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Radio One, Inc. (NASDAQ:ROIAK)

Q2 2014 Earnings Conference Call

August 5, 2014 10:00 AM ET

Executives

Alfred Liggins - CEO

Peter Thompson - CFO

Analysts

Lance Vitanza - CRT Capital Group

David Siebert - Wells Fargo Securities

Aaron Watts - Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Radio One Second Quarter Conference Call. I have been asked to begin the call with the following Safe Harbor statement. During this call, Radio One will be sharing with you certain projections or forward-looking statements regarding future events or its future performance.

Radio One cautions you that certain factors including risks and uncertainties referred to in the 10-Ks and 10-Qs and other reports periodically filed at the Securities and Exchange Commission could cause the Company’s actual results to differ materially from those indicated by its projections or forward-looking statements. This call will present information as of August 5, 2014. Please note that Radio One disclaims any duty to update any forward-looking statements made in the presentation.

In this call, Radio One may also discuss some non-GAAP financial measures in talking about its performance. These measures will be reconciled to GAAP either during the course of this call or in the Company’s press release which can be found on its website at www.radioone.com.

A replay of the conference call will be available from 12 pm Eastern Time August 5, 2014, unit 11:59 pm August 7, 2014. Callers may access the replay by calling 1-800-475-6701 that’s in the U.S., international callers may dial direct 1-320-365-3844, the replay access code is 330905, access to live audio and the replay of the conference call will also be available on Radio One's corporate website at www.radioone.com. The replay will be available on the website for seven days after the call. No other recordings or copies of this call are authorized or maybe relied upon.

I will now turn the call over to Alfred C. Liggins, Chief Executive Officer of Radio One, who is joined by Peter D. Thompson, Chief Financial Officer. Mr. Liggins please go ahead.

Alfred Liggins

Thank you very much operator, and welcome everyone. And as you can see from the press release, second quarter was soft for us led by challenges in Houston from a competitive standpoint. The market was soft as well. All end our radio business was just about flat with our markets being down 4.1 and we’re down 3.8, and if you normalize for Houston, we actually beat our markets. Peter is going to go in this more detail about it, but the competition in Houston has been challenging, but we have an offensive plan there and we’re bouncing back.

I think there was a blurb of inside Radio today that talked about us opening up a significant lead against our competitor on the rating. And so we’re feeling like our sense of plan is in process and is working. Also TV One is relatively flat year-over-year in EBITDA. I have mentioned a number of times on conference call that we’re investing in programming this year as go into all of our renewals of our cable carriage agreements. We are on target based on where we were budgeted. Our TV One carriage renewals continue to go a very extraordinarily optimistic that we will positive outcomes with our major distribution partners.

So, I will turn it over to Peter now and then after he finishes with the details, we will open it for Q&A.

Peter Thompson

Thanks Alfred. And just points of clarification there, the markets in which we operate were done 8% for the quarter. We were down 4.1%. As Alfred mentioned, we have competitive issue in Houston. The back half of Houston market and the markets in which we operate were down 4% and we were down 2% excluding Houston.

Alfred Liggins

Thank you.

Peter Thompson

Just sort of given to -- net revenue was approximately $108.4 million for the quarter ended June 30, 2014, a decrease of 9.4% year-to-year. The decrease primary resulted from timing difference of the Tom Joyner Fantastic Voyage. Adjusting for the timing difference of that event, net revenue decrease 5.4% for the radio division including Reach Media, we recognized approximately $38 million of net revenue from cable television segment in the second quarter and increase 0.7% of the second quarter of 2013 primarily from an increase in affiliate sales.

TV One affiliate revenue was up 4% versus prior year while advertising revenue was down 3% versus prior year. Net revenues for the internet division decrease by an 8.2% year-to-year. At Charlotte, Columbus, Dallas, and Detroit clusters had the most significant revenue growth while Houston, Atlanta and DC clusters have the most significant declines. Excluding Houston, our core radio revenues were down 2% versus minus 4% in the market in which we operate. Local revenues were down 9.8% and national revenue was up 1.4%.

Cable subscribers as measured by Nielsen finished the quarter at 56.8 million, compared to 57.1 million at the end of June last year. TV One currently has 50.5 million billable subscribers. Operating expenses excluding depreciation, amortization, impairments and stock-based compensation decreased to approximately $76.8 million in Q2 from approximately 81.9 million, that was approximately $6 million of expense from the Tom Joyner Fantastic Voyage in the second quarter 2013 and normalizing for the expenses of that event operating expenses were up 1.1% year-over-year. For the second quarter consolidated station operating income was approximately $41 million down 10% in last year. Adjusted consolidated EBITDA was $31.7 million a decrease approximately 10.9% year-to-year or 13.5% after normalizing the timing of events.

Interest expense was approximately $19.3 million for the second quarter down from approximately $22.3 million in the same period last year. The decrease in interest expense is primarily due to the large interest rates associated with the nine quarter senior subordinate notes due 2020. The company made cash interest payments of approximately $10.4 million in the quarter.

Net loss was approximately $10.8 million or $0.23 per share as to net loss approximately $14.2 million or $0.29 per share the same period 2013. The second quarter capital expenditures were approximately $1.7 million at $3.6 million in Q2 of 2013. Second quarter cash tax has paid were approximately $311,000. Company received dividends from TV one in the amount of $6.3 million in the second quarter. As of June 30, 2014 Radio One have total net of cash balances approximately $761.4 million. The bank covenant purposes, our total net debt was approximately $671.4 million and our LTM bank EBITDA was approximately $94.3 million, giving a total leverage ratio of approximately 7.12 times and a senior leverage ratio of approximately 3.57 times.

Company’s cash and cash equivalents by segment are as follows. Radio and Internet approximately $33.1 million, Reach Media approximately $3 million; Cable Television approximately $23.9 million. In addition to cash and cash equivalents, Cable Television segment also has short-term investments of approximately $2.6 million and long-term investments of approximately $806,000. With that, I’ll hand it back to Alfred.

Alfred Liggins

Great. Operator I’d like to open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Lance Vitanza with CRT Capital Group. Please go ahead.

Lance Vitanza - CRT Capital Group

Could you elaborate a little bit, Alfred, on the comments you made regarding TV One? And I think you mentioned you were very enthusiastic about the opportunity there. I missed maybe some of the comments that you began with regarding affiliate fee rates and distribution and so forth, but any additional color that you can share on either of those fronts would be appreciated.

Alfred Liggins

I didn’t mention anything about affiliate fee rates, but I’ve mentioned in the past that our rate is in the mid to high teen, and we are in the middle of discussions with kind of almost everybody. Comcast and Time Warner effectively both end at the end of this year. Charter ended in I think it was June we extended them to anywhere 2015. So we can now focus on the deal that not uncommon, that happens particularly for a network our size because the big guys end up given more focus and so we have very positive conversations with them about renewals and they ask for an extension of six month and we gave it to them. And we got AT&T, DirecTV comes up with the end of 2015 but we’ve already started discussions with AT&T and DirecTV about that. And we’re also in discussions with Verizon that ends in March 2015.

So I think the network has great brand awareness, has enormous consumer report, support enormous community support I think the industry recognize is that after 10 years we fulfilled our programming promise. We have got pretty ratings for a network only in 57 million homes. The rankings bounce around but I think we’ll rank kind of like now, high 50s or 60 out of the 100 cable networks and by the Comcast has deals with 500 networks. So from rating standpoint even with the competition we’re doing pretty well. So I’m fully confident we’ll get all of our renewals done at fair rates.

Lance Vitanza - CRT Capital Group

Thanks for that. Can I ask you one follow-on question? Obviously and you touched on it, right, there is so much M&A in the space with the distributors combining, I would think that has got to be a negative for you. And being you have got potentially Fox and Time Warner combining, potentially making it more expensive to bid on content. How do you -- how would you describe the lay of the land from that perspective and are things getting more difficult for you?

Alfred Liggins

Actually, I think it’s been the opposite for us. The distributor combining is actually going to positive for us because anytime the big guys want to get bigger. They have to explain to community groups and government why they being bigger is good for everybody else besides their shareholders and diversity comes up always. Diversity has been a question that has been raised in every single Congressional incentive hearing that happens thus far on the mergers. TV One has actually been mentioned in the number of those. So I think we couldn’t ask for a better time to have our deals come up. And quite frankly, on the programming contents first of all Fox and Time Warner don’t really compete with us.

They don’t have the African-American focus or really even slanted programming outlets. So our competitors are Viacom, Discovery with Oprah Network, NBC Universal with Oxygen and Bravo. And all those guys are ready way bigger thus, so we’re already operating in a world where the other guys can pay more for content and we can’t and we’re actually focused on trying to make smart acquisitions, but increasing our original programming offerings and trying to do at the smart way so that we don’t have to play the game of bidding against guys that are 100 times of our size.

Lance Vitanza - CRT Capital Group

Thank you.

Alfred Liggins

And by the way the distributor ultimately I think really wants to hear that who is going to create original programming as opposed to asking them to pay for regurgitated reruns that they are already probably paying for on somebody doesn’t have more.

Lance Vitanza - CRT Capital Group

Thanks very much for the color.

Operator

Our next question is from David Siebert with Wells Fargo Securities. Please go ahead.

David Siebert - Wells Fargo Securities

Could you elaborate on that Houston situation, and how that competitive situation got so disruptive? And, secondly, on the radio business in general, we have heard a lot of talk about net national displacement with the World Cup and the Olympics. Share shifted digital mobile. Just curious if you could provide big picture thoughts on the radio space given the sluggishness we are seeing.

Alfred Liggins

I have been -- I hate to use the term bear, but I am going to use it. I have been bear on the radio space for 10 years. When I say bear, I think it’s a great business. I think it is wonderful particularly for region ethnic audiences African-American, Hispanics. But it is a mature medium, period, end of story. So we run our business looking at radio as the flat business is never going to grow and who knows maybe overtime it secularly declines. Although, it an audio medium and distributing audio is not all that complicated whether you’re a radio station or whether you’re a Pandora.

And there isn’t as much of disruption coming from internet guys to distribution audio distributors like us as there has been to the newspaper and the magazine folks from the internet. Distributing magazines and distribution newspapers is very complicated and very costly. So I don’t you can compare the radio business to those businesses, but the fact of the matter it is first, we used to have the car to ourselves then came satellite, okay, we have got the connected car, you have got Pandora, you have got Spotify. There are just more mindshare that you’ve got deal with, so I think that you’re going to continue to see radio would be a business that’s matured under pressure.

So we have got to reinvest ourselves. All of these radio companies need to reinvent ourselves. I think that we’ve done a good job of it reinventing ourselves as an African-America targeted media company. I know for sure that the African-America population is growing and it’s going to grow faster than the general market population. And so our pitch to advertisers more and more is about the demographic and our platform and we don’t need to argue with them about whether they reach them on radio or on a syndicated radio shows or on television or online or on mobile. But, the Houston situation we used to say.

How did it get so disruptive? I never expected it would be this disruptive. I mean we had no urban competitor and clear channel puts a hip-hop station on and all of sudden they have got close to a four share and that heard in a shape couple of share points off on our hip-hop station there, but that station is now bouncing back that happened in January, so it’s midway through the year now. There are still other levers we have to pull in that battle, but we’ve been in format battles 20 times before maybe 50 times, in fact we use to pick most of the fights and so we’ve got to make adjustment for this our biggest revenue in cash flow market and even if it’s down 10% it take number. Now I think that we’ve got some offside opportunity that are going to offset that in places like Detroit, is coming up started to show significant ratings growth. Charlotte is doing well, but we’re going to go through a bit of rough patch here and we’ll come out on the other side in a good place.

David Siebert - Wells Fargo Securities

Okay. That’s helpful. I know you have the jump ball with Comcast at the end of the year on TV One. Just curious, Comcast was quite busy, do you have their ear, or are you having any discussions around that buy/sell agreement? And is the thought still that you sort of change to the capital structure would still dovetail with the TV One.

Alfred Liggins

Yes, so we have absolutely at high level discussions with Comcast about the buy/sell agreement and they’ve indicated that if we want to buy they would consider selling, we need to approach them and make them offer and became the negotiations. We have been primarily focused on getting the distribution deal done first, which unfortunately they’re complicated. We’ve agreed on essentially the economic terms of the deal, and now we’re trying to work through all of the different rates, because the world changing and their business is changing and there is new media rise et cetera, et cetera. And so working through all that stuff, is the brave new world.

So we’ve been focused on that before we actually come back to them and engage in a resolution to the buy/sell, but they’ve been very open with us, they’ve been open with other people that something that they are willing to consider, it’s never been strategic for them, they know it’s important to us.

So the change in the capital structure essentially will be that when we do our first lien. TV One is under levered I mean I think it’s levered at two times. We need to change our first lien at Radio One because it’s expensive. And so we’ll essentially redo our first lien to affect the Comcast, now by the way if we don’t buy Comcast and we ultimately in the stand partners whatever we do our first lien anyway because it’s expensive and we can get you for that. But that’s a thought process is that sometime in Q4 we’ll look to fluctuate that.

David Siebert - Wells Fargo Securities

Okay. Thanks for that. And last question for me; is there any update on 2014? Some of the guidance numbers you have talked about in TV One, Reach Media, and Internet largely being better on the EBITDA perspective versus 2013? Just any change…

Alfred Liggins

Yes, I want to still make money, and I think we gave Radio Reach guidance, looking at Peter?

Peter Thompson

No.

Alfred Liggins

I think we gave TV One guidance that said it was going to be in below 50s. I still think that somewhere between 50 million and 53 million of EBITDA for TV One is where to end up. Again TV One was designed to have cash flow growth this year because again we’re investing in programming. When you’re asking distributors to sign up for another extended period of time it continue to pay rate, you can give them good reason why they’re doing it. And so there is no change what we’ve give you already I don’t think that we want to give Radio guys at this pointing time. We guided to Q3 which is looking negative kind of mid-single digits. We are expecting a bump in Q4 from political we’re facing a head of 2010 by a couple of million bucks we think or forecasting a couple of million dollar higher than.

And so we think Q4 is going to be better than Q3, but I think that there is a strong possibility that the radio business initiatives down even if it’s down one or two in a political year and I wasn’t thought that going into this year. So I gave up different radio guidance the long time ago when I couldn’t really predict the share shifts, and there are share shifts and the money is going somewhere and share shifts they’re starting to be talk about in Television Two, the cable upfront this year is going to be down. And lots of people are pontificating that it is a share shift out of cable television into digital video. I saw report yesterday that said maybe the shares shift really didn’t go to digital video, but I know for sure that the upfront is soft this year TV One probably finish the upfront flat, which I count as a win because most everybody else didn’t finish flat, but they are finishing down. And so it’s hard to predict in terms of whether dollars going that’s the reason our strategy has been and continues to evolve to -- when I am talking about the demographic and how we’re unique player in this demographic and we’re the only company that has access all of the relevant distribution channels. And let’s just figure out how you take advantage of the growing buying power of the African-American community.

Operator

(Operator Instructions) And we will go Aaron Watts with Deutsche Bank. Please go ahead.

Aaron Watts - Deutsche Bank

You covered a lot of ground. I just had a couple of questions on the radio business. Could you repeat for me I know you said what local and national did in the second quarter? Could you say that again?

Alfred Liggins

Sure, national was up 1.4%, local was down 9.8%.

Aaron Watts - Deutsche Bank

Okay. And is that excluding the timing issues?

Alfred Liggins

No, that is not excluding those.

Aaron Watts - Deutsche Bank

Okay. So as I think about what you are seeing in the third quarter versus the second quarter, any kind of bifurcation between local and national advertising and thoughts that may be driving that?

Alfred Liggins

That both that about the same as above yesterday’s pacing. Both down kind of mid-single, so we have been doing consistently better nationally then locally for the last several quarters, but it seems Q3 at the moment the both pricing down about the same, political going to help us national. If would say Q4 looking stronger than Q3 and we still got I think probably around $4 million in political that is not yet on the book, so we’ll come through between now and the end of the year.

Aaron Watts - Deutsche Bank

Okay. But generally speaking, would you say that the environment in the third quarter for core radio, I guess setting aside what is going on down in Houston, feels pretty similar to what you have experienced so far the last few months?

Alfred Liggins

Yes, if anything, it’s a little softer. The start of Q3 has been very soft.

Aaron Watts - Deutsche Bank

And what do you think has been the culprit there?

Alfred Liggins

I don’t know. You just talk about overall markets that the market that we operate in while there is soft. The only thing that it could be always one or two things, it can be softening economy or it can be share shift, right, or I guess it could both.

Peter Thompson

And the nation number that’s you original points, so national has been holding us up and that national has been feeling soft in Q3. That’s why you feel soft because of national is not pacing.

Alfred Liggins

Again, we’ve got a good view into a bunch of different channel, right. The upfront, the cable upfront first time in recent memory and I think twice, this is the second year it happened forgot what the timeframe was, it can be down. That say to me that national advertisers are not as bullish about businesses they have been in the past. And I guess there could a share shift argument there as well. That happens behind the black curtain the share shift. So let’s us ignore that for a second and I think that’s an indicator that economy continues to be a sluggish, if it’s a sluggish recover.

Aaron Watts - Deutsche Bank

That’s how and we have heard this theme a little bit across the board in broadcasting for the third quarter, so I was just curious, your thoughts around that.

Alfred Liggins

I mean, you’re right and look I just don’t mean -- I think that companies are making money, corporate earnings are good. But maybe for a lot of other reasons beside the fact that consumer spending is rebounding robustly, because companies make money doesn’t mean that the consumer is doing much better and we’re obviously a business that’s dependent upon how much the population is consuming. And that’s also put a lot of stuff that I’ve seen in the news and read myself.

Aaron Watts - Deutsche Bank

Okay. Last one for me. I think you may have touched on this before, but, Alfred, in your experience when you have a format flip in one of your markets, whether you are the one pulling it or you have a competitor acting on it like Clear Channel did here in Houston, what's the typical kind of cycle that happens? Obviously they will gain some share off the bat. Do you typically see that reverse over a certain amount of time or give back a lot of it? How should we think about that?

Alfred Liggins

It depends on -- it’s a fight, right, it depends on how hard they punch, how hard we punch, who’s got stronger will and puts more resources with that. What I can tell you the thing that, the thing has been I think a secret to this company’s success in our singular focus for the most part it’s like we will lose the battle aiming that like, we’re not leaving the format we’re only going to fight harder, put more resources behind it, be smarter and defend the turf.

So question ultimately is, is how committed are they to the battle. So we won many more battles than we lost in the urban radio business

Operator

And Mr. Liggins and Mr. Thompson, no further questions in queue.

Alfred Liggins

Thank you for joining us. And as always we’re available offline for any additional questions. Talk to you next quarter.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Source: Radio One's (ROIAK) CEO Alfred Liggins on Q2 2014 Results - Earnings Call Transcript

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