Entercom Communications (NYSE:ETM)
Q2 2014 Earnings Call
August 05, 2014 10:30 am ET
Stephen F. Fisher - Chief Financial Officer and Executive Vice President of Operations
David J. Field - Chief Executive Officer, President, Director and Member of Executive Committee
Good morning, and welcome to Entercom Second Quarter 2014 Earnings Release Conference Call. [Operator Instructions] This conference is being recorded. I would like to introduce your first speaker for today's call, Mr. Steve Fisher, CFO and Executive Vice President. Sir, you may begin.
Stephen F. Fisher
Thank you, Shirley, and good morning, everybody. Thanks for joining us on this beautiful -- well, it is a beautiful sunny Tuesday morning in the Northeast. Those of you listening on the replay later may regret you're not with us today.
I'd like to welcome you to today's Entercom Communications earnings conference call. This call is being recorded. A replay will be available on our company website shortly after the conclusion of today's call and also available by telephone at the replay number noted in our release, which was issued this morning at approximately 8:30.
With our notice of today's call, we asked that you submit your questions in advance of this call to the email address email@example.com, and I have quite a few of your questions. In addition, I'm always available for any follow-up questions, if you wish to call me directly at (610) 660-5647.
Before we begin, I'd like to make a note that, should the company make any forward-looking statements, such statements are based on current expectations and involve risks and uncertainties. The company's actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ is described in the company's SEC filings on Forms 10-Q, 10-K and 8-K. The company assumes no obligation to update any forward-looking statements.
During this call, we may reference certain non-GAAP financial measures. We refer you to our website at entercom.com for a reconciliation of such measures and other pro forma financial information. And with that, I'd like to turn it over to David Field, President and Chief Executive Officer.
David J. Field
Thanks, Steve, and welcome, everyone. Thanks for joining today's call. I'll start with a brief summary of the quarter's highlights, followed by some color on recent developments before turning it over to Steve and your questions.
Second quarter revenues were down 1%, as results were impacted by sluggish business conditions that impacted a wide range of media companies during the quarter. Operating expenses increased 3%, primarily due to start-up expenses related to our new SmartReach Digital division, which we will discuss further in a few moments.
Here are some additional second quarter data points. The sluggish business conditions persisted throughout the quarter, although June was a bit better than April and May. Our best performing categories were insurance, telecom, TV and cable, grocery and professional services. Our best performing markets were Memphis, San Francisco, Milwaukee and Buffalo.
We continue to experience solid ratings performance across our markets. This is no accident but rather a direct reflection of our vigilant focus on investing in strong local brands and strong local personalities in our various markets. And our relative sales performance continues to improve sequentially as we outpaced our peers in most of our markets according to Miller Kaplan.
And circling back to my prior comment about Q2 expenses, which were up 3%, it is important to note that, that number includes our SmartReach Digital operations, which added about 2% to the quarter's expense increase. But I should add that spot reach had a negligible impact on Q2 revenues.
On a macro level, we are bullish on radio's future prospects. Broadcast radio fundamentals are strong, with growing mass of audience reach and a superior ROI to competitive forms of media. And Nielsen is now providing us with outstanding research, showing that radio is the #1 medium in the country from 5 a.m. to 5 p.m. daily, and that radio delivers a 6:1 return on investment, outperforming television and digital. To quote Ad Age, this is "an ROI double that of even the best results from any recent studies of digital or TV media."
With Nielsen as our research partner -- our research provider, we now have powerful information from the world's most respected research organization to support our efforts to get our fair share of ad spending. Currently, broadcast radio receives about 7% of ad dollars, while garnering roughly 23% of the public's time spent with media. Radio deserves a greater share of the media mix, and the Nielsen data provides an unprecedented and powerful catalyst for radio to be revalued by marketers and to be allocated a significantly larger share of ad dollars than it has historically received.
Now that said, while we believe radio can and should grow its share of ad dollars in future years, we are actively focused on developing growth opportunities that will enable Entercom to post meaningful revenue and cash flow growth, irrespective of radio secular performance. We continue to focus on investments in innovation, brand development and digital enhancements. Our goals are to improve our listener and customer experience and to enhance our growth potential.
I'd like to highlight 3 current examples of this innovation.
In June, we relaunched The End, our alternative station in Seattle, with a unique new business model. The End features the industry's first 2 Minute Promise, limiting commercials to 6 minutes per hour and never more than 2 minutes at a time. We were also revising The End's advertising model, focusing on a 360-degree millennial integration program, enabling customers to reach The End's valuable and hard-to-reach audience across our digital, radio and experiential platforms.
We expect that the enhanced listener experience will drive higher ratings. And we anticipate higher revenues and profitability from these improved ratings and from the enhanced value of the station's limited integrated advertising availabilities. While it is still early, initial response from listeners, both directly and across social media, has been outstanding. We will closely monitor the performance of this station to determine what opportunities we might have to duplicate this experiment in other situations.
Separately, this past Friday, we launched a new station in San Francisco, Q102, featuring rhythmic adult contemporary music. Typically, when a broadcaster launches a new format, it comes at the expense of another brand, which gets eliminated to make room for the new product. But that is not the case here.
In 2011, we acquired KFOX, a Classic Rock station in San Jose at 98.5 FM from Clear Channel. This station was a high performer in San Jose, but we also took our 102.1 FM San Francisco signal and used it to simulcast KFOX programming into San Francisco and the Northern part of the market, believing that the combined signals would generate outstanding market-wide ratings.
Well, we were wrong. The experiment failed. The logic of the plan was compelling, but this is the media and entertainment business, and you never know for sure how audiences will react to content.
So while KFOX continues to generate great ratings in San Jose, we were never able to duplicate that success across the rest of the San Francisco market. So now, KFOX will return to focusing entirely on building on its position as a leading San Jose station, while Q102 will provide us with the equivalent of a newly acquired San Francisco property at 0 capital cost.
And finally, a few words on SmartReach Digital. In April, we announced the launch of SmartReach, a new division of the company that provides digital marketing solutions for local business customers. We are building SmartReach as a separate business with its own management team, a full-service digital agency and dedicated sales executives and campaign management in each of its markets. We began building our team and infrastructure late last year and began sales and operations in 6 of our markets on April 1. We have now expanded our SmartReach operations to a total of 10 Entercom markets and expect to expand to additional Entercom markets in the months ahead.
While it is early in its development, SmartReach is off to a solid start, and we are pleased with its early performance. We are optimistic about SmartReach's sales ramp, as we begin to gain traction with local customers. As we noted earlier, the second quarter SmartReach revenues were negligible as we are in early launch phase, and most orders extend over longer-term contracts. Third quarter SmartReach revenues will show significant percentage growth but remain quite small. Looking forward, we believe that SmartReach will be a meaningful contributor to our growth in 2015 and beyond.
Turning to current business conditions. As you are hearing from a number of other media companies, Q3 conditions have been choppy, and we continue to see business booking later than in past years. Currently, we are pacing flat for the quarter. July was flat, August is currently down low- to mid-single digits, and September is up low- to mid-single digits. And at this point, we have not yet seen meaningful political revenues, as those tend to break for radio just after Labor Day.
Looking ahead, as we have said in the recent past, we are optimistic and confident that our relative performance will continue to accelerate as we capitalize on our strong ratings, our powerful local platforms, our enhanced sales and marketing capabilities, our innovation and the emergence of our SmartReach Digital division in the quarters ahead. And with that, I'll turn it over to Steve for his thoughts before we turn to your questions.
Stephen F. Fisher
Okay. As David said, I'll give you a little more color and data points, and then we'll go to your questions that have been submitted in advance.
As David mentioned, second quarter expenses were up about 3% over the prior year, and that was slightly below what we forecasted on our last call in May. A note: This quarter's expenses included, as David mentioned, the increased investment in SmartReach Digital, along with some increased spending on events and brands.
Our year-over-year expense growth this quarter also reflected a onetime expense credit in last year's quarter that unfavorably impacted a reported expense growth in this year. So the way we look at it, if you exclude the impact of SmartReach Digital and operating investment and the prior year credit, our core station expense growth would have been pretty flat for the quarter.
Looking forward to the second half of the year, third and fourth quarter, we would expect operating expense growth to be in the 3% to 4% range in each of the next 2 quarters, with expenses at core stations up slightly and our digital investments adding another couple of points to expense growth in each quarter.
We're currently expecting that full year 2014 operating expenses will be up around 3% over the prior year, which is what we've been indicating to you on the past few calls. I believe our corporate expenses of about $5.3 million in the second quarter represents a good approximation of our expected run rate for the balance of the year.
Our booked tax provision for the second quarter was 42%. This is in line with our full year expectation of a tax rate in the low- to mid-40% range, with that annual range subject to quarterly adjustments. And as a reminder that I always feel obligated to point out to you when I talk about taxes, that this is a GAAP tax provision, as we do not currently pay cash taxes and enjoy significant tax shields and over $250 million in net operating losses to apply to future earnings.
Our second quarter net interest expense was about $9.8 million. And a note, this amount includes about $1.1 million in amortization of certain noncash interest expense items. And our interest expense continues to benefit from our focus on debt reduction and the December 2013 repricing of our term loan B credit facility.
On the balance sheet, we've made great progress reducing our net debt outstanding, net of cash, to $483 million as of June 30, and we paid down about $22 million thus far this year. Our June 30 leverage ratio, as defined by our credit facility, was 4.7x, which is well within our covenant.
Our CapEx for the quarter was $3.2 million, which is higher than our usual run rate and reflects the timing of some ongoing larger projects that should be completed by the end of this year. Our current full year expectation for CapEx is between $8 million and $9 million.
Stephen F. Fisher
So with that, David, let me go to some of the questions that were submitted. Quite a few questions come in from all the analysts and a few shareholders asking for your insights and color on national and local, both in the second quarter completed and in the third quarter outlook as we see it, at this point in time.
David J. Field
Yes. For us, national actually was a little better than local in Q2. And for Q3, we're seeing them in roughly the same neighborhood.
Stephen F. Fisher
Okay. Let me kind of stay on that theme. I will do a question, and then maybe I'll take the answer, David. Mike Kupinski says many companies have indicated a downcast view on political, his words. "Any thoughts on what the company may post in the second half?" And then, I'm going to relate that to another question from a shareholder saying, "Do we have firm commitments for political in the second half?" Let me answer the second first, which is no. As David indicated in his comments, political, in every election year, tends to break more heavily after Labor Day. Data point for the second quarter, we had about $700,000 in political; by the way, that's what we expected. We said at the beginning of the year, while we don't have a crystal ball, we don't have commitments, that if you go on past trends, as we look back over historical years, we would expect $6 million to $7 million in political for 2014, most of that coming in the second half for the year. If you do the math, that would range in the $4 million to $5 million in the second half for the year. But again, at this point, no firm commitments. David, let me go to a question from Marci Ryvicker, who asked a follow-up question. "Can you talk about the -- " and I know you addressed this in the script, but since it's a new venture, I think it's worth addressing. "Can you address the revenue expense contribution from SmartReach Digital?"
David J. Field
Yes. Again, so our costs were up 3 in second quarter, and 2 of those 3 points were SmartReach, and Steve has talked more about that as well. And on the revenue side, launching in second quarter, essentially a new business in a handful of our markets. We're seeing nice take-up locally and writing lots of business. But it's early. And the time cycle of these contracts tends to be fairly long. So second quarter was negligible. Third quarter, again, will be significantly larger from a percentage standpoint, but still very small in terms of the scale of our business. But as we look forward, we're optimistic about where this is taking us.
Stephen F. Fisher
I'll go to some related revenue questions from Aaron Watts. "Can you give any color on how auto category performed in the second quarter?"
David J. Field
Sure. Auto was in line with our corporate results or company-wide results at the second quarter.
Stephen F. Fisher
And a related, and we've had this in the past, again from Aaron, "Any feeling on out-performance or underperformance by geographical region in our footprint?"
David J. Field
There's really no pattern that would lead us to say anything other than, it was a pretty randomly distributed across our portfolio.
Stephen F. Fisher
I'll take the next question for myself. This comes from Chen Revlyn [ph], a shareholder. "Are we expecting CapEx in the $7 million to $8 million range, and then a decline next year?" As I indicated in my prepared remarks, Chen [ph], we'll file the Q tomorrow. We're moving the range up to $8 million to $9 million. We do have a couple of larger projects moving through this year. I would expect it to go down next year. I don't have a specific target. Just a refresh. We're in 23 markets, probably the most lumpy aspect -- that's a non-GAAP term -- lumpy aspect of our CapEx is timing on facilities relocation. Oftentimes as we come up on leases, we seek a more favorable lease that might trigger some CapEx but be economically advantageous to shareholders. And we have a couple coming up next year. We don't know if we're staying or moving, and so, that might trigger some stuff. But we'll give you more color as we get into the next year. Clearly, I think those that you have seen in the past, normalized CapEx in the $3 million to $5 million range with some of these lumpy projects such as we're experiencing this year. Let's see, David, a question from Howard Rosencrantz [ph], who wants to know, "Are we losing ad share to Pandora, Spotify or other digital radio or other digital mediums?"
David J. Field
Well, let me take a macro view to that question. If you look big picture, it's very clear that the audio space is booming right now, and that the consumption of audio continues to expand. And then, if you focus in on where broadcast is, broadcast radio is thriving within that. Our reach continues to grow. We have an all-time record number of listeners, we're the #1 medium in the country, 5 a.m. to 5 p.m., as I mentioned earlier. And if you look at the level of disruption in this growing pie, the best data that we see shows that broadcast radio has about a 92% share versus an 8% share for all streaming media amongst all of those players. And so, it's a pretty demonstrable difference in performance, which I think sort of speaks again to the overall competitive context in the industry and certainly far less disrupted than virtually any other media space that one can think about. Now that all said, I believe competition is good. And I think that new entrants are making the space stronger, and I think that it makes the space more vibrant. And if we think about what the impact should be on advertising in radio, well, sure, competition is going to write some business from some existing customers. It also should bring in some new advertisers, and add some new sparkle to the space and make it more enticing for new customers. So I'd like to believe that, over time, we're going to see new entrants in radio expanding, not only the pie of listening but also expanding the pie of advertising. And I think that can be a great thing for everybody.
Stephen F. Fisher
Let me go to another question, and looking at the question, maybe I'll take the answer. This is again from Chen Revlyn [ph], and let me read it directly for everyone. "Are we expecting noncash compensation expense to be higher this year versus 2013? And then, is noncash comp tied to EBITDA?" Let me point out, because this is some data points. One, I would expect noncash comp to be about $5.3 million this year, roughly. That's a noncash book expense. But that will be among the lowest over the past 6 years. Last year, 2013, was a low watermark, just given the timing of some of the equity grants that the board had made. I guess, it's maybe self-serving, but let me point out to all shareholders it was in our proxy that was approved in May by shareholders, that the grant given to David Field, the CEO of the company, are entirely performance-based, based on share-price performance. So a lot of skin in the game on that. And then, just an accounting note for Chen [ph] and for the benefit of shareholders. The company recognizes based on models, the Monte Carlo model, that gets specifically, a certain -- a majority of that is an expense, whether they ultimately invest or not. That's the way the rules works. So a little color on noncash expense. I have 2 questions related. While I've got the floor, David, let me -- Mike Kupinski asked on prospects of refinancing. Let me address that. One, as we have said all along, it's well-known that we have 2 tranches of debt: A term loan B facility and about $220 million in high yield notes outstanding. Those have a call that come up next fall, fall 2015. I think that represents an excellent opportunity depending on overall industry, economy -- economic and interest rates for the opportunity to perhaps refinance some or all of the company's balance sheet. We think that could be a huge windfall for shareholders in terms of free cash flow versus current interest. Of course, we can't forecast the interest and debt environment at that time. But if you just look at where those are trading today, the performance of the company, the delevering, the debt pay-down that we've demonstrated, we think that, that does represent a future opportunity that will accrue benefits to shareholders. So kind of in that shareholder-friendly vein, David, a question from several people as to, "What is the company's highest use for free cash flow in the future and what's the flexibility of the company to return cash to shareholders in the future?"
David J. Field
Yes, I think our actions speak loudly in this regard. Over the course of the last few years, we have deployed essentially all of our free cash flow. And as we all know, this business model is fantastic and generates great free cash flow and deployed essentially all of about to repaying debt and improving our balance sheet. And we've also discussed on numerous occasions the fact that as we -- as our leverage evolves towards a sort of mid-4s or lower level, dividends are something which I think will receive some significant consideration. And we're obviously very, very close to that level at this point in time. Stock buybacks, I think, are a little less appealing, particularly in the context of our limited flow. You never say never, but I don't think that's quite as appealing as a dividend would be going forward. And then lastly, there's always the possibility of acquisitions, and we've been very consistent, I think, over the years in saying that -- and radio is predominately a local business, and we are very strong in the markets that we serve with deep positions with many stations. And so, for us, M&A is not a comparative, but it's just something that we look at opportunistically. And if we see the opportunity to acquire stations, where we can add significant value to shareholders without harming our balance sheet, we would certainly take a look.
Stephen F. Fisher
Okay. So that's the questions submitted in advance. As I indicated earlier, I'm always available to ask any followups at (610) 660-5647. David?
David J. Field
That's great. Thanks, all, for attending today's call, and we look forward to reporting back to you all in a few months.
Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your line.
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