Spanish Broadcasting System's (SBSA) Management on Q3 2016 Results - Earnings Call Transcript

| About: Spanish Broadcasting (SBSA)

Spanish Broadcasting System, Inc. (NASDAQ:SBSA)

Q3 2016 Earnings Conference Call

November 16, 2016 11:00 AM ET

Executives

Brad Edwards – Managing Director-Brainerd Communicators

Albert Rodriguez – Chief Operating Officer

Joseph Garcia – Chief Financial Officer

Analysts

Patrick Fitzgerald – Baird

Operator

Good day, and welcome to the Spanish Broadcasting Third Quarter 2016 Conference Call and Webcast. 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 Mr. Brad Edwards of Brainerd Communications. 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 facts. 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 stations before considering costs and expenses related to capital structure and dispositions. This information is not intended to be consideration 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 2016 third quarter earnings release, which is available on the Investor Relations section of the Company's website at www.spanishbroadcasting.com.

I will now 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 2016 third quarter earnings conference call. On today's call, we will provide an overview of recent operating developments and review our financial results. Joining me today are Joseph Garcia, our Chief Financial Officer; Robert Castro, Vice President of Finance; and Frank Soricelli, Corporate Controller.

Now, turning to our third quarter operating highlights. During the third quarter, we further expanded our total audience shares through the successful execution of our multi-platform strategy. Our audio station group remains well-positioned across many of the nation’s largest Latino markets and continues to grow its listenership through our strong station brands and content offerings.

We also greatly advanced our digital offerings, particularly on the mobile side, through the recent launch of the next version of our LaMusica app. The app now offers a robust video channel line-up to complement its existing, deep and immense immersive audio capabilities. It also offers unique opportunities for advertisers to reach the highly desired Latino millennial audience. Overall, our digital revenues and reach continue to grow, which positions us to deliver a growing and engaged multi-platform reach to advertisers, and generate growth over the long-term.

On our network division, AIRE, reported increases in audience, with the most recent-released survey from Nielsen Audio DMA, Spring 2016 – Monday through Sunday among Hispanic adults 18 to 49, total radio AQH was up 2%, Spanish-language radio was up 4%, while AIRE Radio Networks averaged AQH plus 7%. AIRE Radio Networks now reaches 13 million listeners in a given week. AIRE Radio Networks expanded its coverage to 55 Hispanic markets including 30 of the top 30 Hispanic markets with over 100 radio affiliates nationwide. This footprint enables this platform to reach 90% of the U.S. Hispanic DMAs, thus accessing highly attractive demographic group including millennials, young adults and families.

AIRE Network sales in the third quarter were down 12% from the prior quarter, although we are confident that we are driving improved performance through a strength in sales team and leading content offerings. Our success in attracting new advertisers is driving an expanded advertiser base, as we finish the third quarter with 37 total advertisers. On the content side, AIRE’s nationally syndicated radio show, Por el Placer de Vivir with Cesar Lozano, total audience continues to expand its national coverage with 54 radio affiliates in 37 markets.

It's important to note that Dr. Cesar Lozano also has a tremendous online following, which is consistent with our focus on expanding our multi-platform audience. In fact, today, he has the largest online following of any Spanish-language deejay in the U.S., with over 6 million followers. We remain hard at work at expanding AIRE's reach and content offerings. We continue to believe the network has strong growth potential given our progress to date, as well as opportunities we seek to further grow our audience shares and attract a larger pool of advertising dollars.

Turning now to our audio group. Third quarter audio revenues were down 4%. Local sales were up 1%. Political sales exceeded our expectations for the 2016 presidential election cycle, finishing up 3% compared to 2012. Today, our audio station group remains well-positioned across the largest Hispanic markets nationwide. WSKQ Mega 97.9 FM, our flagship station in New York continues to be the most listened-to Spanish-language station in the entire nation. Today, Mega averages over 2.5 million weekly listeners and is the most listened-to station in all of New York, according to Nielsen Audio.

WSKQ continues to be number one in adults 25 to 54. Also in New York WPAT Amor 93.1 currently has over 1.6 million average weekly listeners and continues to grow its audience shares from a 2 to a 3 share.

In Miami, WRMA Ritmo 95, changed to a new format, Cubatón and immediately went from a 1.7 share to a 4.8 share in adults 18 to 49. Ritmo had an unprecedented immediate ratings impact in the South Florida market. With this new format, we created El Cubatonazo, a first-ever of its kind two-night concert series with top Cuban artists of today. Station revenue will positively impact this quarter. Our three Miami stations are solid and have the most time spent listening in Spanish stations in the market.

Turning now to Los Angeles, where we remain well-positioned in the market due to continued strength at KLAX La Raza and KXOL Mega. KLAX La Raza is once again the number-one rated regional Mexican station in the entire city with over 1.4 million weekly listeners. KXOL Mega is the number-three ranked Spanish-language station in the market with over 1.3 million weekly listeners.

Our attractive station footprint continues to drive outperformance of the broader radio industry. Miller Kaplan estimates indicate that our local station group topped the industry by 220 basis points in the third quarter. This marked the 12th straight quarter of our industry outperformance. Looking at Puerto Rico, our stations remain ranked in the top three this includes WMEG La Mega, which is ranked number one among adults 25 to 54 and number three among adults 18 to 49. WZNT Zeta 93 is ranked second among men 25 to 54 behind our own WMEG, while WODA La Nueva 94 is number one among adults 18 to 34 across all day parts.

During the third quarter, audio advertising categories that showed strength across our audio group included automotive, entertainment and retail. Automotive remains particularly strong and finished up 12%. Categories that were down in the quarter included general services, beverages and professional services.

Turning now to the video group, where core revenues were up 23% in the third quarter. Advertising categories that were up in video included automotive, media and political. Turning now to our digital platform. On previous calls, I have shared our enthusiasm and emphasis on strengthening our mobile offerings. This strategic focus is supported by the highly attractive and sought-after Latino millennial audience, which over-indexes on key metrics, including mobile ownership, mobile usage, audio streaming and video consumption.

Last month, we've launched the latest version of our LaMusica app, which included the addition of a full video channel line-up, complete with daily updates and over 10 exclusive shows. LaMusica now offers bi-cultural/bi-lingual, short-form vertical video content that highlights the dynamic world of Latin music, entertainment and pop-culture.

This expands the video offering builds on immensive music experience that LaMusica already delivered, complete with live streams of all of our audio stations, the ability to create unique listening experiences through access to over 23 million songs as well as algorithmic playlists. As well as over 200 curated playlists based on genre, mood, activity or user-favorite SBS talent. Overall, our LaMusica app offers unique and seamless digital entertainment platform specifically designed for the Hispanic millennial audience, while also providing advertisers and marketers with a dynamic platform that reaches the highly engaged and increasingly influential Latino millennial.

In addition, LaMusica, our mobile groups are executing custom-branded stations, client-branded campaigns and other strategic initiatives that strengthen our digital offerings and capabilities. All in all, our total audience continues to grow. Today, we have 1.8 million unique visitors across our websites and LaMusica mobile app. The shift towards the mobile interaction with our brands and content is clearly demonstrated 70% of our traffic coming to the mobile web and LaMusica. This clear trend is driving our digital focus and investment priorities, which is clearly demonstrated by the recent updated launch of LaMusica. Social media followers are at 5.7 million. That is a 20% increase from the same period last year.

Our audio streaming metrics also point to a growing digital engagement with our brands and offerings. In the third quarter, we generated an average of 6 million audio sessions across web and mobile. This growing digital interaction with our brands has resulted in a strengthened following across key social media platforms. Expanding our digital platform will remain one of the most primary strategic initiatives. We've made notable progress in this area, demonstrated by our strength in LaMusica app, which now delivers an unparalleled digital entertainment experience to users, as well as further growth in our total digital audience.

Our goal remains growing our digital platform and influence, and delivering engaged online and mobile audiences to our advertising partners. In summary, we continue to make solid progress, building our multi-platform audience and best positioning SBS for growth over the longer term. Our core audio station assets include the leading brands located across many of the nation's top Latino markets. This strong market position is supported by our expanding digital platform that connects with Latinos across many key demographic groups, both online as well as on-the-go, via our unique LaMusica digital entertainment platform. Moving forward, we are focused on continuing to expand our multi-platform audiences and deliver integrated advertising opportunities to our partners.

Now, let me turn the call over to Joseph Garcia, for the financial overview.

Joseph Garcia

Thank you, Albert. Turning to our results for the third quarter, consolidated net revenues totaled $35.6 million, down by 2% compared to $36.4 million for the same prior-year period. Our radio net revenues decreased by 4%, primary due to decreases in national, network, barter and Internet revenue, which were partially offset by an increase in local sales and special events. Our local sales increased in our San Francisco, Miami, Los Angeles and Puerto Rico markets. Our television net revenues of $3.6 million were up by 23% during the third quarter, due to increases in national, local and barter sales.

Consolidated OIBDA, a non-GAAP measure, totaled $11.1 million, up 4% compared to $10.7 million for the same prior-year period. Our radio OIBDA of $13.5 million was down by 6%, mainly due to decrease in net revenues, offset by lower operating expenses in the period. Radio station operating expenses were down by 3% in the third quarter, mainly due to decreases in compensation, marketing expenses, bad debts and facility expense, offset by increases in special events and digital programming content expenses.

Television station operating expenses were down by 5% in the third quarter, primarily due to a decrease in professional fees and compensation expenses, offset by increase in originally produced programming costs. Corporate expenses of $2.5 million were down by 13%, mostly due to a decrease in professional fees, offset by a decrease in compensation and benefits, and stock-based compensation.

Finally, our operating income totaled $9.9 million, up by 13% compared to $8.8 million for the prior-year period. The increase in operating income was primarily due to the decrease in net revenues, offset by the decrease in operating expenses, and the prior-period recognition of an impairment of an FCC license. Our third quarter capital expenditures totaled approximately $400,000. As defined by the indenture governing in our notes, our secure leverage ratio was 6.9 times as of September 30, of this year.

The Company currently has $262 million in federal NOLs, and approximately $17.6 million in cash. As we've previously disclosed, we have filed applications to participate in the Federal Communications Commission Broadcast Incentive Auction with our television stations in Miami, Houston and Puerto Rico. And please remember that we are in a quiet period with respect to the FCC Broadcast Incentive Auction, and subject to strict FCC provisions from directly or indirectly communicating, both internally and externally, information regarding our bidding strategy or the status of our bids in the auction.

As such, we will not take any questions related to our participation in the auction. We remain hopeful that the FCC Broadcast Incentive Auction will conclude in the near future, and we will be in a better position to formulate a strategy to address our upcoming maturity in April 2017. Our financial advisors continue to discuss potential alternative transactions with our noteholders and preferred stockholders, and we will be evaluating the proposed transactions once the Federal Communications Commission Broadcast Incentive Auction has concluded.

And this will conclude our formal remarks, and I would like to turn it over to the operator for any questions and answers, please. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Patrick Fitzgerald from Baird. Please go ahead.

Albert Rodriguez

Good morning, Patrick.

Patrick Fitzgerald

Good morning, good morning. How is the fourth quarter looking for you guys?

Albert Rodriguez

Patrick, we are not giving formal guidance, but I will tell you we are pleased so far in terms of local and national. Local we are seeing, we are up in both, up mid-single-digit in local and for national we are up in the low double digits.

Patrick Fitzgerald

Okay. And then, when do the – you were down 12% last quarter – when do the comps start to get easier there again?

Albert Rodriguez

We are starting to see, right now we are in the midst of the 2017 upfront. But as we discussed in the prior two calls, we positioned a brand-new sales team that we believe is going to take AIRE to the next level. We are starting to see results now in the fourth quarter, so hopefully, when we do the next call, we will be able to give you something really good information. But we are starting to see positive results right in the fourth quarter. It was going to take several months. But we are pleased so far with the team.

Patrick Fitzgerald

So you're seeing positive results in terms of like improvement in the decline? Or you're actually seeing growth year-over-year in AIRE?

Albert Rodriguez

Like I said, Patrick, we are not giving formal guidance, but we are starting to see a positive movement in the fourth quarter with them. So in all aspects.

Patrick Fitzgerald

So really, the product – in your opinion, the product is just getting better, it is just, you didn't have the appropriate sales team, and now that you have the appropriate sales team, you feel like that can be a growth area for you guys. Is that fair?

Albert Rodriguez

It's fair.

Patrick Fitzgerald

Okay. Now I see that you put the midtown townhouse on the market, I guess, or at least you hired a broker.

Albert Rodriguez

Yes.

Patrick Fitzgerald

Do you have any view on the timeline there? Or is this kind of, if you don't get the spectrum auction – is this going to be sold regardless of what happens with the spectrum auction?

Joseph Garcia

Well, first of all we are very optimistic, as I indicated, this is Joseph Garcia, in the spectrum auction. We do have some assets that are available, that will help in taking care of our needs coming up in April. At this moment I cannot give you any timeframe as to when the sale is going to be realized, but we are, again, looking at pursuing all possible avenues of maximizing our cash.

Patrick Fitzgerald

What about the LA property?

Joseph Garcia

As I said before, we are exploring all possible assets that are nonstrategic to our costs here, our operations, that can be used to help in the refinancing.

Patrick Fitzgerald

Okay, great. All right. And do you think if the spectrum auction doesn't get done before the maturity, is there kind of a plan in place in that event, where people would kind of defer their potential actions with respect to like the default, to give you guys a little more time to see where those proceeds shake out?

Joseph Garcia

I mentioned that we have retained financial advisors, one of them is Evercore that is – as we said, in discussions with all of our holders. Again, I continue to – we continue to be optimistic regarding the spectrum auction.

Patrick Fitzgerald

Okay, great. Thanks a lot, guys.

Albert Rodriguez

Thank you, Patrick.

Operator

[Operator Instructions] Seeing none, this concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

Albert Rodriguez

Thank you and thank everyone for participating on our call. We look forward to speaking to you, to our investors in the first quarter of 2017. When we release our fourth quarter of 2017 results, as well as our full-year. Thank you.

Operator

Ladies and gentlemen, the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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