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Emmis Communications Corporation (NASDAQ:EMMS)

F4Q07 Earnings Call

May 11, 2007 9:00 am ET

Executives

Kate Snedeker - Investor Relations

Jeffrey H. Smulyan - Chairman of the Board, President, Chief Executive Officer

Patrick Walsh - Chief Financial Officer

Rick Cummings - President of Emmis Radio

Analysts

Victor Miller - Bear Stearns

Mark Wienkes - Goldman Sachs

Laraine Mancini - Merrill Lynch

Lee Westerfield - BMO Capital Markets

Jonathan Jacoby - Banc of America

Marci Ryvicker - Wachovia

TRANSCRIPT SPONSOR
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Operator

Welcome to the Emmis Communications fourth quarter earnings call. (Operator Instructions) Now I will turn over the meeting to Kate at Emmis Communications. You may begin.

Kate Snedeker

Thanks, Kelly. Good morning. Thank you for joining us for today’s Emmis conference call regarding fourth quarter earnings. I want to extend a special welcome to all the Emmis employees who are joining us and listening in this morning and those of you listening in from our website, www.emmis.com.

We will begin in just a moment with opening comments from Emmis Chairman and CEO Jeff Smulyan and Pat Walsh, CFO. After their opening comments, our conference call moderator will come back on the line to instruct you on how to submit questions. Joining us to help answer your questions is Rick Cummings, President of Emmis Radio.

A playback of the call will be available for the next week at 1-203-369-3658.

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 disclosures related to non-GAAP financial measures can be found on the investors tab of our website. Jeff.

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Jeffrey H. Smulyan

Thanks. Obviously the company has major challenges. We know that if you look at all the data, all of that stems from performance issues in New York and Los Angeles. In addition, it’s no secret that the radio industry domestically is still challenged. We see some signs that are encouraging. We also understand for investors that until things get better, they rightly are skeptical.

As far as Emmis-specific issues, we have significant plans in place in both markets and while we have a way to go, we are encouraged by some of the signs we see. Specifically, in Los Angeles, Power 106 has rebounded very nicely. In the last three ratings books, it has been back up to first and now second, 1834, and its performance in terms of revenues has significantly outpaced the market for the last quarter, so we are encouraged about that.

Movin is our turnaround -- a dramatic drop of cash flow by switching KZLA to Movin. We knew that. We continue to bear the brunt of that and that makes a big difference with our results, but internal research is very encouraging with Movin. It took us two rating books to exceed the numbers that we had with KZLA in its last book, and we are doing the most significant marketing campaign in the history of the company. In addition, we feel very comfortable with some of the results we see, especially with not only the music but Rick Dees’ Morning Show.

In New York, it’s a little bit broader challenge. All of the stations, while they have had some decline in ratings, are still three of the top 12 stations overall in New York City, but we’ve revamped really our entire sales effort in New York. Quite encouraged by the plans in place and the people we brought in, and refocused research and marketing, and again it’s a longer battle in New York. We’ve got specific competitive challenges in a market which, as you all know, has been down dramatically.

The rest of our radio portfolio is really performing quite nicely. We just finished a great round of rating books in Austin and St. Louis. Indianapolis and Chicago were also showing signs of improvement, so we feel good about all of our group. Also, I should include our Terre Haute radio group. All have been very, very competitively -- have been very well-positioned competitively.

Our international group has had a very good year and is poised for another excellent year. We would like to expand our portfolio there but Paul Fiddick and his team have had a very nice in the last fiscal year, and we look for better things from them in the coming year. And our publishing group also has had a very good year. Our city and regional magazines, not only have they had record cash flows, they are poised to do better this year, led by a really remarkable turnaround of Los Angeles Magazine, as well as the always stellar performance of Texas Monthly and our other titles.

I should also mention that we had another year of record-breaking awards in the city and regional magazine awards contest, and while I understand financial investors might question how relevant that is, what we find is when our content is great, whether it’s in our radio stations or our magazines, and it’s appreciated by our consumers, that will lead to building and continuing to build and maintain great brands, and our publishing people do that as well as any.

The other thing I want to talk about briefly is the remarkable rise of our interactive group. You will notice that we’ve allocated a number of dollars to invest. Probably one of the things I’ve been most gratified by is the vision of our interactive group, led by [Davis Sayen] and [Ray Mana]. They are really redefining the relationship between American radio listeners and our audiences, and doing it in many ways what we call the 360-degree model. The Radio Advertising Bureau board asked them to present last week, and it’s one of the more gratifying experiences I’ve had to see how far really ahead of the curve our interactive group is. We’ve been contacted by a number of other companies to help develop that not only for our own stations but for others in the industry.

I think this is an incredibly challenging time for all of American media and all of us are searching for answers to reinvent that relationship between radio and television and magazines and newspapers and our audiences, and I realize that most people look at this and say I didn’t see it in the quarterly numbers, but we think we are making strides long term that will help redefine that relationship.

The same is also true in the American radio industry. We’ve been a very active participant, and through Rick Cummings’ leadership and others in the company in moving forward with HD radio, which has had really remarkable results the first year, just in terms of getting off the ground and getting placement in almost every major retailer, and getting radios out and the development of all the new formats throughout the country.

We’ve also been very active in PPM, as we feel that will be a major event in getting credibility with our customers, our advertisers.

So these are challenging times but I think the one thing I can tell you in spite of earnings, which have not been stellar, is that our energy, our passion is still as great or greater than ever in being leaders in reinventing this medium and capitalizing on our 93% reach every week with the American public.

Let me say one more thing before turning it over to Pat. The focus of the earnings call is our performance during the last quarter and insight into the state of the business going forward. That said, there have been a lot of rumors and speculation since I withdrew the go private offer last August. In my SEC filing last September I said I might revisit this issue from time to time. Beyond that, as is our practice, I won’t comment on rumors or speculation.

With that, I want to turn it over to our Chief Financial Officer, Pat Walsh.

Patrick Walsh

Thanks, Jeff. Good morning, everyone. I want to walk you through some of the particulars and provide a little bit of color on the earnings release and our annual report. A diluted net loss from continuing operations for the fiscal year ended February 28th ’07 was $0.33, compared to a loss of $0.80 per share for the prior fiscal year. For the quarter, our diluted net loss from continuing operations for the fourth quarter ended 2-28-07 was $0.23 per share, compared to $1.01 for the comparable prior period.

Net revenues for fiscal 2007 were $359.5 million, which represented a 4.7% decrease compared to fiscal 2006. Net revenues for the fourth quarter were $78.6 million, a 4.6% decrease compared to FY2006 fourth quarter. In both cases, weakness in our New York and Los Angeles radio operations was offset by better performance in our other domestic radio, international radio, and publishing operations.

Domestic radio revenues in Q4 were down 9% compared to our markets, which were up 0.6%. Our New York and Los Angeles operations contributed significantly to the shortfall. During Q4, our New York stations were down 20% in a flat market. In Los Angeles, our radio cluster was off 16% in a flat market. Ratings improvements at KPWR, which Jeff outlined, have enabled improved performance at that station but the format change at KMVN has more than offset Power’s gains.

Fourth quarter results for other markets included revenue gains in Chicago and Indianapolis, with Austin keeping pace with strong market growth.

Our international radio division completed a very successful fiscal 2007, with revenues of $32.4 million, a very strong 17.7% increase over the prior year. Fourth quarter revenues internationally increased by 9%, based on continuing strong performance across the group but particularly at our operations in Slovakia.

We are guiding first quarter FY08 radio revenues to decrease mid- to high-single digit percentages based on continuing challenges with performance in New York and the format change at KMVN. Excluding the effect of KMVN, we would expect performance to be in line with our markets being down mid-single digits for the first quarter.

Some additional color on fourth quarter domestic radio operational performance, nationally Emmis was down 12.5%. Our markets were up 1%. Locally, Emmis was down 7.6%. Our markets were flat.

For the fiscal year, Emmis’ national was down 3%, our markets up 5%. Locally, Emmis was off 11%, our markets down 5%.

In terms of categories for the fourth quarter, automotive, our largest single category, was off 10%, with media, banking, movies, beverages and retail suffering declines. Entertainment, restaurants, healthcare, and cellular trended positively for us.

For the fiscal year, automotive was off 6%, with cellular and healthcare being the only two categories in positive territory.

For the fourth quarter, sellout was up 4%, and disappointingly our average unit rate was off 10%.

To close out our discussion of top line performance, our publishing segment closed out the fiscal year with a revenue increase of 0.9%, based upon strong revenue growth at Los Angeles Magazine, Texas Monthly, Atlanta Magazine, Indianapolis Monthly, Cincinnati Magazine, and two each of our city and regional titles. This performance was offset by the elimination of two titles at Country Sampler.

Now turning to the expense side, fourth quarter radio expenses were up 0.9% as higher costs associated with the KMVN format change and higher international operating expenses were offset by lower station sales and G&A expenses.

Publishing expenses were down 1.6% in the fourth quarter. Our corporate expenses were down 54%, largely as a result of $6.1 million in severance related to the TV divestitures being paid in the fourth quarter of FY06. Additionally, corporate expenses are down significantly as a result of our recent corporate right-sizing initiative, and we expect additional savings throughout FY08. We are expecting corporate overhead expenses, excluding non-cash compensation, of approximately $5.5 million during the first quarter of fiscal ’08.

Station operating expenses are expected to increase mid- to high-single digits in the first quarter FY08. Excluding our two primary strategic investments, one being the marketing of KMVN and secondly, expanding Emmis Interactive, we estimate domestic radio expenses will be flat for the first quarter.

The marketing initiative at KMVN in Los Angeles, as Jeff mentioned, represents the single largest marketing program in Emmis history and demonstrates our strong belief in the size of the potential audience for the format. For competitive reasons, we do not want to disclose the particulars of the campaign. However, Rick Cummings can provide some color during question and answer period regarding the early response to the marketing program and our new format.

At Emmis Interactive, we outline in the annual report our plans to continue to extend the capabilities of Emmis Interactive to better serve Emmis and other media companies. Our success to date at interactive, where we continue to deliver 20% to 25% annual growth in experienced markets like Emmis Chicago, where Media Week recently outlined the fact that interactive represents nearly 15% of revenues in that market. We believe our world class team is well prepared to deliver solutions not only for Emmis but other media companies.

On the balance sheet, at 2-28-07 we had $498 million outstanding under our $600 million credit facility. Our leverage ratio, excluding non-cash comp, was 5.8 times EBITDA as defined in our credit agreement, with a weighted average cost of debt of 7.32%.

In March 2007, consistent with our credit facility, we entered into a three-year interest rate swap agreement that fixed the underlying three month Libor on $165 million of notional principal at 4.8%.

On February 20, 2007, we entered into a definitive agreement to sell KGMB, our station in Honolulu, for $40 million in cash. We expect the transaction to close in the first half of calendar ’07. Completing this transaction would leave WVUE in New Orleans as our lone remaining TV property. We continue our efforts to divest WVUE and are anticipating selling the property in the next three to 12 months.

We also made two small investments during the quarter. One, a second radio network in Bulgaria and secondly, a mobile telephony and Internet gaming company focused on interactive sports applications. Both investments are small in nature, in approximately the $1 million range.

A couple of other housekeeping items before we jump into Q&A. In terms of CapEx, we anticipate spending approximately $9 million in fiscal 2008, and a quick note on minority interest, since we’ve noted that there are some differences in how our friends in the analyst and investor community evaluate our properties where we have minority partners. In domestic radio, we own 50.1% of our Austin radio operations. Internationally, we own approximately 60% of our radio operations in Hungary and Bulgaria. We reflect 100% of these operations in our consolidated revenues and expenses, but reduce consolidated operating income for the minority holder’s share of the income.

In FY07, combined net revenues and station operating income from these three entities were approximately $49 million and $19 million respectively, with nearly $9 million of cash flow attributable to the minority partners.

With that, I will hand it back over to Kate for our Q&A session.

Kate Snedeker

Kelly, I think we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Victor Miller of Bear Stearns.

Victor Miller - Bear Stearns

Good morning. Thanks for taking the question. First of all, on the 10-K this morning you put out, it seemed to suggest that in L.A. and New York, unit rates for the fiscal year were down 14%, units sold up about 0.2%, but the numbers that you just talked about seem to be even worse than that. Is the decline actually accelerating in New York and L.A.?

Secondly, can you give a little bit more granularity -- you said that domestic expenses were flat I think for second quarter, but you are giving mid-single to high-single. Could you maybe compartmentalize that expense growth a little bit?

Lastly, Jeff, would you comment on whether you think it’s appropriate for you to look at asset sales other than the TV assets? Thanks.

Jeffrey H. Smulyan

Well, let me answer the last one, Vic. We always look at a wide variety of acquisitions and divestitures. Lately, it seems like there is a lot of speculation about that, but that’s been an ongoing hallmark of the company since day one, so we always look at all of our options.

As far as the unit rate, Pat.

Patrick Walsh

I think as we’ve had, and Rick can speak to this in addition, as the market and our particular stations have had some ratings challenges in New York, and that’s continued, particularly at KISS, throughout the third and fourth quarter there has been some additional pressure on rates. I think it is probably not surprising that you see some fall-off in average unit rate in the fourth quarter compared to the full fiscal year, where we started with a much stronger four book average on KISS, and that’s weakened throughout the year.

In terms of expense growth, Rick, do you want to give additional color on that?

Rick Cummings

Just very quickly, Pat. Hi, Victor. I don’t think the decline in Q4 is significantly better or worse. It’s about the same as the rest of the year. The year finished down 9 and the quarter finished down 9. Looking ahead at the first quarter, it looks like it is going to be about the same, so I don’t think it’s any worse than it has been. But there’s no question that you have a whole of issues here. You’ve got ratings that are not stellar in New York. You’ve got a turnaround in Los Angeles, which we still believe fervently will become a successful radio station, but two books in we are barely ahead of where we were as a country station so we’ve got a ways to go there.

It is clearly a buyer’s market. I think when you add all those things together, you get pretty much the same results in Q4 and ahead in Q1, as we’ve seen the last couple of quarters.

Patrick Walsh

In terms of the expense growth question, Victor, the mid- to high-single digits expense growth in the first fiscal quarter is really driven by three factors, two of which I outlined. One is the unprecedented marketing campaign at KMVN, and for competitive reasons we don’t want to get into the particulars of how large that spend is. The expansion spending on Emmis Interactive, and then the continued growth that we see in our operations and the revenue from those operations internationally. Those are really the three buckets that are contributing to the expense growth.

If you stripped out the two items that are domestic in nature, interactive and KMVN, then the rest of our operations domestically, the operating expenses would be flat, which represents I think some really difficult decisions we’ve made to actually make sure the rest of the operations are growing on the expense side at less than GDP. Rick and his team have really taken a hard look at how we operate. We’ve had to make some difficult choices, but strategically in terms of our future growth, we think the two largest pockets of opportunity are interactive and Movin in Los Angeles, and we’ve made the decision to invest in those properties, even in a difficult period for us.

Victor Miller - Bear Stearns

Pat, just a follow-up, in the 10-K, it says “fiscal ’08 we expect to incur approximately $4 million of costs associated with the expansion of Emmis Interactive.” What was the -- is that an incremental $4 million with that program?

Patrick Walsh

Yes.

Victor Miller - Bear Stearns

Thank you.

Patrick Walsh

Well, not incremental to the guidance we just provided. The first quarter --

Victor Miller - Bear Stearns

No, I understand but that $4 million --

Patrick Walsh

It’s new money, yes.

Jeffrey H. Smulyan

We have specific operating ideas that we will use that for.

Victor Miller - Bear Stearns

So what kind of growth does that imply? What was the base of costs associated with Emmis Interactive in fiscal ’07, to get a sense of just how much that’s contributing to the growth of expenses?

Patrick Walsh

About $6 million.

Victor Miller - Bear Stearns

So it’s going from $6 million to $10 million, essentially.

Patrick Walsh

That’s correct.

Victor Miller - Bear Stearns

Thank you.

Patrick Walsh

Some of that will be one-time in nature, so I’m not sure you’d start a whole new cost base from that spend, but that’s kind of the --

Victor Miller - Bear Stearns

Do you expect to make money at Emmis Interactive versus that $10 million base of expenses?

Jeffrey H. Smulyan

We always have. It’s been a remarkable -- it’s really been a remarkable group. We believe that their expansion has the ability to really develop multi-platform sales and transform broadcasters’ product model to a different model and create new profit centers, not only for our company but also we’ve been approached by other people and we’ll be doing this on a consulting basis.

Patrick Walsh

The one thing I would point out is the core operation has been profitable and cash flowing for the past couple of years, and we expect that to continue and to grow and that’s why I mention the 20% to 25% growth rate, but we are investing in expanding and offering this platform to other media companies, and that will look a little more like a start-up phase, where we probably will suffer some early losses.

Jeffrey H. Smulyan

There will be announcements coming out about that down the road.

Victor Miller - Bear Stearns

Thank you.

Operator

Mark Wienkes of Goldman Sachs, you may ask your question.

Mark Wienkes - Goldman Sachs

Thanks. Good morning. I’m just wondering, could you revisit your move in Chicago to swap out Mancow and Q101 with the local talent? How is that progressing, and then how those two stations are doing overall?

Jeffrey H. Smulyan

Rick, do you want to do that?

Rick Cummings

I’d be happy to. We took Mancow off the air in August. We knew that we would take a significant ratings hit. It happened. I’m pleased to tell you that as of the winter book, we have finally started back up. We had actually for both stations a very nice winter book. I’m especially pleased that in spite of taking Mancow off and taking a pretty good ratings lick at the same time, we actually grew revenue in Chicago in Q4, so this is one that seems to be working out the way we planned. Total week, 1834, Q101 dropped post-Mancow from nearly a five share to a mid-twos. In the winter book, we bumped back up to a 2.8, and the final phase was in the mid-threes.

So we are seeing some pretty good signs finally that this new morning show is starting to build an audience base. We see both internally, in our own research and in the ratings that it is starting to get some traction. We’ve been able to grow revenue in spite of the ratings decline and now the ratings appear to be coming back up on both Q and The Loop, so we feel good.

Jeffrey H. Smulyan

The new approach in mornings, which is more of a John Stewart thing, is much more attractive to advertisers. It’s a less controversial environment and more advertiser friendly.

Mark Wienkes - Goldman Sachs

Is it safe to assume that since revenue grew, the expense drop-off with Mancow was probably more significant than what you added and profitability is better?

Rick Cummings

Yes, absolutely.

Mark Wienkes - Goldman Sachs

Okay, and then just one final follow-up on Google. Are you noticing -- some of the other radio operators have said that so far, the Google sales reps do not seem to be knocking on the same doors as their own station reps. Are you noticing that with your own experience with them?

Rick Cummings

Yes. We have not run into, and I think Google now is in three of our markets. We are about to add a fourth. We are talking with them about doing a group deal along the lines of Clear Channel. That has not been worked out yet but both parties have expressed an interest and we’ve not really run into, in now over a year of beta testing this thing, a lot of evidence that they are out either talking to the same customer base or in fact trying to hire a lot of the same types of talented sales execs. We just haven’t seen it.

I know that a lot of people are concerned about it, but we’ve not seen that. And in fact, when there has been any concern about, I know that a couple of times there was concern that we had local clients who were paying considerably better rates in a couple of our markets, I think in the mortgage category, and there was some concern about that. We exercise the right, which we’ve always had, to take the Google customer who was on at a considerably lesser rate, off the air.

So we’ve really not run into any kinds of issues there as we continue to test this.

Jeffrey H. Smulyan

Mark, the Google experiment, we’ve been out front in saying that we think it makes sense. Our belief is that number one, we only want to take business that makes sense for us. They do have a reach beyond our capabilities and always will. If we can utilize that reach in a profitable way then of course we would explore it. It’s a noble experiment on their part and our part, but we think that at a time when this industry needs to be redefined, that foreclosing any options just doesn’t make any sense to us.

Mark Wienkes - Goldman Sachs

Right. Do you think they are reaching -- is it different categories that they are targeting or is it just more of a --

Jeffrey H. Smulyan

Well, I think and I might be wrong, but something like they reach 91,000 businesses and the entire American radio industry reaches 11,000. I’m not sure of the numbers but it is a staggering amount of people that they reach that we could never reach through our traditional sales efforts. That coverage might -- and I say might -- be able to translate into creating more demand, which theoretically would lead to higher rates. If it doesn’t, then it’s something that we won’t do.

Patrick Walsh

Mark, the only thing I would say, just to follow up on Jeff’s and Rick’s comments, this is still very much experimental in nature. The Google remnant inventory that they sell represents less than one-half of 1% of our domestic radio revenue, so this is still early days. We’ve done this to frankly learn a great deal and work with them and see what develops, and we’re in continued discussions with them to see if moving the partnership forward, along the lines of Clear Channel, makes sense. But we are still very much in the evaluate and learn phase of this process.

Rick Cummings

That’s absolutely right and one of the reasons we’ve not been concerned about this experiment is that if we learn things that indicate to us that it’s not a good idea, we stop tomorrow. So we’ve found the partnership good so far. They have grown the rates on our stations but they’ve got a long way to go. They know that, we know that. So, so far, so good.

Mark Wienkes - Goldman Sachs

It seems like there is probably some natural level of saturation, or maybe if they become 4% or 5% of revenue, now there is fewer new businesses to find and -- you know what I mean? If they are already in three of your markets, you are talking about a fourth, maybe they haven’t -- you haven’t come across them yet because it is less than one-half of 1% of revenue. I mean, it’s incremental up to a point and then it’s not.

Rick Cummings

Yes, that makes sense.

Mark Wienkes - Goldman Sachs

Okay. Thank you very much.

Operator

Laraine Mancini of Merrill Lynch, you may ask your question.

Laraine Mancini - Merrill Lynch

A few questions; first of all, the marketing spending in L.A., how far into the year should we expect that to continue? Should we budget high expenses for that market for the whole year? Second, you mentioned that it’s a buyer’s market and then the benefits of Google, so can you talk a little bit, do you know what the average unit rate differential might be between what you can sell and what Google sells? Does Google only work in large markets because presumably these small local businesses in smaller markets may not be able to afford to be on radio?

Patrick Walsh

I’ll take the first one. The spend on Movin will be concentrated in the first two quarters of the fiscal year. If you’ve spent any time driving or watching television in Los Angeles, you can see that the campaign is in full swing, but we expect it to be concentrated in the first two quarters of the fiscal.

Rick, I don’t know if you want to take Google.

Rick Cummings

I was hoping you’d take the second one, but that’s okay.

Patrick Walsh

I think it’s too early, and to make sweeping pronouncements on something that represents such a small revenue base and is only in three of our markets, we don’t even have it yet in our two largest markets. They are in L.A. but not in New York, so it is probably too early to make any major generalizations.

Rick Cummings

I would just add that the Google folks know this has a long way to go and they know that they’ve got to continue to try to drive rates if they are going to have access to bigger day parts. Right now, a lot of the access they have on our stations is in late night, early morning, non-prime kinds of day parts. So they clearly know what they are up against there.

I think as they spread this platform to more and more markets, they have a chance actually to hit some smaller customers because they will be in smaller markets with this product, but that’s down the road. In the meantime, they know they’ve got to grow these rates pretty significantly.

Laraine Mancini - Merrill Lynch

So are you doing business with Google in your smaller markets then if you’re not in all of your large markets?

Rick Cummings

We’ll about to add Indianapolis at the end of May. We will probably bring New York online to continue the testing in probably June. The reason New York has not been on has really been a technical issue. They started out with mostly the Scott studio systems delivery platform that DMark has built there now, spreading that to other kinds of digital delivery systems, such as New York, Audio Vault in Indianapolis, they had to build interfaces for those, so that’s really been the reason those markets have not come on sooner, but that’s about to happen. They’ve done the deal with Clear Channel so they are going to give this thing a good run, I think, and the real test will be are they able to create demand that drives rate. If they can do that, this has a chance to be successful.

Laraine Mancini - Merrill Lynch

Which three markets are they doing business with you in right now?

Rick Cummings

They are in Chicago, St. Louis, and Los Angeles at the moment.

Laraine Mancini - Merrill Lynch

And do you see any difference in St. Louis versus Los Angeles on what they are able to do?

Rick Cummings

No, I mean, I think it’s about the same in terms of the amount of business they place. Obviously the rates are different but it’s about the same. It really runs about the same in all three markets. Again, I think it’s important to recognize what Pat said -- it’s a very, very small slice of the business at this point, both in terms of the rates they are bringing to us and the amount of inventory they are using in the day parts that that inventory is running in. It is still pretty much remnant at this point.

Operator

Lee Westerfield of BMO, you may ask your question.

Lee Westerfield - BMO Capital Markets

Thank you very much. Three questions, actually, the first one’s one more time on Google for a moment here, and Rick, you may have just touched on this but to the extent that your access to inventory is available to Google, is any portion of that on what they would characterize as reserve ad place as opposed to remnant bidding for ads?

Rick Cummings

No, it hasn’t been at this point, Lee.

Lee Westerfield - BMO Capital Markets

Okay, that’s what I wanted to know.

Rick Cummings

At the Vegas spring show when Clear Channel announced their deal, we had a chance to sit down with Eric Smith to talk a little bit about it, and they’ve expressed an interest in doing a deal with Emmis similarly. It made sense to us but they obviously want to do one with the biggest companies first and we are certainly open to it.

My understanding is the way that kind of a deal works is both parties, both Google and Clear Channel, have certain thresholds and certain responsibilities, certain metrics they have to deliver for that to grow. I’m guessing that the same kind of deal would be struck with Emmis if we are able to do one of those.

We finally said look, let’s get the rest of our markets online, let’s continue the test and we’ll continue to have those discussions. But I think if it made sense to us, we would certainly do it. We have said to Google all along we are happy to sell our inventory to you, but if you want the best day parts on the biggest radio stations, you’ve obviously got to pay the rate.

Lee Westerfield - BMO Capital Markets

Second question is at -- how long beyond this current May quarter would you be expected to or anticipating to stay at a heightened promotional expense rate? And then I have one final question.

Patrick Walsh

I think as we mentioned, for the first half at Movin we expect heightened promotional spend, but I think it will moderate thereafter and be back to some more normalized levels.

Lee Westerfield - BMO Capital Markets

Okay, that will help with modeling. And the final one, and this relates to the mobile game initiative with Exponentia, first, what percent stake your investment afforded you? Second, if I’m not mistaken, you are using their service or they are using you on Hot 97’s site for moderated chat. Does that signal that you might, if it goes well on Hot 97, expand them across more of your stations, not only in New York but elsewhere? Especially, if I’m not mistaken, they also have the Indy 500 and you do have some stations in Indianapolis.

Jeffrey H. Smulyan

We’re working with them and I don’t want to talk about the specific stake.

Patrick Walsh

It’s a minority stake and we will leave it at that. But we think it’s an important platform. It’s principally sports applications that we are working with them on. Given some of Jeff’s relationships in that area, we have opened quite a few doors, including the folks at the 500. They had an existing contract with the National Hockey League and it’s an interesting platform that we think we can pair with a lot of our different media operations and help them grow. They’ve got some capabilities that are additive to what we already have in our Emmis Interactive team, so we think it’s a small play, very early stage but we think they’ve got a lot of opportunity for growth.

Jeffrey H. Smulyan

They have been a vendor of ours with our interactive group for a number of years and we’ve developed a very close relationship with them basically in developing games and also in texting. They’ve done some interesting things in texting primarily around sports, but in some other areas. We love them. Very creative and have come up with some pretty interesting ideas that we want to leverage with our interactive.

Rick Cummings

And the moderated chat you referred to at Hot is certainly their work too. They’ve been great partners from the get go for our interactive division.

Lee Westerfield - BMO Capital Markets

That’s interesting and thank you very much for sharing that.

Operator

Jonathan Jacoby, Banc of America Securities, you may ask your question.

Jonathan Jacoby - Banc of America

Thank you. Jeff, I’m to ask a tough question.

Jeffrey H. Smulyan

Jonathan, I wouldn’t expect anything less from you.

Jonathan Jacoby - Banc of America

Okay, and -- well, let me try to ask it and then we can discuss it, but I think investors are struggling a little bit as to the strategy for Emmis going forward. Ratings are weak. They are weak beyond just L.A. The numbers that I run, New York City was down about 19% in the last book, Chicago down about 11%. It looks like the replacement team for Mancow, as has been discussed, is going to take some time. You obviously are ramping investments here pretty significantly. How should we look at the company going forward? There is clearly an opportunity between the private market values right now and the Emmis equity value, so what should investors think about here over the next year or so?

Jeffrey H. Smulyan

Well, Jonathan, we are -- certainly we have to stand on what has been not a great record. On the other hand, this company has always been a leader in terms of performance in 26 years of creating formats and maintaining formats. Last year the question would have been how could you be this bad at Power, and now Power is back and way exceeding the market. We have owned that radio station for 20 years and in almost all those 20 years, it’s been one of the top three stations in Southern California.

We certainly are responsible for making a decision at Movin, which may or may not be right. We inherited a country station that had been owned by five companies in the previous 15 years, all doing country in Los Angeles. We got the station to record, I don’t know about ratings, but certainly a record cash flow and yet we look at the future of country in Southern California and we couldn’t make the case for it.

Whether Movin and Rick Dees will be right or not, I could not say. We feel comfortable with the decision and we feel comfortable with the internal research but making formats work in this day and age is dramatically more difficult than it was 25 years ago when we started this company. People have many more choices, their lives are more complicated, there are a lot of options -- many of them false options -- that may look attractive and certainly have cachet on Wall Street, but may not be viable businesses.

We know that these are challenging times and Jonathon, I certainly, as I said, stand guilty as charged. Our performance has not been good but we believe we are taking steps, both in this company and in a leadership position in this industry to reinvent American radio. Hopefully others will take the steps to reinvent American newspapers or American television, but that’s the challenge. This is not a problem which is indigenous to Emmis. This is true of all of American radio and we believe that investors, if they look at it and they realize that the bright side is that consumption has held remarkably well, more people listen to radio today than at any time in the history of this country, and yet there is more fragmentation because of all these other choices. If they believe that that reach and that impact will lead to better growth than has been in the last five years, we think they should be patient.

On the other hand, if they say we need a quick fix, is it coming this quarter, we would say that’s not going to happen. Jonathan, you’ve heard at least seven or eight other earnings reports this week and I don’t think my statement deviates from anyone else. These are challenging times and I think we have more creativity here and more of a track record of creating ideas and content that matters to people than just about any of our peers. But if the proof’s in the pudding, the pudding doesn’t look very good this year, and it hasn’t.

I don’t know how else I can answer that. Does that make sense to you?

Jonathan Jacoby - Banc of America

Thank you for your thoughts. I do appreciate it.

Kate Snedeker

Kelly, we have time for one last question.

Operator

Marci Ryvicker of Wachovia, you may ask your question.

Marci Ryvicker - Wachovia

Thank you. If you look down the line at your business, how much do you think the interactive segment will comprise your overall company and how much will your international radio division comprise, greater than right now or the same?

Also, where do you see your target leverage ratio at the end of the year?

Jeffrey H. Smulyan

Let me answer the second one. Obviously our goal has been to deleverage and yet we’ve also looked at returning capital to our shareholders, we’ve look at a whole host of options in the past few years, buying stock back, paying a dividend, deleveraging our balance sheet.

In terms of growth, we obviously -- you want to feed the areas that grow the fastest. That’s why we felt our best potential for growth this year was in building our interactive group and we think it will continue to be a greater percentage of our business. I couldn’t tell you exactly how much. International, the same thing. It’s had very good growth rates, as have our publishing group.

So obviously we would like to focus on areas that grow. It is hard to say exactly what percentage of the portfolio they will provide.

Marci Ryvicker - Wachovia

Thank you.

Patrick Walsh

In terms of target leverage ratios, Marci, depending upon the sale of New Orleans, we’ll be somewhere between 5 and 5.5 times.

Marci Ryvicker - Wachovia

Thanks.

Kate Snedeker

Jeff, before I turn it over to you for final comments, a remind that a replay of the call will be available until next Friday at 203-369-3658, or by visiting our website.

Jeffrey H. Smulyan

Thanks. I think what I want to say in conclusion is that there’s no way that you can be sanguine about what you see certainly in our challenges in New York and Los Angeles, or the overall American radio market, or the overall American media market.

I think the thing that does make me optimistic is the remarkable creativity and energy I’ve seen from all parts of this company, and also from our peers in the industry who have said we know we have a challenge, we can’t quite understand why our consumers keep consuming this product but it doesn’t seem to ring the cash register. We are looking -- you always learn the great lessons of life in adversity and I think that’s always been true in the 26 years of this company, and every time that’s happened, our people have rallied to even greater heights. I have no doubt that will happen now but I also know that it’s a long climb and we are going to do our best.

The thing I know is that our people will work harder and they will work more creatively to find answers. For that, I thank them and I thank you.

Operator

Thank you for attending today’s conference call. You may now disconnect.

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Source: Emmis Communications F4Q07 (Qtr End 2/28/07) Earnings Call Transcript

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