Radio One, Inc. (NASDAQ:ROIA)
Q2 2016 Results Earnings Conference Call
August 04, 2016, 10:00 AM ET
Alfred Liggins - CEO, President and Treasurer and CEO, TV One
Peter Thompson - EVP and CFO
Jody Drewer - EVP and CFO, TV One
David Siebert - Wells Fargo
Aaron Watts - Deutsche Bank
Lance Vitanza - Cowen and Company
Ash Thomas - Bybrook Capital
I've 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 other 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 is 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 4th, 2016. 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.radio-one.com.
A replay of the conference call will be available from 12 PM Eastern Time August 4th until 11:59 PM August 6th, 2016. Callers may access the replay by calling 1-800-475-6701; international callers may dial directly 320-365-3844. Replay access code is 397824. 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 made 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'll now turn the conference 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.
Thank you, operator. We also for this call have Jody Drewer, who is the Chief Financial Officer of TV One joining us in case there are any more detailed questions about TV One from investors. But as you can see from the press release, we're pleased with the quarter that we just reported.
Core radio revenues up 1.4%. Strong EBITDA growth for the entire company, close to 10%, which really happy with, maintaining our significant cost control efforts. Ratings at TV One are continuing to improve; we'll talk more about that later on in the call.
We're getting through the current upfront pretty well. Our strategy, it's pretty strong as you can -- probably have guessed from some of the other comments from the bigger guys have gotten their deals done earlier.
Our strategy this year is to actually focus on the rates, so we're looking at CPM increases in the mid to high single-digits. We're probably going to take a little less volume this year, churn out some of the lower paying advertisers in favor of the higher paying advertisers and also to play more robustly in the scatter market. We feel good about that strategy; it's really now time for us to get the rates up in TV One after being in the marketplace for 11 years.
Radio in Q3 is softer than we would like, but Q4 is pacing stronger than -- significantly stronger than Q3. Relatively little political is booked at this point and we expect that to improve Q3 and Q4. Peter is going to elaborate. We're reaffirming our guidance of $133 million to $137 million in terms of full -- company full year EBITDA. Any softness in our radio business will be offset by TV One's performance where we think we've got a bit of upside.
So, with that I'm going to turn it over to Peter for the details and then we'll come back to Q&A.
Thanks Alfred. So, net revenue was up 2.4% for the quarter ended June 30th, 2016 at approximately $122.7 million. Core radio advertising revenue was up by 1.4% for the quarter, excluding political advertising and event revenue and a breakout of revenue by source can be found on page five of press release and a breakout by segment can be found on page seven.
Our Washington D.C., Charlotte, Cleveland, Richmond, Dallas, Atlanta, Cincinnati, and St. Louis clusters showed positive revenue growth in the second quarter. Growth was offset by declines in our other clusters notably in Columbus, Philadelphia, Houston, and Detroit.
For the second quarter local revenues were down at 2.7% and national was up 9.1% for our radio stations.
Total spot revenue was up for the second quarter; however, event revenues down due to the elimination of some unprofitable and low margin events as part of the company's ongoing expense management program.
According to Miller/Kaplan, the radio markets in which we operate were up 0.1% for the quarter while we were up 0.6%. Net political revenue was approximately $850,000 compared to approximately $450,000 last year.
Looking by category, sales were up 12% in the telecommunications category, which our largest country for the quarter. Food and beverages was up 17%, retail was down 2%, entertainment was up 5%, and government, public was up 6%. Healthcare was flat, financial was down 18%, automotive was down 15%, services were down by 4%, and travel and transportation were up by 30%.
Radio ratings were significantly up year-over-year with 12-plus ratings up 8% and in the P25-54 demo, we were up 9%. We have double-digit ratings increases in nine of our markets, which includes Atlanta, Baltimore, and Washington D.C.
For the second half of the year, our radio business is currently pacing down low single-digits overall, with approximately $800,000 of political revenue booked for the second half.
There has been minimal political advertising booked in the third quarter, only $170,000 is on the books so far in Q3. And Q3 is currently pacing down mid-single-digits. Q4 is pacing up high-single digits and we expect the political lift to begin in September and October.
Our year-to-date adjusted EBITDA for the radio division is up by $3.5 million and we expect second half performance to show growth also. Overall, our year-to-date adjusted EBITDA is up by $7.4 million and we remain comfortable with our guidance for the year of $133 million to $137 million of adjusted EBITDA.
Net revenue for Reach Media was up by 2.8% for the second quarter. Net revenues for our Internet business increased 7.9% for the quarter, mainly due to higher direct advertising sales.
We recognized approximately $47.6 million of revenue from our Cable Television segment in the quarter compared to approximately $45.6 million for the same period in 2015, an increase of 4.3%.
TV One's gross advertising revenue was up 4% or $800,000 with average unit rates up 15%, driven by 6% CPM increase on upfront inventory and 20% CPM increase was scattered.
However, delivery shortfall versus rate card estimates increased our audience efficiency liability by $1.3 million which netted to a 2% year-over-year drop in net advertising revenue for the quarter.
Although the household delivery was down in prime by 6% and total day by 6% versus last year, advertising revenue was down by only 2% for the same period. The under-delivery was partially offset by increased pricing.
So far in the third quarter, we're pacing up 8% in prime households and flat in total day. We continue to see sequential quarterly improvement in ratings delivery with third quarter prime-time ratings currently up 12% in the P25-54 demo.
June was our best month ever in the ratings; Love Under New Management was our best original movie ever. With TV One ranked number one -- number one cable network in prime for all black key demos the night that movie was on. EMPIRE has outperformed our ratings estimates by 5%.
Cable subscribers, as measured by Nielsen, finished the quarter at 57.9 million, up from 56.8 million at the end of March. As of August, Nielsen subscribers are at 58.2 million.
Operating expenses excluding depreciation, amortization, impairments and stock-based compensation increased by 1% to approximately $85.7 million in the second quarter. Corporate SG&A expenses increased mainly due to the CEO's non-cash TV One Award of $2.5 million, which was an increase of $1.4 million versus the second quarter of 2015, and that number is driven by the valuation of TV One business.
Radio operating expenses were down 6.2% driven by various cost cutting measures, including eliminating non-profitable and low margin events. Reach expenses were up 2% due to higher event cost, which were covered by higher revenues.
Operating expenses at Interactive One were down 1.4%. TV One expenses were up 2.9% year-over-year, driven by higher marketing spending including $1.3 million on Empire.
For the second quarter, consolidated station operating income was approximately $48.9 million, up 5.5% from last year. Consolidated adjusted EBITDA was $39.9 million, an increase of approximately 9.6% year-to-year, with all of our operating segments showing adjusted EBITDA growth in the quarter.
Interest expense was approximately $20.5 million for the second quarter, up from approximately $20 million for the same period last year and the company made cash interest payments of approximately $18.6 million in the quarter
Gain on retirement of debt of approximately $2.6 million was due to the redemption of approximately $20 million of our 2020 notes at a discount of approximately 14%. This reduces the company's ongoing interest burden and contributes to lower leverage in the long-term.
Net income was approximately $7.3 million or $0.15 per share compared to a net loss of approximately $13 million or $0.27 per share for the same period in 2015. For same quarter, capital expenditures were approximately $1.1 million compared to $1.6 million in the second quarter of 2015, decrease mainly due to the completion of our Dallas facility build out that occurred in 2015.
Q2 cash taxes paid were approximately $352,000. During the quarter the company repurchased 575,608 shares of Class D common stock in the amount of $1.1 million.
As of June 30th, 2016, Radio One had total debt net of cash balances, OID, and issuance costs of approximately $951.2 million. For bank covenant purposes, pro forma LTM bank EBITDA was approximately $131.1 million and net debt was approximately $970.6 million for total leverage ratio of 7.4 times and a net senior leverage ratio of 4.91 times.
And with that I'll hand it back to Alfred
Thank you, Peter. Couple updates on some projects that are in process. Our MGM investment is still on track, still looking at a late Q4 opening of that property and we're going through the licensing process. Right now completing our final applications, so that we can make the balance of $40 million investment, which is $35 million. We've notified gaming commission that we plan to make that investment and we expect to file our final application here in the next couple weeks.
We had mentioned on our Roadshow and posted on our website that the company -- the parent company is going to undergo a name change to reflect our new fully diversified media business that is still our target for a Q3 execution.
And we're in the process -- we’re the middle of a process with our tower sales. We hired a broker to help us with it. They put together presentation package, data roaming and we've gotten four, five really credible strong offers that we're sifting through now. We expect to have that process completed in the near-term as well.
So, with those updates, I'd like to operator turn it over to the audience for Q&A.
Thank you. [Operator Instructions]
Our first question comes from the line of David Siebert, Wells Fargo. Please go ahead.
Thanks everyone and good morning.
I wanted to ask about Radio, Peter could you repeat what you said the radio business overall is pacing for the third quarter?
Yes. So, I gave a few numbers. So, I first start with the second half, which is pacing down low single-digits. Q3 itself is pacing down low -- sorry mid-single-digits for Q3. But I made the point that there's a little political book, there's only 170,000 on the books Q3. And then the fourth quarter is pacing up high single-digits.
Up high single. Okay. All right. And Alfred maybe if you kind of give us an update on the radio business, there's been a lot of interesting numbers being thrown out by Nielsen in terms of the Reach. You guys have had some ratings that have been kind of up and down, so maybe if you could just kind of give us a state of the union on your radio business as it stands today?
Yes, so the first two months of the year, January and February were soft and they started improve March, April, May. June turned out to be a soft month. July is a very soft month. And right now, it's starting to pick back up and improve in August and September.
Our ratings have actually continued to be good. I am -- there -- I think we're up in key demos like that 8% quarter-to-quarter and it's looking a bit choppy for us. I still think that we've got some specific markets that are going through some execution issues.
Our market to-date -- we -- our market mix is not helping us. So, through Q2, our markets were basically flat. They were up 0.1% and we were up 0.6%. But I think if you looked at our market mix, it's going to show not as favorable as some other companies, but with that said, it was started up slower, improved, going through a rough patch in June and July, and then starting to pick up.
And political hasn’t laid in yet, very little political to lay in. So, we feel like we're still going to grow that business. We're ahead of last year by -- how many millions of dollars? $3.5 million? Yes, so we're about $3.5 million on our radio business ahead of last year through the second half. We're continuing to contain our cost and improve on our execution.
So, we feel good about where we're going to land at the end of the year in terms of overall guidance; even if radio ends up call it flat. And so I still feel bullish about the overall business.
In fact I think a number of other companies continue to report strong earnings. The business overall hasn't fallen off anywhere near as the other traditional mediums and as I've said before, we continue to kind of work through our own internal issues, but we're making significant progress in that area.
That's really helpful. Thanks for going through that. And then Peter just to confirm, you said Q4 pacing up high single-digit, that is -- that's no political or inventory [ph]?
There is a little bit of political and that's about $600,000, $650,000.
Okay. Got it. And if I could shifted TV One, there has been some carriage disputes between other programmers and Charter-Time Warner Cable, is there anything we should expect on that front and as TV One sets?
No, we announced -- I forgot how long ago, -- Jody, when did we do our Charter deal?
That was at the end of the first quarter.
It's the end of first quarter; we announced that we had our Charter deal done. It's an eight year deal. Our Charter deal specifically outlined that the Charter agreement would control the Time Warner subscribers. So, we're good to go. There's no issue with us losing rate or going backwards, because of the Charter-Time Warner merger and they are starting to rollout the additional subscriber commitments that they made to us, we couldn't be happier.
Okay. That's good to know. And then just of couple more, if you could just comment on where you might think Reach Media and Internet EBITDA will finish for the year? And then any sort of plans for the balance sheet whether it's refinancing the term loan facility and whether you look at the Comcast note as well? And that'll do it for me. Thank you.
Okay. So Reach Media, we think finishes just a little up year-over-year on what they did in terms of EBITDA last year. We feel pretty good about that. And then the Internet business, we budgeted it as a breakeven business. I think you know plus or minus that's where it's going to end up. So, it's neither going to help, not hurt us in any material way for this year.
And then in terms of balance sheet refi, to be honest, we've had our heads down operating pretty hard over the last quarter. I think we'll look at that as we get -- we want -- the balance sheet management, I think it consist again the $25 million in on the tower sale adding that to cash. That will give us more dry powder, obviously with our MGM acquisition coming up $35 million probably December time. And then we'll see where we're at.
Obviously, the notes have traded up nicely which we're very happy about and I think that gives us some more options as we start to think about the nearer term maturity on the term loan.
Yes, the key to that term loan extension was getting those personally secured notes trading up to par. So that when we go to refinance the term loan, we can get it done at a reasonable cost.
So, I think priorities for us as Peter said building cash to give ourselves flexibility, to also make sure that we continue to execute and deliver on the full year guidance, send ourselves up for next year. And that extension or -- either extension or a total refi that term loan because that maturity is at the end of 2018 is a top priority for us.
Great. Thanks so much for the color.
Our next question comes from the line of Aaron Watts, Deutsche Bank. Please go ahead.
Aaron, your line is open.
Hey, guys. Thanks. Alfred you touched on this a little bit already, but just -- again on the kind of ad environment for radio, your ratings are improving and a lot of your markets, you said 3Q a little softer, 4Q stronger. What's the push and pull there in the market? Is there something you can kind of pinpoint that's driving, kind of, the softness in June, July, but why after that it feels a little better?
June in particular we got hurt, so two things. Last call, I said that national was driving our radio performance and we're underperforming in local, but that's where we have improvement and upside and that's still true.
But what has -- what’s happened in June, July and going in the third quarter is national has fallen off and we haven't reached the inflection point of improve the local sales enough yet and so national falls off quickly.
In June, in particular, we had an event in Dallas that hurt us -- that hurt our performance. It was a car show I believe and that came in lighter due to -- some significantly lighter due to some revenue issues.
And so July, I talk to some other people; I think July has been in the larger markets, a tough month for a lot of folks. We don't have July Miller/Kaplan and yet. So, I don't have real clarity on how tough and how much of it is just us and how much of that was the market.
But based on what I've heard by checking with other companies, I think we're going to find that it's going to be a tough month for a lot of people. And then it just -- and it starts to improve in August.
Right now, in August, we’re placing -- pacing flat and up in September. So, it's -- we've gone from negative, to good, to -- negative for a couple months to improving. So, right now its choppy, but it's choppy for us against what I think is a decently healthy market.
So, I'm okay with that because we can always continue to improve our own performance in that segment. And so the whole notion of us diversifying was to offset any -- and to mitigate any effect of a choppy radio business on our overall performance and I think that's where the company is at.
Yes, and just add some more color on that, so national was negative both June and July, but is pacing positive August and September, so that's driving a healthier August and September and that’s not political, that's very little political in that. So, that’s picked the numbers back up. Alfred's point about the national business dropping off in June, July, but it seems fine again August and September.
Okay, that's helpful context. And then on the TV side, obviously, you talked about better ratings moving forward, EMPIRE outperformed your expectations, do you feel like you have most of the pieces in place from the programming standpoint or do you feel like you have to go out and pick up another block of content to help fill out your schedule?
No, I mean, we had the Martin issue where we poorly communicated what was going to happen to the marketplace. We knew it -- we knew three years before it happened, we're going to lose Martin and it was going to have an impact and we just didn’t communicate that to the market appropriately.
But what we found in -- I have Jody here in case if there are any more detailed questions, is that we actually -- and we didn’t do this originally, originally when Martin went away, we started airing more repeats of our originals which didn’t performed that well. And then we backed off with that and we started scheduling more of our classic sitcoms in places and they really did perform well and they're good source of content for us.
And when we look at actually Martin versus Sanford and Son which is one of the shows that you -- we put into replace it. Sanford and Son actually historically performed better than Martin, even though we ran Sanford and Son a lot less than Martin.
So, it turns out, it's been a good workforce for us. EMPIRE was the nice thing to layer on top of that. It wasn't that expensive for us, brought in significantly younger viewers, gave us a lot of buzz and cache. But I don't -- I don't think, we feel like we have to go out and make another big acquisition to fill out our programming schedule.
We’re still looking at stuff that we can find something that gives us a lot of hours that we think will rate well at a decent price, then we’ll look at it. But right now I think it's really about getting the mix of our original programming right with the library of acquired that we currently have.
We’ve got some significant successes on the original programming front. Our reality show Rickey Smiley For Real is doing exceptionally well, outpacing season -- this is -- we’re in Season 2 now outpacing Season 1 by 25% in the persons 25 to 54 demo.
And our biggest original movie ever recently happened, Love Under New Management, the Miki Howard story, it's turned in -- turned in over one household rating and we have had a slate of original movies recently that have performed better than we had hoped, not as good as Miki Howard did, but better than the originals that we had in the first part of the year as we -- the ones a rolled out in late second and third quarters have started to do better than the ones that were in Q1 in the beginning of Q2.
So, no, we feel like we're in a good spot. I don't think we need to take any big programming swings, whether it's from an acquired standpoint or deviate from our original programming plan that we have, say original programming, stuff that we make that we already have in place is trying to make sure those things that we have on the slate are good, well done, well made pieces of content, and we market them correctly. So, on I feel very good about the TV One business which is why I think also if anything we got them upside there.
Great. Thanks for the time.
And our next question comes from the line of Lance Vitanza, Cowen. Please go ahead.
Hey guys, thanks for taking the questions. And I apologize if I missed this, but the tower sale leaseback of borrowing, effective borrowing costs on that would be -- what would you expect?
About 7% give or take.
So, it's going to cost -- yes, it's going to cost us somewhere in the region of $1.9 million of EBITDA to yield $25 million.
Okay. So, pretty attractive there. And then when you take that into account and the $35 million investment then, your projected cash and liquidity would be -- is it simple as just taking out $35 million and adding back $25 million, or are there some other things going on there and how should we be thinking about that?
It should be that simple. I had a question email asking me about Q2 cash generation. The other big variable aside from working cap, the big variable is the TV One programming expense. And as an example, so for the second quarter, it was roughly $12 million -- there's a delta of about $7 million in terms of what's actually run through the cash flow statement in terms of amortization of content assets, call it $10 million and about 17 and change of content asset cash out of the door.
So, there are some fairly lumpy program and payments that can affect that cash flow. But I think they normalize out over time Lance. So, generally, it should be $35 million goes out and $25 million comes in and then obviously, we're going to generate some free cash flow in the second half of the year.
Should we think about the towers -- I mean the tower transaction is that just opportunistic given that if you can get 7% capital, you might as well or is this really you kind of needed to because you would've been too tight given the investment if you hadn't done the tower transaction?
No, I think there's a little bit of both in terms of balance sheet management as well, but it's a nice multiple and it's deleveraging and it's accretive relative to where we're trading.
So, I think it's a good piece of arbitrage. We're seeing a lot of other people in the business do it. And obviously having the $25 million on the balance sheet helps, but we obviously closed on our $25 million revolver which is undrawn. So, we don't think we have any liquidity issues. We just think it gives us some extra flexibility.
Thank you. And then last for me. With respect to the gaming project, I heard the comments about where you are in the process, but could you remind me once that's up and running, what kind of timing do you expect on revenues to you on account of the investment that you've made?
I mean is there sort of a lag between the revenue generation and the income generation of the project and then when that gets distributed? Or does it come more or less contemporaneously? How should we be thinking about that?
The ramp-up will be pretty quick I think in terms of being able to accrue income from it. But then the agreement we have is an annual payment just after the end of the year. So, it will be a one-time annual reimbursement.
So, we won't see any cash from it until the early part of 2018. Although we will have numbers and be able to report how income stream is coming along from January, February of next year.
And the timing of the payment that refers to both the rev share and the percentage of the profits?
The rev share, yes, what we get on an annual basis is just 1% of the net gaming revenue. So, it's in lieu of a dividend if you think about it that way. So, it’s the one revenue stream from it.
Okay, got you. Thank you. Thank you very much.
And the next question is from the line of Ash Thomas with Bybrook Capital. Please go ahead.
Hi guys. Thanks for taking my call. I saw in your SEC filings that you fired EY as your auditor and you've taken on BDO instead, but you about a week or so prior to that affirmed E&Y as your auditor at your AGM. Could you give us a bit of context around why that happened?
Yes, it was nothing sinister, it was simply timing. We'd sent out the proxy statements which had the reappointment of Ernst & Young in and then we got into a fee discussion on account of RFP process and we decided it was a significant enough saving that we should switch and so we did.
And obviously having put out proxy materials, we needed to go ahead and reaffirm them and then we made the decision really quickly on the back of the -- of that meeting that we were going to change.
So, nothing other than that. Just the timing was a little unfortunate, but the savings in the audit fee made it worthwhile.
Okay. Good to hear. Thank you very much.
And this time, there are no other questions in queue.
Thank you everybody for your support and for tuning in and as usual we're available offline for any follow-up questions. And we'll look forward to talking to next quarter.
And ladies and gentlemen, that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.
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