Fisher Communications Q3 2007 Earnings Call Transcript

| About: Sinclair Broadcast (SBGI)

Fisher Communications, Inc.(FSCI) Q3 2007 Earnings Call November 1, 2007 4:00 PM ET

Executives

Mae Numata - SVP, CFO and CorporateSecretary

Colleen Brown - President and CEO

Rob Dunlop - SVP

Analysts

Bishop Cheen - Wachovia

Tom Carr - RCV Investment

Kevin Seagraves - Fort Washington

Operator

Welcome to the FisherCommunications Third Quarter 2007 Earnings Call. This call is also beingwebcast. A replay of this conference will be available later this afternoon,and can be accessed through call Fisher's website at www.fsci.com.

This conference call containsforward-looking statements relating to the development of the company'soperations, products and services, and anticipated future operating results.These statements are based on information available at the time they're made,but are necessarily subject to a number of risks and uncertainties and actualresults may differ materially from expectations.

The factors that could causeactual results to differ materially from those expectations described in our AnnualReport on Form 10-K and our quarterly reports on Form 10-Q as filed time totime with the Securities and Exchange Commission. The company undertakes noobligation to update publicly any forward-looking statements due to newinformation, events or circumstances after this date of this conference call or to reflectthe occurrence of unanticipatedevents.

All calls have been placedon-mute during the presentation and further instructions will be given prior toQ&A session.

I will now turn the call over toMae Numata, Senior Vice President, Chief Financial Officer and CorporateSecretary for Fisher Communications. Please proceed.

Mae Numata

Thank you, Lacey. Good afternooneveryone and thank you for joining us on Fisher Communications third quarter2007 earnings conference call. Our third quarter earnings release was issuedearlier this morning and can be accessed through our website along with ournon-GAAP performance measures.

Joining me on the call today areFisher's President and Chief Executive Officer, Colleen Brown and Senior VicePresident, Rob Dunlop. We will begin with opening comments from Colleen andsubsequent to her comments I will review the third quarter financial results.We will then open up the call to your questions.

Colleen Brown

Thank you, Mae. The third quarterresults reflect the efforts of our selling initiatives, Fisher Plazarevenues and dedicated cost controls across the company with focus on revenuedevelopment and ratings growth in our properties. We are pleased to reportcontinued revenue improvement compared to the same period in 2006.

Revenue was $41 million up 5%year-over-year. This was driven by television revenues, which were up $1million to $26 million, an increase of 4% year-over-year despite cyclingagainst strong political revenue in 2006. In addition, our Radio segment posteda 6% increase in revenue up $700,000 to $12 million for the same period.

Fisher Plazarevenue was strong at $3 million, an increase of 19% over third quarter 2006,which for the most part is a result of increased occupancy. Total occupancy was96% at the end of the quarter.

Loss from continuing operationswas $600,000 against a prior-year loss of $780,000 due to startup news cost inour Univision and Internet initiative. Net loss of $530,000 was a 21%improvement over the prior year's quarter and includes income from discontinuedoperations of $58,000.

Let me provide a little color onthis quarter's performance. Third quarter was challenging across the industrydue greatly to the cycling against 2006 political advertising. For Fisher, wewere able to overcome the political cycle in this quarter and I am particularlypleased that our revenue growth performed favorably compared to most peercompanies.

While, ABC Prime programmingstruggled during the summer for ratings, our news product continued tostrengthen. Just one example of this morning news at 6:00 am in both of our ABCaffiliates in Seattle and Portland delivered year-to-year ratings growth in keyadult and women demographics with Eugene maintaining its dominate number oneposition and Boise, garnering year-to-year increases in multiple newscasts ourCBS stations continue to show positive results in the markets.

Our key focus has been to driverevenue creatively and rapidly through better inventory management, increasedsources of revenue, training and non-traditional advertising. In addition, weimproved our selling effectiveness and brought increases in the home products,food products and general services advertising categories. For the marketrevenue, orders received our stations have all achieved growth in local marketshares from year-to-year.

Total page views for Fisher's interactivearea improved 18% in third quarter 2007 over 2006 to an average of 18.7 millionmonthly page views. Unique Visitors increased by 49% during this period to anaverage of 2.1 million.

Centralization has reducedoperating costs. We have three of our eight CBS stations running successfullyand centrally out of the Fisher Network OperationsCenter based in Seattle.

We continue our leadershipalignment with strategic initiatives. On September 27th, this year, weannounced that Jim Clayton was named Vice President, General Manager of FisherSeattle. He has our Seattleradio stations, KOMO 1000 News, STAR 101.5 and 570 KVI to his currentresponsibilities, as Vice President and GM of KOMO 4 and KUNS-TV. This is ourfirst step towards fully realizing the synergies and efficiencies between allof the Seattlebroadcast properties.

In August, we named Nancy Bruneras Vice President Fisher Interactive Networks. She is a seasoned mediaexecutive with expertise in Internet business development, strategic marketdevelopment, product development, and media management. This is the next steptoward achieving our internet revenue goals for the company.

On August 6, 2007, we announcedan agreement to purchase two television stations in Bakersfield, California,a CBS affiliate and a Fox affiliate. This unique duopoly opportunity in Bakersfield was purchasedfor approximately $55 million. If all goes as planned, we should be closing onthis acquisition in early January and we will have moderately diversified ourgeographic footprint and positioned Fisher to participate in the strong advertisingenvironment in California.

In July we announced the additionof Pegasus News, a Dallas-based online local newscompany pioneer of hyperlocal media. Pegasus news specializes in providingpersonalized local news, information, and advertising.Fisher plans to take Pegasus news, information, and advertisingmodels to additional U.S.markets in the coming year further enhancing our delivery of news to ouryounger consumers and allowing us to apply our expertise in any market in thecountry.

In summary, the work of ourstrategic plan is on track. I am pleased with the company's improvedperformance. However, we recognize we still have more to do and look forward tocontinuing the momentum we have begun to establish.

And with that, I'll turn the callback over to Mae to provide you more details on the financial performance.

Mae Numata

Thank you, Colleen, and againwelcome to our call today. We issued our third quarter earnings release thismorning and we plan to file our Form 10-Q by the November 9 deadline. Thosedocuments include in-depth information regarding our financial results. So,please refer to those sources for additional information.

Let me briefly summarize thesources of our revenue for the first nine months of 2007. Television accountedfor 66% of total revenue. Our two ABC affiliated stations, KOMO-TV in Seattle and KATU-TV in Portland, continue to account forapproximately half of the company's revenue for the first nine months of 2007.Year-to-date, 2007 revenue also includes Internet and our new cluster of Univision-affiliatedSpanish language television stations.

Radio accounted for 27% of totalrevenue excluding discontinued operations. Our remaining five small marketradio stations in Montanacontinue to be held for sale. This group of radio stations has been carved outof the radio segment presentation and is disclosed under the caption"discontinued operations".

The sale of these properties wereslowed down by the magnitude of Broadcast assets placed on the market. However,activity has been picking up in the recent months. Remember that we have theradio broadcast rights for the Seattle Mariners baseball team. Therefore, ourradio revenue and expense that includes a built-in rights escalator is greatestduring the baseball season. We have one season remaining with the Marinersunder this contract. Fisher Plaza accounted for 7% oftotal revenue.

Now, some further details. Fisherincreased total revenue by 5% to $41 million, as Colleen mentioned in the thirdquarter of 2007 compared to $39 million in the third quarter of 2006. Fisher'stotal revenue increased 6% to $116 million compared to $110 million in thecomparable nine month period in 2006.

Broadcasting revenue was higherin 2007 due to increased revenue in both Television and Radio, as compared to2006 for both the three and nine month period comparisons. The increases weredue primarily to the startup of our Spanish language stations in the secondhalf of 2006, stronger national and local revenues at our CBS affiliates, andstronger local sales at our ABC affiliates.

In addition, the growth in ourInternet revenue continues. This is a solid revenue performance, as we cycleagainst 2006 political spending. In comparison to the nine months endedSeptember of last year, year-to-date 2007 non-political local televisionrevenue continues to increase. We attribute the revenue growth to improveselling efforts and stronger ratings.

Our radio operations showed an increasein revenue in the nine month period ended September 30, 2007, as compared tothe same period in 2006. We attribute the increase to improved ratings on KOMO-AMand KPLZ-FM. This increase was partially offset by lower revenue associatedwith our broadcast of the Mariners baseball games. Internet advertising and retransmissionrevenue also increased in the first nine months of 2007 as compared to the sameperiod of 2006.

Revenue at Fisher Plazaincreased $441,000 and $1.8 million in the nine months period ended September30, as compared to the same periods in 2006. These increases were due primarilyto increased occupancy as well as increased electrical infrastructure fees.With four consecutive quarters of profitability under our belt, Fisher Plaza'sresults continue to strengthen.

Operating expenses increased 7% to$111 million in the first nine months of 2007 as compared to the same period in2006. Total operating expenses increased 6% to $39 million in third quarter2007, as compared to third quarter 2006. These increases were due primarily toincreased news, selling and depreciation expenses.

News expenses increased 8% to $42million in the first nine months of 2007, as compared to the same period in 2006.These expenses increased 2% to $14 million in the third quarter of 2007compared to the third quarter of 2006. These increases were comprised ofinvestments in our news gathering and additional news programming, costsassociated with our growing Internet business and the addition of our Spanish-languagestations.

Selling expenses increased 8% to$43 million in the first nine months of 2007 as compared to the same period in2006. These expenses increased 10% to $15 million in the third quarter of 2007compared to the third quarter of 2006. These increases were comprised of newsand sales costs associated with the addition of the Spanish-language stationsand increases in market research expenses, selling costs associated with ourgrowing Internet business, and the built-in rights escalator on the SeattleMariners contract.

Depreciation increased 15% to $9million in the first nine months of 2007 as compared to the same period in2006. Depreciation increased 13% to $3 million in the third quarter of 2007compared to the third quarter 2006. These increases are due primarily todepreciation associated with our digital buildout and Fisher Plaza'scontinued infrastructure buildout with replacement service primarily during thesecond half of 2006.

For our net results. The thirdquarter 2007 consolidated net loss was $533,000, a 21% improvement over thirdquarter 2006. In both years, third quarter consolidated net loss was comprisedof continuing and discontinued operations. From continuing operations, wereported a net loss of $601,000 in the third quarter of 2007, a 23% improvementover third quarter 2006.

Both years included income tax adjustmentsof $448,000 and $388,000, respectively, as a result of a continuing IRS auditof prior year federal tax returns. Without these tax expense adjustments thirdquarter results would have improved 61% and third quarter 2007 would be closeto breakeven.

For the nine months endedSeptember 30, 2007, we reported a loss from continuing operations of $1.2million, compared to a loss of 780,000 in the comparable period in 2006. Withthe addition of income from discontinued operations of $1.6 millionyear-to-date 2007 consolidated net income was $478,000, compared to a loss of$104,000 last year.

For cash and liquidity, we endedthe quarter with cash and cash equivalents of $7.5 million and working capitalof $29 million. Significant items affecting our cash flows include the secondquarter radio station sale, the purchase of four low-power Spanish language TV stationsin Eastern Washington, an escrowdeposit placed on the purchase of Bakersfieldstation and additions to property, plant and equipment.

As of the end of third quarter,2007, we had our entire credit facility available to us. Our investment inSafeco stock was valued at $184 million as of quarter end.

As part of our regular quarterlyinvestor conference calls, we provide the trailing four quarter calculationinformation for operating cash flow as defined by our debt agreements.Operating cash flow was $35 million excluding the effect of discontinuedoperations. The details can be found on our website along with adjusted EBITDAdetails.

That concludes the preparedportion of our presentation. Thank you for listening.

At this time, I ask that Laceyassist us with responding to the questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from theline of Bishop Cheen with Wachovia. Please proceed.

Bishop Cheen - Wachovia

Thank you for taking thequestion. Hi, Colleen. Hi, Mae.

Colleen Brown

Hi, Bishop.

Bishop Cheen - Wachovia

Thank you for the verycomprehensive summary. Let me go to something that I don't think was in thesummary and that's Bakersfield.Please remind us again when you anticipate closing on that transaction theamount of the transaction that will still have to be funded that is not anescrow. And how you plan on funding the closing of that deal?

Mae Numata

Thank you, Bishop it's alwaysnice to hear from you. Our anticipated closing date is, January 8th of nextyear and the second piece of your question is what is the remainder to befunded. It’s a $55 million purchase price and we have an escrow deposit of $2.5million. So $52.5 million is left to be funded. And at this time, we willutilize cash and we are continuing to look at our options on how best to fundthe rest of the amount.

Bishop Cheen - Wachovia

Okay. And again your creditfacility was really I think in the summer of '04 and you have never reallyamended that existing credit facility. Is that correct?

Mae Numata

Yes. That is correct.

Bishop Cheen - Wachovia

Okay. So there, it would seemthat there was something that could be done there. And then, as you look at Bakersfield, which is thekind of station between the two stations it does generate in the politicalviewers, I think noticeable political revenue?

Colleen Brown

Yes that's correct. Bakersfield is significant in the even numbered years, asyou know Californiais a huge political state.

Bishop Cheen - Wachovia

Okay. And then can you give usany color on whether you are seeing any significant political ad spending seepinto Q4 '07 and whether you are adjusting expectations up or no adjustment forpolitical across your whole platform in '08?

Colleen Brown

That's a great question. On 2007,we generally don't give forward advice or forward guidance, but I will say that,since October is behind us. It was a very strong political month for thecompany. As far as going forward in 2008, I think it will be an interestingtime in the political arena, depending on how this spending works out with the waythe primaries were moved up in some of the larger states. Washington has moved theirs up, but for somereason moved it up two weeks behind, where as the big state moved theirs up.

So, it's going to be somewhat newto us on how the primary spending will fall out in the State of Washington. We do expectsome primary spending, but we have no real knowledge at this point to whatdegree in Washington.Oregon didn'tmove up their primaries and we don't anticipate any real change from evennumber years.

Bishop Cheen - Wachovia

Okay. Let somebody else get inhere and I may come back with a follow-up on your digital and internet?

Colleen Brown

As long as we have you Bishop,why don't you go ahead if you would like?

Bishop Cheen - Wachovia

Okay. Well, I just wanted to knowthe internet initiative it seems to be off to a very good start. I'm wonderingIf you have enough data yet to say whether how long it will take to breakevenas such. I know that you probably have some sort of hockey stick growth curveof basically nothing there before.

But initially to get internetoperations and platform extensions up, they seem to require some operating costsand I'm wondering if you can tell us when you think on a timeframe, you mighthit the breakeven point?

Colleen Brown

I think that's a great question.We have depending on the month, hit breakeven. Again it really does depend onhow you are ramping up. And you are right it is a huge hockey stick, this companywas a little bit behind its peer group and once we were able to get ourservers, and get our functions in place for the company, we have seen dramaticgrowth. And I do anticipate that depending obviously how we rollout Pegasus andwe account for Pegasus.

I do expect our internet divisionto be profitable and I would say in the near term, but again I caveat thatbecause this is an area of great growth and I see that continuing in thenear-term. So we want to take advantage of that and we will continue to investto make sure that we bring in the dollars that are due to company.

Bishop Cheen - Wachovia

Let's say two years from now, canyou see a point where your internet, and I guess you [retran] whatever yougenerate, let's call it digital from retransmission, would contribute X percentof your total TV ad revenue?

Colleen Brown

Yes. Bishop, I've publicly saidalready that Internet represents 3% of our revenue and in fact it reallyrepresents 4% of our TV revenue at this point. So, we are picking up stream.

Bishop Cheen - Wachovia

Yeah, seems to be.

Colleen Brown

And I do know that slightly aheadof our peers. I think most of our peers would be lucky to be in the 4%category. I think the marketplaces that we operate in and the functions wecurrently are working with on our Internet sites are really slightly ahead. Andas a result, we are getting but not on the Internet revenue site.

Bishop Cheen - Wachovia

Well, it seems to be. [Lynn] said today, but theycombined retrans or they did as they call the digital revenue retrans andInternet and they said the goal is 5%?

Colleen Brown

Yeah. Well…

Bishop Cheen - Wachovia

Of their base?

Colleen Brown

I'd shoot for more than that forour company.

Bishop Cheen - Wachovia

Okay. That is helpful. Thank youvery much Colleen.

Colleen Brown

You're welcome, Bishop.

Operator

Please standby for your nextquestion. And the next question comes from the line of [Tom Carr] with RCVInvestments. Please proceed.

Tom Carr - RCV Investments

Hi, guys. How is it going?

Colleen Brown

Good. How are you?

Tom Carr - RCV Investments

All right. Just you touched onthis briefly, but kind of step back and give us the big picture update on theoverall duopoly strategy. I think you really want to be in terms of stations,but in terms of getting the margins and the whole purpose of duopoly, where westand in terms of that, and what's left to do?

Colleen Brown

Yeah, great question. As far asduopolies go, we've three of our markets duopolized with the Univision stationsand as you know duopolies generally increase or improve your margins. And wefeel very good about the hockey stick growth we are seeing on those Univisionproperties and with very minimal additional costs other than we did start a Spanish-languagenewscast and that was what you saw startup in this quarter.

But other than that, and I needto backup and say the newscast put us on the map of advertisers. Once we getthat on the air, we were sponsored and it started to grow from there and westarted switching from standard advertisers that were, just let's say, a lowercost per point to the big advertisers like General Motors, insurance companies,et cetera, once we had the newscast.

So, we see a good hockey stickgrowth duopolies make great sense where you can do them obviously in oursmaller markets; there are some challenges with that because of the FCCrestrictions. But we continue to look at legitimate and appropriate ways to doduopolies.

Tom Carr - RCV Investments

And when you say hockey stickgrowth that refers to revenues or cash flows or margins or all three?

Colleen Brown

All three.

Tom Carr - RCV Investments

Okay.

Colleen Brown

All three, it has so far been avery solid development with first of all our assumptions and second of all thedelivery. And it's still not significant enough to breakout. But I wouldanticipate that it might be in the near term.

Tom Carr - RCV Investments

Great, that's all I have. Thanks.

Colleen Brown

You're welcome.

Operator

Our next question comes from theline of Kevin Seagraves with Fort Washington. Pleaseproceed.

Kevin Seagraves - Fort Washington

Hi, I'm new to these calls; theseare issues you may have discussed in the past. I'm interested in two things,one the strategy behind the expansion in Bakersfield.Is that a diversity play for you guys, is there an opportunity there to improvethe margins that were there and improve the products?

Then also trying to understandthe, I guess the plans with that Mariners contract, that you guys talk about Ithink you set in for next year. Would you think you would try to renegotiatethat, extended it, walk away from that, just try to get a better sense formaybe where the profitability of radio is heading. I guess going forward?

Colleen Brown

Yeah, Kevin, thank you for thecall. First of all, regarding Bakersfield andthe strategy there, we are heavily focused in Washingtonand Oregon and in Idaho, but this does diversifygeographically. It was a duopoly opportunity, which is unique, because it is amarket that typically isn't allowed a duopoly because of the number of voicesin the market place. But because of the way Fox had structured the deal they'reon low powers and we are able to broadcast like a DHF television station. Andthat station had not been developed yet.

So, we fully look forward todeveloping the Fox affiliate there. Obviously, they're signed on and they arebroadcasting, but there is very little news initiative, there is very littlerepurposing, there is very little development of that particular station. So,there is a great upside on the duopoly in Bakersfield.In addition to enter the California market, amarket that is so rich in advertising as well as phenomenal growth, Bakersfield outstrips growth in Boise, Idaho,which is our fastest growing market.

In addition, it benefits fromvery strong political advertising. And I mentioned during even years, but evenwhat we are seeing now in odd years in California,because they have so many issues initiatives that end up on the docket. So,it's a strong political statement very good for local revenue. As far as wherewe go with the Mariners contract, it's a year away essentially from expiring andwe continue conversations with them.

The way I like to state this, iswe continue to look at a way to do a win-win deal for both companies and if it'snot win-win for both companies, it doesn't make sense for us to do. But we'dvery much like to see the Mariners be successful for them to remain on KOMO1000.

Kevin Seagraves - Fort Washington

Okay. And then with Bakersfield, I guess,further developing the Fox is that, I don't know what that, what are theeconomics behind that, is that a material increasing cost, I guess in the shortrun to build out the news or build out the other?

Colleen Brown

Yeah it was all built into theanalysis in our acquisition strategy. It's not large when you do createduopolies. There isn't a lot of infrastructure costs that goes with that. It'sreally just a matter of reorganizing. There might be some incremental costs, butfor the most part that's the benefit of the duopoly as you lever the cost thatalready exists with the CBS station.

Kevin Seagraves - Fort Washington

Okay, great. All right, thanks. Iappreciate it.

Colleen Brown

You are welcome.

Operator

At this time, there are noquestions in queue. I'd now like to turn the presentation back over to Mae Numata for closing remarks.

Mae Numata

Thank you, Laceyand thank you all for joining us today. We are very pleased with our continuedrevenue improvement and our third quarter results. And of course, if any of youhave any side questions you know how to contact both Colleen and myself. So,again thank you very much. And this is the end of our call.

Colleen Brown

Thanks.Bye-bye.

Operator

Thank you foryour participation in today's conference. This concludes your presentation. Youmay now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!