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Emmis Communications Corporation (NASDAQ:EMMS)

Q1 2015 Earnings Conference Call

July 9, 2014 9:00 a.m. ET

Executives

Jeff Smulyan - Chairman and CEO

Patrick Walsh – CFO & COO

Kate Snedeker – Investor Relations

Analysts

Operator

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

Now I will turn the meeting over to Ms. Kate at Emmis Communications. And ma’am, you may begin.

Kate Snedeker

Thank you, [Hark]. Good morning everyone. Thank you for joining us for today’s Emmis conference call regarding first quarter earnings. I want to extend a special welcome to all the Emmis employees who are joining us and listening in.

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 will respond to the questions submitted via email to ir@emmis.com. Again it’s the initial ir@emmis.com. A digital playback of the call will be available until 6PM on Wednesday, July 23 by dialing 203-369-3625.

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 is – it’s certainly been an interesting quarter. I almost say it’s a good news – a challenging news, a very good news quarter. For Emmis, we continued to perform at the highest levels of the industry. We were up 1.6% against the markets down 5.5%, and the 5.5% obviously is the challenging news.

To beat our markets by 7 points is really amazing and we keep doing that and I think it’s a tribute really to the performance of our radio group. Our publishing group was up 7%. So months after months, quarter after quarter, year after year, we seem to have found the formula to really outperform.

This quarter also was marked by the closing of WBLS, WLIB that obviously is a very significant event for the company and really we think puts us in a position in New York to have a major presence there, and we couldn’t be more excited and pleased.

And we also invested in Digonex this quarter, dynamic pricing business which we think is the way to the future and we want to be on the cutting edge of learning about that, both for our own company, also we believe to attract a lot of other businesses that have learned what we've learned and that is the dynamic pricing is the future and we hope we can do a pretty good with managing Digonex. So that’s all good news.

The challenging news obviously is it was a tough quarter in our markets. I don't -- I want to stress the fact that our markets were down 5.5%, we don't have the rest of the industry. But speaking at a number of industry events and talking to a number of peers, we know that this is a challenging time. On the other hand, there is some good news on the horizon. And that good news is obviously a political year, increasing retail sales, and some other – increasing job numbers. So, we feel that this was a particularly tough quarter, sort of like last quarter’s GDP that was sort of an outlier. We hope that’s the way for the industry. But there's no getting around that it was a tough quarter.

Having said that, the really good news obviously and the thing that we think is the most important catalyst for Emmis and our industry is NextRadio, and this was – this really was an amazing quarter there, starting with the NAB convention now with the fact that every major radio company is doing interactivity and they've all supported it financially. We are up to I think around 600,000 activations and remember, with NextRadio, we have to win it one phone at a time. But we now know that there are 15-enabled smartphones in the market through Sprint. We know that the HTC One is in the market for every carrier. And we know that public awareness is just starting.

On Monday of this week, two days ago, we launched the campaign with National Public Radio, Educational Media Foundation, and American Public Media. This is the first public campaign and the campaign is free radio on myphone.org and it will ask the carriers rightly so and other public figures why is that the FM chip is on every smartphone turned on. But we now know we’re at the tipping point. This is the first public awareness campaign through our friends in non-commercial radio. The next campaign will be at the end of the summer led by the National Association of Broadcasters.

In my 40 years, I have never seen the industry come together as much on a project and it’s very gratifying. The fact that almost all of this was just developed at Emmis through the incredible leadership of Paul Brenner and his tech team. And the fact that we really believe we have the catalyst to change the industry. When I started this, even before we invented NextRadio, I said that I think our industry will be transformed more on 300 million smartphones. I would now say that it would be transformed that we’re not only on 300 million smartphones, but we’re on every tablet and in every automobile dashboard and in the clock radio of the future.

The really amazing news is we’ve now seen customer research that our friends at Coleman did and while that hasn't been publicly released, I can tell you that it is remarkable, how positive this is with consumers. We are now certain that this infrastructure we’ve built and making radio interactive is the game changer for our industry. And now it’s up to all of us to push it over the top to get other carriers to adopt it and then I think we will finally have a transforming event for our industry. So I realize I talked a lot about that but this really was a landmark quarter for NextRadio and I couldn't be more pleased with it and I also could not be more pleased with the fact that by every metric, ratings, and industry revenue and leadership, our company continues to set the standards on. I am very proud -- against the backdrop of the quarter, which certainly wasn’t great in our core business.

With that, Pat, I’ll turn over to you.

Patrick Walsh

Thanks, Jeff. Good morning everyone. This morning we’re releasing earnings for our fiscal first quarter ended May 31, 2014. These earnings include results from the WBLS and LIB LMA in New York. And as such, as we do each quarter we encourage those on the call to refer to the additional financial information disclosed at our website emmis.com to assist with better understanding of pro forma results of our radio and publishing operation.

Our results for the first quarter reflect the continuing outperformance of our radio and publishing operation compared to our peers, while our team also effectively integrates our newly acquired properties in New York while continuing to deliver important innovation for the radio industry in the form of NextRadio.

During the first quarter ended May 31, 2014, we recorded station operating income up 2%. Radio net revenues grew 22%. Pro forma radio net revenues, including WBLS and WLIB were flat year-over-year. However radio net revenues reported to Miller Kaplan which excludes certain barter and syndication revenues, were up 1.6% on markets which Jeff described that were down 5.5%. This 7% spread against our markets demonstrates our continued progress in taking market share, monetizing our ratings and growing our new business initiatives.

4 of our 5 Emmis Miller Kaplan markets showed growth in the quarter and each of these markets, Los Angeles, St. Louis, Indianapolis and Austin took market share with the fifth market New York performing in line with its market.

For the quarter, we were able to perform well in each revenue category compared to our market competitors. National was down one for us on markets down 15%. Our strategic focus on local enabled us to deliver 1% growth on markets that were down 6%.

NTR at Emmis was up a healthy 17% on markets up 14%, and digital continued to exhibit growth up 5% at Emmis on markets up 6%.

Taking a quick look at our monthly trends. We were up 2% in March, up 5% in April and down 2% in May, leading our markets in each month by at least 5%.

During Q1, our number of minutes sold decreased 1% compared to the prior year with average minute rates up 2%. The automotive category was once again our largest, representing 13% of revenue, automotive grew 5% during the quarter.

Healthcare bumped up to become the second-largest category, representing 7% of our revenue and grew a robust 18%. Wireless, our third-largest category, was a drag on revenue, with revenues off 19% during the quarter. This category has showed very, very strong growth the past several years but took a step back during the first quarter.

Top 10 categories that showed growth included home-improvement, financial and media, with quick service restaurants, entertainment, beverages and professional services showing decline.

Revenues in our publishing division were up a strong 7% in the quarter, driven by strong growth at nearly all of our titles. Looking forward to Q2, we are currently pacing down 3% as market revenues in our largest markets underperformed the prior year. We were down 1% in June. Our publishing division is pacing up mid-single digits in Q2 similar to the first quarter.

In terms of station operating expenses, excluding depreciation and amortization, Q1 expenses were up 14%, a result of adding the personnel and non-personnel expenses associated with WBLS and LIB.

Pro forma domestic radio expenses, including BLS and LIB but excluding expenses associated with NextRadio, were up 1.5% during the quarter, considerably lower than our expense growth guidance at year end. Publishing expenses were up less than 1%. Corporate expenses were up $500,000 during the quarter as a result of certain bonus payments associated with the company’s strong operating performance.

At May 31st, the company had $58 million outstanding under our senior credit facility with a weighted average cost of borrowing of 4.42%. Also on our balance sheet is $73.9 million of 98.7 FM non-recourse debt related to the 98.7 FM New York transaction.

Subsequent to the end of the first fiscal quarter on June the 10th, we entered into a new $185 million term loan and $20 million revolving credit agreement to refinance our existing credit agreement and complete the purchase of BLS and LIB.

The BLS and LIB purchase contemplated a two-stage closing with proceeds from the financing funding $55 million of the $131 million purchase price in June 2014 and also funding the remaining proceeds due in February 2015. We received a pro-rata reduction in the BLS, LIB LMA payments after the $55 million payment and the LMA payments will cease following the second payment in February 2015.

As of June 30, 2014, we have $199 million outstanding under the credit facility at an average cost of borrowing of 5.74%. I recommend investors reference the leverage calculation on our website which reflects leverage at 4.2 times EBITDA as defined in our new credit agreement, excluding both the 98.7 FM non-recourse debt and its related LMA payments.

Finally, we invested $600,000 in CapEx in the first quarter and expect to spend in the range of $3.5 million for the full fiscal year. I know Jeff and I are proud of the hard work and innovation displayed by our team at Emmis, our ability to continue to take market share for this, a fifth consecutive fiscal year, while also providing industry leadership through the NextRadio development is a testament to the quality and hard work of our great people.

With that, Jeff, as we've done for the past several quarters, investors have submitted a number questions in advance of the call for us to cover –

Jeff Smulyan

Right.

Patrick Walsh

At the end of the call.

Question-and-Answer Session

Patrick Walsh

So let's start with NextRadio, folks asked for a status update which you gave. Folks also asked for a quick look at what they can expect for the balance of the year and when NextRadio will begin to generate meaningful revenue for the company?

Jeff Smulyan

Well, I think what's coming, as we’ve said is we’re now ramping up – we have -- every major company in the industry is now doing interactivity through tag station. I think we’re up to about 1300, 1400, 1500 stations and that probably represents about 70% of the listening in America. So, obviously the larger the company accounts for more listening, that doesn't mean that we don't have an outreach to every broadcaster. We think it's important for every broadcaster to be in the system, it’s agnostic, it was built so that it is universal for the industry and – and so we’re going to continue that but clearly we’re in the pipeline to have a system where most Americans who turn it on can see interactivity for their favorite station which we know causes listening to be twice as much. That will come now. That's coming in the summer and the fall and then we believe that as the public awareness campaigns occur, with both public radio and then the broadcast industry, but that will cause some of the other carriers to rethink their position. And we believe that that will be the tipping point. We believe that the other carriers come online, that we -- that this will become a ubiquitous standard.

It's hard for us to say profitability but we believe that this can be a profitable venture for the industry and certainly Emmis as the builders of this.

Patrick Walsh

The next question relates to our operations in New York. There were number of folks who asked how the integration with BLS and LIB is going, where we want it to be and how do we get New York to exhibit the same type of strong performance you’re seeing in your other markets?

Jeff Smulyan

Well, I think we had particular challenges in New York. I think and Pat, listen you are the architect of the transition, and I think it's been a very smooth transition. Are there always bumps whenever you have acquisitions? Sure, but I think -- because of our culture, I think those are minimizing them. Obviously New York had its challenges. We particularly have had our challenges there, that we think that that's getting solved certainly in this fiscal year.

Patrick Walsh

A couple of questions about Digonex. At the end of the quarter, we purchased a controlling interest in Digonex, as you mentioned, a dynamic pricing business. We initially put in $3 million to take control of near term plans for another $2 million. Tell us why you made the investment and your plans for the company?

Jeff Smulyan

Well, again, we sell $200 million of inventory a year. Obviously if we could find the holy grail to price that better, that alone would make the investment worthwhile. But we also think this is going to be a business that’s going to grow. They have contracts in retail, they have contracts in entertainment, they have contracts in sports. They have contracts in a number of areas and we’re convinced in doing a lot of due diligence, talking to a lot of people that dynamic pricing is the key to all inventory management and frankly we like to be on the cutting edge of it.

Patrick Walsh

I guess this is a question we get with each earnings call. The litigation with the dissident group of preferred shareholders continues in federal appeals court. Can you give the group an update?

Jeff Smulyan

Well, I am not sure when Judge Parker’s ruling was, I think it was before our last earnings call. We won a summary judgment from Judge Parker, which affirmed the original ruling. It could not have been more clear cut. So we were proud, we thought like we were vindicated. As we said, we once again demonstrate that Indiana is not Delaware and the things we did were correct. Having said that, the case is now at the Seventh Circuit and I believe that breach [ph] is being done now and the Seventh Circuit will hear the case. And so from our standpoint to the preferred shareholders, they certainly -- they can exercise those rights. We’re confident, it’s up to the courts, the appellate court, we think the appellate court will affirm Judge Parker's ruling, and we will see.

Patrick Walsh

And I guess we’ll close up with a couple of questions for Pat [ph] on the radio industry. This one just came over a couple minutes before the call but an investor asked, if we see additional consolidation coming in the radio industry, and if so, where does Emmis fit into that process?

Jeff Smulyan

Well, my favorite saying like is you never say never. We don't see anything active, make no mistake, our industry is challenged for capital. It’s better than it was, the perception is better. You’re seeing multiple rise [ph] slightly, and I think one of the trades did an analysis, like [indiscernible] yesterday about slowly rising. I think there's a lot of research that indicates that people have oversold radio from both an advertising standpoint and capital markets standpoint, because even in businesses that are flat to slightly down, this industry generates a lot of cash flow and I think a lot of people are recognizing that there's a lot of streaming businesses and none of them make money. But you have sort of a disconnect. You’ve got Pandora, Spotify, others that have certainly attracted billions of dollars of capital in valuation and yet they haven't found any way to make money, and yet our industry and all 10,000 radio stations make hundreds of million of dollars a year. So I think we need to change the perception.

I think there are things, I think the study that Clear Channel did with Nielsen, and Cats [ph] was groundbreaking, because it shows radio’s return on investment and I also think, as I’ve said, I think we need a catalyst, I am absolutely convinced now more than ever that NextRadio is that catalyst. But clearly we need to have a change and it is simple as radio needs to be cool again. And I think the most gratifying part of the research is overwhelmingly when consumer saw the interactivity of the radio tuner of the future which we’ve built, they think it's cool. And I can't think of anything more, I mean, than give our 275 million people who listen to this industry look at it, listen a little bit longer and think that it is cool again. I've always said, that’s the game changer that we need and make no mistake about it. Our industry needs a catalyst. We think we have it. We certainly have it here.

Patrick Walsh

I am just checking in email again. I think that’s all we got for today. So if you’ve got any closing remarks, then we can wrap up.

Jeff Smulyan

Well, it always ends with the same thing, I think our people. We were at a celebration yesterday at Power 106 where we are now. And Power 106 has been the crown jewel, and I have said, I think it’s not only the best radio station in performing certainly in our company but I think it's the finest radio station in the United States with the best leadership in the United States. But we really have that station to station, market to market. There's a reason that people view Emmis as the destination company. We’re certainly not that large, but we’re large enough and we have a culture that allows people to win and our people go out and win every day, and I could not be prouder.

So sure, we’d rather have quarters where the industry is up 5.5%. But up or down this company for 34 years has always found a way to do well and I could not be prouder especially of the culture and innovation of this company because I think not only are we leading our own way through but I think we’re going to help the rest of our industry come through this and it’s very gratifying. And I thank every one of our employees and thanks, Pat.

Kate Snedeker

Thanks everyone. Just a reminder, a playback of the call will be available until 6PM on Wednesday, July 23. The number 203-369-3625. Thank you.

Operator

That concludes today’s conference. Thank you for participating. You may now disconnect.

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