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Salem Communications Corporation (NASDAQ:SALM)

Q4 2005 Earnings Conference Call

March 8th 2006, 1:30 PM.

Executives:

Eric Jones, Director of Communications, Investor Relations

Edward Atsinger, President, Chief Executive Officer

Evan Masyr, Vice President, Accounting & Finance

David Evans, Executive Vice President - Business Development and CFO

Analysts:

Jonathan Jacoby, Banc of America Securities

James Dix, Deutsche Bank

Leland Westerfield, Nesbitt

Chris Ensley, Bear Stearns

Jim Goss, Barrington Research

David Bank, RBC Capital Markets

Bishop Cheen, Wachovia Securities

Bobby Melnick, Terrier Partners

James Marsh, Hanover Square Capital

Operator

Good afternoon, ladies and gentlemen. My name is Sandra, and I will be your conference facilitator today. At this time I would like to welcome everyone to your Salem Communications Fourth Quarter and Full-Year 2005 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If would you like to ask a question during this time, please press “*”, then the number “1” on your telephone keypad. If would you like to withdraw your question, press the “#” key. Thank you, it is now my pleasure to turn the floor over to your host, Mr. Eric Jones. Sir, you may begin your conference.

Eric Jones, Director of Communications, Investor Relations

Good afternoon. And thank you for joining us today for Salem Communications Fourth Quarter Conference Call. As a reminder, if you get disconnected at anytime you can dial 973-582-2734 or listen from our website at www.salem.cc. We will begin in just a moment with opening comments from our President and CEO, Edward Atsinger; and Vice President of Accounting and Finance, Evan Masyr. After their opening comments, our conference call operator will come back on the line to instruct you on how to submit questions. David Evans, Executive Vice President of Business Development and CFO will participate in the question and answer portion of our call. As David is calling from his home as he has a pinched nerve in his back.

Please be advised that statements made on this call that relate to future plans, events, financial results, prospects of performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those anticipated as a result of certain risks and uncertainties, including but not limited to market acceptance of Salem's radio format, competition in the radio broadcast, Internet, and publishing industries and new technologies, adverse economic conditions, and other risks and uncertainties detailed from time-to-time in Salem's reports on Forms 10-K, 10-Q, 8-K and other filings filed with or furnished to with the Securities and Exchange Commission.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Please undertake Salem undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events. This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically station operating income, EBITDA and adjusted EBITDA. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures, including a reconciliation of such non-GAAP financial measures included in this conference call and the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles is available on the Investor Relations portion of the company's website. As part of the current report on Form 8-K in the earnings release issued by Salem earlier today. I will now turn the conference call over to Edward Atsinger.

Edward Atsinger, President, Chief Executive Officer

Thank you, Eric. And thank you all of you who have joined us for today's conference call. During the challenging fourth quarter, we continued to fulfill our business purpose of super-serving the large and growing audience interested in Christian and family-themed content through our radio, Internet and publishing platforms. Our radio stations achieved a 1% same station revenue growth and a 3% same station operating income growth. Although obviously not as strong as in several recent quarters, our growth of same station net broadcasting revenues still compares favorably in Q4 of ‘05 by, in fact, about 400 basis points to the industry's 3% decline as reported by the radio advertising bureau.

Our financial results for Q4 of 2005 reflect also the absence of $1 million political advertising revenue, which we had in Q4 of ‘04 and the results are inline with the guidance we provided in our third quarter '05 earnings release. I want to detail our fourth quarter activity in the context of our ongoing initiatives to grow our businesses, focusing on our three strategic radio formats, our national advertising business and our Internet businesses.

Let's talk first of all about the News Talk stations of our most recently focused and growing format. We have 34 News Talk stations serving eight of the top ten cities in America and 20 of the top 25. Stations in this format contributed 15% of our total net broadcasting revenue for the quarter. And achieved a 24% increase in net broadcasting revenue compared to the same quarter last year. On a same station basis, our News Talk stations grew net broadcasting revenue by 16%. Since 2003 we have more than doubled the number of stations we operate in this format, adding stations in such markets as Chicago, Philadelphia, San Francisco, Detroit, Miami, and I believe we have a significant revenue and profit upside as we develop these stations to maturity. One way to quantify the upside is by comparing our actual average audience share and actual average power ratio for these stations with our goals. Currently our 34 News Talk stations have an average 12-plus rating share of 0.7 and an average power ratio of 0.6, and they generated $28 million of revenue in 2005. Our first goal is to achieve a four-book average rating share of 1.0 and an average power ratio of 0.8. Achieving this audience share and power ratio would result in an additional $20 million of revenue from these stations assuming that the radio dollars going into these markets remain constant in 2005 terms.

Once we've achieved this initial goal, the next goal will be to drive the ratings for these stations to a four-book average of 1.5 and an average power ratio of 0.9, which would equate, again on the assumption the radio dollars remain essentially the same for these markets would equate to an additional $33 million in incremental revenue. So achieving these goals represents one of Salem's more significant opportunities for growth, and we're concentrating our resources on doing just that. A second initiative to grow our company is to bring to maturity our contemporary Christian music stations. We have 14 stations in this format, which as a group contributed 22% of our total net broadcasting revenue for the quarter. In most markets we promote this format as the fish. These stations are also branded as safe for the whole family because of our commitment to provide radio programming that is appealing, entertaining, while remaining consistent with the core values of our target audience.

Same station CCM profitability decreased slightly to $3.6 million in Q4 of 2005 from $3.7 million in Q4 of 2004. Same station revenue at our CCM stations was flat for the quarter compared to Q4 of '04 but if we exclude KLTY in Dallas, which had a 5% decrease in revenue for the quarter due to the inventory reduction program that we started in March of 2005, our CCM stations would have achieved same station revenue growth of 3% in Q4 of ‘05. March 1st marks by the way the one-year anniversary of the inventory reduction program that we initiated at KLTY. This decision to reduce this inventory was the right decision, the station’s ratings have increased 15% based on a four-book average in the fall of 2005 for KLTY's target demographic of females 25-54, and we now expect KLTY to return to positive revenue growth.

Now, as you know KLTY in Dallas continues to be a market-leading highly profitable franchise. Replicating KLTY's performance at our other CCM stations is a key focus. The station's best position to achieve performance similar to KLTY's measured by ratings and power ratios, are those stations that enjoy full market signals: Atlanta, Portland, Cleveland, Sacramento, Jacksonville and Honolulu. The 2005 four-book average for all people 12-years old and older, on the basis of average quarter hours share for these stations was approximately 2.4, with a power ratio of approximately 0.8. On the other hand KLTY, the franchise we are working to replicate, achieved a 3.2 share for the same period and a power ratio of 1.4. This combination of a 32% ratings increase with a 67% power ratio increase represents another significant growth opportunity for Salem.

Our third initiative is to continue to grow revenues at our 44 Christian teaching and talk stations. These stations achieved same station revenue growth for the quarter of 2%. However, if we exclude a political advertising as a factor, revenue for the quarter would have grown by 4%. Stations in this format contributed 51% of our total net broadcasting revenue during the quarter. An important and unique feature of the Christian teaching/talk format is their stable national and local block programming business, which contributed 54% of the revenue on the Christian teaching/talk stations or 28% of our total net broadcasting revenue for the quarter. At the end of each year, we negotiate renewal rates with national block programmers that purchase time on these Christian teaching/talk stations, the new rates are effective for the entire upcoming year. We announced earlier today the average increase in rates for 2006 is 5%. This block programming business remains rock solid and is an important underlying factor in the stability of our overall business.

Our fourth initiative is to grow our national advertising business. The lack of political advertising in Q4 of '05 compared to Q4 of '04 made a growth difficult for the quarter. And same station national advertising revenue, including spot and network revenue declined by 3% to $800 million. If you again want to exclude political same station national advertising revenue increased by 7%, which represents good underlying expansion. While Salem has historically sold less national advertising than the average general market radio company, advertisers are beginning to recognize the exceptional value of our platform. Not only do we provide the most efficient way to reach listeners interested in Christian and family-themed programming nationally but we can also readily demonstrate through results the size and buying power of the audience. We're confident in our ability to continue to expand this business.

The fifth initiative that I want to discuss is the opportunities that afford us to develop the Internet business further. During the quarter, our Internet business revenue grew by 15% to $1.7 million and generated $300,000 profit. Monthly page views increased by 28% to 47 million, and our network of sites averaged more than 4 million monthly unique visitors. Since December, we strengthened our position as the leading Christian content provider on the Internet by acquiring ChurchStaffing.com and CrossDaily.com. Church Staffing is the preeminent source for online job search information targeted to church professionals. And it is a natural compliment to our existing ChristianJobs.com website.

We acquired ChurchStaffing.com for $3.1 million, a purchase price that represents a multiple of expected first year EBITDA of 10 times. Cross Daily is an online provider of Christian content, graphics and online community resources. We acquired CrossDaily.com in February of 2006 for $2.3 million. A purchase price that represents a multiple of expected first year EBITDA of 9 times. Each of these acquisitions was, you could say, in format, when acquired, and was generating positive cash flow.

Let me conclude my prepared remarks by mentioning the recent action taken by our Board of Directors authorizing the repurchase of up to an additional $25 million of Salem Class A common stock. Given the growth potential of these five initiatives that I just outlined, the upside at our developing News Talk and music stations, recognition by national advertisers of the reach of our platform and the importance of the audience, our consistent block programming business, and our rapidly developing Internet platform, we consider Salem's recent stock price weakness to provide a good opportunity to create value for our shareholders by investing in our own stock. I'll now turn the call over to Evan Masyr for a more detailed discussion of our fourth quarter 2005 results and our first quarter of 2006 guidance. Evan?

Evan Masyr, Vice President, Accounting & Finance

Thank you, Ed. Our results for the fourth quarter of 2005 were issued in a press release earlier today, and are available on the Investor Relations portion of our website. I will briefly review these results. Net broadcasting revenue for the fourth quarter increased 5% to $51.5 million, and SOI increased 5% to $19.8 million. On a same station basis, net broadcasting revenue grew 1% and station operating income grew 3%.

Let me also provide some detail on same station growth rates by revenue type. For those growth rates that are significantly affect by the absence of our $1 million of political advertising in the fourth quarter of '05 numbers but present in the fourth quarter of '04 numbers, I will also provide same station growth rates that exclude political.

Beginning with block programming, same station revenue grew 8% to $15.6 million. Same station local advertising revenue declined by 1% to $21.5 million. However, excluding political it increased by 1%. Same station national advertising revenue including spot and network revenue declined by 3% to $8 million. Excluding political, it increased by 7%.

Finally, other revenue, which includes in commercials declined by 3% to $2.7 million. Included in our same station numbers is broadcasting revenue from 84 of our 104 radio stations in our network, representing 93% of our net broadcasting revenue. Regarding our balance sheet, as of December 31, 2005, we had net debt of $321 million and were in compliance with all covenants. Our bank leverage ratio was 4.94 as of December 31st, versus a compliance covenant of 6.25. Our bond leverage ratio was 5.35 versus a compliance covenant of 7.0.

During the quarter ended December 31, 2005, Salem repurchased 274,542 shares of its Class A common stock for $5 million. As of March 6, 2006 we had repurchased 1,475,362 shares of Class A common stock for approximately $24.8 million. For the first quarter of 2006 we are projecting net broadcasting revenue to be between $49 million and $49.5 million, reflecting low single-digit growth compared to first quarter of 2005 net broadcasting revenue of $47.5 million. SOI is projected to be between 16.8 million and 17.3 million reflecting flat to slightly negative growth compared to first quarter of 2005 SOI of $17.3 million. And net income per diluted share is projected to be between $0.01 and $0.02 per share. Our first quarter 2006 outlook includes 0.8 million of non-cash compensation expense related to the adoption of FAS 123R based on stock-options currently outstanding.

Our first quarter 2006 outlook reflects the following. Same station net broadcasting revenue growth in the low single-digits compared to first quarter of 2005, same station SOI growth in the low single-digits compared to first quarter of 2005, reduced inventory loads at KLTY 94.5 FM, our contemporary Christian music station in Dallas, continued growth from Salem's underdeveloped radio stations, particularly our News Talk and CCM stations, fixed cost associated with recently acquired stations in Detroit, Honolulu, Miami, Omaha, Sacramento and Tampa markets, and the impact of recent acquisition, exchange and divestiture transactions. This concludes our prepared remarks and we will now open the floor for some questions. Operator?

Question-and-Answer Session

Operator

Thank you. Operator Instructions We'll pause for just a moment to compile the Q&A roster.

Your first question is coming from Jonathan Jacoby of Banc of America Securities.

Q - Jonathan Jacoby

Hi. Just two questions here. Firstly, if block programming is roughly about 35%, growing at 5%, should we then assume sort of negative growth for the rest of your business on the broadcasting side in the first quarter? Second question, leverage is roughly about five-and-a-half times. How much literally do you really think you have to buy stock here? Thanks.

A - Edward Atsinger

Why don’t we -- David, if you picked up the question, you might want to take a shot particularly at the second part of it. But, Evan?

A - Evan Masyr

Certainly on the second one, the buyback capacity, at this point we think we can buyback a total of approximately $39 million of stocks, so an additional 14 million given our current leverage ratios.

Q - Jonathan Jacoby

And that would take you to what about six times?

A - Evan Masyr

That would take us to, I think about --

Q - Jonathan Jacoby

Okay. And then on the first question?

A - David Evans

Yeah on your first question, Jonathan can you hear me I'm calling from a different line so there might be a little interference. We had a particularly challenging January. And we were in negative territory for the month. We are seeing sequential improvement into February, into March but for the first quarter as a whole the balance of our business outside of block programming will be flat to down slightly.

Q - Jonathan Jacoby

Okay. Thank you.

Operator

Thank you. Your next question is coming from James Dix of Deutsche Bank.

Q - James Dix

Good morning. I guess your time, gentlemen. I had a couple of questions. Just first for us for modeling purposes, I mean, if you could layout what the same station base is for, I guess, your first quarter guidance in terms of revenue and station operating income, and I guess if you had a kind of a comparable number for the full year 2005, just so we had some sense as to what you're considering same station going into the year? I guess also, Evan, I think you mentioned that same station in the fourth quarter accounted for 93% of revenue. Do you have what -- how much of station operating income, those same stations, those stations accounted for? And then I guess in terms of your guidance, any way to quantify some of the impact of the items you listed in the release on first quarter and then how they should change in the second quarter through fourth quarter specifically? I'm thinking of, you know, the costs for your News Talk stations, some of the fixed costs on some of your recently acquired stations and any impact of swaps?

A – Evan Masyr

Okay.

Q - James Dix

And that's it.

A – Evan Masyr

Okay. Let's start with you r first question here, same station base in Q1 of '06. Revenue, the same station base, it would be 46.6 million. And SOI, 17.5 million. Your second question was, you want to know what percentage of SOI was in our same station in Q4, correct?

Q - James Dix

Yes.

A – Evan Masyr

Let's see. It was, hold on. Virtually all of it, 98%.

Q - James Dix

Okay.

A – Evan Masyr

And what was your third question?

Q - James Dix

Just -- well, actually on the first one I actually want to know whether you had a same station base number for the full- year '05?

A – Evan Masyr

We do not have one for the full year.

Q - James Dix

Okay. And then I guess my final question was, just if you list a couple of items in the last press release as affecting your first quarter results specifically, investment, I guess, in the News Talk and CCM stations, some fixed costs associated with recently acquired stations, and then the impact of the, I guess, divestitures or exchange transactions, any way for us to think about at least in aggregate what the revenue and BCF impact is there?

A - Evan Masyr

Dave, do you want to take or crack at that one?

A - David Evans

Let me find a couple of pieces of that.

Q - James Dix

Okay, thanks.

A - David Evans

Hopefully most prominent is KLTY in Dallas since we're projecting that for the first quarter, KLTY's revenues are down about 5% compared to last year. Having said that, KLTY will revert to positive revenue and profit growth beginning March 1, with the anniversary day of the inventory reduction program. In terms of costs associated with recently acquired stations, I am imagining that you're going to see 700 to $800,000 worth of quarterly start-up losses from those stations, and those start-up losses will gradually be eliminated during the course of 2006. I think those would be the two largest contributors.

Q - James Dix

Okay. Great.

A - David Evans

Okay?

Q - James Dix

Thank you.

Operator

Thank you. Your next question is coming from Lee Westerfield of Nesbitt.

Q - Leland Westerfield

Thank you very much, gentlemen, good afternoon. Two questions, first on Dallas and the second on your Internet investing this year. Just based upon our own tracking of commercial airtime we had seen in January, the Dallas station cuts 20% of its time and again in February 20% of its time, so if you're down in revenue only 4%, I guess that would imply that your effective pricing is actually up in the 15 to 16% range? Does that furthermore implies that come March, we can -- and then in the second quarter we might expect double-digit revenue growth out of that station? And then secondly how much did Dallas represent in revenue overall in the fourth quarter, and then I'll ask the question on the Internet.

A - Evan Masyr

David Evans, you better take a shot at that.

A - David Evans

Yeah. In terms of your first statement, yes, indeed, our average rates in Dallas are up significantly with the inventory reduction program. The fact is that the spots that we got rid of when we initiated the inventory reduction program for the stocks that had the lowest rates. So that pushed up our rate structure overall in the station vis-à-vis what the station will look like post March 1, I expect to see it deliver low to mid single-digit revenue growth. I don't think we're anticipating at this time anything more than that. And so I think that's what I would model for KLTY for the balance of the year. Evan, do you happen to have the Q4 KLTY numbers handy so we can see a snapshot of its percentage revenue and SOI contribution?

A - Evan Masyr

I do. On a percentage of revenue it's in the 7% to 8% range of our total net broadcasting revenue.

Q - Leland Westerfield

And, sorry, for what period was that, Evan?

A - Evan Masyr

That's for the fourth quarter.

Q - Leland Westerfield

That's perfect, thank you. And then on the Internet side, you know, you've been doing some significant multi acquisitions, different interesting URLs and so forth. The question I have is really in the first quarter you're signaling a negative cash flow from the Internet and other divisions. You were up a year ago admittedly in the few hundred thousand dollar range. So, the question I have is really, is it your plan this year to be investing for the full-year 2006, to be investing, say, negative EBITDA in that area as you build out the various more recent acquisitions, Church Staffing, Cross Daily, etc.?

A - David Evans

Yes, if you examine Q1, Lee, there are a couple of factors that impact Q1 that won't impact the rest of the year. There's one factor that will impact the rest of the year. You know, Q1 we always have a seasonal magazine publishing loss, that’s reflects in our Q1 numbers. Its profitable Q2, Q3, Q4, but the first quarter is always the weakest quarter because of lack of record company releases. On the Internet side in Q1 we are incorporating Church Staffing and Cross Daily for the first time, so there are some one-time costs related to integrating those new websites into our infrastructure. But once we hit Q2, Q3, Q4, those will be profitable accretive acquisitions. The final answer I mentioned that we will have an impact both of the whole year, we are going to be launching our own national News Talk website, that will mirror what our News Talk radio stations do on the Internet, and that new venture will have some start-up losses during 2006, probably amounting to about, probably somewhere between 800,000 and a million dollars in start-up losses related to that new website.

Q - Leland Westerfield

Net David does that signal that Q2, Q3, Q4 would be breakeven to positive in that Internet and other line?

A - David Evans

I think they would be positive for three quarters.

Q - Leland Westerfield

Thank you. Thanks very much gentlemen.

A - David Evans

Thanks.

Operator

Thank you. Your next question is coming from Chris Ensley of Bear Stearns.

Q - Christopher Ensley

Good morning, thanks. Just wondering in the first quarter guidance, if on a local and national basis you're seeing sort of the same dynamic, local maybe excluding political, you know, comparing it to the fourth quarter, sort of low single and national up mid to high or if any of that dynamic has changed at all. In the second quarter, I was wondering if you – if the tone of business has changed at all. I would guess that KLTY alone would cause that to improve fairly nicely. And then finally you mentioned 9 million of revenue producing CapEx. And I was wondering if you could just discuss one or two of the bigger projects and what kind of, you know, would we see the return on that in '07? And what, perhaps, kind of return we might see?

A - Evan Masyr

I can take a shot at the last question. The biggest income producing CapEx expenditure is a building which we have purchased and which we are actually building in Honolulu that will allow us to house all of our stations at one location, and free up the obligation of paying rent, plus we'll also have a little built of additional square footage that can be made available to third party lessees. We will have some build out expenses associated with the acquisition of Detroit. That's more of an acquisition related expenditure rather than income producing, the biggest one is the building in Honolulu and there is a significant dollar amount associated with that.

Q - Christopher Ensley

And when might that be complete?

A - Evan Masyr

We expect to occupy the space at least in part around the 1st of May, April or May. And it should be finished shortly thereafter, another 30 or 60 days thereafter. What were the other questions you asked?

Q - Christopher Ensley

The local national mix that you are still seeing for the same contribution, local up low single but national maybe even up mid-to high when like it was in the fourth quarter ex-political? And then are you seeing any change in the tone of business in the second quarter or are you seeing it kind of more of the same?

A – David Evans

I think comparing local to national, we are seeing greater strengths on the national front than local, if you exclude political. If you examine first quarter, we see things progressively getting stronger, January February March. January was the weak month; we're seeing much stronger trends at this point in terms of pacing with for March. But don't want to get too ahead of ourselves in terms of thinking about what that might mean for second quarter and beyond.

Q - Christopher Ensley

Okay. Thank you very much.

Operator

Thank you. Your next question is coming from Jim Goss of Barrington Research.

Q - James Goss

Thank you. Couple of questions, one relating to the Christian teaching/talk stations, you mentioned a 2% revenue gain that, but 4% without political. And that varied somewhat from the 5% block programming revenues I guess because of the ad dollars. I'm wondering looking into this year, how you see that working out, how much of an impact political can have on the positive side, in either percent or dollar terms. And then looking at the News Talk stations and the music stations, as they grow as a share of your business, is it somewhat of a mixed blessing in a way, in that similar to the Dallas situation, they become more competitive with other more commonplace formats and therefore that there is a little bit of an inhibitor to the growth in power ratio and revenue that you're talking about? And then finally related to business mix, as the internet grows, do you have aspirations for internets and magazines and other non-radio revenues to be a fairly significant share of revenues and what might you eventually aspire to?

A - Edward Atsinger

Let me comment on the first question about the News Talk, I mean the Christian teaching/talk format. It's very difficult to know what the impact of political will be particularly in an off year of political season. 2004 was the most hotly contested national political contest in many, many years. And there was a ton of money spent in a number of markets where we have clusters of stations. So it's difficult to know from year-to-year, if looks like there will be some pretty good political activity and we'll just have to wait to see. In terms of -- I think that I don't have the exact figure, Evan may be able to give us a little more of a specific figure. But on the Christian teaching/talk side the block program revenue still represents, I think we gave a percentage, still represents the bigger piece of that revenue. In past years the spot component of it was growing. It's leveled a little bit and is not growing to the same extent that it did. The block programming continues to be pretty robust. We have gotten a 5% increase as we mentioned in our press release earlier today and as we mentioned earlier in the call. We probably will do better than that overall, I'm not quite sure how much better, but I suspect that we'll do a little better on the block side because we still have -- we still have inventory that we can sell, and when we finish the year we normally will do better than what we begin in terms of an average rate increase. So I think that probably for '06 I think that the block component will probably remain at least where it has been, if there is a lot of political advertising we could see an uptick in the spot part of that.

A - Evan Masyr

To add a little specificity to what Ed was talking about, our block programming in the fourth quarter of '05 on our Christian teaching and talk, both on the national and local basis accounted for just over 50%, actually around 53% of revenue from those stations, total revenue.

A - Edward Atsinger

As far as your question about the mixed blessing with the News Talk and music stations, yeah, to some extent but again, they do tend to be focused sort of niche plays, and we roll them out on an existing platform so they have the benefit of some consolidation, which gives us a little bit of a cost advantage vis-à-vis competition. As far as the contemporary Christian music stations go well, yes it is true they will compete in many markets with other AC program stations. They still have their unique place and they still have some competitive advantages in that, a good bit of the advertising base is, is seeking that specific audience, even though in general the demographics on a broader basis look like typical AC formatted station. So there is more of a -- you do have a competitive issue. We've mentioned them in some of our calls where other AC-type stations have gone with light inventory and heavy promotion. It does tend to have a bit of an impact on us, but I don't think as much as it has on straight general market formatted stations. As far as the News Talk goes, yes, there is some tough competition there.

Our goals, the goals that I articulated are pretty modest. And the good news is that we roll those out very inexpensively using for the most part our own nationally syndicated talent. So there is kind of a double whammy for us there. We know we can always get the talent. We have enough syndicated product that we can go into any market that we think we should and know that we will have credible talents that we can go with. It may not be -- it may not be the most highly rated talent, but it’s credible, it’s effective and it doesn't cost us a whole lot. So your observation is probably accurate but again because of the leverage that we have in controlling our own content we sort of get benefit more than just at the local station level. We also get a little side benefit with our national businesses through the syndication of that national talent. As far as the internet and publishing components go, yes, I personally believe they will continue to grow, perhaps more rapidly than our other businesses. We really see, as I have articulated in past calls, the strategic direction for the future is to develop a consistent program to integrate your old media platform with new. And to take advantage of the old media platform to drive and expand drive traffic and expand listenership to the new media. And as a niche player we're uniquely qualified to do that, because online -- successful online sites can be much more narrowcast rather that broadcast. As a niche broadcaster we tend to be by definition a bit more narrowcast. So successful online sites tend to be unique communities, and that is the focus that we have as a company that focuses on Christian and family-themed content. That common denominator does allow us to build those sites. So I am very bullish by the opportunity. I think for our company it is a better opportunity than for most because of the nature of the internet.

We got into the publishing business, held with for -- maintained it for a number of years without a lot of profitability, just to keep the platform, to have the platform and to have the infrastructure so that we can quickly and cost effectively bring out new publications that would be complimentary to some of these internet initiatives, and we intend to do that. Now, the acquisition of The Singing News that we announced last call, or maybe two calls ago, in our press release we noted that we had closed on that, that is a real franchise. And by including that business with our publishing business, it now makes that publishing solidly profitable or it will be solidly profitable going forward into 2006. That was a great acquisition for us. And it really broadens that publishing platform and allows us to have now a very effective infrastructure that will allow us to move very quickly and rollout new publications as the opportunity affords itself. So to summarize it, yes, I see a significant expansion of our internet and publishing business really working together in a dynamic interaction with our old media platform to increasingly contribute to the revenues and profitability of the company in the future.

Q - James Goss

Thanks, Ed.

Operator

Thank you. Your next question is coming from David Bank of ARC Capital Markets.

Q - David Bank

Good morning. I don't think we -- we didn't change our name, we're still RBC. Guys, can you just talk about how the Fish station growth has been outside of KLTY, in

the fourth quarter, the first quarter that you see and then kind of how it is developing in the second quarter?

A - Edward Atsinger

When you say developing, you want to know in revenues or do you want to know --

Q - David Bank

Yeah, how does growth look from the revenue side, we know that KLTY is sort of skewing things because of the reductions, but if you look at fourth quarter and first quarter and as you see it in second quarter, how the Fish station is doing outside of KLTY?

A - Edward Atsinger

I'll let Evan speak to it in a minute. Let me just say, David, that, remember, I mean the challenge with this format, it kind of goes to some extent to the last question that Jim Goss asked is, you really have to build the audience share first and then the power ratio comes and then the revenue comes in. And so you do have that that sort of sequence. It's very difficult to build revenue without the audience share in that format. You can build audience share and sometimes not get the revenue, hence a lower power ratio. So I think when you look at those you need to ask -- how are they coming audience sharewise and how are they coming revenue sharewise? Having said that, I'll let Evan to address the latter part of it because we do have that data literally.

Q - David Bank

Okay. And then I just have one quick follow-up.

A - Evan Masyr

Okay, sure. Let me just give you a fourth quarter idea of where we were overall on our Fish station. We grew at about 1% and on a same station basis we were pretty much flat for the quarter. There was some political revenue but not a whole lot in this format.

Q - David Bank

And these numbers include KLTY?

A - Evan Masyr

That's correct. That's correct.

Q - David Bank

Okay.

A - David Evans

And if you pull out KLTY, the same station growth rate for the other Fish stations was plus 3%.

A - Evan Masyr

Correct.

Q - David Bank

Okay.

A - David Evans

And I think if you were to back out political, it would probably be plus 4%. So, you know, continuing to grow faster than the overall radio industry, there continues to be some upsides to reach maturity, and we expect to see some continued outperformance in 2006 and 2007 as we continue to grow those stations.

Q - David Bank

Then in 1Q are you seeing the same kind of growth, again outside of KLTY in terms of the Fish stations?

A - David Evans

I don't have that number specifically in front of me. January as I mentioned is a little challenging, so the January number was probably a little lower. But I think if you were to look at February and March, I would expect to see a similar trend for Q4.

Q - David Bank

Okay. And then I guess the follow-up is, then in terms of KLTY, what kind of ratings increases did you, did you see post the spot loads and the improvement? I guess, part of what I'm trying to get at is I know we're going to see an improvement because the comps are so tough and you are accounting to reduce spot load. But is that just a comp issue or do the reduced spot loads drive longer-term revenue growth, beyond just an easy comp?

A – Edward Atsinger

David, do you want to continue with that?

A - David Evans

I think when we look at KLTY, excluding the inventory reduction programs, so once we're beyond that March 1, KLTY is very much a mature radio station. Yes with the inventory reduction campaign, there was some revenue loss, there was some ratings improvement. We feel good about that ratings improvement, but overall looking ahead, '06-'07 KLTY is mature radio station, we expect to see positive revenues, positive profit growth but it's not doing anything out of the ordinary.

Q - David Bank

Okay. Thank you very much.

Operator

Thank you. Your next question is coming from Bishop Cheen of Wachovia.

Q - Bishop Cheen

Hi, good afternoon. Thanks for taking the call. As usual, very helpful on your color for both insight and modeling. Two questions let me billboard them for you. One, I want to go back and revisit political; two, I want to talk about pending acquisitions. Let me go with the last one first. I think there's roughly 23 million of pending acquisitions listed on your press release. How much escrow is there already of that amount listed? How much is already been laid out in deposits?

A - Edward Atsinger

We probably have about a million dollar of escrow.

Q - Bishop Cheen

Okay. The minimums?

A - Edward Atsinger

Yes, the minimums.

Q - Bishop Cheen

Okay. And then all of those acquisitions have been closed during the first quarter. Right, I mean, your press release does layout what has been closed, I was going to, I mean, it is the same format as you always do?

A - Evan Masyr

Yeah.

Q - Bishop Cheen

The ones that are pending as of December 31st. So are you saying did I misunderstand that all of these have been closed since December 31st?

A - Evan Masyr

No, no, they closed during the first quarter.

Q - Bishop Cheen

Okay. All of these have closed in Q1?

A - Evan Masyr

Yeah.

Q - Bishop Cheen

Okay. So it's already done and already on your balance sheet?

A - Evan Masyr

By March 31, it will be.

Q - Bishop Cheen

Okay. Great and then how much revenue or cash flow did these represent?

A - Evan Masyr

Bottom line is, well, I'm not sure we have those numbers handy.

Q - Bishop Cheen

Okay. I can circle back with you, okay. Let me go to the political. You are famous for not overguiding, and we appreciate that. But by all accounts this is going to be a record political year in media. And you guys certainly have skin in that game, especially if all these local elections are going to be nationalized as such on one side and heavy local on the other. So I sense this real reluctance to even talk about what you expect in political this year. Can I get you talk on a little more?

A - Evan Masyr

Well, the problem with political is that it's so difficult to predict. You may well be right. It may turn out to be a big year. But I have seen this happen before where it turns out to be not such a big year or, if it's a big year, it turns out that radio doesn't seem to get as much of the advertising budget. So it's a difficult thing to predict. And I don't know that we have drilled down. And perhaps we could do this, and you could do with yourself, drill down and see where the really contested races are going to be for the house and for the Senate on a national level, and of course for the house, Senate, to some extent those are local elections.

Q - Bishop Cheen

Yeah. We are all getting -- week by week we're getting more clarity on it, and I have done it and you guys have done it.

A - Evan Masyr

Yeah. I think that's probably -- I haven't -- we haven't really done that much of it, and if we do we can probably get a little better idea of where it will be. It's not that we're being coy and that we really kind of have a got thing that what its going to be, its been so volatile that you really are on dangerous treading on thin ice if you try to be too predictive of political advertising.

Q - Bishop Cheen

Fair enough. Can you just refresh my memory? In '04 what was your political, either give it to me in gross or apples-to-apples net if you have that handy?

A - Evan Masyr

In the entire '04, not just fourth quarter.

Q - Bishop Cheen

No entire ’04, I mean yes, fourth quarter would be great too if -- if you have it handy?

A – Edward Atsinger

Yeah let’s see, we will take it, Evan is looking here. Let’s see if we have that.

A - Evan Masyr

We probably for the entire year, we were about a million-and-a-half of political.

A – Company Speaker

One-and a-half gross.

A – David Evans

One-and-a-half net.

Q - Bishop Cheen

One-and-a-half net, okay.

A - Evan Masyr

And we were one million of that was in the fourth quarter.

Q - Bishop Cheen

Okay. That is very helpful. Thank you, guys.

A - Evan Masyr

You are welcome.

Operator

Thank you. Your next question is coming from Bobby Melnick of Terrier Partners.

Q - Bobby Melnick

Thank you, a simple and a complex one. Simple one, what's the historical cost of your 23 money-losing stations at the end of the year, please?

A – Edward Atsinger

Let me -- let's find the number there. Give us a minute here.

A - Evan Masyr

It's about $100 million?

Q - Bobby Melnick

100 million?

A - Evan Masyr

Yeah.

Q - Bobby Melnick

Okay. And the more complicated one, which requires some color, if you play with some of these numbers which again, you divulge a lot of information and we can sort of give me some of these numbers in play elements, the elements are liking but and I fully disclosed in terms of what stations are jumping up and around from what components within the sort of money losing to, 0-29, 39-49, etc., but if you kind of play with some of these numbers and you make certain assumptions that the, KLTY is in the very profitable component and that some of your block programming ones are profitable stations, then you can reach a conclusion which I think is right, but I am making a question as a statement, that, yeah, that there's not a lot of growth in the undeveloped stations, either year-over-year or sequentially from the third quarter of 2005.

Let me flesh that out a little bit. If you look at the third quarter of '05 versus the fourth quarter of '05, what you see is approximately the same station count and approximately the same cash flow count, again, adjusting for the fact that by your own admissions the block programming stations are showing revenue growth and one can reasonably presume, given the cost structure of those, cash flow growth. Similarly, if you did the same numbers '04 4Q the '05 4Q i.e. not sequentially but year-over-year you'd see some of the same things and again if you backed out the 50% or greater ones to try and calculate the lesser performing or underperforming stations, you come up with similar ratios in fact, in the fourth quarter of '05 with a comparable station count we produced 7.8 million of cash flow in the 49% and under versus 8.4 million of comparable one. So the question with that data, and I hope you followed me is, is there something that's changed in the industry, or something that's changed in our model or something that's changed in our ability to execute the model that is causing our lesser developed and underdeveloped and money losing stations longer to turn into profitable, valuable entities than they once were? And if that's so, how does Salem Communications as a publicly traded company adjust its going forward strategy, please? Thank you.

A – Edward Atsinger

David, do you want to comment on that or you want me to?

A - David Evans

Do you want to start and I'll chime in?

A – Edward Atsinger

I think the thing that the wildcard in there, Bobby, that's a little hard to follow is that you can, you know, with the number of stations that we have, the number of clusters, you are going to have from time-to-time some markets where you run into a bump in the road, sometimes a big bump. And if there are five stations in that cluster, four stations, they have been moving nicely, and then suddenly they fall out. And they moved from one category to another. But you don't just move one, you move four or five stations. So it plays with your numbers. And with a company our size, you have some management challenges that you look at and you determine that their management issues that can be solved and that you are still bullish and you are going to move forward or you might come to the conclusion that you are beating the dead horse and that you can't ever get there and of course if you can't with some of those markets, speaking to the last part of your question, you are going to consider all alternatives, including divestitures. We've made decisions when we acquired properties that we thought were pretty good, that are based upon an approach that's been pretty successful for us for a number of years. I am not seeing a lot of changes in the industry yet that would suggest some kind of paradigm shift or some kind of major change that we're groping with that we didn't have in the past. I think there is -- to the extent that there may be, I think it is a perceived issue rather than a real issue and that was all of the hype and publicity about satellite radio and the iPod and the wireless Internet and. With all of that, that there's been a perception that the old platform somehow is affected as it used to be but there's no empirical evidence yet to suggest that. So I don't see any new factor other than may be perceived one that may be impacting advertising budgets to some extent, less so for us as a niche broadcaster. Now, as I said, having said that, there are a few markets where we had – you can have a management implosion or for a variety of reasons you lose two or three key sellers all at once through a variety of circumstances, and it can plunge a market or two into a negative column. And that has happened to us in '05 and I think that's what's jumbled some of your numbers a little bit. And that's kind of the macro picture. David, you want to take a shot at anything else.

A - David Evans

Yeah. I think, I see it more as a micro issue as opposed to the macro issue. In terms of your analysis, Bobby, there are few stations that have been in this start-up development category too long, too long for your liking, too long for our liking. We're very focused on those markets. And we are absolutely examining the question of can we get them to an appropriate level of profitability because we do need to monetize them through some other means, for example. Now, in your analysis, compounding that a little bit is in Q3 '04 and Q4 '04 we had pretty strong political dollars that hit most of our markets. So, there has been a less improvement from '04 to '05 than we would have liked but that's partially because of the lack of -- because of the absence of political comps. But there are a couple of markets we're a little disappointed with. We're focused on fixing that. And if we conclude that we can't fix it, through operations, then, we may have to look at selling a couple of markets. But I think that's the comment that I would add.

A – Edward Atsinger

Yeah. And the good news is I don't think that the asset value for any of the markets we're in, in spite of their perhaps less than stellar growth, the asset value has not declined over our basis. I mean, we feel very good about where we are in terms of the asset value, just even on a stick basis, so…

A – David Evans

Yeah. A good example of that, will be a very small one is we recently announced the sale of AM station in Richmond. Here's a very small example. That station never got the level of profitability that we desired. We decided to sell it. You know, we will generate a pretty decent profit on that sale and we'll definitely recover, you know, the asset value, plus some.

A – Edward Atsinger

I think we paid 700,000 for the station and we sold it for a million and a half.

A – David Evans

Yes.

A – Edward Atsinger

And even if you aggregate losses associated with the start-up period, that we still come out ahead of the game and I think that's been pretty typical of the assets that we hold.

Operator

Thank you. Your final question is coming from James Marsh of Hanover Square Capital.

Q - James Marsh

Hi gentlemen, just couple of questions. One, I was hoping to comment a little bit on the block, appears to be deceleration from the 8% level on the fourth quarter to the renewal rates of 5%. I wondered if there is a way that that will catch up or if you could just reconcile that, that would be helpful. And then secondly on the Internet businesses, I think you mentioned that they were growing 15%, revenue 16% in the fourth quarter. Is that an apples-to-apples number, number one? And then, two, are you happy with that growth rate, it seems like the rest of the Internet, and then certainly Internet ad spend seems to be up in the 25% plus range, a lot of numbers flying around but it’s definitely higher than 15. Thanks.

A – Evan Masyr

Well, I think in terms of your first question on the block, the rate increase that we negotiate and implement with our block program users at the end of each year for the upcoming year represents an overall increase that we can expect based upon historic experience in terms of, you know, we get about a 90% renewal rate, typically higher than that, and so there is a little bit of a challenge of filling unsold inventory, that the remaining new inventory. When you factor all of that in, it could well end up higher than that percentage but the percentage that we've given is a conservative figure based upon a formula that we use and…

A - David Evans

Let me just reconcile the 8% that you heard for Q4 and the 5%. The 5% increase for '06 relates solely to block programming on our Christian teaching/talk stations, the 8% number for Q4, it also includes some block programming, mainly local that we placed on our news/talk stations.

Q - James Marsh

Okay.

A - David Evans

And because we added more news/talk stations from '04 to '05, that gave us some new weekend inventory that drove our overall block programming number. But when you isolate the Christian teaching/talk components of it, you know, pretty much every quarter is 5, 5.5%, quarter in, quarter out, with very little variance.

Q - James Marsh

Okay, fine. That's helpful. Yeah, thanks for that, David.

A - David Evans

Vis-à-vis your question about the Internet, we really don't compare ourselves to overall Internet trends. We tend to look at our growth in page views and our growth in unique visitors and how well we're translating page view and unique visitor growth to revenue growth, and then to profit growth. And we've seen -- if you look at '05 as a whole, we've seen great consistency in terms of whatever our page view growth has been, we've translated a very similar number in the revenue.

Q - James Marsh

Okay.

A - David Evans

We use more of a internal micro metric as opposed to what's going on in the general market.

Q - James Marsh

Okay. Fair enough. All right, thank you.

A - David Evans

Okay?

Operator

Thank you. At this time there appear to be no further questions. I would like to turn the floor back to management for any closing remarks.

Eric Jones, Director of Communications, Investor Relations

Well, I think that concludes our comments. We thank all of you for joining the call. And we'll look forward to visiting with you in another quarter.

Operator

Thank you. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.

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Source: Salem Communications Corporation Q4 2005 Earnings Conference Call Transcript (SALM)

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