we make the system more seamless.

So I'm not worrying about it, but like I said, I wish that we had not been the people that had set up a system like that because I think there are others who are maybe more equipped. But the reality is we're getting it all done and I think the most important thing is to [buying from different people] [ph], not only the largest companies which has been encouraging, but the smaller ones.

If there's one frustration it’s the build-out of TagStation, but as Paul Brenner and Ben Hussman who've been at the NAB have told me almost all of the major companies that they are committed to ramping up the build out of TagStation. And one thing we've learned is the more interactive the NextRadio experience is the better customers like it. And what that means is, if you're station comes up on the dial and you see album art, you see contest, you see other graphical interfaces, you're more engaged, you listen twice as long and broadcasters are understanding that.

But make no mistake. This is building out an entire new ecosystem. And these things take time. But all of the metrics are in the right direction, and more important than that customers love the system. And I think that's the most encouraging thing. The fact broadcasters love it is great, but we are broadcasters, but the fact that when people see it in place the experience, they love it and they use it, really very encouraging.

Patrick Walsh

In terms of the metrics question, we've been blogging out frequent updates and with Sprint committed to tens of millions of phones over the next several years we'll continue to provide update. We're particularly excited that models have recently launched across their prepaid Virgin Mobile and Boost Mobile, which are lots and lots of additional units, but I think investors and other interested parties should continue to see frequent metric updates from us on NextRadio.

Jeff Smulyan

Yes, Pat. Let me just say one more thing. This one of those things where I feel like the shift in technology benefits our industry. The ability to distribute terrestrial signals in a seamless way free at a time when customers are understanding that data charges keep ramping up, I give a lot of speeches and I always ask people how many have data metering? And a year and half ago, you get blank stares and two or three people would raise their hands, now we're up to probably 25% of the population is data metered.

When that happens it changes consumption patterns because people understand that listening to streaming audio is not seamless. And so, we think that the technology is on our side because not only in cell phones but in automobiles people can listen to what we do free. And if we can make the experience interactive and exciting, we think it really makes a technology shift move in our direction for once and that's very gratifying.

Patrick Walsh

A segue, Jeff, is a question related to technology. A lot of news out of the Consumer Electronics Show where we've got NextRadio TagStation team out in Las Vegas this week. About the connected car and GM, Audi and BMW announcing 4G LTE in the vehicle, how do you see these trends playing out for AMF and radio, NextRadio and your various digital initiatives?

Jeff Smulyan

Well, I think there's a couple of things; number one, I think that the fact that automakers have looked at NextRadio and said wow, this is it. Paul and his team have basically taken NextRadio system and applied it to the automobile and minimized distractions, because the most important thing that the American automakers have said is we've got to have systems that are seamless, but that really do not have the kind of distraction.

So we've modified the NextRadio system, translated, I believe, into mostly an auto prompt and audio prompt system, which makes the experience less distracting, but still has the key features. But that has been remarkably gratifying to this company that a number of the largest automakers love what we do.

Let me say that I am very sanguine about the fact that terrestrial radio has a great ability to compete in the automobile. And I've seen the stories. I know that a number of companies are going to put 4G systems in, but when you have to put it in 4G systems in a car and you realize that whether it’s AT&T or Verizon or whomever is going to provide a connection that's probably another at least $50 or $60 a month to the consumer.

The disposal income of the American public is still an issue and that 4G connection is not free and as people consume more information in that system, we've seen results in the past having a radio that is interactive, that is free, that doesn’t consume data, we think gives us a tremendous opportunity to hold our position in the car.

Doesn’t mean we won’t - always want to be in, tune in, we believe we have to be everywhere, but I like our ability if we can do our job as an industry and provide a compelling consumer experience. The advantage of being free in a world in which people -- you know there was a story yesterday about AT&T offering to advertisers the ability to pay for people's data for ads.

Now I don't know how many advertisers will do that. I know that they told content providers, if you don't want people to have streaming charges, just pay their content. Well, that would -- if I am providing video or a lot of audio and I have to pay for the customers, now in my own distribution to them, now the customers, I mean this becomes mathematically untenable.

I see why AT&T wanted to it, one more party to buy data, is one more party to buy data, but I like being free and like being universally distributed.

Patrick Walsh

Jeff, a couple of questions around your outlook for next year, we are seeing a number of folks projecting more robust economic growth for next year, do you see 2014 as a year radio breaks out of its flat to 1% growth of the past few years?

Jeff Smulyan

Well, I am hopeful. It's hard to be a pollyanna about our industry growth. That's why I've been so fanatical about the game changing aspects of NextRadio, which changed consumption, changed perception. We are encouraged by what we see in our fourth quarter. Obviously January and February pacings and December pacings have been better than expected, but I would not want to say that based on what we see now that we would be at the high end of those ranges. May be we are just more data weary.

Patrick Walsh

In the past several calls, you’ve mentioned potential private equity partnerships and investor just asked for an update.

Jeff Smulyan

Well those discussions are continuing. As you say, it's not soup till its soup and it's not soup, but we are having some interesting discussions in a few areas and I think we may do some interesting things this year. We have a pristine balance sheet. We are going to be very judicious about what we spend it on, but if we decide to allocate capital, is because we see areas where we think we might grow disproportionately.

Patrick Walsh

Finally a couple of different questions from investors related to uses of free cash flow, as we go under 2.89x now and further delever a few other broadcasters have announced dividends in the past few quarters, what are our plans as we approach that 2.5x threshold for restricted payments?

Jeff Smulyan

I think it's very clear that we would like to be dividend payers or we would like to deploy capital to buy back some of our stock because we think there is significant value in this company that has not been unlocked yet. So I think those are clearly priorities that we are going to focus on as the New Year comes now.

Patrick Walsh

And that's all the questions that we had from investors team. Not something else came in.

Kate Snedeker

No before -- I don't think so. Before Jeff makes his final comments, just a reminder, a playback of the call will be available until Tuesday, January 21, 402-220-3756. Jeff?

Jeff Smulyan

Kate thanks. This has been a good quarter, but more than that, it's been a groundbreaking year. It's been a groundbreaking year and because of the launch of NextRadio, it's been a groundbreaking year because BTC has now gone to another level. I think it's been a groundbreaking year because we have now fixed our capital structure and its gives us the flexibility and it's been a groundbreaking year because I think we've demonstrated again operational excellence and that's due to a culture which I could not be prouder of and a group of people, not only in this room, but throughout this company. They've had a unique unrivaled passion for doing things the right way and making a difference in where they live and producing very good results, so very pleased. Thanks.

Kate Snedeker

Thanks everyone.

Operator

That concludes the conference. Thank you all for joining. You may now disconnect.

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