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Radio One, Inc. (NASDAQ:ROIA)

Q2 2014 Earnings Conference Call

August 5, 2014, 10:00 AM ET

Executives

Alfred Liggins - Chief Executive Officer

Peter Thompson - Chief Financial Officer

Analysts

Lance Vitanza - CRT Capital Group

David Siebert - Wells Fargo Securities

Aaron Watts - Deutsche Bank

Operator

Welcome to Radio One Second Quarter Conference Call. I have been asked to begin this call with the following Safe Harbor statement. During this conference 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, 10-Qs and other reports periodically filed with 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 at its website at www.radio-one.com.

A replay of the conference will also be available from 12 PM Eastern Time August 5, 2014, until 11:59 PM August 7, 2014. Callers may access the replay by calling 1-800-475-6701 within the US. International callers may dial direct 1-320-365-3844. The replay access code is 330905. Access to live audio and a replay of the conference call will also be available on Radio One's corporate website at www.radio-one.com. The replay will be available on the website for seven days after the call. No other recordings and copies of this call are authorized or may be relied upon.

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

Alfred Liggins

Thank you very much, operator, and welcome, everyone. As you can see from the fresh release, second quarter was soft for us, led by challenges in Houston from a competitive standpoint. The markets are soft as well. All in, our radio business was just about flat with our markets being down 4.1. We're down 3.8. And if you normalize for Houston, we actually beat our markets. Peter is going to go into some more detail about it.

The competition in Houston has been challenging, but we have an offensive plan there. And we are bouncing back. There was a blurb in inside radio today that talked about us opening up a significant lead against our competitor in the ratings. And so we're feeling like our offensive plan is in process and is working.

Also, TV One, relatively flat year-over-year in EBITDA. I've mentioned a number of times on conference calls that we're investing in programming this year as we go into all of our renewals of our cable carriage agreements. We're on target based on where we were budgeted. Our TV One carriage renewals continue to go very well, extraordinarily optimistic that we'll have positive outcomes with our major distribution partners.

So I will turn it over to Peter now. And then after he finishes with the detail, we'll open up for Q&A.

Peter Thompson

Thanks, Alfred. And just a point of clarification there, the markets in which we operate were down 3.8% this quarter. We were down 4.1%. As Alfred mentioned, we have the 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.

Net revenue was approximately $108.4 million for the quarter ended June 30, 2014, a decrease of 9.4% year-to-year. The decrease was primarily a result of the timing difference of the Tom Joyner Fantastic Voyage. Adjusting for the timing difference of that, net revenue decreased 5.4% for the radio division, including Reach Media. We recognized approximately $38 million of net revenue from the cable television segment in the second quarter, an increase of 0.7% over the second quarter 2015, 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. The net revenues for the internet division decreased by 8.2% year-to-year.

Charlotte, Columbus, Dallas and Detroit clusters had the most significant revenue growth, while Houston, Atlanta and DC clusters had the most significant declines. Excluding Houston, our core radio revenues were down 2% versus minus-4% in the markets in which we operate. Local revenue was down 9.8% and national revenue was up 1.4%. Cable subscribers, as measured by Nielsen, finished the quarter with 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 due to approximately $81.9 million in 2013. There was approximately $6 million of expense from the Tom Joyner Fantastic Voyage in the second quarter of 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% from last year. Adjusted consolidated EBITDA was $31.7 million, a decrease of approximately 15.9% year-to-year or 13.5% after normalizing for the timing of event.

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 low interest rates associated with the 9.25% senior subordinated 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 a share compared to net loss of approximately $14.2 million or $0.29 a share for the same period 2013. For the same quarter, capital expenditures were approximately $1.7 million compared to $3.6 million in Q2 of 2013. Second quarter cash taxes 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 had total debt net of cash balances of approximately $761.4 million. For bank covenant purposes, total net debt was approximately $671.4 million. 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 had short-term investments of approximately $2.6 million and long-term investments of approximately $806,000.

With that, I'll hand back to Alfred.

Alfred Liggins

Great. Operator, I'd like to open it up for Q&A please.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll go to line of Lance Vitanza with CRT Capital Group.

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 your 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

Why I didn't mention anything about affiliate fee rates, but I mentioned in the past that our rate is in the mid to high-teens 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 June. We extended them till January of 2015, so we could focus on the deal. That's not uncommon if that happens, particularly for a network our size, because the big guys end up giving more focus. And so we are in very positive conversations with them about renewals. And they asked for an extension of six months and we gave it to them.

DirecTV comes up at the end of 2015, but we've already started discussions with AT&A and DirecTV about that. And we're also in discussions with Verizon in March of 2015. So I think the network has great brand awareness, has enormous consumer support, enormous community support. I think the industry recognizes that after 10 years, we've fulfilled our programming promise with that pretty ratings for a network only in 57 million homes. The rankings bounce around, but I think we're ranked kind of like high 50s or 60s out of the top 100 cable networks. And by the way, Comcast has deals with 500 networks. So from a ratings standpoint, even with stiff competition, we were doing pretty well. So I'm fully confident we'll get all of our renewals done at fair rates.

Lance Vitanza - CRT Capital Group

Can I ask you one follow-on question? You touched on it, right, there is so much M&A in the space of the distributors combining, I would think that's got to be a negative for you. And then you've got potentially Fox and Time Warner combining, potentially making it more expensive to bid on content. 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 opposite for us. The distributors combining has actually been a positive for us, because any time the big guys want to get bigger, they have to explain to community groups and government why them 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 and Senate hearing that's happened thus far on the mergers. TV One has actually been mentioned in a number of those. So I think we couldn't have asked for a better time to have our deals come up.

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

And by the way, the distributor ultimately, I think, really wants to hear that you're going to create original programming as opposed to asking them to pay for regurgitated reruns that they are already probably paying for on somebody else's network.

Operator

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

David Siebert - Wells Fargo Securities

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

Alfred Liggins

I have been, I hate to use the term there, but I'm going to use it that I've been there on the radio space for 10 years. And when I say there, I think it's a great business. I think it is wonderful, particularly for region ethnic audiences, African-Americans, Hispanics. It is a mature media, period, end of story. We run our business looking at radio as a flat business. It's never going to grow. And who knows, maybe over time, it secularly declines, although it's an audio medium and distributing audio is not all that complicated whether you're a radio station or whether you're Pandora. And there isn't as much of a disruption coming from internet guys to the traditional audio distributors like us as there has been to the newspaper and the magazine folks from the internet. Distributing magazine, distributing newspapers is very complicated and very costly. So I don't think you can compare the radio business to those businesses.

But the fact of the matter is first, we used to have the car to ourselves, then came satellite. Now you've got the connected car. You got Pandora. You got Spotify. There's just more mind share that you got to deal with. So I think that you're going to continue to see radio be a business that's mature and under pressure. So we've got to reinvent ourselves. All of these radio companies did reinvent themselves. I think that we've done a good job of reinventing ourselves as an African-American targeted media company. I know for sure that the African-American 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 someone on radio or on a syndicated radio shows or on television or online or on mobile.

But the Houston situation as to how did it get so disruptive, I never expected it wouldn't be disruptive. I mean we had no urban competitor and Clear Channel puts a hip-hop station on. And all of a sudden, they've got close to a 4% share. And that hurts and it takes a couple of share points off of our hip-hop station there, but that station is bouncing back. That happened in January. So it's mid-way 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 usually pick most of the fights. And so we've got to make adjustments, but it's our biggest revenue and cash flow market. And even if it's down 10%, it's a big number.

Now I think that we've got some upside opportunities that we're going to offset that in places like Detroit and Philly is coming up, starting to show significant ratings growth. Charlotte is doing well. But we're going to go through a bit of a rough patch here and we'll come out on the other side in a good place.

David Siebert - Wells Fargo Securities

And I know you have the jump ball with Comcast at the end of the year on TV One. Comcast was quite busy. Do you have their ear? 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

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

So we even 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 is something that they're willing to consider. It's never been strategic for them to know what's important to us. So the change in the capital structure essentially will be that we will re-do our first lien. TV One is under-levered. I mean I think it's levered 2 times. We need to change our first lien at Radio One, because it's expensive. By the way, if we don't buy out Comcast and we ultimately end up staying partners or whatever, we're going to re-do our first lien anyway, because it's expensive and we can get you for that.

But that's the thought process is that sometime in Q4, we'll look to effectuate that.

David Siebert - Wells Fargo Securities

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?

Alfred Liggins

iONE is still making money. And I think we gave TV One guidance, said it was going to be kind of like in the low-$50 million. I still think that somewhere between $50 million and $53 million of EBITDA for TV One is where it'd end up. Again, TV One was designed to have tepid cash flow growth this year, because again we're investing in programming. When you're asking distributors to sign up for another extended periods of time and continue to pay your rate, you got to give them a good reason why to do on it. And so there's no change beyond what we've given you already. I don't think that we want to give radio guys at this point in time. We've guided to Q3, which is looking negative kind of mid-single digits. We are expecting a thump in Q4 from political or placing ahead of 2010 by a couple of million bucks or we're forecasting a couple of million dollars higher.

And so we think Q4 is going to be better than Q3. I think that there is a strong possibility that the radio business finishes down, even if it's down 1% or 2% in a political year. And I wouldn't have thought that going into this year. I gave up giving radio guidance a long time ago when I couldn't really sort of predict the share shifts. And there are share shifts. And the share shifts there are starting to be talked about in television too. I think the cable upfront this year is going to be down. And lots of people are pontificating that as the share shifts out of cable television into digital video. I saw a report yesterday that says maybe the share shifts really to digital video, but I know for sure that the upfront is soft this year. TV One will probably finish the upfront flat, which I would count as a win, because almost everybody else didn't finish flat.

And so it's hard to predict in terms of where those dollars are going. That's the reason our strategy has been and continues to evolve to when I'm talking about the demographics and so how we're unique player in this demographic and we're the only company that has assets in all of the relevant distribution channels unless it figures out how you take advantage of the growing buying power of the Africa-American community.

Operator

And we'll go Aaron Watts with Deutsche Bank.

Aaron Watts - Deutsche Bank

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

Peter Thompson

Sure. National was up 1.4%. Local was down 9.8%.

Aaron Watts - Deutsche Bank

And is that excluding kind of the timing issues?

Peter Thompson

No, that is not excluding those.

Aaron Watts - Deutsche Bank

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?

Peter Thompson

They're both down about the same as of yesterday's pace, both down kind of mid singles. So we've been doing consistently better nationally than locally for the last several quarters. But it seems Q3, they're both facing down about the same. Political is going to help national. As Alfred, Q4 is looking stronger than Q3 and we've still got probably around $4 million of political that's not yet on the books that will come through between now and the end of the year.

Aaron Watts - Deutsche Bank

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?

Peter Thompson

Yeah. It's a little tougher. The start of Q3 has been very soft.

Aaron Watts - Deutsche Bank

And what do you think has been the culprit there?

Peter Thompson

I don't know. We could talk about overall markets, the markets that we operate in, while they're soft, it could only be one of two things. It can be a softening economy or it can be share shift, or I guess it could be both.

Alfred Liggins

National has been holding us up.

Peter Thompson

We've got a good view into a bunch of channels. The cable upfront, first time in recent memory and I think twice, this is the second year it's happened, forgot what the timeframe was, it can be down. That says to me that national advertisers are not as bullish about businesses that they have been in the past. I guess there could be a share shift argument there as well. But that happens behind the black curtain, the share shifts. So let's just ignore that for a second. I think that's an indicator that the economy continues to be a sluggish recovery.

Aaron Watts - Deutsche Bank

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

You're right. I think companies are making money. Corporate earnings are good, but it's maybe for a lot of other reasons besides the fact that consumer spending is rebounding robustly. Companies make money doesn't mean the consumer is doing much better. We're obviously a business that's dependent upon how much the population is consuming.

Aaron Watts - Deutsche Bank

ALFRED, in your experience, when you have a format flip in one of your markets, whether you are the one kind of 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'll 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? Just how should we think about that?

Alfred Liggins

It's a fight. It depends on how hard they punch, how hard we punch, who's got stronger will and puts more resources. What I can tell you the thing that has been a secret to this company's success is our singular focus for the most part. It's like we won't lose the battle, meaning that 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 how committed are they to the battle. So we've won many more battles than we've 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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