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Emmis Communications Corporation (NASDAQ:EMMS)

F1Q09 Earnings Call

July 10, 2008 9:00 am ET

Executives

Kate Snedeker – Investor and Media Relations

Jeffrey H. Smulyan – Chairman, President and Chief Executive Officer

Patrick Walsh – Chief Financial Officer and Treasurer

Richard F. Cummings – President, Emmis Radio

Analysts

Jim Boyle - C.L. King and Associates

Mark Wienkes - Goldman Sachs

Lee Westerfield - Harris Nesbitt

Marci Ryvicker - Wachovia

Operator

Welcome to the Emmis Communications Corporation earnings conference call. (Operator Instructions) I'd like to introduce your host for today, Ms. Kate at Emmis in Indianapolis. Ma'am, you may begin.

Kate Snedeker

Thank you for joining us for today's conference call regarding first quarter earnings. I want to extend a special welcome to all the Emmis employees who are joining us and listening in and those of you listening in from our website, www.Emmis.com.

We'll begin in just a moment with opening comments from the Chairman and CEO, Jeff Smulyan, and Pat Walsh, our CFO. After their opening comments, our conference call moderator will come back on the line to instruct you on how to submit questions. Joining us to help answer your questions this morning is Rick Cummings, President of Emmis Radio.

A playback of the call will be available for the next week at 203-3690399.

This conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to Emmis' public filings with the SEC for more information on the various risks and uncertainties. Additional disclosure related to non-GAAP financial measures can found under the Investors tab at our website.

Jeffrey H. Smulyan

This has been an interesting quarter. It's actually been a very good quarter for us, very good station operating income growth. That's a result of better-than-expected revenues as well as significant cost controls.

As we said in our last call, we have now caught and by most metrics beat our markets. We're very encouraged about that because it's the result of some significant initiatives, especially in our three largest radio stations, KISS in New York, HOT 97 in New York and Power 106 had an exceptional quarter, all significantly beating their markets. And I think that's probably the most important thing. People focused on the performance of those three stations, and they have done a very significant job.

The ratings of the group also have been very good. We're finishing a series of books. Starting in New York, where KISS looks to be the number one radio station in the market in the last ever diary. So as the diary system finishes, it looks like we'll finish with the number on radio station in the largest population market.

In addition, good trends, you know, in New York with HOT, Power in Los Angeles, our Austin cluster, St. Louis, very encouraging turnaround signs in Indianapolis. Across the board, we're really very pleased with the ratings of the company.

In addition, I think the most important thing is that we're seeing the innovation of this company staring to pay off, both in programming - we see some encouraging signs with the new RXP in New York, some other PPM metrics have been encouraging - and that we have seen in a lot of places in the company, the innovation throughout Emmis.

Emmis Interactive, as you've seen, has made a lot of news and will continue to make some pretty interesting news in the near term. Really, it's become the hallmark of how our industry approaches the interactive experience, and it's been led by a remarkable team at Emmis Interactive by [Devon Ray]. I think if you talk to anybody in the American radio industry, the first thing they talk about when it comes to the digital experience is the things we've learned at Emmis.

In addition, the Broadcaster's Traffic Consortium we think probably the most significant new development in monetizing our digital spectrum, and it's been led - the first president, is Paul Brenner of Emmis, one of our Executive Vice Presidents. And it's only fitting that Paul was named president because he was the person, along with Scott Enright and Curtis Taylor and several of our other people, who really put this together. We could not be prouder of it.

So throughout the company I am encouraged by our sense of innovation. In addition to that, I'm encouraged by signs that we see in reinventing radio throughout the country. We have been a major supporter, an active participant, leader, of Radio 2020, both with Rick's position on the NAB board as well as my involvement with a working group that is working vigorously and will continue to meet to reinvent this industry, to bring it forward as we enter into the next decade.

In addition, I guess we've gotten some notoriety for working on our initiative to put radio tuners in cell phones, and I have been most encouraged by the progress that we've made in our discussions, not only with the wireless carriers but also with people at the FCC and members of Congress who believe our idea is a perfect solution to the Emergency Notification Act.

For all these reasons, I'm encouraged, but it's against a backdrop of an industry which is clearly very severely challenged. It's not secret all of media is challenged. Traditional media is challenged. You've read about the radio business. You can see the stories. You've seen the problems in television and certainly the problems in newspapers. And yet even new media, which is suffering fragmentation and which is struggling to find a business model. The only thing I can say is that I believe that radio, with its ability to reach now about 260 million Americans every week, has the ability to reinvent itself, and I believe that as that occurs, the people at Emmis will lead that way.

It's a challenging time. It's a challenging time not only in media but obviously in all the economy. But I think when times are tough, great people work hard. They roll up their sleeves and they find solutions, and I think we've found more of those solutions and are finding more here at Emmis than anyone else.

And I can promise you one thing. We will not quit trying to find those solutions.

Patrick Walsh

I'll walk you through some of the financial highlights.

Our diluted net loss from continuing operations for the quarter ended May 31, 2008 was $0.05 per share, an improvement over the loss of $0.07 per share during the prior fiscal year.

Net revenues for the fiscal first quarter were $86.8 million, a 0.5% decrease over the prior period. Pro forma net revenues for the fiscal first quarter decreased 2.5% compared with the prior year.

Our domestic radio net revenues outperformed our markets during the fiscal first quarter. Our net revenues decreased 3% compared to a 4% decrease in our markets, which significantly outpaced our FY '09 operating budget. The growth in domestic radio revenue includes certain revenue performance guarantees associated with our national sales representation agreement.

During the first quarter, excluding any revenue guarantees, our Los Angeles cluster fueled our performance as our two stations posted revenue down 3% compared to the LA market being off 6%. As Jeff mentioned, our three largest station brands - KPWR in LA, WQHT and WRKS in New York - each posted year-over-year net revenue gains.

Our [break in audio] New York cluster, the revenue gains at HOT 97 and KISS helped offset to some degree the early stage nature of WRXP, which we reformatted to rock in February. In total, the New York market was off 2%, and our stations were down 8%.

The Chicago market was down 6% in the fiscal first quarter, with our stations off 11%.

Our domestic radio stations closed June down 11% and were seeing comparable pacings in the final two months of our fiscal quarter ended August 31, 2008 on general economic softness impacting both national and local pacings, with weak pacings, particularly in automotive, electronics, entertainment - including media, movies and amusement parks - and cellular.

As Jeff also mentioned, we're hopeful that strong ratings headed into the final phase of the spring book will bolster sales in the coming months.

International radio continued to deliver record results. Net revenue for the first quarter fiscal quarter were $9.3 million, up 14% compared to the prior year and up 12% on a pro forma basis. Our Slovakian operation, Radio Expres, continues to drive our international growth, with revenues up 32%. Our Belgian and Bulgarian operations also exhibited strong revenue growth.

Approximately 69% of the revenue gains are attributable to the weakening U.S. dollar. Irrespective of the foreign currency gains, the performance of our international division has been outstanding. We expect this strong performance to continue in the coming quarter.

Pro forma revenues in our publishing division were down 5% during the first quarter to $22.7 million. General economic weakness began to erode revenue growth at each of our city regional magazines. With the exception of Atlanta Magazine, each of our magazines saw decreases in net revenue during the first quarter. This weakness has accelerated during the second quarter, with pacings down 13% compared to the prior year. Weakness in the real estate sector has been a prime contributor to the weaker second quarter pacings.

In June we made the difficult decision to suspend publication of our start-up magazine, Tu Ciudad, which targeted Los Angeles' affluent assimilated Latino market. The magazine made significant progress in three years, but was unable to meet the cash flow targets we set for the publication. We expect to reclassify Tu Ciudad into discontinued operations and record a $1.1 million charge in the second quarter for shutdown and severance costs.

Back to domestic radio and some color on the first quarter results. Through the hard work of our local national sales management and Katz, our new national representation firm, our national revenues outpaced our markets by 10%. Emmis was only down 2% compared to our markets being off 12%. Our local business was off 9% compared to our markets being off 6%. Strong NTR results, growth in third-party interactive revenues, and national revenue guarantees allowed us to outpace our market performance.

During the first quarter our largest category, Automotive, represented 11% of our radio revenues. Automotive revenues decreased 8% year-over-year.

Our second largest category, Media, was up 12%. The only other top 10 category that saw gains was Beverages.

During the first quarter, sellout was up 5% and average unit rate down 9%.

On the expense side, during the first quarter our station operating expenses excluding depreciation and amortization decreased 2%. Domestic radio expenses in the first quarter were down 10% as a result of previously announced work force reduction, lower revenue-related expenses such as commissions, and lower promotional spending, some of which is timing related and will be incurred later in FY '09. With our revenues beating our markets and tight expense control, these two factors allowed us to increase station operating income by 12%.

We do not expect domestic radio expenses to trend down at the same rate as Q1 during the balance of the year. Certain promotional expenses later in the year at our reformatted stations in New York and Indianapolis will impact our domestic radio expenses.

International radio expenses increased 16% during the quarter and 15% on a pro forma basis, in part due to the weakening U.S. dollar along with increased expenses associated with our fast-growing operations.

Publishing expenses were up 5% year-over-year and 2% on a pro forma basis.

Corporate expenses excluding depreciation and amortization were down 2% in the quarter.

On the balance sheet, we had $437.6 million outstanding under our term loan at the end of the quarter. Our leverage ratio a defined by our credit agreement was 5.55 times and our fixed charge coverage, 1.56 times. Our weighted average cost of debt at 5/31/08 was 5.54%.

Capital spending in the first quarter was $800,000, down 23% from the prior year. We continue to anticipate Capex to be approximately $7 million for the entire fiscal year.

With that, we can move on to Q&A.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Boyle - C.L. King and Associates.

Jim Boyle - C.L. King and Associates

Pat, if you guys are pacing down domestically roughly 11% in your fiscal quarter, are your markets also similar to those pacings?

Patrick Walsh

Our estimates are. It's still a little bit early stage because we don't have, obviously, the Miller, Kaplan information so far. But we actually see our market -

Jim Boyle - C.L. King and Associates

But from chatter?

Patrick Walsh

The chatter is that our markets are pacing a little bit better than what we saw in June, but still down significantly.

Jim Boyle - C.L. King and Associates

Rick, is there any quantifiable trend that suggests to you that the radio industry could rebound during recessionary times?

Richard L. Cummings

Not yet. I think there will be. I guess that's a - I think we'd all like to believe those things. But I haven't seen anything yet, Jim, that would tell us that.

Jeffrey H. Smulyan

You know, that used to be the - it's funny, I mean, I guess I've lived through so many of these that in a previous time the thought was that in a recession, this is when advertisers realize they couldn't lose market share, and we were the most efficient medium. Now obviously what we've seen the last years, all bets are off. But the old saw was  this was actually when we picked up a little share vis-à-vis our peers. I certainly wouldn't predict that now.

Jim Boyle - C.L. King and Associates

Jeff, in an era of potentially long-term lower multiples in private market radio transactions, would Emmis seriously consider selling an individual asset at a lower-than-historical multiple but a good multiple in these much-lower times?

Jeffrey H. Smulyan

Jim, let me answer that this way. I don't think anybody who sits in this chair is going to preclude any option. I don't know how I can say it anymore strongly than that. I think you look at all of your options and, in a world which is changing so much, clearly - clearly - we would think about that.

Jim Boyle - C.L. King and Associates

Okay, final question. Rick, the Portable People Meter service is about to commercially launch in your two biggest markets. When the PPM launched in Philly and Houston, there was revenue disruption. Putting your stations aside in New York and LA, which of those two radio markets should see the most revenue disruption from PPM launch, and how long do you think it happens?

Richard L. Cummings

Well, I don't know which market, Jim. I'm not really - I couldn't tell you. I think we'll have a shakeout. I think we sort of budgeted at the beginning of the year in anticipation of that based on what we saw in Philadelphia.

I don't think it's going to be as steep as what Philly went through because a lot of those buyers talk to each other and a lot of the people who buy Philadelphia are in New York. So I guess from that standpoint, perhaps LA might have a little bit more exposure.

But we sort of put that into our calculations when we started the year, and we believe that it'll take some time, but you're going to see such tremendous compression in the ratings that the best sales organizations are going to be the ones that do well, and we think we're pretty geared up there.

Jeffrey H. Smulyan

Jim, remember one thing. You know, we strongly believe that one of the things that's hindered us as a medium is not having credible data. We think PPM solves that.

And I'm not sure that the economic disruption in Philadelphia and Houston has been very significant. You know, there's countervailing data. It isn't like these businesses, these markets, fell off the face of the earth. There's some data that actually they did a little bit better.

So I don't want to, you know, add to - I realize there's sort of a sky is falling mentality with everything we do. We think the net result of PPM will be a positive for this industry.

Operator

Your next question comes from Mark Wienkes - Goldman Sachs.

Mark Wienkes - Goldman Sachs

I was just wondering, could you give us more on the momentum and, I guess, the timing of the rollout of the Broadcaster Traffic Consortium, what's the competitive advantage of this consortium versus the other alternatives that are out there, and then how this plays into the HD radio push?

Jeffrey H. Smulyan

Well, it is - and I'm not the best person to describe all the technical iterations, but quite simply it is the ability to use a portion of our HD spectrum to deliver real-time data to maps in cars and other portable devices. We are partnered with NAVTEQ. What NAVTEQ needed was the ability to roll this out throughout the United States.

The competitive advantage is the finance-supported model, Mark. We think that's the ultimate killer app. People want real-time traffic data, but they're not really dying to pay $10 or $12 a month, especially in times like this. The NAVTEQ Broadcaster's Traffic Consortium model is that when you are, you know, in your car and you turn on your map, it immediately uploads real-time data, and it does that with all devices, so ultimately cell phones and Garmin instruments and whatever else.

And the killer app is that we have universal distribution. It's not one company that has some markets but not all or may, you know, buy in or sell out a market. This is a consortium of a number of broadcast companies.

And I couldn't be prouder of Paul Brenner and Scott Enright, who put this together.

Patrick Walsh

Mark, the only other thing I would add is the real competitive advantage - because you know Clear Channel, SIRIUS and XM have traffic services as well - but by partnering with NAVTEQ, Jeff's right, we've got a tremendous distribution footprint to provide them, but NAVTEQ owns this market. They have the mapmaking market. They're got 90% market share. They have the best data. And they've got intimate relationships with the automakers.

And so we think this really gives us an opportunity to integrate HD radio into the dashboard, perhaps in an even more rapid manner than we've been able to do with audio. Traffic is an application that all of the automakers want. NAVTEQ is a preferred supplier, and we've put together a distribution network that's going to give them coverage pretty much everywhere.

Mark Wienkes - Goldman Sachs

Right. So then these are like banner ads that will be above or next to or below whatever - the maps?

Jeffrey H. Smulyan

Yes. If you're driving by Dunkin' Donuts and you see that there may be a delay, you pull into Dunkin' Donuts and it says, you know, special on cheese danish today.

Patrick Walsh

And what's nice about it, Mark, is this rings the cash register quickly. We're able to use kind of an intermediate technology, RDS, to deliver the traffic information to units that NAVTEQ has in the marketplace right now. So this is going to ring the cash register quickly for the broadcasters involved in the consortium. We don't have to wait until automakers actually integrate HD devices. We can start now and with HD we have more bandwidth and can send more and more content out to the cars of the future.

Mark Wienkes - Goldman Sachs

And then - sorry to dive so deeply, but you mentioned driving by Dunkin' - is it location-based ads then, as well, or is that the next step?

Jeffrey H. Smulyan

No, it can be location-based ads, just as your driving is location-based obviously. You get on the 405 freeway or I40 and you're driving to work and you see patterns and alternate patterns as you drive by certain things, it's location based.

Mark Wienkes - Goldman Sachs

Interesting. And then your cost side of the equation to NAVTEQ since it's ad-based on your side, is there a minimum guarantee or is there a percentage deal?

Jim Boyle - C.L. King and Associates

We have a percentage of the deal. And what we're contributing is a very small percentage of our digital spectrum. This is a very small percent, which allows - remember, the map business was static. They put maps in cars, and you could where your way to work was, but the challenge was that when there were tie-ups you didn't know that. This now solves that problem.

Operator

Your next question comes from Lee Westerfield - Harris Nesbitt.

Lee Westerfield - Harris Nesbitt

Just two questions. First, to drill into the Publishing segment, if you can talk about which titles fared better or worse during the quarter, I'm just trying to understand the revenue trends within the collection of the titles. And then secondly, the publishing costs; it looks like they took a notch up in the quarter. If you can help me understand that a little bit better. And then the final question relates to your agreement with Katz. Correct me if I'm mistaken certainly here, but my understanding was that there may have been a minimum guarantee that would be anniversaried at some point, and if you could help me understand if that's true and when that might occur.

Patrick Walsh

Sure. Let's knock out the publishing questions first. It's been somewhat general across the board with the exception of, as I mentioned, Atlanta Magazine had a decent quarter. Country Sampler, our crafting magazine, tends to do well when economic conditions are somewhat challenging. The rest of our city regionals had been large immune to some of the economic pressures. The luxury segment has performed very, very well. I think what's happened is the real estate market began to really affect these publications. They take a lot of advertising from homebuilders, you know, remodeling companies, and I think that's hurt some of our larger publications. But I think the weakness we're seeing the second quarter is somewhat general across our magazine group.

The expense uptick is just, you know, you see increases in - getting a little bit of feedback - you see increases in energy prices, which cause an increase in some of our paper and printing costs. Some of our personnel costs have gone up. But given the weakness that we see in the second quarter, we're taking a hard look at our publishing operating expenses, and I don't think the expenses will trend up at anywhere near the rate they did in the first quarter for the balance of the year.

In terms of Katz, our national rep agreement, any revenue guarantees are for this current fiscal year, and there's no additional guarantees thereafter.

Operator

Your last question comes from Marci Ryvicker - Wachovia.

Marci Ryvicker - Wachovia

Can you just clarify the negative 11%? Is that what you finished in June or is that what you're pacing now? And I'm assuming that's excluding the national rep agreement.

And then the second thing is, can you remind us what your covenants are?

Patrick Walsh

Sure. As I mentioned in my remarks, the down 11 was where we closed June. And I think I mentioned that we're seeing comparable pacings in the final two months of the quarter.

We currently have a 6.5 times leverage covenant, and a 1.25 times fixed charge covenant.

Marci Ryvicker - Wachovia

Okay. I just have one last question.

Jeffrey H. Smulyan

Marci, to clarify, that does not include our guarantee.

Patrick Walsh

Correct.

Marci Ryvicker - Wachovia

Okay. Are you seeing any cancellations at this point more than you would normally see?

Jeffrey H. Smulyan

Rick, do you want to answer that?

Richard L. Cummings

We did in June, but I can't tell that we're seeing any further out, Marci, because these come in at the last minute, and they aren't category specific. But we've definitely seen some, sure.

Kate Snedeker

Thanks, everyone. Thank you for joining us. A replay of the call will be available, again, until next week  2033690399.

Jeffrey H. Smulyan

Kate, again, I want to thank all of our people. I could not be more encouraged by the fruits of a lot of the innovation that we've done and the leadership position we've taken. But clearly, you know, we have a challenged industry in a challenged time, and all I can pledge to our investors is that no one - I guarantee you, no one - will work harder or more creatively to find solutions for this portion of American media. Thank you.

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Source: Emmis Communications Corporation 1Q09 (Qtr End 5/31/08) Earnings Call Transcript
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