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Beasley Broadcast Group, Inc. (NASDAQ:BBGI)

Q2 2008 Earnings Call

July 31, 2008 11:00 am ET

Executives

Caroline Beasley - Chief Financial Officer

Bruce Beasley - President & Chief Operating Officer

Analysts

Tracy Young - JPMorgan

Leland Westerfield - BMO Capital Markets

Operator

Welcome everyone for the Beasley Broadcast Group second quarter 2008 results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host CFO, Caroline Beasley.

Caroline Beasley

Welcome to the Beasley Broadcast Group second quarter conference call. Before beginning, I would like to emphasize that this call will contain forward-looking statements about our future performance and results of operations that involve risks and uncertainties that are described in the risk factors section of our most recent Form 10-K.

This call will also contain a discussion of certain non-GAAP financial measures within the meaning of Item 10 of Reg S-K. A reconciliation of these non-GAAP measures with their most directly comparable financial measures, calculated and presented in accordance with GAAP can be found on the company's website.

I would also remind listeners, this call is being webcast live over the Internet and that a replay of the call will be available on our corporate website, BBGI.com, for five days after the call ends. Investors can also find a copy of today's press release on the investors or pressroom sections of the site. Bruce Beasley, our President and COO, is with me this morning as always to keep our remarks focus on the second quarter and operations outlook after which we will open the floor to Q&A.

So, moving on for the quarter, our revenue decreased 10.9%. In summary, the quarter-over-quarter revenue decline is attributable to four primary areas, 25% of the 10.9% decline was related to the Las Vegas cluster. Another 25% is related to the Fort Myers cluster, other 25% is related from not having revenue from the Florida Marlins in Q2 and then the final 25% is related to the reduction in revenue at our stations in Coastal Carolina and in Miami. In the six markets that reports to Miller Kaplan, our clusters did not perform in line with our markets on a combined basis.

As total revenue in these markets decline 9.4% compared to our clusters which declined 12.5%. However, in the first quarter conference call, we noted that we expected to incur an additional 3% impact to our net revenue from our decision not to renew the Florida Marlins and this factor accounts for the majority of the variance between BBGI and our market. So, if you will exclude the negative impact of the Marlins, we would have performed in line with our market. According to Miller, Kaplan our affiliate stations outperform the market as our total cluster revenue increased to 0.4% or market revenue decline 4.5%. In Miami our stations under perform the market as total market revenue declined 11.4%.

Our Miami cluster’s total revenue declined 15%. However, if you exclude the impact of not carrying the Marlins, then our cluster revenue decline is approximately 5% compared with the market decline of 11.4%. The Las Vegas market continues to be economically challenged and during the quarter, total market revenues decreased 13% while our cluster revenue declined 23%. Also, the Fort Myers market sold quarterly market revenue 20% behind last year with our cluster revenue’s decline in about 26% and our clustered base station continues to place greater than market decline and this is related to its rating's drop.

The cluster Carolina market also declined for Q2 placing an 11% decrease and our cluster was down almost 11% but absolutely, only BBGI market placing year-over-year gain with revenue increasing 2% or our cluster increase approximately 1%. We have another quarter of significant growth related to our interactive initiative with revenue from these sources rising 33% and accounting for 4.6% of the Company's total revenue. We recorded about $1.4 million in quarterly interactive revenue and generated net margins in excess of 60%.

Our station operating expenses declined 11% for the quarter, the decrease is primarily related to savings from not renewing the Florida Marlins sports contract and lower sales expense related to the decline in revenue and our SLI [ph] declined 10%. Corporate G&A excluding stock base compensation is $2 million for the quarter. This reflects an increase of approximately $100,000 which represents the Company's investment in interactive. Stock base compensation expense for the quarter was approximately $400,000 and this represents the decline of 38%.

Interest expense for the quarter decreased 40% which primarily reflects lower borrowing cost and voluntary repayment under our credit facility. During the period which totaled $5.75 million and year-to-date with voluntary repayment of $9.5 million. Our effective tax rate for the quarter was approximately 43% and there were no current cash taxes and turning to the balance sheet, total senior debt was 181.6 and [548] operating cash flow was 29.2 for an average of 6.2 one time. Cash on hand was $43.2 million, CapEx for the quarter was spent $323,000 and year-to-date is $827,000.

Now moving on to third quarter, effects of second quarter of '08 we continue the practice of providing specific quarterly revenue guidance and indicated that going forward, we expect our stations to generate quarterly net revenue growth or declines in line with the industry with a possible following exceptions. just as in the second quarter, we will incur an additional 30% intact to total revenue based on our decision not to renew the Florida Marlins broadcast right. Office to consider and as mentioned last quarter, the Fort Myers and Las Vegas market continue to have the biggest impact on the Company's revenue because of the housing and real estate environment.

The Miami market is bringing headwinds as well and these three markets account for approximately 50% of our total revenue. Now, let us review our expense assumptions for third quarter. We expect a decrease in expenses at 7% for the third quarter and this decline represents a savings from not renewing the Florida Marlins in Miami. Corporate G&A excluding stock base compensation expense is projected to be $2.9 million for the quarter and approximately $8.4 million for the year. Stock base compensation is expected to be $400,000 in third quarter and $1.8 million for the year.

G&A expense, we are projecting $800,000 for the quarter and approximately $3 million for the year and interest expense, we are projecting $2.5 million for the quarter and approximately $9.8 million for the year. Effective tax rate 43%. CapEx, we will spend approximately $1 million in the third quarter and we expect to turn in a total of approximately $3 million for the year which is a decline of about $1.5 million from our original projection. This will be the expense guidance we are providing for the third quarter and the year at this time and we undertake no obligations to update this information until the next conference call.

Thank you very much and now, we will turn it over to Bruce.

Bruce Beasley

As we have discussed on recent calls, the radio industry and traditional media in general is facing a host of challenges. According to the Radio Advertising Bureau in June, industry revenue was down 9% with May down 8% and April was off about 1%. General economic softness is impacting both national and local businesses with category weakness most pronounced for us in retail, automotive and telecom. Excluding the impact by the lack of the Florida Marlins revenue in Q2 '08, the Beasley clusters that report to Miller, Kaplan form roughly in line with our markets on a combined basis.

Our Miami results significantly exceeded the market and a number or all our stations exceeded the industry's performance. Our Philadelphia stations continue above the industry trimming with Augusta cluster with both recording modest revenue gain. In addition, our interactive initiatives continue to gain traction in both revenues however the Las Vegas and Fort Myers markets continue to endure very difficult economies related to the real estate downturn and some clusters specific issues in these markets resulted in our biggest quarterly revenue hits in terms of dollars.

I will say it again, it is a challenging time not only in media but in the economy at large. In light of the environment, it probably makes hints to the bulk of this morning's comments to reviewing the general strategic approach we are taking to arrive as we are getting things back on track. Our broadcasters are in the same boat when it comes to the challenges of the general economy. Our advantage comes from a 45 year history of operating in the industry which includes weathering some past very ugly environments. In this regard, the most important thing that we are doing is emphasizing the quality of our stations in terms of broadcast and programming and backing that up with the appropriate level of promotion.

It sounds basic but with the fragmented competition out there for consumer's times, it is absolutely imperative that we give people reason to listen to our stations. In a minute, I will talk about the expense manage initiatives in place but I will tell you now, we are not turning back on spending in areas such as listener research or promotion that are vital to the healthy operation of our station portfolio. Our Chairman George Beasley has guided us to understand that when times are tough, great people work together.

They work hard and they are resourceful. I think the second quarter results demonstrate the discipline and focus we have instilled companywide in controlling and managing cost. The press release and Caroline's comments highlight how with cut total cost and expenses as well as cost of services, station SG&A and corporate SG&A as well as interest cost. We have had every market manager to review their clusters, station by station, expense by expense, person by person and to get every contract out to determine if renegotiation is an option.

Expense costs are being carried out in a prudent matter such that they do not impact our competitive all market position and they contribute to our ability to record a 12.4% rise in 2Q net income and a 10.3% gain year-to-date but we know we will not save our way to prosperity and that there are few problems that cannot be solved by increased revenue so we are also addressing to the sales bumps including making sure our sales staffs are fully staffed.

We have been very clear in making our station personnel understand that simply shrugging your shoulders and using economy of the local market as an excuse for performance is unacceptable. There is business out there and if we are not aggressively out there pursuing it, someone else will. Also, we have our ongoing initiative to further capitalize on the integrated interactive offerings that have been so successful for us thus far.

In '08, we have recorded impressive revenue from programming such as program such as our high school testing promotion, streaming pre-roll ad sales and the online half price store area. These and other interactive efforts accounted for 4.5% of our total revenue from the first half of '08 which is up from 2.9% in the same period last year. Throughout the Company, I am encouraged by our commitment to capitalize on the strength with radio to embrace innovative and new ways of doing things and to reinvent radio as a formidable technology driven media and capable of competing with any other media.

There is a bright future in radio, MTV jocks, DJ is rising to the current challenges. On the whole, radio now reaches about 260 million Americans every week and we have about 4.4 million weekly listeners in markets that we still consider to be some of the most attractive in the country. Florida and Nevada are routinely pointed for their housing lows but at the past, it continues to be an indication of the future, these markets will be among the first to recover. Also in less than two years, we made significant progress to our goal of deriving 5% of our revenue from interactive activities and we are going to set the bar higher for this metric as we continue to enjoy this new source of high margin revenue.

Our HD Radio investment and build out is ongoing with 26 stations broadcasting in HD and 13 multicastings. Over 500,000 listeners have purchased the HD Radio and none of the major auto manufacturers are or will be offering HD receivers in new models. Finally, the challenges experienced in early PPM markets are finally starting to see some and I say some improvement but they still have a long way to go. Example in Philadelphia the 25 to 34 and other initiatives put in place in March wound up displacing some stations ranking and Arbitron has not provided a satisfactory explanation for that to us as of yet.

With that said, we do believe electronic audio measurement will ultimately live up to its promise of enabling radio to compete with other forms of digital media. I would like to thank our managers, sales people, on air talent, programmers, promotion staff and everyone throughout the Beasley Broadcast group for stepping up to the challenge and ensuring that we capitalize on the strong position as we build the many outstanding radio market. Press beginning to find their way into our income statement.

With that said, I would like to ask the operator to open the call up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tracy Young - JPMorgan.

Tracy Young - JPMorgan

Okay, I have two questions for Bruce and two questions for Caroline. For Bruce, can you tell us what retail, auto and telecom are down for second quarter and also can you talk about the market shares first that you saw in Philadelphia and some of the performance that you have seen and then to Caroline, can you talk about your things in CapEx side and then also on the interest expense. The interest expense guidance you are giving for the third quarter is somewhat to what I was expecting so I am wondering why the decline in second quarter thing.

Bruce Beasley

Tracy, I am going to let Caroline take those two questions you post to me because she is going to have some numbers that we are going to have to pull out for you really quick.

Caroline Beasley

Tracy, I did not hear the second one but the first question was you wanted to know how much retail and auto was down and telecom. Retail in second quarter was down 20% for us although it was down 28% and telecom was down 20%.

Tracy Young - JPMorgan

In Philadelphia?

Caroline Beasley

In Philadelphia…

Bruce Beasley

Are you looking for the market share revenue wise, Tracy?

Tracy Young - JPMorgan

Yes, I just normally you give some detail in how you perform in different markets in Philadelphia. Obviously you are up from the market so any detail you could give?

Caroline Beasley

Okay, our share obviously grew. I will have to; I will get that really quickly for you because I do not have it here.

Tracy Young - JPMorgan

For Bruce, if you could talk about some station performance?

Bruce Beasley

Well, we receive the performance at both Wired and WXTU. They are both contributing well to the overall performance of our cluster there and I think Caroline has these numbers you are looking for.

Caroline Beasley

Okay, so the shares for the second quarter growth are 9.4% last year to 9.9% this year.

Caroline Beasley

CapEx, we did reduce at $1.5 million and that is primarily due to just projects moving into next year and it is just for whatever reasons they have been delayed till next year. They are large projects and things are not coming together this year as we have expected but they have to be postponed till next year.

And then the interest expense, yes I mean it was down and I think our average interest rate for the quarter was about 4.5% and we are very happy about that.

Operator

Your next question comes from Lee Westerfield - BMO Capital Markets.

Leland Westerfield - BMO Capital Markets

I want to walk through leverage test now and over the next year and half, I think currently 6.75 is drifting on 5.75 and then 5.25, anyway if you could remind us with those leverage condition in government issues and then secondly, Bruce if you can elaborate a little bit on your comments about the PPM concerning this roll out and more importantly, what impact if any that might be having on the short run on…, you believe you had monetized your true lines? Thanks.

Caroline Beasley

Lee I will be answering your questions regarding leverage. The covenant currently is 6.2 5 times and we came in at 6.2 1 time for the third quarter, 6.25 the covenant will be through December 31 and then on March 31 there is a step down to 5.75 and then there is another step down March 31, 2010 to 5.25 and then another one in 2011 to 4.75.

Bruce Beasley

Lee, with PPM in Philadelphia, what we have seen happen is Arbitron did a pretty darn good job with the 25 to 34 initiative and we are seeing our Wired, our room with CHR [ph] doing a whole lot better there but what we cannot quite understand is when that 25 to 34 and other initiatives were put in place back in March or maybe February, we started seeing some other radio stations quite frankly over in radio station started being displaced in their ranking and one of those was our country station, WXTU had been a consistent fifth, sixth, seventh, 25 to 54, all of a sudden when these new initiatives took place, it was down to 10 to 11. So, we are trying to understand what happened there and that is why I say I think Arbitron has done a pretty good job but they have, I think, a long way to go. One thing that PPM does do and I think it shows, is that when they make changes, it will show in the industry. It will show in the marketplace. Now, we got to make sure that the changes they make reflect what the market actually is demo wise, sub-sale wise, gender wise, and so forth and so on. So, those were the same thing we are going through right now and having discussions with Arbitron.

Operator

There appear to be no further questions at this time.

Caroline Beasley

Thank you, Nelson and thank you everyone for dialing in today. We look forward in speaking with you next quarter.

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