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Outdoor Channel Holdings, Inc. (NASDAQ:OUTD)

Q2 2010 Earnings Call Transcript

August 5, 2010 5:00 pm ET

Executives

Brad Edwards – IR

Roger Werner – President and CEO

Tom Allen – EVP and CFO

Tom Hornish – EVP, COO, General Counsel and Secretary

Analysts

Michael Kupinski – Noble Financial

John Lewis – Osmium Partners

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Outdoor Channel Holdings Incorporated earnings conference call. My name is Tahisha and I will be your operator for today. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session.

(Operator Instructions) also, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brad Edwards. Please proceed.

Brad Edwards

Thank you, Operator, and good afternoon, everyone. Before we begin please recognize that certain statements on this conference call are not historical fact. They may be deemed therefore to be forward looking statements under the private securities litigation reform act of 1995.In particular statements about future results expected to be obtained from the company's current strategic initiatives are forward looking statements. Many important factors may cause the company's actual results to differ materially from those discussed in any such forward looking statements. These risks and uncertainties are described in further detail with the company's filings with the SEC. you are directed to these filings for more detailed information. Outdoor Channel Holdings undertakes no obligation to publicly update or revise its forward looking statements.

Please also note that we will be discussing non GAAP financial measures within the meaning of the SEC rules. The company believes that earnings before interest, taxes, depreciation and amortization or EBITDA adjusted for the effects of share based compensation expense and acquisition and integration costs provides greater comparability regarding its ongoing operating performance.

This information is not intended to be considered in isolation or as a substitute for net income or loss calculated in accordance with US GAAP. A reconciliation of the company's US GAAP information to EBITDA adjusted for the effects of share based compensation expense and acquisition and integration costs is provided in the table attached to the company's 2010 second quarter earnings release distributed earlier today and available on the investor relations section of the company's website at www.outdoorchannel.com.

Outdoor Channel is Neilson rated, Neilson Media Research is the leading provider of television measurements and advertising information services worldwide. Please note that Neilson estimates regarding Outdoor Channel subscriber base are made by Neilson Media Research and are theirs alone and does not represent opinions, forecasts or predictions of Outdoor Channel Holdings or its management. The company does not, by its reference today, imply its endorsement or concurrence with such information.

Finally, we've allotted one hour for today's conference call. Outdoor Channel's President and CEO, Roger Werner will begin with a brief overview of the ongoing progress being made with strategic initiatives being implemented at Outdoor Channel. Tom Allen, Outdoor Channel's Executive Vice President and Chief Financial Officer will then provide an overview of the financial results for the 2010 second quarter. Then we will open up the call for a Q&A session, and as usual, Outdoor Channel's Chief Operating Officer, Tom Hornish is also here with us and will participate in the Q&A.

With the formalities aside, I'd now turn the call over to Roger Werner. Roger?

Roger Werner

Thank you, Brad. Welcome, everybody, to the second quarter earnings call. I particularly want to welcome our new CFO, Tom Allen, who's in his third week on the job and doing a fantastic (inaudible). So Tom, welcome to the team and we look forward to having you participate today.

Total revenues for the second quarter were down 12%, due primarily to our refocusing efforts at Winnercomm and the elimination of some of their lower margin businesses and to a lesser extent a decrease in our subscriber revenues due to changes in our potential MFN line. Results for the second quarter also reflect the ongoing recovery in the ad market; we're seeing improved results there in selected advertising categories.

At the Outdoor Channel legacy business, total ad revenues increased 2% during the second quarter. Enjoyed solid increases in our combined short form and online sales although these gains were somewhat offset by continued weakness in the long form of paid advertising category and lower time line revenues.

Overall, we're encouraged with the ad revenue performance during the second quarter, which remind you marks the end of our seasonally weaker half of the year. So while there's still some pockets of weakness, we believe the ad recovery is taking hold a little more each day and we continue to see improvement. We believe that our expanded distribution, our growing HD presence, the recognized brand and multiplatform leaderships position offer unique opportunity and value proposition for our advertising sales partners and we expect that that business will continue to get healthier. As we enter our seasonally stronger second half of the year, we remain optimistic that we will be able to achieve year over year advertising sales growth as well.

On the distribution front, reported subscriber revenue was adversely impacted as I said because of changes in our reserves for potential MFN liabilities, which is something we deal with every quarter and are inclined always to take the most conservative route for financial reporting on.

As of August 2010, our Neilson household universe is now 35.6 million homes. Over the past year we have made some significant progress expanding that sub base through new system launches and packaging upgrades. Our affiliate sales team, as I've said a number of times is one of the strongest in our business and they continue to make progress growing the distribution base. Now while our reported subscriber revenues were down, we continue to make progress overall in the distribution area. We very recently reached an agreement with Comcast, in a packaging upgrade in the Houston market, which is significant. And as a result, Outdoor Channel will be available on Comcast Digital Preferreds here later this month. And we'll also still be carried on Comcast's sports tier in that market.

Our HD offering has been building strong momentum and we further advanced our position during the second quarter. In late June Outdoor Channel became the first and only outdoor cable network to be broadcast 100% in HD. We also recently launched Outdoor Channel HD across all of Comcast systems in Colorado.

In total, the Outdoor Channel HD feed now exceeds 7 million total subscribers. We've secured 250 system launches here to date across 98 broadcast markets. We are at18 of the top 25.

Finally, we remain focused on continuing to grow our subscriber base and as we discussed on our last earnings call, we believe there are a few million homes that we can reach over the relatively near term and so we're kind of continue to be hard at work and in active discussions to try and secure those gains.

Looking at Comcast, our concerted push to become 100% HD illustrates our ongoing commitment to delivering the highest quality content to our viewers. In fact our third quarter programming slate is driven by three key initiatives, 100% HD, record number of new shows, some season debuts and industry recognized marquee talent. Total third quarter lineup includes 13 brand new original shows as well as over 70 returning favorites.

And turning to the 2011 season for a moment, our fishing programming lineup will be substantially bolstered by five new and highly acclaimed shows in 2011. These programs previously aired on competing networks, mainly ESPN2 and are established shows that possess a strong and passionate build in audience; they have brand recognition all around.

The shows are focused on a number of different aspects of fishing, including both fresh water and salt water, inshore and off shore, all in all we believe these programs will be solid additions to the line up next year, will help us particularly first and second quarter.

Turning to Winnercomm for a moment, our production services subsidiary. Winnercomm generated 5.1 million in revenue during the second quarter and produced adjusted EBITDA of a negative 800,000. This compares to revenue of 6.8 million on adjusted EBITDA of a negative 1.6 million during the second quarter of last year.

We believe our efforts to improve the operations they are gaining traction as evidenced by the sharply lower negative EBITDA for the quarter, even including the fact that we had another 300,000 or so of restructuring costs in June.

The results were in line with our expectations as we continue to focus Winnercomm's operations. In June we took additional steps to improve the profitability there by further reducing workload and better aligning its production activities with our content leads and overall program strategy.

Looking ahead, we expect to realize full results of our efforts at Winnercomm during the second half of the year, which I'll remind you, like the legacy Outdoor Channel business is heavily skewed to the second half of the year.

So in conclusion, ad market continues to demonstrate some signs of recovery. Our objectives of Winnercomm are currently on track and we continue to make progress expanding distribution. Key strengths of our business remain intact and we're focused on advancing the company's position during our stronger second half of the year. Lastly our financial condition remains quite strong. We continue to have a large cash and cash equivalence balance, no debt and significant flexibility to invest in our business as well as look for external avenues for accelerated growth. At this time I’m going to turn the call over now to you, Tom Allen, our Executive Vice President and Chief Financial Officer. Tom will review second quarter results and financial position in a little greater detail. So, Tom?

Tom Allen

Thanks, Roger. Great job. I already feel I already feel superfluous. As Roger noted, our second quarter total revenues decreased 12% over the prior year period and mostly by the 25% decline in revenues at our production services unit, which was related to our decision last fall to begin reducing lower margin business. Also impacting the quarter’s results was a 16% decrease in subscriber fees that Roger referenced and that decline as he indicated was related to changes in our accruals for potential MFN liabilities. These MFN accruals are fairly fluid for us as we typically establish reserves on a more conservative basis and from time to time reverse run rates on the outcome of discussions and negotiations with the distributors involved. This was actually the case in Q2, 2009 when our sub fee number included a $500,000 reversal of prior MFN accruals and new accruals unrelated to those year ago in the second quarter of 2010, obviously created a significant year-to-year swing for us.

Advertising revenue increased 2% during the quarter, but our short form in online revenues increased 19% on a year-over-year basis. Before make good reserves for the quarter, that combine short form and online revenues increased 30%. Offsetting these gains were offset – were continued to offset in our long form advertising revenue and lower time by revenues which should rebound here in the second half of the year.

Total cost of services declined by 21% to 8 million, primarily due to the reduced Winnercomm activity, I referenced earlier, the decline in Winnercomm’s cost of services exceeded the decline in their revenues, obviously reflecting the fact that we are improving their gross margin compared to a year ago, which obviously was the plan.

SG&A expenses for the second quarter were essentially unchanged compared to a year ago, as increased salary and related cost related to Winnercomm’s terminated step in this year’s second quarter was close to match by acquisition and integration cost included in last year’s second quarter numbers and reduced run rate cost from earlier Winnercomm staff reduction.

The company recognized a net loss of 1.2 million or $0.05 a share – fully diluted and diluted the same number – basic and fully diluted, excuse me, compared to a net loss of 937,000 or $0.04 a share for the second quarter of 2009.

Consolidated second quarter 2010 EBITDA, adjusted for the effects of share-based compensation expense and acquisition and integration cost was 17,000 or roughly breakeven compared to $1 million in the second quarter of 2009.

Our legacy Outdoor Channel business generated 829,000 of EBITDA adjusted for the effects of share-based comp, compared to 2.7 million in Q2, 2009 on the lower subscription fee revenue we've talked about and slightly higher programming expense and final cost related to our former CFO’s departure.

Roger already covered the production services unit, exceeded our performance and he has also noted our continued healthy and debt free balance sheet. As of June, 30 the company had cash and cash equivalents and marketable securities totaling 58.1 million, working capital of 67.2 million and total shareholder equity of 137 million.

That concludes our formal remarks. Now Roger, Tom Hornish and I will be happy to take any questions you have. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And your first question from the line of Michael Kupinski from Noble Financial. Please proceed.

Michael Kupinski – Noble Financial

Thank you and thanks for taking the question. I'm glad to see that you guys are making some progress with Winnercomm, the cash flow number came in better than I was looking for so that's great. Just a couple of questions, the programming expenses seemed a little higher than I was looking for. Is that a good run rate going into the balance of the year?

Roger Werner

You know something, Tom Allen, I would ask you to maybe take a crack at that one. I don't think that's necessarily projectable through the end of the year, Mike, but as you know we got this first half, second half skew and we are debuting some new shows in third quarter so honestly I don't know whether it will be up or down versus –

Tom Allen

It’s certainly not an aberration in the second quarter, I would guess that it’s a fairly good number for us, going forward it might be – we might have slightly higher number going into the third and fourth quarter, given as we’ve mentioned some increases in our owned programming.

Michael Kupinski – Noble Financial

Okay. And then the production expenses were lower and obviously I think that reflects the downsizing of Winnercomm, would that be a good run rate for the balance of the year or for that line item?

Tom Allen

We hope its revenue which historically has been much higher skewed back half for Winnercomm it’s much more normalized now, first half to second half. Of course last year’s back half compared to the first half for Winnercomm was especially distorted given the lack of the first 15 days in January of 2009 which was pretty heavy production period for both Winnercomm and their aerial camera businesses, which obviously have a lot of football and bowl games in that first 15 days of January. So, I think – we’re hoping to see improved margins as we go though the balance of the year to the extent that the revenue we expect to be somewhat normalized in the back half of year. I would expect that our production – production costs, AKA cost of services that will be close to the same type of run rate that we saw in the second quarter.

Michael Kupinski – Noble Financial

Can you give us some thought in terms of the revenues for Winnercomm because I know that you went through a significant downsizing, you mentioned about 30% in terms of employee headcount earlier and then you said that you might have taken some additional cost cuts more recently. What should we look for in terms of the revenue for Winnercomm in the back half of the year? I mean, I know seasonally that that's your stronger period, historically anyway, but with all the downsizing what could we expect there?

Tom Allen

Little – I would just say that Mike, I think that the number for the first half of the year is not far off, of close to 50%. We probably will have a little higher in the back half of the year, but not to the same degree that we had last year. And we are continuing to review and analyze our opportunities at our production services unit. Obviously we want them to focus first and foremost on developing shows and executing production for shows that on the network, but we obviously have an existing client base and we’ve made some effort in calling that client base to keep higher margin business and try to offload lower or no-margin business. But we continue to see opportunities there and we’ll be opportunistic going forward if we believe we have the capacity to take on the business without diverting the attentions of what we see is a core mission. So, some of these things can happen pretty quickly on some of these production agreements but I guess I’d stand by the fact that I think it’s in the back half of the year, not far off of little bit more than what we have.

Michael Kupinski – Noble Financial

And in terms of the advertising market are you seeing – you mentioned that you're seeing firming trends. Could you just break that out between the long form, short form, where are you seeing the strength and I know that your second half is mostly your third-party advertising and – do we get rate increases with those guys or are you just seeing firming demand? What do you see driving that revenue line in the second half on the advertising line?

Roger Werner

Mike, it’s mostly firming demand. Some price increases is built in but not big ones, not big double-digit increases. Generally where we're seeing strength is short form and in online. The long form business, I think as Tom mentioned earlier continues to be soft. The sort of traditional infomercial business and we expect that it will remain soft. We don't see any real rebound coming there in the short term.

Michael Kupinski – Noble Financial

Okay. All right, I'll let others ask a question if they have one. I'll get back in queue.

Operator

(Operator Instructions) And we have Mr. Michael Kupinski back from Noble Financial. Please proceed.

Michael Kupinski – Noble Financial

Okay, I guess I'm the only one asking questions here. If we looked in terms of the Neilson numbers, I noticed it's interesting that their numbers came down and I know that you have no control over third-party reporting, but did the company's internal numbers reflect any decrease in subscribers in the quarter?

Roger Werner

No. No they did not. We continue to see growth in our numbers, Mike, which is a little frustrating for us sometimes, but again we – we always offer that kind of cautionary disclaimer about Neilson, we don't control their numbers, we don't understand how they derive their estimates in every case and you will see some noise in that number. But no, we're not seeing any kind of corresponding decrease in our internal cash.

Michael Kupinski – Noble Financial

And as far as you know, there were no cable systems that would have – that would have jettisoned Outdoor Channel that you were aware of?

Roger Werner

None that we are aware of.

Michael Kupinski – Noble Financial

Okay, and then in terms of the ad rates – it's interesting that a lot of the cable networks are seeing very strong scatter prices and I was just wondering in terms of why wouldn't you be able to participate in that, kind of just industry wide trends right now.

Roger Werner

Well, I think we are in general. Tom Allen, please jump in or Tom Hornish if I miss something here but we're getting close to sold out position actually in the third quarter and so have corresponding leverage with some of our customers on the pricing side. I think we – I think we're participating in this sort of general rebound in the ad sales market that we talked about earlier, but we – going into third quarter

But we going into third quarter, we are pacing ahead of last year, but it's too early for us to tell you with any precision how we expect to finish the year other than we hope to and expect to still finish with growth year-over-year in spite of the decline in first quarter.

Michael Kupinski – Noble Financial

And it's interesting that you said that you made – had some advertising make goods in the second quarter, if I got that right? I was just wondering what can you – give me some sense of what the ratings have been like, maybe year-over-year or in what you're anticipating in terms of your new lineup for the second half.

Roger Werner

Yes, Michael, in general again these are the Nielsen numbers and Nielsen estimates that we sell off of. And we noticed in the last – in the last two quarters that Nielsen has had some serious gyrations in their demographic numbers for us. Some of our ad sales business is based on demographic guarantees, particularly the non-endemic advertising part. So it does – it has had some effect on us. That – as you mentioned the make goods, that's what the make goods result on.

Going forward, we think that's a manageable situation and in fact Nielsen has expressed an interest in digging into why some of their numbers seem unstable and uncorrelated with the sort of internal numbers that we're seeing, and they're looking into it, but that's about all I can tell you. We are, for better or for worse, still somewhat dependant on Nielsen.

Michael Kupinski – Noble Financial

Okay.

Roger Werner

And somewhat unable to control both the timing and the trends and the numbers they show. But in general, we've had some negative – we've had some negative trends in the first half that we are having a very hard time explaining.

Tom Allen

And Mike, I'd just add to that. Obviously as we've talked about the difference in the cash pace, if you will, for the second quarter versus the net of make good reserve number, obviously we've got a stewardship responsibility to our advertising clients, and that has pulled inventory out of the third quarter for sale, which is obviously stymieing some of the strength in the scatter market that you referenced in question earlier.

Michael Kupinski – Noble Financial

And in terms of the –I guess subscriber fee revenue line item going forward, obviously some – a little bit of a noise in that number in this quarter. What do you anticipate that looking like going forward? I mean, I would think you're kind of going now in the second half year-over-year likely to get a little bit of the price increases. Is that what I should assume, something in the low-single digit range growth in terms of that revenue line in the second half?

Tom Hornish

Mike, it’s Tom Hornish. Generally, that’s true and the whole accrual – changes in the accrual on a quarter-to-quarter basis is something that we don’t have control over because it depends on some of the things that the distributors do. So, it’s really hard to give us –for us to give you some good direction in that. But your general trend with a CPI tapper[ph] growth for the rest of the year I think is right in line, barring –. And hopefully if we can fix the issue that –some of the issues that we are facing and everything, we can get that reserve back, and that will have a huge upside, but we can’t guarantee you that will happen obviously.

Michael Kupinski – Noble Financial

Right, okay. I think that’s all I have. Thank you.

Roger Werner

Thanks, Mike.

Operator

(Operator Instructions) Your next question comes from the line of John Lewis from Osmium Partners. Please proceed.

John Lewis – Osmium Partners

Hi, Roger. Hi Tom. Just a quick question. Can you divulge what the internal discrepancy is between what you have is –I guess your subscriber base versus the Nielsen, just what the difference is ballpark?

Roger Werner

John, it’s Roger. I’ve been in the business about 30 years and I’ve been involved with a number of cable networks and my experience is that Nielsen always overstates the actual number of subscribers that a network can count internally, or that effectively that a network is getting paid on. And partly that’s a function of a practice Nielsen is not doing an actual count, they are doing a sample and then projecting from the sample to a national universe number. And part of it has to do I think with kind of conflicting incentives for the cable operator and to Nielsen.

Nielsen get’s paid as a function of the number of subscribers in your networks base, not all the bigger network and where they charge for their service. So, their incentive is to kind of remain on the high side. Our customers themselves are distributors typically report several months in arrears and frankly because they're paying us, have an incentive to record a lower number they can justify. So, there is always a spread and the network’s internal count will always be lower than the Nielsen estimate in my experience. And that spread in our case is now running somewhere around 5 to 6 million subscribers on or somewhere around 15% and that in my past experience they’ve been in the ZIP code.

Tom Hornish

Hey, John, it’s Tom Hornish. Let me kind of kick that up a little bit further. I mean Nielsen always reports prospectively like at the end of July, they will then predict what they expect our universe to be for August. That’s the only thing we have to compare that to, like Roger said, the distributors that are actually remitting payments on the number of paying subscribers that’s three to four months old. So, you are always –if you are growing, you are always going to have that inherent just presently.

And additionally, Nielsen tries to predict using their statistical methodology the actual number of TV sets in the –I’m sorry, homes, most of them TV sets that might be multiple sets in one home. But the idea is that a lot of the distributors will go into a sub-division or an apartment building what they call MDUs, multiple dwelling units and get a –an overall lower rate on a per-home basis that they didn’t remit to us, which would actually intuit a lower number, but yet Nielsen should count that the total number of homes. Hope that makes sense.

John Lewis – Osmium Partners

Yes, that does. That's helpful. So the actual number of homes is closer to 40 million, is that right then? In terms of what you internally count?

Tom Hornish

No, the actual number of homes that we internally count would be lower than the Nielsen number by –

John Lewis – Osmium Partners

Okay.

Tom Hornish

Typically by 10% to 15%.

John Lewis – Osmium Partners

Okay, okay. Got that. Lastly, just given – I guess you’ve talked in the past about your – the close to 60 million in cash now, I mean obviously that's almost 40% or so of the market cap and that's a significant asset. You've had a history of repurchasing stock. I know that there's a – obviously a transition with the CFO, what are your thoughts kind of on ways to really enhance and unlock value and is this something that we're looking at 2011, or do you see any possibility of anything in 2010 that could significantly enhance value?

Tom Hornish

Well, let's put it this way. We certainly hope that in 2010 we can demonstrate our ability to unlock some of the value. And we – you mentioned some of the tools at our disposal, we continue to look at all of them and basically I would tell you that nothing is off the table.

John Lewis – Osmium Partners

Okay, I appreciate your time.

Tom Hornish

It's not – it's not – our perspective is not kind of business as usual for 2010, and then we'll see what the market looks like next year. Our objective for this year is to unlock value for you guys this year, in the current year. We may not get there, but that's our objective, continues to be.

John Lewis – Osmium Partners

That's great. I appreciate that. Thank you, Roger. Thanks, Tom.

Operator

You have one more question from Michael Kupinski. Please proceed.

Michael Kupinski – Noble Financial

Sorry about that. I did have one other question. On the SG&A line, I know as we go into the third quarter, we're going to be coming up against, Roger, your supplemental bonus that you had in the year earlier. And so I was just wondering in terms of the cost – the SG&A line as you go into the second half. Are there additional areas where you can cut cost into the third quarter and fourth quarter vis-à-vis – I mean, versus like what you have I guess in the second quarter?

Tom Hornish

I'll take that Roger. I think first of all, we noted there's a couple of unique cost in the second quarter that obviously we don't expect to go forward for the rest of the year. Clearly, one of my key focuses going forward is look to find ways to reduce costs and we’re already making some progress on that front. But to the extent that the bulk of our SG&A costs are staffing, Nielsen costs, commissions on sales revenues, those reductions are going to be meaningful, but not a significant reduction I would expect for the back half of the year.

Michael Kupinski – Noble Financial

Okay, that's all I had. Thank you.

Tom Hornish

Okay.

Roger Werner

Thanks, Mike.

Operator

We have no further questions at this time. I would now turn the call back over to management for closing remarks.

Roger Werner

Thank you, moderator. I think that (inaudible) for today unless anyone had a last minute question, I think we will adjourn and thank you all for your continued interest in Outdoor Channel.

Operator

We have no further questions. So, ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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