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LIN TV Corp. (TVL)

Q2 2010 Earnings Call Transcript

July 22, 2010 9:15 am ET

Executives

Vince Sadusky – President and CEO

Scott Blumenthal – EVP, Television

Rich Schmaeling – SVP and CFO

Analysts

Marci Ryvicker – Wells Fargo Securities

Avi Steiner – J.P. Morgan

Jonathan Levine – Jefferies

Aaron Watts – Deutsche Bank

Harry Dumont – Knighthead Capital Management

Edward Atorino – Benchmark

Bishop Cheen – Wells Fargo

Operator

Good morning, ladies and gentlemen and welcome to Lin TV Corporation earnings call for the second quarter ended June 30, 2010. Today’s call is being recorded. Before we introduce the speakers, I will read a brief legal statement from the company.

This conference call may include statements that constitute forward-looking statements particularly in the area described as business outlook but also including any other statements of future business prospects or financial results including but not limited to the use of the words like believe, expect, estimate, project or other similar expression. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

Factors that could contribute to such differences include the risks detailed in the company's annual report on form 10-K and other filings made with the Securities & Exchange Commission, which are available on the company's website, www.linmedia.com in the investor relations section or at www.sec.gov which discussions are incorporated in this release by reference.

Lin TV Corporation undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, unless otherwise required to by ethical law.

At this time, I will turn the call over to Lin TV Corporation's President and Chief Executive Officer, Mr. Vince Sadusky.

Vince Sadusky

Thank you. Good morning and welcome to our second quarter 2010 conference call. I will begin with a brief review of our results and achievements. Scott Blumenthal, our Executive Vice President of television will update you on station operations and Rich Schmaeling, our Chief Financial Officer will provide financial results and guidance.

We had a terrific revenue in operating income growth in the second quarter of 2010 delivering results that were consistent with our guidance. Net revenues increased 21% in the second quarter to $99.5 million compared to $82.5 million for the same quarter in 2009.

As a result, operating income grew 78%, excluding the non-cash impairment charge we took in the second quarter of 2009. We continue to experience a recovery in core TV advertising revenues.

National advertising is rebounding more rapidly than local advertising, especially in our largest markets. Nine of our top 10 categories grew from the second quarter of 2009. Our most significant category, automotive, was up 51% from the second quarter of 2009.

We believe that our commitment to localism continues to build brand loyalty and differentiate us from our competition. We are one of the few local broadcasters to have increased the amount of local productions during the recession offering high quality, local programs that are customized and unique to each market.

Given the strength of our local television stations, May resulted in another great rating book. We are either number one or number two in all of our news markets based on key demos in late news. In addition, 94% of our news markets are number one or number two in key demos in early news.

We are particularly pleased with the growth of our digital business. In the second quarter, digital revenues increased 44% compared to the same quarter last year. Digital revenues now make up 15% of our total revenue and continue to be the fastest-growing portion of our business.

It is exciting to see how well we are monetizing our Internet properties. In the second quarter, Internet advertising and other interactive revenues increased 164% compared to the same quarter last year.

These results include incremental revenue from our acquisition of RMM. Our investment in RMM has provided numerous synergy opportunities. Through cross training and development our multiplatform salesforce has teamed up with RMMs online salesforce and media analyst to expand the scope of our offerings beyond our traditional markets.

All of our station's are now marketing RMM's innovative and targeted products including custom display, vertical display, search and e-mail marketing solutions and categories such as travel and tourism, database, financial automotive, healthcare and education.

Our multiplatform contents indication has been a major focus area. In the second quarter, our stations internally shared more than 8,000 stories with other Lin stations and externally syndicated video which delivered more than 27 million impressions in the second quarter of 2010.

I am pleased to announce we are now number one or number two in all of our local markets that Comscore measured in June 2010 for the average time spend on site. In the second quarter, average time on-site was over 20 minutes.

In addition, 94% of our markets measured by Comscore in June are number one or number two for unique visitors. The Comscore rankings are in comparison to our local broadcast competitors. This is a major accomplishment and a credit to the focus and effort of Lin's digital team.

In addition to our competitive success, we delivered 6.5 million video views and engaged 38 million total daily unique visitors on our stations websites in the second quarter of 2010. We are committed to being ahead of the curve through continuous product innovation.

Last month, we were the first in our local markets to launch android application. In addition, we unveiled a new and enhanced version of our iPhone application that includes technology that allows people to share their stories and participate in the news-gathering process.

Mobile impressions which include iPhone, Blackberry and our new android applications were 52 million in the second quarter of 2010 compared to 19 million in the second quarter of 2009 when we only had an iPhone application. Our sales teams are now offering mobile display video and sms text marketing solutions to new and existing clients.

We are finding that advertisers in the automotive, legal and financial industries are most interested in utilizing mobile in their multiplatform marketing campaigns. Before I hand it over to Scott, I want to mention that we are encouraged by the recent revenue trends and also our ability to sustain a lean cost structure while still investing in our growth priorities.

Our cash operating expenses increased 11% in the second quarter of 2010. This increase is primarily a result of variable costs associated with revenue growth and our acquisition of RMM. Finally, we entered into a shared services agreement with Acme communications in the second quarter with two TV stations in Albuquerque, one TV station in Dayton and one in Green Bay. This agreement is consistent with our strategy to create operating synergies and expense savings in our local markets.

Now, I'd like to hand it over to Scott.

Scott Blumenthal

Thank you, Vince and good morning. National advertising sales which excludes political advertising increased 23% in the second quarter to $30.1 million. National advertising sales represents 32% of total TV advertising revenues.

As Vince mentioned, national advertising is recovering faster than local advertising sales. While we're encouraged by these trends, we do however recognize as the development of local business is paramount to our future.

Local advertising sales which exclude political advertising increased 9% in the second quarter to $59.2 million. Local advertising sales represented 63% of total TV advertising revenues.

Core local and national advertising sales combined which excludes political advertising increased 13% to $89.3 million compared to $78.7 million for the second quarter of 2009. Our political categories have been consistently growing over time.

In the second quarter, we benefited from heavy political spending in Albuquerque, Mobile, New Haven and Indianapolis. Political revenues were $5.3 million in the second quarter compared to $1.4 million for the same quarter in 2009.

Year-to-date political revenues are up 24% compared to the last non-presidential political year in 2006. Looking more closely at our revenue performance in the second quarter, we realized double-digit percentage growth in six of our top 10 categories, with nine out of our top 10 categories showing improvement.

Medical as well as the services category was up 20%. Financial services up 18 and retail was up 13%, all compared to the same quarter last year. So far this year, the automakers and local dealers are spending more of their budgets on local advertising as their sales volumes are restored.

As already mentioned, our automotive category was up 51% compared to the second quarter of 2009. Drawing that down even further, domestic was up 67%, foreign was up 42% and local dealer advertising increased by 31% and that's all compared to second quarter last year.

National advertising made up 40% of our total automotive advertising revenue with local advertising making up the remaining 60% in the second quarter. Our message is consistent every quarter. Local programming is an important part of our strategy.

In the second quarter, we added more than 200 hours of local programming across our stations compared to the same quarter last year. And our local programs are competing very effectively.

For example, WLUK in Green Bay's locally produced show Living with Amy outperformed the market in many key demos against typical highly related syndicated for our competition like Regis and Kelly. We plan to continue evaluating new multiplatform opportunities to reach new audiences, capture market share and distinguish ourselves from the competition.

And now I'd like to hand it over to Rich who will discuss our second quarter 2010 financial performance.

Rich Schmaeling

Thanks, Scott and good morning everyone. Our Q2 2010 net revenues came in at $99.5 million and we’re up $16.9 million or 21% versus prior year. The increase was driven by $10.6 million or 13% increase in core time sales.

A $3.9 million increase in political advertising, and continued strong growth in digital revenues which increased 44% to $14.7 million from $10.2 million in 2009. Our total station and digital operating expenses for 2Q 2010 which includes direct operating, SG&A and program payment costs but excludes stock-based compensation increased by 9% or $5 million to $63.2 million and was driven by increases in variable direct costs such as sales commission and bonus expense resulting from the growth in revenue and our October 2009 acquisition of RMM.

BCF for the quarter was up $11.9 million or 49% to $36.3 million compared to $24.3 million in the prior year. Our corporate expenses excluding stock-based compensation increased by $1.6 million for the quarter to $5.7 million, primarily driven by increased costs for compensation and benefits.

Adjusted EBITDA for 2Q 2010 increased by the $10.3 million or 51% to $30.6 million compared to $20.2 million in 2Q ‘09. Our free cash flow after debt service increased by $4.7 million to $12.5 million for the second quarter.

This increase was driven by the recovery in EBITDA and the reduction in our quarterly term loan amortization to $826,000 in the second quarter from $4 million in the prior year. And offset by an increase in cash capital expenditures to $5 million in the second quarter from $1.6 million in the prior year as well as an increase in cash interest expense to $12.3 million in 2Q 2010 from $9.3 million in the prior year.

Turning to our debt and key credit metrics, at quarter end we had unrestricted cash on hand of $8.5 million and $40 million available under our revolving credit facility. We expect our revolver capacity to continue to grow throughout 2010 as we continue to use our free cash flow to pay down debt.

Our total debt at June 30 was $664.9 million, down $18.1 million from year end, with $7 million of this balance classified as short-term. The average cash interest rate on our debt at quarter end was about 6.9%.

Consolidated leverage at June 30 as defined under our senior credit facility was 5.9 times compared to 7.6 times at the end of December. Our total leverage coming in at June 30 was nine times and that steps down to 7.5 times for the third quarter.

Our interest coverage ratio at June 30 was 2.6 times compared to our covenant of 1.75 times and our consolidated senior leverage ratio was 1.5 times compared to our covenant of 3.75 times. Also, at quarter end we had approximately 365 – 358 million of federal NOLs.

Looking forward for the third quarter, we expect that 3Q 2010 net revenues will increase in the range of 24% to 33% or by $19.7 million to $27 million compared to reported net revenues of $81.4 million for 3Q ‘09. We expected our direct operating and SG&A expenses will increase in the range of 8% to 15% for the third quarter, compared to reported expenses of $50.4 million for 3Q ‘09, driven primarily by increases in variable direct costs associated with revenue growth and our acquisition of RMM.

For the full year, we expect that 2010 direct operating and SG&A expenses will increase in the range of 7% to 10% compared to reported expenses of $209.5 million in 2009. I'll now hand it back to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) we'll take the first question from Marci Ryvicker from Wells Fargo Securities.

Marci Ryvicker – Wells Fargo Securities

Thank you. Good morning. Your guidance range seems pretty wide for the third quarter. So can you tell us what you're baking in for both the bottom end and at the top end and if you can comment specifically if this has to do with the economy or political or both or anything else, I'm missing?

Rich Schmaeling

I think that the biggest variable we see in the third quarter is where political revenues come in. And our call is for about $15 million, plus or minus three. So that's why that range is bigger than it typically is, Marci.

Marci Ryvicker – Wells Fargo Securities

Okay. And then a question for Scott. So you mentioned auto is 60% local and 40% national, yet local is still in general slower than national. So I'm just curious as to what exactly is driving the gap between local and national. Is it a difference in comps or something else?

Scott Blumenthal

No, it's something else. Right now some of the local categories, although all of them are pacing up very nicely, some are a little bit slower than we actually had anticipated. For example, in restaurants, while the majority of the participants are pacing ahead of last year both in second and projected for third right now. There are a couple of key players that are restructuring their marketing plans and have pulled back. So local is a little bit slower than we had thought even though it's pacing substantially ahead of last year. National just showed huge gains because of the deficits that we have seen in 2008 and 2009.

Marci Ryvicker – Wells Fargo Securities

Okay. So I just want to make sure. So for the restaurants category it's more of an economic issue?

Scott Blumenthal

No. It's actually just a rebranding and marketing for some key players that are adjusting their expenditures from quarter to quarter.

Marci Ryvicker – Wells Fargo Securities

Okay. And one last question. Has there been any difference in performance by region in terms of your core revenue?

Scott Blumenthal

Core revenue national came back substantially greater in the New England area than it did in most of our other markets. But I think that's a function of the fact that it was also depressed a lot more than most of our areas in 2009. So on a percentage basis we would see some differences there but other than that we're seeing pretty consistent growth across all of our markets.

Marci Ryvicker – Wells Fargo Securities

Great. Thank you so much.

Operator

We'll take our next question from Avi Steiner from J.P. Morgan.

Avi Steiner – J.P. Morgan

Thanks. Good morning, guys. A couple things here. First one just on the third quarter expense growth, I may have missed it. Can you segregate out maybe how much is RMM related versus core business?

Rich Schmaeling

We didn't provide that, Avi.

Avi Steiner – J.P. Morgan

Okay. Can you update us if there's any change to what may be happening at the NBCJV in terms of contributions you may have to make for the rest of the year?

Vince Sadusky

Sure. During the second quarter, we made a short fall loan joint venture of $0.8 million. That was consistent with our expectations. The joint venture stations are performing better than planned. In the second quarter, revenue for the joint venture stations was up 23%, and operating income increased by 77%. On our books at June 30, we have a remaining accrual of $2.1 million and our view is that continues to be an adequate estimate through the end of our existing shortfall sharing agreement at the end of the first quarter of next year. Now, we are hopeful to do better than that, and they may do better than that because things are clearly trending somewhat better than expected.

Avi Steiner – J.P. Morgan

Okay. A couple more and then I'll turn it over. Just on the SSA with the Acme stations, can you provide a little detail maybe how we should think about that in terms of financials going forward and fees you may get?

Vince Sadusky

Yeah. We think that at a minimum our agreement with Acme will provide about $3 million of incremental EBITDA for Lin. And there's further upside against that number but that's a good starting point.

Avi Steiner – J.P. Morgan

I'm sorry. That balance of this year or through the life of the agreement?

Vince Sadusky

That's the next 12 months.

Avi Steiner – J.P. Morgan

Okay. And I think there's a put option there? Can you give us a little color on that?

Vince Sadusky

Yep. Acme has a put option to Lin two and half years into the term of our agreement. And that put is at fair value as negotiated and terms between the two parties. Lin also has an option to acquire their stations in Dayton and Green Bay earlier than that. And we have an option throughout the entire agreement to acquire each of the stations at Fairvalley.

Avi Steiner – J.P. Morgan

And I assume that will be subject to SEC approval. Do you know right now under the current rules are any of those acquisitions possible?

Vince Sadusky

We think it's unlikely that we'll ever be able to acquire their Albuquerque stations, that our agreement in that market is just limited to shared services, really just leveraging our back office capabilities to provide cost savings to both parties. In Green Bay and Dayton, there may be a possibility through a bifurcated acquisition structure to gain operational management of those stations.

Avi Steiner – J.P. Morgan

Okay. Last question for me. As always very helpful. Given the market has been a little more volatile maybe on my side of things as well, has that changed you guys' view on the 6.5 note and may be how you think about and obviously it’s a great coupon versus you are paying down a bunch of bank versus potential flexibility for acquisitions down the road? Thanks.

Vince Sadusky

Yeah. We have – our focus right now is retiring our retiring our pre-payable debt. We will or we expect to fully pay off our existing credit facility by the end of this year, early next year the latest. I think you know come May 15 next year our 6.5s go to par. We look at the math right now, current forward yield curve and conclude that it's advantageous to wait that out a little bit more. The market as you know, the high yield market is getting better. We continue to look at it. But right now we're focused on using our free cash flow to pay down debt. We'll look to probably pay down the 6.5s with free cash flow from operations after they become callable at par and we're looking at our options. We will keep our senior secured leverage conservative to maintain strategic financial flexibility.

Avi Steiner – J.P. Morgan

Thank you guys.

Operator

And we'll move on to Jonathan Levine from Jefferies.

Jonathan Levine – Jefferies

Thanks. I was wondering if you guys could talk a little bit more in terms of the monthly trends for your local revenues?

Vince Sadusky

As it relates to?

Rich Schmaeling

Yeah, sure thing. I'll jump in here. What we saw during the second quarter was the quarter started off very strong. And when you look at the overall numbers in core advertising and in Internet, it finished strong but the pacing slowed during the course of the quarter. That was due to a combination of businesses put on the books earlier in the second quarter than had historically taken place. But it certainly reflected an economic slowdown as well.

Going into the third quarter, we've seen very good pacing reports and we're seeing very strong pacing throughout all three months of the quarter. So we're optimistic that since this business is so demand-driven that advertisers we've been speaking with are concerned about being displaced and about rising rates surrounding the political season. That with some decent economic activity, I know there's been a lot written about some negative signs of the economy, we're obviously watching those very closely.

But we are seeing our local businesses and our national advertisers continue to place money. And I think the squeezing out of the inventory due to political has been very helpful in that as well. So granted we saw a bit of a slowdown toward the end of the second quarter, but again numbers are still very, very positive. And then going into the third quarter we continue to see very strong trends in third quarter pacing.

Jonathan Levine – Jefferies

Are those pacings ahead of the growth that you achieved in the second quarter?

Rich Schmaeling

Yes.

Jonathan Levine – Jefferies

Okay. And just as far as RMM, can you give us what the organic growth rate was for RMM?

Rich Schmaeling

Yeah. RMM has been a very good story for us. Just I know folks struggle a little bit to understand what it is. Basically, we've got these terrific interactive content teams and these interactive sales teams throughout our organization. And we had issues with our advertisers being excited about advertising on our top-rated local interactive properties.

But we were frustrated in that we weren't able to offer them a broader offering. Either geo targeting or demographic targeting or all the terrific targeting that the web is able to do. So we've been very focused in kind of the early days of this acquisition in getting our interactive folks at our television stations to be educated and understand how to sell the RMM product as well as getting the RMM folks integrated into our television stations and realize synergies from being able to offer up quite a bit more than we've been able to offer up historically.

And that's all gone very well. So we've got an increase in revenue on the interactive side of our television stations as well as an increase in revenue on the RMM side that's been very robust and that's all included in that interactive number. I think we had mentioned we were up 144% or 164, I'm sorry. That's not apples-to-apples. The after we get past this next quarter it will be apple to apples since the acquisition took place in the fourth quarter of last year.

But it's been – the apples-to-apples organic growth has been significant and to specifically answer your question, the growth for RMM stand alone on an apples-to-apples basis was 36% for the quarter.

Jonathan Levine – Jefferies

Okay. And the organic growth just for the historical Lin business, would that have been a double-digit as well?

Vince Sadusky

Yeah. The growth on the Lin web sites, the Lin interactive revenue, was 21%.

Jonathan Levine – Jefferies

Okay, great. And then just one other question. Just the jump in corporate expense, is that something that we should think about as kind of the normal run rate as we look forward?

Rich Schmaeling

Yeah. There's two things going on there. We do have an increase in comp driven by putting back our retirement benefits that were suspended last year. Merit increases, bonuses somewhat in excess of our plan given we're outperforming our expectations. And also what's in that corporate number is an accrual for the projected performance bonus that the RMM team has an opportunity to earn assuming they exceed certain targets in 2012 as disclosed in our 10-K, Jonathan. So it is likely most of those things, most of those part pieces are recurring.

Jonathan Levine – Jefferies

Okay. And is there anything that we should think about that may roll in the future quarters, in terms of cost cuts that were made?

Rich Schmaeling

Yeah. I do think getting ready to lap ourselves on some of our cost saves. For example,we had some pretty good saves associated with power as a result of digital conversion. And this next quarter, we'll ramp ourselves those cost saves. But that's all baked into our guidance.

Jonathan Levine – Jefferies

Okay. Thank you.

Operator

And we'll take the next question from Aaron Watts from Deutsche Bank.

Aaron Watts – Deutsche Bank

Good morning, guys.

Vince Sadusky

Good morning.

Aaron Watts – Deutsche Bank

Just one question for me. And if we focus in on the local market, obviously you've told us it's been a little slower, the crawl back, than the national arena but as it does come back, I'm just curious if you're hearing anything from your troops on the ground with regards to share and what are the pushes and pulls going on there as people put more dollars to work in advertising in the market? Were you able to – what do you feel like you're taking share or do you think you're giving up some? I don't know if it's from newspapers where you're grabbing some, if you're losing some to the local cable, just may be some color around that.

Vince Sadusky

Yeah. I think if you – all this data comes out in arrears. But when we look at the data through the first quarter, local market share for television versus the other local medium, television has done very well. Television continues to grow share and it really has come – continued to come at the expense of other local medium.

So I think that that's a great trend going forward. It's a great I think affirmation to come out of really the most difficult year in local media that any of us have seen and recognize that advertisers came back to television in a big, big way. We're also seeing on the television side that the money is going towards the more significant outlet. So folks that have real strong newscasts, top-rated stations in the market. We're seeing – we've got mostly we've got those properties and we do have some other properties, CWs in my networks where we're not seeing the growth nearly as robust as we are for the more important outlets. So I think that that's a trend that we believe has a good chance of continuing.

Aaron Watts – Deutsche Bank

Okay. And then just on the local news, do you feel that your local news, that your audiences still has good traction and how much is other outlets like in your local markets a viewer going online to grab local news or going to the online newspaper website versus your online site? Can you just talk about maybe some of what's going on there?

Vince Sadusky

Yeah. If you look at the Nielsen data, it will show that over time the audience that's available for local news has declined. But it's declined slower than the decline in national television. Having said that, through the last I guess it's five or six quarters, we've actually increased our news audience. So what we can't control is the changing viewer trends where you're seeing fewer people viewing let's say the early evening newscast.

But what we are seeing is more people are consuming things like a morning newscast. And more people are consuming a 10 o’clock newscast versus a 11 o’clock newscast. And fortunately with our duopoly strategy we're able to offer a 10 o’clock newscast in many of our television markets. So I think the history or the future of local news is very good. In that, we've also seen a significant reduction in both the number of hours and the quality, the amount of minutes that are devoted to localism on our competing products. The local newspapers are much thinner.

All but the top television stations in most of our markets have either reduced the number of hours of local news or they have reduced the amount of localism in their product. I think that's what's led us to five or six quarters of increasing or overall ratings in local news. And then of course, the trend towards consuming news online is something that's been a well-documented trend. And of course, that's really the key behind our interactive strategy is to make that available to folks, have it also be the most robust product that's available in the market, the most amount of localism, the most video and present it in a way that's most attractive and least cumbersome for people to access.

Aaron Watts – Deutsche Bank

Okay. That's helpful, Vince, thanks.

Operator

And we'll take our next question from Harry Dumont from Knighthead Capital Management.

Harry Dumont – Knighthead Capital Management

Hi there, guys. A quick question for you. I haven't heard Bishop Cheen on the call so I'll ask the question. Can you just give us a breakdown between credit facility and what's left on your term loan? And then I had a question about just the digital strategy.

Rich Schmaeling

Okay. It's 36/12 credit facility term loan.

Harry Dumont – Knighthead Capital Management

36 and 12. Got it. The other question on the digital side is, when you look at – if I go to some of your websites and I look at something like, I don't know, if I go to like Wish TV which I assume is indicative of most of your websites. Are you finding that advertisers that you're getting in the revenue that you're getting off here is pretty similar to the advertisement you're getting on your TV station or have you really developed almost like a completely separate audience and client base for that? I mean for example on wish if I pull it up I see a Porsche Cayenne at, down to bottom as a banner and at top, I got up a Trans Union Credit Score at – just wondering what you found from your client on the digital side. You've obviously done a great job there.

Vince Sudosky

Yeah. Thank you. It's been a greatest that our interactive team has done to get these properties to be the most heavily consumed properties in the market and make it very attractive for our local audiences that now have the ability to check news and kind of updated throughout the course of the day at work, where most folks don't have a television set and have the way to get home.

As far as the advertisers go, the advertisers have recognized that it's been a process to educate our local advertisers to understand the value of interactive but we've come a long, long way. And we feel like our advertisers are now competing for the choice ad space, both video pre-roll and banner space on our web sites.

And the answer is it's really been a combination, we've got new business teams, business development teams at our TV stations that are able to go out now and offer low price point advertising on the web relative to high price point advertising on television. And then of course we also present as every sales presentation a combined multiplatform opportunity for our existing advertisers.

So it's really been a lot of fun, now that our team has gotten very well-educated and it's a constant educational process as the products our interactive team turn out constantly have new offerings and the way we think about the web and the measurement and delivery and interaction is constantly, constantly changing. And so it's kind of a constant education process and a constant selling process but it's been a great combination.

If you dig deeper in our sites, you'll find video pre-roll contains everything from automobile dealers to local handymen. And it's built around the sections that make the most sense for where the consumers might be going in order to get that targeted advertising. And now with RMM, that's a whole different area where we're able to offer up – let's say the local handyman that's historically been our expert in, let's say, roof repairs now has the opportunity to target those potential customers in Indianapolis through search, through folks that are out searching for roof repair with a geo targeted Indianapolis address, just to use one simple example.

So there's quite a bit of opportunity for us to be able to offer really we think everything up and down the vertical gamut on interactive. And the way we sell it is really according to what the clients are looking for. A lot of clients are looking for display, they want branding. Other clients are looking for lead generation and we've got the capability to provide all that. And we do it in a way in that our local sales force has a terrific relationship with these communities.

And so we are really trusted local medium and trusted local sales team versus many of these interactive competing products which are national in by design and really kind of have folks parachute into a market, try to make a sale, and then leave. Or even worse than that, just simply folks have to go online and kind of figure it out for themselves and kind of hand their credit card over.

Harry Dumont – Knighthead Capital Management

Right. Two follow-ups in there. Do you have a breakdown of sort of how many of your clients online also advertise on TV? And do you have a breakdown of pre-roll versus banners in terms of the revenue? And I have one last one which just popped up here. I got an advertisement for group on here which is interesting because it's not actually just group it's group on New York because I'm accessing it from an IP address in New York which is interesting. When you deal with guys that are group on, are you selling them space on a CPM basis or are you actually doing sort of almost like a CPA type deal where you could actually get a piece of their revenue since it's such a high margin product, the other group on living socials and stuff? Thanks.

Vince Sudosky

Yeah, it varies. Some folks we just sell sponsorship which translates into an incredibly high CPM. Some of it's on a CPM basis. Most of the stuff you see on our sites are either sold on a sponsorship or CPM basis. Most of the stuff that gets sold by RMM is done using a performance metric on a CPC basis, for example. The one that you're looking at happens to be a CPM client but there's countless examples again if you kind of dig deeper into all of our web sites and all the different layers and cabbing.

With regard to the mix between local or between existing local advertisers and new advertisers, I'd say it's roughly 50/50. It varies from month to month. But about half the inventory gets sold to existing TV advertisers and about half is sold to web-specific advertisers. Those are typically advertisers that have been former print, either newspaper or directory services folks that have nice businesses in the market but just didn't have the advertising dollars, the marketing budget, to be able to afford television in the past.

Harry Dumont – Knighthead Capital Management

And then pre-roll versus banners?

Vince Sudosky

Pre-roll is still a relatively small percentage of our total revenue just given the avails on non-video are so much higher. So right now we're running I'd say probably 20% or so of our revenue is on the video side and about 80% would be in display. But that's been video pre-roll has been growing very, very fast. And that's for us and that's really a terrific opportunity for us going forward and it's something we feel very comfortable with. Because it looks and feels like a sure television advertising spot.

Harry Dumont – Knighthead Capital Management

Thanks so much, Vince.

Operator

And we'll take the next question from Edward Atorino from Benchmark.

Edward Atorino – Benchmark

Hi, it's me. I was going to ask the credit facility which you answered, but I will ask, you gave some comment regarding restaurants and auto. Could you just do two things? Talk about a couple other categories? And to what extent is crowding out causing anybody to basically get out of the market and wait? And if there is a big crowding out in 2010 in the fourth quarter, at least through November, would that fall into December or would some of it fall into 2011?

Vince Sadusky

Crowding out, you're referring to a political emphasis?

Edward Atorino – Benchmark

Yeah. Obviously, some advertisers are getting squeezed; they're having to run forward or run back or whatever, but is that going to show up in December, will it show up you think in some extent to 2011?

Vince Sadusky

I don't think it's going to hold for 2011. I think two things are going to happen. One is that we'll slide back into November and December after the political campaigns are over. But in our case the duopoly strategy that we've been able to implement over the years has been beneficial in terms of keeping advertisers from being crowded out because we're able to allocate inventory on two stations with the cross political movements and still giving them opportunity to advertise in our markets during the period of time when they need the message to go to the consumers. Clearly some advertisers have come in earlier which is driving pace right now to try to get in front of the political demands. And we're seeing some categories grow for that reason. But I think with the economy starting to come back a little bit, although we're vulnerable in some areas, I think the cities are trying to take advantage of the advertising opportunities to get the sales as they can, some are paying the higher rates, some are looking for ways to use our second stations, to use our websites, to use the other platform that is we have available to make sure that they don't miss that crucial advertising period in October and November. But clearly you're correct. Some of that advertising will slide back later in November and December.

Edward Atorino – Benchmark

And could you talk about any other categories worthy of mention, pluses or minuses?

Vince Sadusky

Well, actually the majority of our categories are up across the board. Our retail for second quarter is running and it was 13% in second quarter financial services were up 18 medical was plus 20, entertainment was plus 18 and the slowest growth category we had was restaurant and that was almost plus one.

Edward Atorino – Benchmark

Terrific.

Vince Sadusky

And the only category we had down in the top 10 was paid programming which makes a lot of sense.

Rich Schmaeling

As you know when demand gets high your paid direct response will lessen.

Edward Atorino – Benchmark

And on this mobile expansion, has that type of reaction continued beyond the second quarter? Are you starting to see some real consumer acceptance there?

Vince Sadusky

Yeah. It's amazing. I'm sure everybody on this phone call has a smart phone. But the penetration is still relatively low. However, people are – they turn in their cell phones with incredible frequency, so the projected growth is very, very high. And the whole mobile front really feels like the early days of interactive of the Internet. So it's a process now where we've trimmed our sales force in the products that we have available. Our traffic is excellent in many cases we've been the first ones to get out in our local markets. And when folks go ahead and place our icon on their phone, on their PDA there's really no reason to have a second local source on there.

So it's very important for us to get out early and really promote it with our top-rated TV stations, make sure the content was very good and make sure that we had something built for every platform and not just the iphone, which is terrific product but a relatively small percentage of consumption in the U.S. So yeah, we're seeing dollars get booked. The percentages are huge; the dollars are still relatively small relative to our overall interactive business. But we think this is going to be a nice growth opportunity. And as technology advances, we've had conversations with folks that are looking to do electronic couponing and really tie in the retail side. I think that's going to be really exciting opportunity. So the key for us is to get out of the gate early and have a good product and build up our audience the same way that we've built it up on air and online.

Edward Atorino – Benchmark

Okay.

Operator

And we'll go on to the next question from Bishop Cheen with Wells Fargo.

Bishop Cheen – Wells Fargo

Hi, everyone. And thank you. And Vince, you're absolutely right. My phone is clearly a lot smarter than I am.

Vince Sadusky

We all have that.

Bishop Cheen – Wells Fargo

Let me follow up back on this JV thing. This is admittedly a fishing expedition question. The news wires are bubbling over this morning with the speculation that Comcast is going to have to sell some of the NBC stations. And of course, they didn't mention which particular markets, et cetera; we can all use our imaginations. Any color you can add to that in terms of Dallas and San Diego?

Vince Sadusky

Not really, bishop. There's really been no status change for us. We've been in this partnership for over a decade 12 years. I think we both view each other as very good partners. We've had our – two companies have had long standing affiliation relationships. And the same as everybody else and really waiting to we're sitting back and really waiting to go see what happens with the merger. Of course, we're really involved in the affiliate boards concessions that Comcast was kind of enough to grant in order to get support from the affiliate board, which I think is terrific not only for NBC affiliates but I think it's wonderful development for broadcasting and I think it's a terrific affirmation of broadcast that you've – affirmation of broadcast that is very pro, said all the right things through the process. And just through the principles there, we believe them.

We believe that they like the diversification, they like the broadcast business. They think it's got a bright future. They feel as if the whole retransmission dam has busted wide open and going forward that's going to be a value flow back to the broadcast area. And so we view them as everything we've heard so far as potentially very good new partners, not only testing our joint venture but in the many television stations that we affiliate with for NBC. If something were to happen in the process that would cause them to need to divest, that's really all in their hand as to which properties that they would think about or be required to divest of. And again, we've been partners in these two properties for quite some time. So we would certainly listen to anything they had to say.

Rich Schmaeling

And looking us, we have our senior secured leverage is 0.5%, 0.5% turns right now. So we have a little financial capacity.

Bishop Cheen – Wells Fargo

Right. So you don't see this as any immediate kind of accelerating event or any kind of capital challenge in that there's really?

Vince Sadusky

No, I mean there's really nothing that can be done to, kind of, force us to acquire or further up our capital investment beyond the current relationship if that's what you're getting at. It would purely be voluntary on our part.

Bishop Cheen – Wells Fargo

Right. Okay. And then one Lin-specific question. We have been watching you now for – I don't know, two, three years as you've developed the digital strategy. And now it seems that Lin and others are comfortable actually putting a percentage kind of contribution around the digital revenues, which we haven't heard so much in the past. So I think you said it's 15% of total revenue and that includes retrans, where do you think it can head to and sustain at?

Vince Sadusky

Well, yeah, it's an interesting question. The ability to continue to grow the revenue associated with the television station websites I think is very good. I think the ability to continue to grow retrans revenue I think is very good. I think going from zero to I think the industry average is somewhere around 0.20 or the low 0.20 per sub, being an early pioneer in that area was very hard and I think going from a 0.20 to something that gets you much closer to economic value relative to ratings our stations delivered, even with the networks taking back a portion I think it’s something that's very achievable over the mid-term. And I think what differentiates us is this RMM entity that has a whole different level of product to be able to sell that really is unlimited in its potential. So we target – when we look at our plan, our plan is to get up north of 20% and in that 25% range over the next three, four years. And that's really what we think would be successful. We think the industry will continue to do well also. But clearly, we believe that if we can get up in that range, we'll be ahead of the industry and we'll be differentiated.

Bishop Cheen – Wells Fargo

Okay. We will be watching. Thank you, Vince.

Vince Sadusky

Thank you.

Operator

It appears we have no further questions at this time. Mr. Sadusky I'd like to turn the conference back over to you for any additional closing remarks.

Vincent Sadusky

Okay. Thank you all very much for attending our call. And we'll look forward to updating you next quarter.

Operator

That conclude today's presentation. Thank you for your participation.

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Source: LIN TV Corp. Q2 2010 Earnings Call Transcript
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