Fisher Communications Q3 2007 Earnings Call Transcript

Fisher Communications, Inc. (FSCI)

Q3 2007 Earnings Call

November 1, 2007 4:00 pm ET

Executives

Mae Numata - SVP, CFO and Corporate Secretary

Colleen Brown - President and CEO

Rob Dunlop - SVP

Analysts

Bishop Cheen - Wachovia

Tom Carr - RCV Investment

Kevin Seagraves - Fort Washington

Presentation

Operator

Welcome to the Fisher Communications Third Quarter 2007 Earnings Call. This call is also being webcast. 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 contains forward-looking statements relating to the development of the company's operations, 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 actual results may differ materially from expectations.

The factors that could cause actual results to differ materially from those expectations described in our Annual Report on Form 10-K and our quarterly reports on Form 10-Q as filed time to time with the Securities and Exchange Commission. The company undertakes no obligation to update publicly any forward-looking statements due to new information, events or circumstances after this date of this conference call or to reflect the occurrence of unanticipated events.

All calls have been placed on-mute during the presentation and further instructions will be given prior to Q&A session.

I will now turn the call over to Mae Numata, Senior Vice President, Chief Financial Officer and Corporate Secretary for Fisher Communications. Please proceed.

Mae Numata

Thank you, Lacey. Good afternoon everyone and thank you for joining us on Fisher Communications third quarter 2007 earnings conference call. Our third quarter earnings release was issued earlier this morning and can be accessed through our website along with our non-GAAP performance measures.

Joining me on the call today are Fisher's President and Chief Executive Officer, Colleen Brown and Senior Vice President, Rob Dunlop. We will begin with opening comments from Colleen and subsequent 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 quarter results reflect the efforts of our selling initiatives, Fisher Plaza revenues and dedicated cost controls across the company with focus on revenue development and ratings growth in our properties. We are pleased to report continued 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 $1 million to $26 million, an increase of 4% year-over-year despite cycling against strong political revenue in 2006. In addition, our Radio segment posted a 6% increase in revenue up $700,000 to $12 million for the same period.

Fisher Plaza revenue 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 was 96% at the end of the quarter.

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

Let me provide a little color on this quarter's performance. Third quarter was challenging across the industry due greatly to the cycling against 2006 political advertising. For Fisher, we were able to overcome the political cycle in this quarter and I am particularly pleased that our revenue growth performed favorably compared to most peer companies.

While, ABC Prime programming struggled during the summer for ratings, our news product continued to strengthen. Just one example of this morning news at 6:00 am in both of our ABC affiliates in Seattle and Portland delivered year-to-year ratings growth in key adult and women demographics with Eugene maintaining its dominate number one position and Boise, garnering year-to-year increases in multiple newscasts our CBS stations continue to show positive results in the markets.

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

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

Centralization has reduced operating costs. We have three of our eight CBS stations running successfully and centrally out of the Fisher Network OperationsCenter based in Seattle.

We continue our leadership alignment with strategic initiatives. On September 27th, this year, we announced that Jim Clayton was named Vice President, General Manager of Fisher Seattle. He has our Seattle radio stations, KOMO 1000 News, STAR 101.5 and 570 KVI to his current responsibilities, as Vice President and GM of KOMO 4 and KUNS-TV. This is our first step towards fully realizing the synergies and efficiencies between all of the Seattle broadcast properties.

In August, we named Nancy Bruner as Vice President Fisher Interactive Networks. She is a seasoned media executive with expertise in Internet business development, strategic market development, product development, and media management. This is the next step toward achieving our internet revenue goals for the company.

On August 6, 2007, we announced an agreement to purchase two television stations in Bakersfield, California, a CBS affiliate and a Fox affiliate. This unique duopoly opportunity in Bakersfield was purchased for approximately $55 million. If all goes as planned, we should be closing on this acquisition in early January and we will have moderately diversified our geographic footprint and positioned Fisher to participate in the strong advertising environment in California.

In July we announced the addition of Pegasus News, a Dallas-based online local news company pioneer of hyperlocal media. Pegasus news specializes in providing personalized local news, information, and advertising. Fisher plans to take Pegasus news, information, and advertising models to additional U.S. markets in the coming year further enhancing our delivery of news to our younger consumers and allowing us to apply our expertise in any market in the country.

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

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

Mae Numata

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

Let me briefly summarize the sources of our revenue for the first nine months of 2007. Television accounted for 66% of total revenue. Our two ABC affiliated stations, KOMO-TV in Seattle and KATU-TV in Portland, continue to account for approximately 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-affiliated Spanish language television stations.

Radio accounted for 27% of total revenue excluding discontinued operations. Our remaining five small market radio stations in Montana continue to be held for sale. This group of radio stations has been carved out of the radio segment presentation and is disclosed under the caption "discontinued operations".

The sale of these properties were slowed 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 the radio broadcast rights for the Seattle Mariners baseball team. Therefore, our radio revenue and expense that includes a built-in rights escalator is greatest during the baseball season. We have one season remaining with the Mariners under this contract. Fisher Plaza accounted for 7% of total revenue.

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

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

In addition, the growth in our Internet revenue continues. This is a solid revenue performance, as we cycle against 2006 political spending. In comparison to the nine months ended September of last year, year-to-date 2007 non-political local television revenue continues to increase. We attribute the revenue growth to improve selling efforts and stronger ratings.

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

Revenue at Fisher Plaza increased $441,000 and $1.8 million in the nine months period ended September 30, as compared to the same periods in 2006. These increases were due primarily to increased occupancy as well as increased electrical infrastructure fees. With four consecutive quarters of profitability under our belt, Fisher Plaza's results continue to strengthen.

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

News expenses increased 8% to $42 million 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 2007 compared to the third quarter of 2006. These increases were comprised of investments in our news gathering and additional news programming, costs associated with our growing Internet business and the addition of our Spanish-language stations.

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

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

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

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

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

For cash and liquidity, we ended the quarter with cash and cash equivalents of $7.5 million and working capital of $29 million. Significant items affecting our cash flows include the second quarter radio station sale, the purchase of four low-power Spanish language TV stations in Eastern Washington, an escrow deposit placed on the purchase of Bakersfield station 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 in Safeco stock was valued at $184 million as of quarter end.

As part of our regular quarterly investor conference calls, we provide the trailing four quarter calculation information for operating cash flow as defined by our debt agreements. Operating cash flow was $35 million excluding the effect of discontinued operations. The details can be found on our website along with adjusted EBITDA details.

That concludes the prepared portion of our presentation. Thank you for listening.

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

Question-and-Answer Session

Operator

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

Bishop Cheen - Wachovia

Thank you for taking the question. Hi, Colleen. Hi, Mae.

Colleen Brown

Hi, Bishop.

Bishop Cheen - Wachovia

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

Mae Numata

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

Bishop Cheen - Wachovia

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

Mae Numata

Yes. That is correct.

Bishop Cheen - Wachovia

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

Colleen Brown

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

Bishop Cheen - Wachovia

Okay. And then can you give us any color on whether you are seeing any significant political ad spending seep into Q4 '07 and whether you are adjusting expectations up or no adjustment for political 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 the company. As far as going forward in 2008, I think it will be an interesting time in the political arena, depending on how this spending works out with the way the primaries were moved up in some of the larger states. Washington has moved theirs up, but for some reason moved it up two weeks behind, where as the big state moved theirs up.

So, it's going to be somewhat new to us on how the primary spending will fall out in the State of Washington. We do expect some primary spending, but we have no real knowledge at this point to what degree in Washington. Oregon didn't move up their primaries and we don't anticipate any real change from even number years.

Bishop Cheen - Wachovia

Okay. Let somebody else get in here 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 know the internet initiative it seems to be off to a very good start. I'm wondering If you have enough data yet to say whether how long it will take to breakeven as such. I know that you probably have some sort of hockey stick growth curve of basically nothing there before.

But initially to get internet operations and platform extensions up, they seem to require some operating costs and I'm wondering if you can tell us when you think on a timeframe, you might hit 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 on how you are ramping up. And you are right it is a huge hockey stick, this company was a little bit behind its peer group and once we were able to get our servers, and get our functions in place for the company, we have seen dramatic growth. And I do anticipate that depending obviously how we rollout Pegasus and we account for Pegasus.

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

Bishop Cheen - Wachovia

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

Colleen Brown

Yes. Bishop, I've publicly said already that Internet represents 3% of our revenue and in fact it really represents 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 ahead of 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 we currently are working with on our Internet sites are really slightly ahead. And as a result, we are getting but not on the Internet revenue site.

Bishop Cheen - Wachovia

Well, it seems to be. [Lynn] said today, but they combined retrans or they did as they call the digital revenue retrans and Internet 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 for our company.

Bishop Cheen - Wachovia

Okay. That is helpful. Thank you very much Colleen.

Colleen Brown

You're welcome, Bishop.

Operator

Please standby for your next question. And the next question comes from the line of [Tom Carr] with RCV Investments. 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 on this briefly, but kind of step back and give us the big picture update on the overall 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 we stand in terms of that, and what's left to do?

Colleen Brown

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

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

So, we see a good hockey stick growth duopolies make great sense where you can do them obviously in our smaller markets; there are some challenges with that because of the FCC restrictions. But we continue to look at legitimate and appropriate ways to do duopolies.

Tom Carr - RCV Investments

And when you say hockey stick growth 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 a very solid development with first of all our assumptions and second of all the delivery. And it's still not significant enough to breakout. But I would anticipate 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 the line of Kevin Seagraves with Fort Washington. Please proceed.

Kevin Seagraves - Fort Washington

Hi, I'm new to these calls; these are 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 improve the margins that were there and improve the products?

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

Colleen Brown

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

So, we fully look forward to developing the Fox affiliate there. Obviously, they're signed on and they are broadcasting, but there is very little news initiative, there is very little repurposing, 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, a market 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 from very strong political advertising. And I mentioned during even years, but even what 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 where we go with the Mariners contract, it's a year away essentially from expiring and we continue conversations with them.

The way I like to state this, is we continue to look at a way to do a win-win deal for both companies and if it's not win-win for both companies, it doesn't make sense for us to do. But we'd very much like to see the Mariners be successful for them to remain on KOMO 1000.

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 the economics behind that, is that a material increasing cost, I guess in the short run to build out the news or build out the other?

Colleen Brown

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

Kevin Seagraves - Fort Washington

Okay, great. All right, thanks. I appreciate it.

Colleen Brown

You are welcome.

Operator

At this time, there are no questions in queue. I'd now like to turn the presentation back over to Mae Numata for closing remarks.

Mae Numata

Thank you, Lacey and thank you all for joining us today. We are very pleased with our continued revenue improvement and our third quarter results. And of course, if any of you have 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 for your participation in today's conference. This concludes your presentation. You may 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: [e-mail]. Thank you!