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Spanish Broadcasting System Inc. (NASDAQ:SBSA)

Q2 2014 Earnings Conference Call

August 15, 2014 11:00 AM ET

Executives

Brad Edwards - IR

Albert Rodriguez - COO

José Molina - VP, Finance

Analysts

Yehuda Miller - Cedarview Capital

Operator

Good morning and welcome the Spanish Broadcasting System's Second Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would like to turn the conference over to host for the call Brad Edwards. Please go ahead.

Brad Edwards

Thank you, operator, and good morning 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 in the Company's filings with the SEC. You’re directed to these filings for more detailed information. Spanish Broadcasting System 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 operating income or loss before depreciation and amortization, loss or gain on the disposal of assets net, and impairment charges and restructuring costs or OIBDA, is useful in evaluating its performance because it reflects a measure of performance for the Company's stations before considering costs and expenses related to capital structure and dispositions. This information is not intended to be considered in isolation or as a substitute for net income or loss calculated in accordance with U.S. GAAP. A reconciliation of the Company’s U.S. GAAP information to OIBDA is provided in the table attached to the Company’s 2014 second quarter earnings release which is available on the Investor Relations section of the Company's Web site at www.spanishbroadcasting.com.

I would now like to turn the conference over to Mr. Albert Rodriguez. Please go ahead.

Albert Rodriguez

Thank you, Brad. Good morning ladies and gentlemen. Welcome to the SBS 2014 second quarter conference call. Joining me today are Joseph Garcia, our Chief Financial Officer; and José Molina, our Vice President of Finance. On today’s call, we will provide an overview of recent operating developments, then José will review our quarterly results, and we will open it up for questions.

During the second quarter our radio station group generated healthy growth in both local and network advertising as our sales force continued to convert our strong audience shares in the nation’s top Hispanic media market into revenues. We also made additional progress in growing and monetizing our radio network business and expanding our digital following. We are continuing to make the necessary strategic investments to position our Company for growth. These investments span key initiatives aimed at growing our organization in a concerted manner, principally our radio network and digital platform. We believe these investments will allow us to capitalize on our strong station brands, our close ties to the music community and our recent audience share gains.

We have a consistent track record in developing high successful radio formats and building strong station brands. In fact, as our strong ratings book performances consistently show, we believe we have one of the best programming teams in the radio industry supporting the most listened to stations in the country year in and year out. Tapping into our success, we believe it’s imperative that we focus on improving the leveraging of our content across a wider distribution platform. We believe these investments will ultimately lead to returns in the form of a larger national audience and increase access to a greater pool of advertising revenues with a higher margin potential. Through the build out of AIRE Radio Networks we are taking steps to gain greater control of our advertising inventory in the nation’s most dynamic Hispanic markets.

We are pleased with the progress so far and we are continuing to build momentum. We have now grown network revenues quarter over quarter, demonstrating the network’s momentum. AIRE Radio is now featured on a total of 110 radio stations in more than 53 markets, reaching over 12 million listeners. The network delivers our multi-genre programming through six targeted network vehicles as well as three popular music formats and multiple long and short form variety programs. AIRE Radio just recently signed a syndication deal to launch The Joy of Living with Dr. Cesar Lozano. Dr. Lozano will offer daily advice on how an individual can lead a happier life. The program will debut in major Hispanic PMAs such as Log Angeles, Chicago, San Francisco, Sacramento and McCallum [ph] among others.

In addition to the strong content we are supporting the network with national scale solutions that efficiently leverage all of our assets spanning experiential, digital, mobile and online platforms. Our network gives us an opportunity to truly leverage our digital assets on a national scale.

Underpinning our strategy, we have continued to deliver very strong audience shares across our station group. In New York our flagship station WSKQ Mega 97.9FM continues to be the most listened to Spanish station the country with the highest average quarter hour listenership as stated in Nielsen. WSKQ continues also to rank number one adult take into 49, 25 to 54 Hispanic, Monday through Sunday 6A to midnight and in the most recent Nielsen book, WSKQ remained ranked as number one adult 18 to 49 among English and Spanish stations in all of New York City. This is a tremendous accomplishment that puts SBS into the history books and in terms of consistent strength of this station. We have been able to grow our audience and foster an incredible sense of loyalty among listeners in the New York market and we have done it by consistently entertaining, connecting and informing them with the content that fits their culture and preferences year end and year out.

In addition, WPAT-FM in New York has also remained a very strong performer in the nation’s second largest ration market. This station increased its ratings adult 18 to 49 by 30% according to Nielsen in the last ratings book. In Miami, WXDJ El Zol 106.7 FM ranks number one adult 18 to 49 of those 25 to 54 Monday through Sunday 6A to midnight. In addition, many of those stations contain to rank among the top Hispanic formats in their respected markets. Our Rico stations are also continuing to deliver number one and number two ranked morning shows. We also have the number one and number two ranked afternoon shows on the same stations.

On the amortizing front, some of the categories that showed particular strength during the quarter included automotive, technology and restaurants. Automotive category increased 20% quarter-over-quarter in the same period. Our national sales were impacted by retail, beverages and telecommunications.

The healthcare category also continued to perform very well in the second quarter and we expect this category to remain a key contributor in the months ahead given the Affordable Care Act and its impact on the Hispanic community. Our stations represent an important conduit to educating the Spanish-speaking population on the new regulation and how it impacts their lives. Conversely, we witnessed some weakness in retail, pharmaceutical and travel in our radio segment.

With regard to MegaTV division the categories that showed particular strength during the quarter were automotive, beverages and retail. As we have stated previously, we remain committed to maintaining a disciplined approach in managing our cost on MegaTV and returning the network to a positive cash flow. We also continue to strategically invest in our content with the goal of counterprogramming our competition, increasing our audience and strengthening our value proposition to our advertisers. We are also continuing to leverage MegaTV as a cross promotional tool for other assets including radio network. In addition to our radio and television rounding up asset mix, we also operate a growing portfolio of online and entertainment assets, which complement our traditional media portfolio and allow us to offer advertisers multiplatform programs for reaching our audiences.

Through SBS Entertainment, we are the largest independent promoter of Hispanic concerts and events in the nation through LaMusica.com and Mega.TV. We operate a group of 21 branded station Web sites that provide a broad range of bilingual entertainment and news content related to Hispanic America.

SBSE had a very successful second quarter with big arena concerts in New York Alex Sensation Mega Mezcla Block Party sold out, Madison Square Garden on April 9th. SBSE closed the quarter with sold concerts with Latin music’s hottest artist, Romeo Santos who is currently on his 2014 world tour. With regard to our internet assets, in the second quarter total interactive sales grew 35% over the comparable period of 2013. During the quarter radio streaming averaged 1,141,000 monthly unique users, triggering an average of 6 million sessions.

Traffic to our digital properties included approximately 2.2 million monthly page views and 511,000 unique visitors. We ended the second quarter with 2 million cumulative likes and followers across our social media pages.

Finally on the mobile front our LaMusica mobile app attracted over 50,000 downloads during the second quarter and ended the quarter with 515,000 total mobile app downloads and users continue to stream 14 of our radio stations. Overall we are pleased with the strategic progress we’re making and we remain committed to making the necessary investments in those areas of our business that offer the greatest growth opportunities over the long-term supported by our strong content and leading radio brands in the nation’s top Hispanic media markets, as well as the expansion of our radio network and world of our digital assets. We remain very optimistic about our growth potential over the long-term.

Now let turn the call over to Jose for the financial overview.

José Molina

Thanks, Albert. Turning to our results, our second quarter consolidated revenues totaled $40.9 million compared to $36.1 million for the same prior year period, resulting in an increase of 13%. Excluding special event revenues for the respective periods, our consolidated revenues totaled $35.4 million compared to $35.7 million for the same prior year period, resulting in a decrease of 1%.

Our radio revenues increased by 12% primarily due to an increase in special event revenues in our Miami, Los Angles and New York markets and higher network sales across our markets and affiliates. The increase in our network sales is directly related to our new AIRE Radio Networks advertising platform, which we launched at the beginning of this year. Thus far we are pleased with AIRE’s performance and believe we will continue to gain momentum as year unfolds. These revenue gains in radio were offset impart by a decrease in national sales, which occurred to all our markets. Excluding special event revenues for the respective periods, our radio revenues totaled $31.3 million compared to $31.9 million for the same prior year period resulting in a decrease of 2%.

Our television revenues increased by $1 million or 27% during the second quarter, due to increases in special event revenues and local spot sales, which were partially offset by decreases in paid programming and national spot sales. Excluding special event revenues for the respective periods, our television revenues totaled $4.1 million compared to $3.8 million for the same prior year period resulting in an increase or 6%.

Consolidated OIBDA, a non-GAAP measure totaled $9.9 million compared to $12.7 million for the same period year period, representing a decrease of 2.8 million. Radio OIBDA decreased $1.5 million, primarily due to an increase in station operating expenses of $5.3 million, offset by an increase of 3.8 million in net revenues.

Our radio station operating expenses increased mainly due to special event expenses music license fees and expenses related to our AIRE Radio Networks, such as network affiliate station compensation and employee compensation and benefits.

Our television OIBDA decreased approximately $179,000, primarily due to an increase in station operating expenses of $1.2 million offset by an increase of $1 million in net revenues. Television station operating expenses increased primarily due to increase in production of programming costs, special event expenses and professional fees related to a lawsuit, which were offset by a decrease in rating services.

Finally, our corporate expenses increased $1.1 million, mostly due to an increase in compensation which was partially offset by a decrease in professional fees and our operating income totaled $9.9 million compared to $11.4 million for the same period year period.

Our second quarter CapEx totaled $586,000 and we continue to anticipate our capital expenditures for 2014 to be in the range of $2.5 million to $3 million. During the quarter we paid $305,000 in cash taxes and we currently have approximately $215 million in federal NOLs. As defined by our indenture governing our notes, our secured leverage ratio was approximately 6.4 times as of June 30, 2014 and our station operating income for the television segment for the last 12 months ended June 30th totaled approximately $904,000. As of today, we have approximately $26 million in cash.

That will conclude our formal remarks, and with that let me turn the call over to the operator to begin the Q&A process. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions). Our first question is from Yehuda Miller of Cedarview Capital. Please go ahead.

Yehuda Miller - Cedarview Capital

I just have a few questions, first in trying to understand AIRE a little bit. What can we expect? I know it's been ramping up. You said it's 5% of revenue now versus 3% met [ph] network last year. So what can we expect in dollars once we anniversary the first full year and you guys are able to get that network type national revenue for ads?

Albert Rodriguez

It’s Albert. We’re projecting hopefully anywhere from $15 million to $13 million in the first year.

Yehuda Miller - Cedarview Capital

So $13 million to $15 million of revenue and then the expenses, which have obviously been increased from a compensation and distribution perspective, should that really move much or no?

José Molina

The run rate on expenses is approximately $1.1 million quarter over quarter, and the revenues what Al recorded were gross.

Yehuda Miller - Cedarview Capital

So like a 15 growth and there will be some net commission and then about roughly $4.5 million to $5 million of annual expenses? So it could be like anywhere from like $8 million to $10 million in incremental OIBDA from that business?

José Molina

Yes. And clearly it’s a startup. So we just signed a new talent. What it was, two weeks ago Albert?

Albert Rodriguez

Yes Dr. Lozano.

José Molina

So this is a growing business and it’s a fluid projection.

Yehuda Miller - Cedarview Capital

But there is an opportunity though to have that decent amount of revenue projected for 2015 when you guys approach the end of this year from that network kind of advertising sales that you had experienced, correct?

Albert Rodriguez

We’re shooting -- in the pie there is about $100 million worth of radio Hispanic network business and we’re shooting that pie. So this is the first year. We’re very, very optimistic about it. We just signed Dr. Lozano and we expect that program to do well. We’re syndicating across all of these Hispanic markets. And nothing we’re very excited about the ramp up of this AIRE Radio Networks.

Yehuda Miller - Cedarview Capital

And when are those contracts -- I think me and Joe spoke about it previously, but when are those contracts put in place to get part of that $100 million pie? It's not spot. There is a portion that will be put in place before the end of the year, correct?

Albert Rodriguez

The $100 million I'm talking about is the industry, the radio, that Hispanic radio.

José Molina

The network radio Hispanic.

Yehuda Miller - Cedarview Capital

Okay, I appreciate that. And in understanding events a little bit I know what we talked about last quarter was there is a shift in timing. So in respect to the $5.5 million or so in revenue, should we expect for that to kind of be steady over the back half of the year? Is it more? And can you just help us think about where margins are in that business currently?

Albert Rodriguez

It’s continued to grow. We’re going to be very, very much involved in a lot of events for the balance of this year. So we’ve done very well in that business unit and we’re very optimistic about it. So we’re going to do well.

Yehuda Miller - Cedarview Capital

So we could assume that second half events will be larger than the first half?

José Molina

Yes.

Yehuda Miller - Cedarview Capital

Okay, great. So are you guys able to give any sort of full year guidance based on that data or not at this time?

José Molina

No we don’t give guidance.

Yehuda Miller - Cedarview Capital

Okay. And one thing. I think I saw you guys put some press releases out on the World Cup. Did you guys get any benefit from that in 2Q or any of that might flow into 3Q?

Albert Rodriguez

We were in the World Cup in New York, San Francisco and Chicago and we did well in the stations that we did and we did well with the sponsorships.

Yehuda Miller - Cedarview Capital

So some of that you guys got the benefit from 2Q, but then later round flowed into July. So it is possible to see some of that benefit in 3Q as well?

Albert Rodriguez

Yes.

Yehuda Miller - Cedarview Capital

Okay and then I just have two more questions before I'll hop off. It seems like there is a pretty sizable relative to CapEx on a proceeds from the sale of property and equipment of $1.27 million. Could you highlight to us what that was?

José Molina

Sure. It was a tower, a backup tower that we sold in Los Angeles.

Yehuda Miller - Cedarview Capital

Okay. And then my last question is on understanding, I know I kind of moved the delta a little bit on expenses for advisory and legal fees. Are you able to disclose what that was in the quarter?

José Molina

No, we don’t disclose that detailed information.

Operator

And this concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

Albert Rodriguez

Well, thank you operator. Again, we appreciate everyone taking the time to join us today for this update. We look forward in catching up with you again on our next call. Thanks.

José Molina

Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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