Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Stephen F. Fisher - Chief Financial Officer & Executive Vice President, Operations

David J. Field - President, Chief Executive Officer & Director

Analysts

Christopher Ensley for Victor Miller – Bear Stearns

Marci Ryvicker – Wachovia Securities

Bishop Cheen – Wachovia Capital Markets

John Blackledge – J. P. Morgan

Leland Westerfield – BMO Capital Markets

Tony Wible – Citigroup

Mark Wienkes – Goldman Sachs

James Goss – Barrington Research

Michael Kupinski – Noble Financial Group

Entercom Communications Corp. (ETM) Q1 2008 Earnings Call April 24, 2008 9:00 AM ET

Operator

All participants will be able to listen only until the question-and-answer session of the call. This conference is being recorded. I would like to introduce your first speaker for today’s call, Mr. Steve Fisher, CFO and Executive Vice President.

Stephen F. Fisher

Thank you everybody for joining us this morning for our first quarter earnings conference call. Before I turn it over to David Field I’d first like to note that today’s call will contain certain forward-looking statements that are based on current expectation and involve risks and uncertainties. The company’s actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ is described in the company’s SEC filings on Forms 10-Q, 10-K and 8-K. The company assumes no obligation to update any forward-looking statements. During this call we may reference certain non-GAAP financial measures and we would refer you to our website at www.Entercom.com for a reconciliation of such measures and other pro forma financial information.

With that preamble I’ll turn it over to David Field, President and Chief Executive Officer.

David J. Field

Good morning everyone and thanks for joining us on today’s call. As you are aware we released our first quarter results this morning and also announced that we will be reducing our dividend from $0.38 to $0.10 per quarter. I will begin with my remarks for the review of first quarter results and the provide some thoughts on the second quarter before discussing the dividend change.

I’m pleased to report that during the first quarter we achieved strong growth in our bottom line financial results despite the challenging state of the US economy. Free cash flow per share surged 76% from $0.17 to $0.30 while adjusted net income per share increased 44% from $0.09 to $0.13. While same station revenues declined 4% excellent expense controls enabled us to reduce our same station operating costs by 3% and achieve a 3% increase in EBITDA for the quarter.

Here are a few other significant headlines from first quarter, we achieved excellent results in a number of our markets led by Austin, Buffalo, Madison, Norfolk and Providence. Local revenues were significantly stronger than national for the quarter. Digital revenues more than doubled to just over $2 million and now represent just over 2% of our revenues. I would also note that while we continue to find ways to improve our business model and prudently reduce operating expenses we are still significantly increasing our investments in our core growth initiatives. We continue to add personnel and other capabilities to develop our digital and business development efforts and we continue to see great growth and opportunities in these areas. We are achieving a significant reduction in our financing costs as well and have taken a number of steps to capitalize on current financial market opportunities and ensure that we lock in attractive borrowing rates for the next two years. Steve will provide some further color on this in a few moments.

Turning to the second quarter business conditions are marginally better than first quarter. Current basings are down low single digits. We expect second quarter same station revenues to be down low to mid-single digits versus last year.

Which brings us to the dividend, why did we make this move? First and foremost, and I want to be very clear here, we did not make this move because we felt we had to. We are not concerned about our ability to pay the dividend which represented just about two-thirds of our free cash flow in 2007. As I noted earlier on this call our free cash flow is growing and our leverage is stable. Furthermore we remain committed to the principal of returning significant free cash flow to our shareholders. So why did we make this move? The short answer is because we believe that putting greater emphasis on share repurchases in the near term is a wiser deployment of our free cash flow. Let me elaborate a bit on that answer.

When we first declared our dividend in the first quarter of 2006 our stock was considerably higher and the initial dividend yield was at a more normal level of approximately 5%. As our stock prices declined our yield of course has gone up and today it has reached a stunning and stratospheric 18%. This has resulted in a bizarre yet unintended consequence. To many investors the mere fact that the stock is yielding 18% serves as a red flag and likely dissuades them from owning the stock fearing an eventual reduction or elimination of the dividend or some other unknown or unforeseen negative event that might looming in the future or hanging out there.

This psychological overhang has become a distraction for investors and created negativity and uncertainty around our stock that is simply not constructive. In addition over the past nine quarters of dividends we have not attracted a significant number of yield based investors. In fact only one in 30 of our top holders as of the latest available information is a yield based fund. The fact that only a very small portion of our shareholder base is primarily yield oriented was a very important consideration as we discussed the impact of the dividend change on our investors.

Finally we made this decision because we believe that our investors will be better served by a reduction of the dividend to a more normalized but still quite attractive level of roughly 4.5% because this change will enable us to have additional uncommitted free cash flow to use to buy back our stock which we believe is trading at a highly undervalued price. I want to repeat what I said earlier, the change in the earned income dividend has nothing to do with the company’s ability to sustain the payments. Our free cash flow per share is growing, our leverage is stable and business conditions are at worst stable, maybe improving marginally.

Before I turn this over to Steve I want to briefly look ahead. As I mentioned a moment ago I think the market is significantly undervaluing our stock. I believe there are three parts to our story that the market is missing. First is the fundamental health of the radio industry. Unlike certain other media that have seen substantial erosion to their usage by the public and significant disruption to their ad models radio has proven itself to be remarkably resilient. Radio reaches 93% of Americans weekly essentially the same percentage of Americans it has for decades. In fact radio reaches more Americans today than ever adding 3 million listeners in the last year alone.

There are a number of facts I could add, I’ll just throw one other one at you. 36% more Americans tune in to radio daily than go to the Internet. The store is quite strong. Radio is also at a low cost provider of advertising offering great value and effectiveness to its customers. While admittedly the industry revenue performance has been uninspiring over the past few years radio is a very strong relative value proposition compared to other media and ultimately ad revenues will grow to reflect the medium’s underlying strength.

The second issue is the evolution of our business model at Entercom. While it is still early we are making great progress in our efforts to evolve Entercom into a marketing solutions company leveraging our integrated marketing platforms of on air, on line and on site. We are making significant investments in our business development and digital capabilities and are experiencing significant growth and demand for integrated marketing campaigns across the country.

Third is radio’s ability to generate outstanding free cash flow. Unfortunately investors appear to have largely discounted or ignored this. The significant growth in our free cash flow per share in the first quarter despite the challenging macro economic conditions is indicative of the power of our business model. Furthermore we expect to continue to be able to grow our free cash flow per share during the remainder of the year.

In sum, the strong fundamental strength of the radio medium, the evolution of the Entercom business model and the outstanding free cash flow generation of the business are three important parts of our story that we do not believe are properly valued by the market.

With that I’ll turn it over to Steve.

Stephen F. Fisher

Now let me cover first our guidance for the second quarter, give you a little more detail on that and provide then a few highlights for the first quarter before we go to your questions.

As David said we expect same station revenues in the second quarter of 2008 to decline in the low to mid-single digit range as compared to the prior year. We expect station cash expenses to be down by approximately 2%. As we stated in many of our prior calls and we reiterate today we see no clumps in our expense model for 2008. We’re not deferring any expenses. For comparison purposes our prior year second quarter same station information is $126.6 million in net revenues and $75.3 million in expenses. I’d note this base excludes non-cash compensation expense. A reconciliation of this information and other non-GAAP measures is available on our website.

A few other notes on 208 line items to assist you in your modeling, we would expect our corporate expenses in the second quarter to be approximately $5.2 million, non-cash compensation expense for the second quarter and for the remaining quarters of 2008 would be about $2.2 million per quarter. We did have higher depreciation and amortization in the first quarter as a result of short lived amortizations from the recent closing on our CBS and Bonneville transactions.

For the second quarter we would expect D&A to be approximately $5.6 million and then drop to around $4.5 million in the third and fourth quarters of this year as those short lived assets are amortized. Net interest for the second quarter should approximately $11.8 million. As a reference point this interest forecast does not assume any additional debt for share buy backs which we talked about. TBA income or expense will go to zero in the second quarter and for the balance of the year. Our tax rate for the year should be between 42% and 43% excluding one time adjustments and street estimates for the year we would again pay no cash taxes this year utilizing the tremendous tax shields from our intangible amortizations for tax purposes.

Now looking at the first quarter, as you saw in the quarter we achieved a significant increase in free cash flow. We had previously indicated to you that our free cash flow for the year would increase as a result of our lowered financing costs and in fact in the first quarter the combination of interest and TBA fees or financing costs decreased by $3.5 million over the prior year. This is the result of swapping out our TBA fees for lower interest payments, lower interest rates experienced in the overall market and our new senior bank facility put in place last summer realizing a favorable rate structure. With our improved financing costs expense management and lower share count of approximately 4% from last year we were able to achieve a 44% increase in EPS adjusted for extraordinary items and an increase of 67% in our free cash flow for the quarter.

You saw again strong expense management of our operating expenses with a decrease of 3%. You’ve seen that now for many years. This quarter and our future quarters’ guidance reflect constant focus on expenses that matter while as David said we continue to invest in our brands and new initiatives like digital and business development. Our corporate expenses of $5.2 million in the first quarter were down from prior year primarily as a result of extraordinary legal expenses last year. Our non-cash compensation expense for the first quarter was higher than we originally guided due to acceleration of vesting on some restricted shares into the first quarter. Now with that acceleration into Q1 you should note that the guidance I gave you for the remainder of 2008 of $2.2 million per quarter is lower than that we previously provided to you.

An update on our leverage, in spite of the challenging economic environment we de-levered ending the first quarter with leverage under our bank facility terms of 5.5 down slightly from the prior quarter. Interesting to note that we took advantage of the discounted price in the public market of our senior subordinated notes and repurchased approximately 30 million of our bonds resulting in a gain of 1.8 million in the first quarter. Also in the quarter we took advantage of the lower interest rate environment and hedged a portion of our floating senior bank facility to fixed rates and put a collar on some of these floating rates as additional insurance of free cash flow generation in the quarters to come and we’ll continue to evaluate further balance sheet opportunities in the future.

As to the quarter let me address a question I might anticipate and that is, what impact are we seeing from political revenues? In summary, nothing significant in the first half but we expect more in the second half. In the quarter we realized about $600,000 in political revenues in line with our planning model for the year. In the second quarter we should see only a few hundred thousand. I’d note that if this year, 2008, mirrors past quadrennial election patterns we should see between $4 and $5 million in political for the year. But this would primarily fall in the third and fourth quarters. This pattern is consistent with the pattern of radio revenues and political revenue generation.

Let me close with a few notes myself on the dividend policy before we go to your questions. As David said this change was not made lightly. The company has demonstrated long focus of rewarding shareholders by returning cash via share buy backs and dividends. Let me give you some context. Since we initiated a dividend in early 2006 we have paid $3.52 per share in dividends over the past nine quarters cumulatively. And since launching our share buy back in the middle of 2004 we’ve repurchased over 28% of the shares of the company rewarding shareholders. Today’s reset of our dividend implements a yield exceeding most other stocks, 4.5%, yet utilizes less than 20% of our ample free cash flow. This allows the company to be more aggressive in buying back shares as another way of returning cash to shareholders and building shareholder value. With today’s extension of our buy back program by the Board of Directors you’ll see us immediately execute against that plan.

It is important that you note that Entercom’s management team is by far the largest shareholder of this company and management and our Board of Directors constantly evaluate all options and in making this decision finds this to be the most compelling capital structure we can envision at this time.

With that as background, Operator we’ll now open up the lines for any questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Christopher Ensley for Victor Miller – Bear Stearns.

Christopher Ensley – Bear Stearns

Lot of talk about discrepancies between large market radio and small market radio and I wondered if you could talk about Austin, San Fran and Seattle and how you’re doing in those markets and how those markets are faring?

David J. Field

There is certainly some truth to the fact that some of the larger markets have been more challenged than some of the smaller markets. I think that’s a fair comment on business conditions for the first quarter. To I think some extent that’s reflective of national being much weaker than local for first quarter. Whether that’s a prevailing trend as we go through the year or not I think remains to be seen, Chris. We’ve only really seen evidence of that in first quarter and I wouldn’t be in too much of a rush to pound the table and think that’s a long term trend. I would look at it as a one quarter blip for now and let’s see what happens.

Christopher Ensley – Bear Stearns

In those markets are you outperforming in those three markets, or how are you faring?

David J. Field

Yes, we’re doing quite well in our larger markets.

Christopher Ensley – Bear Stearns

Just an update on the Renaissance deal and you’ve also got the Celtics in the Playoffs, so I guess one year into the Red Sox deal you now have ratings that you probably didn’t have a year ago. How is that shaping up?

David J. Field

It’s fine. We continue to do fine with our Red Sox broadcast. Obviously we pay at full price but it’s also a good revenue source for us. The Celtics are a, it’s great to see them in the Playoffs but I also wouldn’t overstate its significance. Basketball on radio is generally not a huge factor. Baseball tends to be a bigger importance.

Operator

Your next question comes from the line of Marci Ryvicker – Wachovia Securities.

Marci Ryvicker – Wachovia Securities

I have a couple of questions, David, I just want to be very clear so I’m going to ask you a couple questions on the dividend. Was any part of this cut a function of your debt level, any pressure from the banks whatsoever?

Stephen F. Fisher

Simple answer, no.

Marci Ryvicker – Wachovia Securities

Coming to the $0.10 per share, was the Board targeting a specific dividend yield when they decided this?

David J. Field

I think we triangulated to a point which felt right and there’s no perfect science to it. It was really about again redeploying our free cash flow in a manner which we felt would be best for our shareholders. Our goal is to create shareholder value and we felt that the mix that we’re presenting today does the best job of achieving that.

Marci Ryvicker – Wachovia Securities

One last question on your leverage, I think year covenant is six times, what’s your target leverage ratio and when do you expect to get there?

Stephen F. Fisher

We get that question quite often and we always answer with we do not manage the business to a target ratio. We are comfortable with where we are today based on the business environment and the business model that we see going forward. We could always adjust that. There is no target leverage. We do not trace a credit rating and we have not given a specific target leverage ratio to the street.

Operator

Your next question comes from the line of Bishop Cheen – Wachovia Capital Markets.

Bishop Cheen – Wachovia Capital Markets

You’ve got a half turn of cushion and it is a recessionary environment so obviously it’s on certainly the bond holders’ minds and stockholders’ minds of how close to scraping metal do you get, but,

Stephen F. Fisher

Bishop, just to address what you said, you saw Q4 and now Q1 and on the guidance for Q2 even under the old dividend policy, we delever.

Bishop Cheen – Wachovia Capital Markets

Right, you’ve stayed with a cushion, it’s true. It’s just shouldering the risk people think, “What if ut-oh?” I mean obviously, it’s not the first time you’ve heard that. Let me just ask a question about your core fundamental, digital is growing nicely, you expect political in the back half and there’s nothing out there I think for anybody to doubt that but what about the core? National just seems to be in a funk, local seems to be stutter step but when do you see your core reference, your local and your national stabilizing?

David J. Field

Well, you say stabilizing, I mean we were flat in all of 2007. I don’t want to pound the table and get excited about that but first quarter revenues being down was really the first down quarter we’ve had in a very, very long time. I think to your broader question Bishop, I look at what is happening with newspapers, magazines and a variety of other media and I’m not sure it’s a fair expectation for radio to rise above what’s happening to essentially all media right now in the midst of a very tough economic climate. Now, once we get through this economic climate and we can all look at our crystal balls but once we’re in a growth mode again the question is how will radio fair as a medium? And, we remain very optimistic about radio’s future. We are the low cost provider, we reach 93% of Americans every single week. I could walk you through a number of other facts which demonstrate radio’s incredible resilience in a world of increasing choice and increasing consumer distraction and I think our value proposition relative to our composition is very, very strong. And, I think that ultimately they’ll be equilibrium in the outer world where radio will once again be a significant participant in the growth of advertising and marketing dollars.

Stephen F. Fisher

Bishop, also let me address another point you made, you mentioned national and you’ve been doing this long enough as have I were you see this beta of national up and down. But, you’re right, national was weaker than local in Q1 as a fact. But, also as a fact we would expect to see that bounce back more to equilibrium in Q2 both within the range of our guidance.

Bishop Cheen – Wachovia Capital Markets

Yes, you’re not the only medium that is having frustrations with national and obviously you’re aware with that. It seems to be weak across the board with any medium.

Stephen F. Fisher

I think for radio in Q1 you tie some of that to the writer’s strike so the spillover from television as people do national spot overlays. People can speculate and I think we’re probably too close to the data to come up with something but I just as a fact say as you correctly pointed out, National was weaker in Q1 as I will then point out it looks stronger in Q2.

Operator

Your next question comes from the line of John Blackledge – J. P. Morgan.

John Blackledge – J. P. Morgan

A couple of questions kind of touching on one of Marci’s questions. Free cash flow allocation, do you guys maintain it, you’re paying about 60% of your free cash flow via dividend. Now, that goes down to around 20% or under 20%. Do you maintain that 50% to 60% via the dividend and the share buyback? Then secondly, just thoughts on overflow benefits from political in the back half of the year? If you think about the macro environment is tough, the industry has been soft but political dollars will accelerate in the second half and you guys benefit directly, you also benefit from the overflow theoretically given heightened demand. Just your general thought on that, if you think that’s true and that will help in the back half of the year?

David J. Field

I’ll answer your second question and Steven will address the former. We ask ourselves the same question. We certainly expect there to be a nice lift in political the second half of the year and you’re correct to point out that we’ll benefit from that in a small or modest way directly but also indirectly is the entirely ad supported media world gets positively impacted. The broader question I think is more to do with the general economy than anything else. I think the kinds of things we’re doing internally to generate acceleration in our business model will continue to help and I think that radio as a medium is undervalued. And we’ll also hopefully see some rebound later in the year from that. But, ultimately the greatest indicator or the greatest factor in our performance in the second half of the year is going to be the state of the overall US economy.

Stephen F. Fisher

If I can remember the first part of the question, I think it basically, I’ll paraphrase the question is, okay with the change in dividend you’ve got extra free cash flow, how do you plan to deploy that? Well, as we indicated, you will expect to see us move aggressively on share buyback frankly, starting as soon as our window opens. How we modulate that, how much we use for debt pay down, how much for share buyback, I mean obviously we will continue to model that as the economic and business model change, as we look ahead at that. Let me just do the math for you, the dividend change alone in one quarter, just one quarter of that freed up cash flow for the board to consider would at today’s price buy back about 3% of the company. One quarter of the dividend change.

John Blackledge – J. P. Morgan

Just one follow up Steve, I know you don’t have a target for your leverage ratio but how should we think about that? Should we think about it at about 5.5 times? Or, come down a little bit?

Stephen F. Fisher

Clearly, you want to see cushion. If you’re looking at it for share buyback, we don’t give a target but I would say as we’ve said consistently, we’re comfortable at 5.5 times. You’ve seen our industry run well north of the six times that we have in our current bank agreement. We’ve chosen not to go there, we’ve always been in the lower level. What we run the company for is to be prudent on all metrics and that is using our balance sheet to reward our shareholders whether it’s through dividends, buyback, whatever. So, that’s why we don’t particularly charge, you know if the credit environment changes or the interest environment changes, we may revisit where we’re running our leverage at. But, I think our best indicator is our historical practice of maintaining a conservative balance sheet, rewarding our shareholders through using our balance sheet as appropriate.

Operator

Your next question comes from the line of Leland Westerfield – BMO Capital Markets.

Leland Westerfield – BMO Capital Markets

Steve, I wanted to ask about the operating expense growth, it really curbs the decline in operating expenses and drill in to that a little more deeply. You mentioned that you’re not deferring expenses in to the second half that get you to the negative cost trends in 1Q and 2Q but can you elaborate on where you’re finding cost savings apart from obviously lower commission on the lower revenue trends? What should we think about in terms of the op ex trends that you’re able to achieve?

Stephen F. Fisher

Well, in terms of the op ex trends, a significant portion of it, as you correctly pointed out will be directly related to revenues. So, with our revenues in Q1 and our guidance for Q1 obviously some of the decrease will be on the variable side. But, a lot of it is just little things. Let me give you just one small example, and this isn’t going to be material but it gets you thinking. We run a large fleet of vehicles as most other radio operators do using them for promotional events. As we looked at our fleet collectively several hundred cards, our vehicles, vans that are painted with our call letters and all that kind of stuff, a lot of them were older sitting in the fleet. Just by willowing out those that we didn’t need reduced insurance premiums by about $100,000. That’s just focusing on a bunch of those small things. So, it is no one large thing. We’ve been investing, you’ve seen the headlines and brand launches and sports contracts and digital as David said in business development. So then on the flip side our challenge on the management side on the station level and the corporate level is to focus on a bunch of those small things. So hey, I wish I could point to big items, I can’t.

Operator

Your next question comes from the line of Tony Wible – Citigroup.

Tony Wible – Citigroup

I was hoping we could carry on the last question, I guess where would those small cost cuts be coming from? Is it more on production or is it on the marketing side?

Stephen F. Fisher

It’s really on how we operate the business. I will say because I’m looking across the table David Field and our management team is very focused on our brands so you don’t do anything to harm the brands. Having said that, how can you operate smarter? How many people does it take to process an invoice or collect receivables? How many engineers? How many promotional staff? How you operate the station, how many vehicles? How many cell phones? It’s just a bunch of those little things Tony.

Tony Wible – Citigroup

Can you help quantify the spread between local and national pacing? And, I think you indicated that you felt like in a very near term national was stabilizing?

David J. Field

I would say that our local revenues in the first quarter were down but to a lesser extent than our overall decline. National was down double digits, in the teens.

Tony Wible – Citigroup

I think I get what you are saying with the dividend, it would be more accretive to be buying back the stock here. How do you balance that versus paying down the debt? When do you hit a crossover point where the debt is more accretive than the buybacks?

Stephen F. Fisher

Well, I’d say as I think I have said, it’s an art not a science but you’re write, we’re using our bank facility now that we’ve hedged 4%, 4.5%, pick a number to buy shares of stock at basically three times free cash flow.

Tony Wible – Citigroup

And what level of the floating debt is hedged? I know you indicated a portion of it, is it half? Is that a good ballpark?

Stephen F. Fisher

We’ve hedged approximately half through collars and swaps.

Tony Wible – Citigroup

Last question is the cost of cash, if we were just to model in a buyback with free cash, what would be the opportunity cost to take out of the interest income?

Stephen F. Fisher

Well, we don’t have any real interest income of note.

Tony Wible – Citigroup

I guess I’m saying the opportunity, if you’re cutting the dividend you would have considerably more cash.

Stephen F. Fisher

Oh, I see what you’re saying. Well, if you use ballpark numbers, on the old dividend policy we’ve been paying out roughly $58 million. Under the new dividend policy it’s going to be closer to $10 million.

Operator

Your next question comes from the line of Mark Wienkes – Goldman Sachs.

Mark Wienkes – Goldman Sachs

Some of the local focus businesses like Starbucks talking about poor traffic trends and gas prices where they are, what do you hear from advertisers? I guess if you could just give a few anecdotes from across the spectrum from like the smaller advertisers to the mid size about their planning for ad spend not just for 2Q but for the balance of the year? And, how has it changed?

Stephen F. Fisher

Well you know Mark, it’s interesting because it is all over the lot. I hosted an advertiser lunch in one of our largest markets just a couple of weeks ago and I’ve done a bunch of these events and you hear different things. Some guys talk about how their business is resilient and strong and they’re doing well and others cry the blues. There doesn’t appear to be a rhythm or reason to it as far as I can tell. As far as their advertising plans go, one of the great lessons that a lot of companies have learned over the years is that regardless of whether we’re in great times or soft times there remains a critical importance of marketing your brands and marketing your stores in order to make sure that you are top of mind and that you are generating traffic and sales. So, I think most customers recognize that and continue to make what they think are the wisest choices to market their products and their stores.

David J. Field

I would just add Mark to add more color, our managers would probably echo that but they would also say one trend we’re seeing which has kind of been a hallmark of this industry for years is the buys are coming in late. Advertisers want to spend but they are just hesitant to commit early given the changing economic environment.

Mark Wienkes – Goldman Sachs

Are you saying that the pace is a little bit later than even last quarter or last year or just continues to be late?

David J. Field

[Inaudible] cycle business and we’re talking minor changes but I’d say yes, probably our managers would say things are coming in just a little later.

Mark Wienkes – Goldman Sachs

In your conversations with the advertisers I guess is there any way to bucket, I’m trying not to ask the category question but it leaves me to by retailers versus auto versus teleco. Is there any specific groups where you’re hearing sort of more negative noise or more positive noise?

David J. Field

Well, the negative noise it tends to be deferment. I mean in auto as an example which was down in this quarter as our revenues were down, kind of the old line is so goes GM so goes the nation. So a lot of that on the flip side we know we’ll get spend as new car introductions are moved around or as plans move around. Obviously we’re not seeing the mortgage refinancing that we saw a couple of years ago. Real estate has never been a very large category for radio. If you want a bazaar one, health and medical is up. Maybe that says that that category is recession proof.

Mark Wienkes – Goldman Sachs

Then last question, even with the stock at three times free cash, I guess if the market is going to be relatively indiscriminate in punishing multiples and valuations across traditional media, newspaper, radio, etc. then I guess what’s wrong with just holding on to some cash? I guess what’s the argument against just maybe waiting it out a little bit? I guess if you look at the returns on stock repurchases across the group over the past couple of years, it hasn’t been great to put it one way.

Stephen F. Fisher

Mark, there would be nothing with that per say. It’s our job and our board’s job to take a look at all the various levers that are available to us to deploy our free cash flow. And, it’s our judgment that this is the best strategy for us to deploy at this time and I don’t think it’s worth looking at sort of the generic studies on the success or failure of buybacks. I think it really is a question of us looking at our business and our future and determining what we think makes the most sense for our shareholders in creating value.

David J. Field

Mark, I think just to add to that we are a short cycle business, we give guidance one quarter at a time. For right now, what we see things, we’re comfortable with our free cash flow and where our leverage. I’m sure as we get to June, July we’ll look again on the back half and look at the overall situation in the radio industry in particular.

Stephen F. Fisher

I think you’ve know us well enough that we’ll try to get that right balance. But, as David said and management and the board believes, at today’s stock price and given our free cash flow generation and our guidance for the second quarter, even keeping in mind where our leverage is, we are comfortable in saying to the street that we are committed to use some portion of that dividend savings to aggressively buy back shares as soon as we can.

Operator

Your next question comes from the line of James Goss – Barrington Research.

James Goss – Barrington Research

A couple of things, one I know Steve you detest getting in to categories but in terms of automotive not on a quarter-by-quarter basis but in a broader sense and not just for radio but for traditional media do you feel, either you or David, feel the industry problems in that sector and its greater options in terms of advertising its wares is a longer term issue radio and other media will have to face? Or do you think that settles out at some stage? Just in a broader sense?

David J. Field

First, I don’t want to paint a picture that auto is weak. Understand, it’s market by market, there are some markets we have that auto is through the roof. There are other markets we have that its very, very slow. So, it’s all over the lot and not a problem per say. Actually, Jim I take a very different look at auto. I think that radio actually is in a very, very good spot for auto going forward and I say that for a couple of reasons. We see a big shift of dollars from the newspaper to the Internet. Radio offers the best value to auto dealers, we are the low cost provider and we have, if you look at again our reach and you look at now our integrated marketing capabilities that can drive listeners from the radio to the auto dealers website and for that matter the auto manufacturer’s website and some of the other programs we’ve developed, I think we have an excellent opportunity to significantly increase our share of auto dollars as we go forward and feel very good about our platform in that regard.

Stephen F. Fisher

I want to echo what David said, these are the reasons why I don’t like category questions because over the years there’s been no meaningful correlations. Automotive was off but it wasn’t off much more than our total revenues.

James Goss – Barrington Research

One other thing, I’m wondering now we’re a number of years in to HD and I was wondering in terms of evaluating HD radio what do you see in terms of how it’s eventually going to enter your business mix and how many years before it is a meaningful factor? Or, is it just as Bob has always talked about, the change in delivery mode and it’s perhaps somewhat less?

David J. Field

Well, first let me start with a reset of your comment, it’s not been many years, it’s been many years that you’re aware of it and as the technology is developed and we as broadcasters have lit up about 1,000 radio stations, about 800 multicasting but to the consumer that really started late last year with the introduction of radios, the design in of car models. So, HD radio is still in its infancy and really just launched. There were about 300,000 receivers sold last year. So, this is from a business model point of view just started although yes, we have talked about HD for several years. So, as it goes from 300,000 receivers to next year ramp to some millions this year and more as its designed in more and more cars and now it’s kind of the chicken and the egg. Now that there are receivers, we can come up with innovative programming deployments and ideas and then we’ll figure a business model out. But, as you saw the recent announcement Entercom and some other players got together to use just a small sliver of our HD channels for data. It still allows us to do other audio programs but with that data and our joint venture with NAVTEQ we can supply traffic information in real time basis in individual markets. Just an application that goes beyond what we’re doing today. So, long answer to the question Jim, it’s just started and I don’t know what the business model is going to be and it’s going to be several years yet.

James Goss – Barrington Research

Are you tending to think the data type of applications will be more important than incremental programming?

David J. Field

I think the marketplace will have to decide that.

Operator

Your next question comes from the line of Michael Kupinski – Noble Financial Group.

Michael Kupinski – Noble Financial Group

I was wondering if you can flesh out your digital initiatives a little bit more? And, if you can talk a little bit about the non-traditional revenues in the first quarter? What were they as a percent of total revenues? And, did they grow year-over-year? And, I suppose that you include your Internet revenues in non-traditional, I was just wondering if you broke out your internet revenues? Were non-traditional revenues up year-over-year or down? Then, I just have a couple of follow up questions.

Stephen F. Fisher

Mike, I’ll do a preamble note and let David address digital. Digital is in our NTR category. Apart from digital there was not a meaningful change. I’ll let David address the digital aspect.

David J. Field

Digital as I mentioned is over 2% of our business now and growing rapidly but it really doesn’t capture the broader issue of what we’re accomplishing and where we’re going which again, goes to integrated marketing. And, the unique ability for radio and the Internet to work together creates an abundance of creative opportunities for us to put together custom programs for our advertiser and we’ve had great success with recent programs for people like Scion, Wells Fargo and others that have really transformed how we interface with our customers and the types of marketing relationships we are able to offer. I see that as a very strong growth area for us over the next few years. The digital numbers really only reflect again the pure digital part of that. They do not reflect the broader integrated marketing dollars and that’s really where we going to see the big growth I think going forward.

Michael Kupinski – Noble Financial Group

Then your Internet revenues, how much did they grow in the quarter if you just factored out the internet revenues?

David J. Field

Again, pure digital more than doubled for the first quarter. Now, it’s 2% of our revenues.

Michael Kupinski – Noble Financial Group

Do you have any thoughts on what percentage of revenues this might account for in the next year or two? Do you have any particular targets?

David J. Field

We expect it to continue to grow rapidly and beyond that, that’s about as much as we’re willing to say and frankly other than that it would be kind of guess work. Do I think it gets above 3%, 4%, 5%, 6% overtime? Sure. Do I think integrated is an even bigger number over time? Yes.

Michael Kupinski – Noble Financial Group

David, your digital initiatives, are they contributing to profits at this point? Or, are you still investing at this point?

Stephen F. Fisher

They are contributing to profits. Just some insight, we don’t have a pure P&L on it because still a lot of some of the staff is integrated doing both on air and then digital support but as it’s growing we will look at perhaps some P&L. Our estimate is it is growing to profits although perhaps dilutive to margins. A great growing business in our second year to be achieving this kind of run rate, our advertisers love it, our listeners love it so it’s exciting growth.

Operator

Your last question comes from the line of Marci Ryvicker – Wachovia Securities.

Marci Ryvicker – Wachovia Securities

I just have a quick follow up, with your Q2 guidance, you said you were pacing down low single digits but you’re guiding down low single to mid single digit decline. So, is the mid single digit decline just assuming that the economy turns down or is it something else to get there?

Stephen F. Fisher

Look, I think it’s we’re still in choppy waters and we’re in a choppy economy and advertisers are making last minute decisions as to how their business is and how they want to invest their advertising dollars. And, as a result, there’s variance in our number and we feel low to mid single digits is a fair and accurate depiction of where we expect the quarter to end up as we sit here on April 24th.

David J. Field

With that we thank everybody for joining us on today’s call and we look forward to talking to you in three months as we deliver Q2 results.

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

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

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

Source: Entercom Communications Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts