Cox Radio, Inc. Q1 2008 Earnings Call Transcript

Cox Radio, Inc. (CXR)

Q1 2008 Earnings Call

May 7, 2008 3:00 pm ET

Executives

Robert Neil - President and CEO

Neil Johnston - VP and CFO

Analysts

Tony Wible - Citigroup

Victor Miller - Bear Stearns

Lee Westerfield - BMO Capital

Jim Boyle - C. L. King

Marci Ryvicker - Wachovia Securities

Richard Tullo - Sidoti

Michael Schecter - Mentor Partners

Lee Westerfield - BMO Capital

Presentation

Operator

Good afternoon ladies and gentlemen. My name is Melissa, and I will be your conference operator for today’s call. At this time I would like to welcome everyone to Cox Radio's first quarter 2008 Earnings Call. (Operator Instructions)

Before beginning this morning, I must remind you that management's remarks will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to Cox Radio's most recent 10-K filing for the list of risks and uncertainties that could impact actual results.

Today’s conference call will also include reference to certain non-GAAP financial measures. In accordance with SEC Regulation G, Cox Radio has provided reconciliations of all non-GAAP financial measures in its earnings release issued earlier this morning. The reconciliations include station operating income to operating income and free cash flow to net income, in each case the most comparable GAAP measure.

Thank you. Now it is my pleasure to turn the floor over to your host, Mr. Robert Neil. Sir, you may begin your conference.

Robert Neil

Thank you operator, and good afternoon everyone. As usual I’ll start today’s call by reviewing our performance and recent developments, and then Neil will provide you with a thorough financial overview for the first quarter and then we’ll open up the lines for your questions.

All Advertising based media faced a tough first quarter in 2008 and Radio was no exception. Our first quarter revenues were down just under 3%, primarily due to the impact of the overall economic downturn. However, I am pleased with our performance versus our peers, overall our clusters out performed the markets where they operate by 150 basis points, with four of our five largest clusters posting better performance than their respective markets.

We take a look at the individual months; January came in down 3 versus the industry which was down 6. February was even with the prior year, versus the industry which was down two, and March for us was down 6 versus the industry which was down 9. I beg your pardon, 8%. While no one can be thrilled with the revenues that are down, I do want to thank our sales staff and our teams for their consistent out performance in a tough environment. It's not an easy task. I commend them all for their efforts.

Our best revenue performers in this quarter were our stations in Houston, Birmingham, Long Island, Tulsa, Greenville, and Honolulu. Revenues up for the quarter, on the other hand economic weakness in some of our large markets like Miami, Orlando and Tampa negatively impacted our overall results.

Revenues at our Atlanta station were down 6% for the quarter, but that was better than the 9% decline for the Atlanta market overall. As we look at our revenues by category it's clear that we are continuing to see the impact of the housing downturn on selected categories, primarily real estate and home improvement advertising, which were down 43% and 20% respectively for the first quarter.

Within our top ten categories, six out of the ten categories were down during the quarter with telecom down 16 and restaurants down 8. Automotive on the other hand was up 1% for the quarter. Some of the strongest categories during the quarter were insurance up 29%, Specialty retail up 28%, Grocery convenient stores up 20%. First quarter political dollars were approximately $600,000, versus less than $200,000 in the first quarter of last year.

During the quarter we generated $22 million of free cash flow; an increase of 8% over the prior year quarter. Cash flow; we purchased an additional $9 million worth of common stock during the quarter while still maintaining one of the strongest if not the strongest balance sheets in the industry.

As we discussed on the last call at the beginning of the quarter we exercised our option to acquire a six station cluster in Athens Georgia which will expand our footprint in the southeast and specifically in the state of Georgia. We expect these stations will be a nice compliment to our portfolio and we currently expect to close on that transaction sometime in the back half of 2008.

As in all economic periods both strong and weak we remain focused on operating excellence and executing our strategies to strengthen our station brands and grow our local audience.

During the quarter we reinforced our long standing commitment to advertisers, audiences and employees alike with our new positioning statement, best people plus best product environment, plus best solutions equals the best results. This statement along with our new umbrella tagline were about listening are intended to highlight our core focus of listening to our audiences and advertisers responding to their needs and delivering results.

We think now is the time to reiterate what we stand for and the value we deliver to all of our audiences because as I’ve said so many times before the value proposition that radio delivers is enormous from a audience targeting perspective. We as an industry and as a company need to do a better job of communicating this message.

From a rating standpoint our stations continue to perform well in the fall of 2007, both stations continued to maintain ratings leadership positions and delivering their target demographics, and we currently operate at least one top five stations in 17 of our 18 markets, while over 84% of our stations continue to rank among the top 10 in each market, in terms of reaching target demographic.

The Winter 2008 results are still coming in. I would like to highlight a couple of stories so far. And the big story for this book is in Tampa where the launch of the Bubba the Love Sponge morning show resulted in huge rating gains for us there. Bubba finished number one, 12 plus, 18 to 34. 18 to 49 and 25 to 54 and his first book Station WHPT was number one overall 25 to 54 for the entire week.

In the mornings, Bubba enjoys a 40% advantage over the next closest station. Rating points for morning shows now generates numbers from a rating point perspective. They are nearly as high as some prime time television shows. That’s truly a great story for us there; one that concentrates on monetizing as the year progresses.

Atlanta it was four of the top five 25 to 54 again, San Antonio three of the top five. Miami three of the top six. You heard us mention that Birmingham was a star performer for us in Q1 and it was just over a year ago that Rick and Bubba joined that station; they were number one 25 to 54 this book and with Tom Joyner on their Sister station Kiss, just two of our stations command almost all of the morning bride numbers in Birmingham.

So we had lots of Bubbas doing it well for us in this book. A point here is that we continue to invest in our products, even with slower economic times. Compelling content draws a big audience to radio. On our morning show numbers start approaching prime time television delivery as they do in Tampa, Birmingham and others; you know that's a healthy audience.

And with the start of Steve and Vicky another big morning show that will start on WSB-FM in Atlanta on July 1^st we think we will continue to have good news to report to you on the ratings front.

I often get asked questions on these calls about Arbitron and as usual I will be glad to take specific questions, but I want to make a couple of points. First, we continue to believe that due to the unending stream of sampling programs in Philadelphia that the PPM rollout should not continue until at least one market is accredited under the new sampling regime.

To refresh you memory, Arbitron uses a different system in Philadelphia than in Houston, which is accredited. I think there is pressure to stay accredited in Houston; the sampling differences there have led to a more stable rating situation in Houston. Accreditation in Philadelphia has been denied and that means the signs of what Arbitron is doing in Philadelphia does not hold up to scrutiny. And this isn't our opinion, it's a fact. It’s looked out by the organization whose business is to double check audience research and make sure the science is right.

If this leads call yesterday is any indication or early in the week rather is an indication, broadcasters in Philadelphia are less than impressed with the PPM so far. The four other richest media markets in America moved to electronic measurement which we support; we need to have that new system accredited first.

And looking at Arbitron’s sec filing, I note with this that their managers have millions of dollars on the line in bonuses if the rollout continues and zero dollars on the line if the data is wrong. So in essence, they're being paid to rollout the PPM system whether it's right or not, whether it causes millions of dollars in revenue losses and thousands of job losses in radio and advertising or not. Personally, I don't think it is good business to pay people to quiet their ethics aside in favor of dollars; I know its not good business foray.

Moving now to our digital strategy during the quarter, we announced a deal with RadioTime to place information about our stations on their online radio guide. This will allow listeners using their computers or other wireless devices to find real time information about what’s airing on all Cox Radio stations nationwide.

We are also looking forward to converting our station websites to our enhanced internet platform version 3.0. which is going to provide additional functionality, including optimized search, speech detect capabilities, better audience and analytics, metrics reporting, enhanced video content, song lyrics, as well as mobile versions of all of our sites. Version 3 sites will start to rollout in late May.

Net revenue for the quarter grew 9% and streaming hours grew 14%. On the HD Radio front, we continue to believe in the long-term prospects of HD and our rollout is nearing completion. We’re optimistic about the prospects that digital broadcasting presents to our business. Progress is being made in getting HD receivers into automobiles and we are actively looking at ways to take advantage of the potential that digital broadcasting provides. One example of this is the recent deal between the Broadcaster Traffic Consortium and NAVTEQ; part of this deal the BTC partners including Cox Radio, will use some of our digital spectrum to broadcast real-time traffic and other location based information to portable navigation devices and automobile in-dash systems. While it's still early we are excited about being a part of this and we will keep you posted on how this partnership is progressing.

Looking forward second quarter business pacing continues to be very volatile as we see business placing very late. April went to down mid single-digits and second quarter was currently pacing negative at the same rate. Official government numbers in quarter one did not indicate recession; I can tell you that businesses that rely on consumer spending are in a recession and they are some of media's biggest customer, and it is hitting every media including the internet. Like past slowdowns, its management's responsibility to steer the company through that smartly and look for opportunities while be prudent with our expense.

With that I will turn it over to Neil.

Neil Johnston

Thanks Bob. Good afternoon everyone. I’ll begin by going through the numbers on this morning’s earnings release and then I will review our expense guidance for the balance of this year.

For the first quarter total revenues decreased 3% to $97.8 million, both local and national revenues were down 4%. Other revenues were up 13%. This includes internet revenues, as Bob mentioned they were up 9% for the quarter. Internet revenues now represent approximately 3% of our total revenues.

Given the current revenue environment, we are very focused on controlling our expenses. For the first quarter operating expenses were flat. We reduced costs in the areas of sales commission and marketing, but these savings were offset by higher programming costs and higher costs associated with our long-term incentive plan. Operating income for the quarter decreased 10% to $25.1 million.

Our effective tax rate for the quarter was approximately 40% that includes current effective rate of 23 and a deferred rate of 17%. Net income for the quarter was $12.8 million or $0.14 per diluted share, flat for the Q1 of 2007. Capital expenditures for the quarter were $1.6 million same as year ago. At March 31st total net debt 359 million and our leverage ratio as defined in our credit agreement was 2.3 times.

We are continuously seeking ways to return value to our shareholders and we believe that our share repurchase program is the best way of demonstrating that commitment, while maintaining a moderate amount of leverage. As of March 3^rd 2008, our board approved an additional $100 million for share repurchases, bringing the total amounts authorized for repurchases to $300 million.

During the first quarter we repurchased 3.3 million shares for an aggregate purchase price of $39 million. As of March 31, 2008, we had repurchased a total of 14.7 million shares at an aggregate purchase price of $191 million, leaving $109 million available for further share repurchases.

Looking now at our expense guidance for the rest of 2008. Excluding non-cash compensation expense, we expect station operating expenses to increase in the low to mid single-digit range. Corporate G&A expenses will be approximately $20 million and we expect our expense under the long-term incentive plan to be approximately $11 million for the year.

Given the current revenue environment we will continue to look for ways to reduce our expenses, but we will make sure that we do not impact the long-term health of our business. Interest for the year is expected to be in the $17 million to $18 million range and our effective tax rate for the year will be approximately 40% with a current affective rate of 25%, and a deferred rate of 15%. Capital expenditures for the year will be in the $15 million to $16 million range.

That concludes the financial overview. Bob and I would now like to open the call for any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is coming from Tony Wible with Citigroup. Please go ahead.

Tony Wible - Citigroup

Good afternoon guys. I was hoping you could start off by talking about if there is an opportunity to monetize some of the success that you have seen in Tampa with Bubba and some of your other markets?

Robert Neil

Tony, I think as always when you put a new show on the air, you are kind of selling on com, you're explaining to people that this was a big show when it was on in Tampa before. You try to get people to buy into that, but you really don't have numbers. Even as the trends come out those don't tend to be taken as official until it becomes an actual book.

So, now that we have a book in our hands that's going to help us a lot, monetize the ratings in Tampa, and in fact they've done a good job on it in the first quarter. WHBTs revenues were in good shape, but this is definitely going to help us; we have it in print. We can actually take some real numbers to buyers. I suspect it will help us in Jacksonville as well. The Jacksonville book is not out yet. The first two trends look pretty good there probably as well. So we just have to see what happens with the book when it comes out. But I certainly think we're not going to have trouble monetizing these kinds of ratings.

Tony Wible - Citigroup

Great. And do you see it creeping up to Atlanta as well?

Robert Neil

You give me that one more time.

Tony Wible - Citigroup

Do you see being able to take the content up to Atlanta as well?

Robert Neil

Well, I don't know that we have a station there that's appropriate for his kind of show. The stations here are harder edge rock stations. We don't own one of those in Atlanta, and somehow I don't think that would fit too well on our adult contemporary station. That might not be such a good idea.

Tony Wible - Citigroup

Okay. Lastly, just the local versus national pacing. I know it looks like this quarter they were relatively in line, but with the comments on the second quarter is there any differential between the two?

Robert Neil

National pacing is significantly more negative than local.

Tony Wible - Citigroup

Okay. Great. Thank you.

Operator

Thank you. Your next question is coming from Victor Miller with Bear Stearns. Please go ahead.

Victor Miller - Bear Stearns

Good afternoon. Thank you for taking the call. The questions: in Atlanta, specifically, Bob, what does that market look like? When do you actually have your toughest comps; you had made a lot of changes in there and you had some substantial growth for all of '07 in general, but what is your comps there?

Secondly, Florida in general, all three Florida markets you kind of posted to the troublesome in the press release. Maybe you can talk about those accounts in those markets and whether you're outperforming there. Secondly, there is some talk that April was actually a fairly good month for the radio business. Some comments there and lastly for Neil, you talked about your willingness to increase your leverage to perhaps three times and then your focus would be primarily on repurchasing stock. Are you still of that mind set 90 days later? Thanks.

Robert Neil

In Atlanta, the comps that you're talking about would be river year-over-year. The comps for B98 would not really start to kick in until late in the year. Based on the changes that have gone on in that marketplace. So it's a bit of a wash although the river numbers would be; they're a tough hurdle based on the big start they got off to last year.

But at the same time, our urban station, WALR has done better, B98 has done better. So, if those two things balancing against the river and to some degree WSB AM, which is very sensitive, because they do so much business, the economic situation, and I can tell you again, as you know Victor because we have a unique perspective of being able to look at both newspaper and television comps in that market.

Atlanta is just having a tough time right now and it doesn't matter what media business you're in. So while we would like to see it better and we certainly believe in that market and know that it's historically been great and it will be great again. We're going through a economic slowdown. We have to be aware of that and that's a market that's being hit.

Same story for Florida. Florida is the story of real estate. Florida is the story of insurance issues. A lot of consumer issues there. And that's affected virtually every market including Orlando which has been fairly immune to this kind of stuff in the past but the whole real estate driven recession in Florida has hurt every market there, again, it's hurt every media.

I know that media general have released their results, probably, three or four weeks ago and their television station and newspaper in Tampa just got killed as a result of the economic problems there. So we have to work through these excesses. As I said earlier on the call, I think this is a consumer driven recession. It certainly is an ad recession. The only thing keeping us above water with the official numbers might be the export markets, but when you look at all the businesses that are out there and ones that are terrific advertisers in media, like automobiles, like restaurants, places like that, they are all just being hit very hard.

Neil Johnston

Vic, on the share repurchases, we still have $109 million available under our purchase plan for future purchases. The great news is we also generated a lot of free cash. We do have the closing of the Athens transaction which is $48 million, which will go out probably in the third quarter so that will push our leverage up just a little bit, but I feel confident we will remain below three times. So I feel good in that 2.5 to 3 times range in terms of leverage. We don't comment on future purchases but certainly our balance sheet could accommodate as continuing with the program that we currently have in place.

Victor Miller - Bear Stearns

So we are emphasizing those over acquisitions at this point?

Neil Johnston

Yeah. I think that's probably accurate; unless, something really compelling would have come in over the balance. At this point when we look out there, the most compelling use of our cash is the repurchase of our stock.

Victor Miller - Bear Stearns

Bob, the general comments in April are okay for the industry, any comments on that?

Robert Neil

I haven't heard that from anybody. So I don't know where the comments came from.

Victor Miller - Bear Stearns

Thank you.

Operator

Thank you. Your next question is coming from Lee Westerfield with BMO Capital. Please go ahead.

Lee Westerfield - BMO Capital

Thank you. And thanks, gentlemen, good afternoon. Two areas of questions if I may, the first is, and Bob you've often made some commentary on the subject in the past and I wonder if you would update us as to your latest points of view as to the PPM rollout and more importantly fixes if there are mends on the way as to your satisfaction in anyway in any markets whatsoever with regard to the sampling.

And then more important to me actually is the outlook on the online revenue and specifically on royalties and margins, and if it caught my attention of course that RealNetworks and some others had some backdated royalty expenses to ASCAP with the court ruled upon it. I wondered if you all may have similar issues or not. I think the answer may be you've discussed that in the past. Thanks.

Robert Neil

As far as the royalty expenses are concerned Lee, we've accrued for those. So I think we are properly accrued for at this point. The streaming hour increases have been significant and it caught us a little bit by surprise, a couple of times in the last year. So we've had to step up the accruals to make sure we will be in good shape in that area. So I think we should be fine.

I think the biggest issue Lee with Arbitron, is that -- I keep saying this; we are talking about two systems here; a system in Houston, completely different sampling regime, and a system that's been accredited and everything else. So, it doesn't matter whether it's Philadelphia or it's the pre-currency markets that we are talking abut, everything operates under what I call that new system and that system has been riddled with problems from day one and it continues to be riddled with problems.

It's funny that Arbitron can't make up their mind what's good news, okay. So, if they're down in their indexing for demo, they try to turn you away from that by saying, yes but we hit our sample target. While in Philadelphia, they just miss their sample target and now they say, well, sample target is not important.

So, honestly I just think they are hand over their head with this. I don't think that they have proven that they can even get Philadelphia up and running with the sample that is acceptable, much less try to roll out several new markets and all we are asking, and I don't think it's a big ask here, is get the science verified, get MRC accreditation for this new system before you start rolling out another four or five or ten markets.

If you can't even handle Philadelphia, how are you going to handle more complicated markets like New York, Los Angeles, Chicago? These are the kind of issues that they face and again I find it incredibly disheartening that a company's board of directors would bonus people on a rollout whether it's right or wrong. So, no matter how disastrous it is for radio, their managers get paid to roll this out. It's just morally wrong.

Again, get the system accredited. We know they don't have to do it in every market, we never said that. We just said look get it accredited in one market where you're using this new system where you continue to roll out. Let's be sure the science is right. We are believers in electronic measurement. Nobody wants to see it roll out any more than we do, but it's got to be right.

Lee Westerfield - BMO Capital

Well said. Thank you, gentlemen.

Operator

Thank you. Your next question is coming from Jim Boyle with C. L. King. Please go ahead.

Jim Boyle - C. L. King

Good afternoon. Two questions, Bob, when you sit around with private radio groups, which may have a different vantage point on things and therefore also have a longer term vantage point, radio top-line used to grow at 6% to 8%. When you're brainstorming or just gazing into that fuzzy crystal ball, long-term where do you see radio revenue growing at?

Robert Neil

I don't know if that's a fair question, okay, because every media's growth rate used to be higher. Cable net sales used to grow at 15% to 20% a year and now they are flatter down just like the rest of the media businesses are. Television, the same way. So to try to crystal ball something like that, I really don't think that's a very -- it's not a fair comparison to single radio out and say you used to grow at 6% to 8% and now you're slightly negative. So did every other media. And guess what, the internet growth rate is starting to slow down dramatically as well.

What we have going on here is a situation as I've explained many times on these calls where there is a proliferation of ad units for sale, regardless of the media. And right now, there is a tremendous over supply of ad units versus the demand and advertisers to use them and until that supply and demand gets balanced, every media, I don't care whether it's radio, I don't care whether it's television, ad sales on cable, newspapers, and the internet, until that gets balanced out, it's going to be very, very difficult to grow at substantial growth rates.

Jim Boyle - C. L. King

Well, if it's unfair to compare to the old days because the world has changed, what about just comparing it to right now when the industry for the last couple of years has seen either slow to no growth? In the new world what do you expect radio to do?

Robert Neil

Why don't we compare it to newspapers or why don't we compare it to television, why don't we…

Jim Boyle - C. L. King

Okay. Newspapers are down high single digits, yellow pages are down mid-single digits, going forward where do you see radio industry top-line growth?

Robert Neil

Jim, I don't know what you're reading that would tell you that newspapers are down single digits. You probably need to double check that. They are down a lot more than that.

Jim Boyle - C. L. King

Depends on what you include on line but I'm asking about radio.

Robert Neil

I just told you, I don't think I can give you a comparison on that because of what's going on with the other media. There is no way -- look guys, you're asking me to play crystal ball here. I'm not going to do that. I don't know. I can't predict what is going to happen, how is that?

Jim Boyle - C. L. King

If Arbitron takes a very long time to get the science right on PPM, how long can radio live with a paper diary?

Robert Neil

Well, let's be clear about one thing, okay, Arbitron's rollout plan includes living with the paper diary in a lot of the medium size, say 50 to 75 markets for years and years and years. Lots of years, 10 years, 15 years, 20. It's unclear. So, we are going to be living with the diary for a long long time in those smaller markets and the diary has some problems that need to be addressed as well. So, I don't think you can say that PPM is just going to supplant the diary in a lot of those markets, we are going to be dealing with it and one more thing that Arbitron needs to be working on and they don't seem to be capable of.

Jim Boyle - C. L. King

But the larger markets account for a disproportionate amount of the revenue. If they indeed continue with the paper diary with its pluses and minuses, can that go on for several years?

Robert Neil

Well, sure. I think it could go on. I don't think its ideal but I think it will go on. I will tell you what I would rather live with is an accredited service where I know that at least the science has been vetted than have to live with a service where the science hasn't been vetted. And we know that there is an awful lot of volatility in the PPM numbers right now. In fact, just as much volatility in a lot of demos as there are in the diary if you look at the index. The indexing for diary demos is often down into the 70% range, which isn't good, and it's the same way with the PPM. I thought the PPM was going to solve a lot of these problems.

Jim Boyle - C. L. King

Thank you.

Operator

Thank you. Your next question is coming from Marci Ryvicker with Wachovia Securities. Please go ahead.

Marci Ryvicker - Wachovia Securities

Hi, thanks. I hate to keep harping on this but given all the issues with PPM, Bob, can you just remind us why you decided to sign up with them in the first place and now, what's your recourse because it doesn't sound like things are getting any better? That's the first question. And then the second one is moving on to auto, it sounded like it was relatively strong in the first quarter. How is this trending in the second quarter and where did the strength come from in Q1?

Robert Neil

When the time came for Houston to roll out, we were one of the groups that had to make an early decision on this. A lot of people were able to sit back and wait to see what happened. Although, I should note in fairness that a lot of groups that -- still down the road signed up early for PPM.

What we believed was that we would be more credible if we were a subscriber to PPM and looking at the results of PPM, particularly in Houston. So in other words, I guess if you're on the outside looking in maybe your credibility isn't as good as if you're on the inside trying to make change happen that way. And frankly, again, no BS aside, someone has done a very good job in the history of radio of not signing up for whatever the rating service was. There have been groups in the past that have tried not to sign up for the diary service and they just got killed.

When some groups decided they were going to not encode in Philadelphia because it wasn't, it was only just a couple of companies that were doing it. They were punished for it. So we felt that when we weighed all of those things together that we would be better off to sign up for it and try to fight for change from within and try to be as positive of factor as we could for that change.

Marci Ryvicker - Wachovia Securities

And the auto?

Neil Johnston

Auto, I wish I could tell you the auto trending had continued in the second quarter. I think it was market specific to some sales and things like that that were going on, but the auto is pacing down now in the second quarter.

Robert Neil

Yeah now the April was down one, so it was just marginally down from what we saw in the first quarter then as we look out May, June, July it's sort of pacing down with the rest of the categories. Hopefully it's just late placing business, and we will see that come back, but it's difficult to know at this point. The only data point we have is April and this is down one.

Marci Ryvicker - Wachovia Securities

All right, thank you so much.

Operator

Thank you once again. (Operator Instructions) Your next question is coming from Richard Tullo with Sidoti. Please go ahead.

Richard Tullo - Sidoti

Hi, I got a couple of questions for you. Well first one comment, newspapers are down around double digits in the recent memory and down high single digits in 2007. Just in case you needed some data points there. Second thing in Florida, in the rest of the group, it seems that March was a bit weaker than the rest of the quarter. Do you attribute that to weather, or just a pull back from advertisers at the end of the month? Is there any specific event that led to the ad sales?

Neil Johnston

Richard in Florida, I think it's kind of a bit of a roller coaster ride there, based on the economic reality of the marketplace. I don't think there was anything specifically that led to March being a little weaker. Certainly March in Florida wouldn't be considered bad weather markets. So I don't think we had issues there. I forgot your second question.

Richard Tullo - Sidoti

That was pretty much it. Did you get any feedback or color from the advertisers, at the end of the month; did the weakness come very late in the month? Or is it something that occurred throughout the whole month of March?

Neil Johnston

I think it was pretty much the whole month. But as we noted earlier on the call, it seems like I've been saying this over the last two or three years, the business keeps placing late and it really does. We’ve gone into some months where the pacing has picked up 500 basis points or 600 basis points from where we thought we were going into the months where the months ended. And that's a bit unusual.

So it does tell you that business is placing late. And I think that makes sense. A lot of businesses are deciding on their marketing plans on a month-by-month basis. A lot of businesses in the past have been placed as annuals; particularly automotive is being placed now on a month-by-month basis. So that makes pacing kind of squirrelly to look at because in year-over-year comparisons you have the base business that was in annuals a year ago and now that business is placing on a month-by-month basis.

Richard Tullo - Sidoti

Little bit of a follow-up, in Florida are you seeing any like vulture type of advertisers, any kind of spot arbitraries that’s coming into the market that would maybe preamble kind of strength on a go forward portion cross your fingers kind of basis?

Robert Neil

I can't think of anything. You got some advertisers sadly are the ones that are doing the auctions on foreclosed properties and things like that, but I can't think of anything specific.

Richard Tullo - Sidoti

Yeah, I know. Last question Arbitron is a name that was near and dear to my heart, but lately it seems like, for last six months things are not going right there. Do you, is there anything they can do to make you happy with the system as it is? Aside from abandoning the panel format as they exist in Philadelphia and going to the Houston format?

Robert Neil

Well, let's think about that for a second. Okay. You guys have heard me on these calls talking about PM and issues involving PPM for a long time. You haven't heard me on this calls really saying bad things about Houston. There are some things that are little discomforting in Houston in terms of the sampling, but those were things that we worked through and that we have tried to deal a little more offline with Arbitron.

For example, in Houston they are over sampling African Americans at a 30% rate. Now, wonder why that's happening and we don't get a very straight answer on it because if you look at every other market that Arbitron samples, there aren't any markets where they are over sampling African Americans at a 30% of index at 130, 120 in that range.

So that’s an issue that at least raises a flag on what are they doing with that and why. But basically we dealt with PPM in Houston; our stations have dealt with it. We have sold the time, we moved on. But where we have spoken out is the science of this is really mundane and boring. It's really hard for people to wrap their hands around it. If you ever sat in I'm sure on one of these conference calls where they talk about this stuff it would probably put the average person to sleep.

And I think that's one of the reasons why folks in our industry have been so slow to jump on this and realize what the implications of it really are, because its tough, it is not the kind of thing that people spend their spare time looking at. But there is a reason why the system in Philadelphia was denied accreditation. Not pending, it was denied. So that means that’s a failing grade anyway you want to put it. Why did it fail? We don't know specifically, but I would suspect it had something to do with the difference of those sampling regimes since that's one of the big differences between the markets.

So all we are saying is look, get to Philadelphia and beyond system accredited. Once you get that accredited and move onto the other markets, we will deal with the sampling issues as they come up. And I don't think that a 70% index is a passing grade. It wasn't a passing grade when I went to school. I don't think anybody is happy with it. Arbitron tried to use that 70% number an awful lot and tried to make it sound like that's what broadcasters agreed to. Broadcasters didn't agree to it; Arbitron wouldn't accept anything higher than a 70% threshold.

So their company wouldn't accept anything higher than a d minus or an f grade. So that's not a very good threshold for them to have to jump over. 85%, that would be a good index, a good threshold for them to shoot for.

So, I can't do anything about that, okay? But the two things they need to do; get accreditation, and get the sampling indexes up better than 70%. That's a failing grade. That's not going to impress anybody. Once they start to get north of 80% and approach 85%, a lot of people would be happier. I am telling you everybody wants electronic measurement to rollout but nobody wants it to go out if it's going to be wrong. Heard Bruce Beasley's call, they are having a lot of problems in Philadelphia with this. It's not just his stations. So, before we go moving on to New York, Los Angeles and a lot of complicated markets the science of this needs to be proven to be right.

Richard Tullo - Sidoti

Sorry to monopolize but do you support the Cumulus [RC]? Would you throw your weight behind it with your small station?

Robert Neil

We don't have a lot of markets where that would affect us. The only markets that would affect us soon are some of the southern Connecticut markets and we are really kind of waiting to see how all of that shakes out but we are certainly open to considering it.

Richard Tullo - Sidoti

Thank you, sir, appreciate your time. And by the way, congratulations on the good sales effort by your sales force, I know how hard it's been.

Robert Neil

Thank you.

Operator

Thank you. Your next question is coming from Michael Schecter with Mentor Partners. Please go ahead.

Michael Schecter - Mentor Partners

Can you just repeat what you were saying for about pacings for April, May and June and realizing that orders are coming in very late.

Robert Neil

April is pacing down about mid-singles and the rest of the quarter in the same ballpark.

Michael Schecter - Mentor Partners

And if you look at your stations that were hit hardest, Florida and Atlanta, how much of that is local economy versus national economy? Are they better stations just in better economic states?

Robert Neil

Well, it's interesting when you look at some of the smaller markets they've done a little better. Particularly Texas, Oklahoma, some of those are energy supported markets so they are doing a little better. But overall in the markets where there are issues. I will tell you that local is doing better than national. National has really had a bad second quarter so far, and we're local pacing. I probably shouldn't just pull numbers out of here, but I can say that the local pacing in most of those markets has been significantly better than the national pacing.

Michael Schecter - Mentor Partners

Thank you.

Operator

Thank you. Our final question is coming from Lee Westerfield with BMO Capital. Please go ahead.

Lee Westerfield - BMO Capital

Well, thanks for allowing the follow-up. Conscious balance sheet is among the best in the public radio sector at this point and among the only ones who aren't brushing up against debt [covenants]. In that regard, when you weigh your decisions about whether to buy stock or possibly compete against fewer alternative bidders versus private equity, or rather strategics. How do you think about the opportunities to cherry pick while quickly handed potential fire sales from some of your peer groups?

Robert Neil

I think we look at it the same way Lee that we always have. We have been public for 12 years. Even before that when we were part of the private company, we really look at it on a return basis. We look at it, if we're going to deploy our capital what's the best return on that investment for us and if we see opportunities to buy radio stations where we think that return is better than repurchasing our own stock, we will do it.

Lee Westerfield - BMO Capital

Does that mean, sorry to interrupt you briefly here, but you're trading in round numbers here, 10 times free cash flow, 10% yield on the bottom line would be the accretion/deletion analysis at this point in time?

Robert Neil

It gets a little more complicated than that in terms of how we look at our internal rates of return and some of that is proprietary, in terms of the system that we use to look at it. But, I think the easiest way to understand it is when we look at a group of stations we say what can we do with that. We don't just look at the cash flow or how they are doing right now. We say how would we operate that, what would it look like if we were operating it. And if that looks better on a rate of return than buying the stock with that money, then we would buy the stations. I realize I'm being overly simplistic with it but I think that's a good way to look at it.

Lee Westerfield - BMO Capital

That fair. Gentlemen, thank you. Have a good afternoon.

Robert Neil

Thanks, Lee.

Operator

Thank you. At this time I would like to turn the floor back over to management for any closing comments.

Robert Neil

As always, we appreciate the questions and the time and we will see you next quarter.

Operator

Thank you. This does conclude today’s Cox Radio conference call. You may now disconnect.

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Comments

[PocketRadio:]

HD Radio is a farce:

hdradiofarce.blogspot....

2008 May 07 07:56 PM