Emmis Communications' CEO Discusses F4Q13 Results - Earnings Call Transcript

| About: Emmis Communications (EMMS)
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Emmis Communications Corporation (NASDAQ:EMMS) F4Q13 Earnings Call May 8, 2013 9:00 AM ET


Kate Snedeker – Investor Relations

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

Patrick M. Walsh – Executive Vice President, Chief Financial Officer and Chief Operating Officer


Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. This call is being recorded. If you have any objections, you may disconnect at this time.

And now, I'll turn the call over to Kate at Emmis. You may begin.

Kate Snedeker

Thanks, Timothy. Good morning, everyone. Thank you for joining us for today's Emmis conference call regarding fourth quarter and full year earnings. I want to extend a special welcome to all the Emmis employees joining us and listening in this morning.

We'll begin in just a moment with opening comments from Emmis Chairman and CEO, Jeff Smulyan; and Pat Walsh, CFO and COO. After opening comments from Jeff and Pat, we'll respond to questions submitted via e-mail to ir@emmis.com. A digital playback of the call will be available until May 15 at 402-998-0731.

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 have been posted under the Investors tab of our Web sitewebsite, emmis.com. Jeff?

Jeffrey H. Smulyan

Kate, thanks. This has been really – we're now giving the results of what has been a transformative year. I could not be more proud of what happened last year and I could not be more proud of what's happening now. Because of our unique reporting structure, we have a pretty good handle on what the first quarter of our next fiscal year will look like and we're equally pleased with that. I think it was a transformative year for Emmis for a couple of reasons. I think we solved this industry's most vexing problems with capital structure and we did it because we have a unique culture here and a culture that I think stands out and I think people are starting to understand that their culture makes a difference.

It's a culture of innovation. It's a culture of collaboration. And it's really a culture of a commitment to getting great results. Last year, our domestic radio outperformed beginning our Q4. Our stations were up 4 versus markets up 3. For the year, we were up, I believe, four against markets were up slightly under 1. So, again, another year where we've significantly outperformed our markets; and that's continuing into the New Year.

We were up dramatically in our first month of the fiscal year, up almost 9 points in March and up 8.5 points in April, and pacing up just around 5 points in May. Contrast it to what we are seeing the rest of the industry, we're seeing a pretty dramatic difference between this company and everybody else. And again, I attributed to just a great job of performance from our people.

To give you an idea of what that’s led to, it really leads us to one of the least levered broadcasting companies. And as you know, that's what we did in our last fiscal year. In fiscal ‘13, we really completed the transformation of the balance sheet of Emmis. And it now repositions the company to build at a time when we think there are going to be unique opportunities for this company out there, and we’ll talk about those in the future whether we do it with our balance sheet or probably more likely with other partners, but this would probably be a year of some new opportunities that Emmis will exploit.

As I said, we finished the year under 3.4 times since our debt is under 5%. We know that in the course of the next year, we will significantly deleverage, and that will open the way for more opportunities, and we’ll make decisions about exactly what we do with our balance sheet, and what we do with the company. And couple of more things I want to point out.

Just in the last week, Emmis Publishing won Three’s National Magazine Awards. These are the Emmys of the magazine awards. And for the most part, we compete with the Condé Nast and The Time Warners and The Merediths, and all of these national magazine chains. And yet, for a small group, Texas Monthly won Two National Magazine Awards, Los Angeles Magazine won one. We couldn’t be prouder.

In the radio division, HOT 97 was named the winner of the Service to America award by the NAB and it also won Crystal Award at the NAB convention last month, all indicating that our people not only have a great culture and produce great results, but make a difference in the communities they live, where they live. HOT 97 was given its award because of the remarkable effort of all of our people in providing comfort and relief and vital information to the people of the Metropolitan New York area during Sandy. So, again, I think that's typical of what we can do throughout this company because of our culture of innovation.

And speaking about the innovation, our smartphone application, NextRadio won a Game Changer Award at the NAB in April. Again can't state how fervently, I think, it's important that people know how important NextRadio is. We believe that it has a chance to be the game changer for the American Radio industry.

And as I look across the landscape and I see an industry which was up 1% last year and it's pacing hopefully that well this year, we think it needs a great shot in the arm, and we think that shot in the arm is NextRadio. We are moving, our team is moving toward the integration of the NextRadio application in smartphones. You will see more about that launch as we go on. A lot has already been written about it. But I think that has a chance to change the trajectory in the American radio industry and I think that's what we need.

We know that it will increase listening, as it does all around the world. We know that it will open up a dramatic new revenue stream with enhanced ads and couponing and location-based services. Probably the most gratifying thing that I have seen in the last almost 40 years in this business has been number one, the response to the NextRadio application. When people see it, they understand it. They know that it makes a difference in how the American public will relate to radio and also how our industry has rallied behind this effort, the near-unanimous support for this effort to get radio on smartphones. And we’ve said we won't rest until there is an active radio in every one of the 315 million smartphones in United States, and we’re on our way, and I’m proud of that.

One other update, we filed our memorial with ICSID in late April. This is regarding our case in Hungary. As many of you know, we were nationalized in Hungary along with another national network. Just to fill in the blanks, our memorial claims that our loss was $73 million to $82 million, and that’s not – and in addition to that, there will be attorney's fees.

These are high damages. I think a lot of people have wondered, but you have to remember that Sláger was a network that, when it was taken, reached almost 4 million people a week in a country of 10 million. It was the dominant national radio brand when it was nationalized, and the damages we claim are high because we believe that it was a very, very, very valuable franchise.

As many of you know, we won in the Hungarian Courts twice, and then the Hungarian government chose to ignore the verdict. We now know that we are in the ICSID forum, which is the international forum, and the Hungarian government would be bound by any decision.

That will be a process that will play out over the next year to 18 months to two years, but we feel very confident about the case, and we think that we will be vindicated. And hopefully, in the future, the people of Hungary will be vindicated for the challenges that they are going through with the government they have.

So with that, I think it's been a remarkable year. I am excited. We are on our way here. And we are on our way thanks to the people of this company that has really made it a unique enterprise in American media.


Kate Snedeker


Patrick M. Walsh

Thanks, Jeff. Good morning to everyone on the call. I'll give you a little flavor on the financial results. As Jeff outlined, our results for the year ended February 28, 2013 reflect our success at not only transforming our balance sheet, but an equally successful period for executing our operating strategy and our continuing radio and publishing operations.

The financial results for the three months and 12 months ended February 28, 2013 are impacted by a number of transactions the company has undertaken over the past two years, including the required accounting for the sale of a controlling interest in three stations to Merlin Media during September 2011 and the LMA of WRKS-FM in New York to ESPN in April of 2012.

We encourage those on the call to refer to the additional financial information disclosed at our Web site, emmis.com, to assist with better understanding the pro forma results of our radio and publishing operations.

During the fourth quarter ended February 28, 2013, we reported net revenues up 2%. Pro forma for our station divestitures, radio net revenues consisting solely of our domestic stations grew 3%. Revenues in markets where Emmis competes, excluding barter revenues, grew 2.8% during the quarter. Emmis' pro forma radio revenues reported on the same basis to Miller Kaplan grew 4.2%.

Our New York and Los Angeles stations beat their markets and demonstrated double-digit growth and our market leading cluster in Austin also outperformed the market. Our national revenues were up double-digits during the quarter. Local was up, in line with our overall revenue performance and better than market. Digital was up high single-digits and MTR was down during the quarter.

Taking a quick look at our monthly trends, we were up 11% in December, down 1% in January and up 3% in February. During Q4, our number of minutes sold increased 2% compared to the prior year, with average minute rates flat. Automotive was once again our largest category, representing 11% of revenues, with the category growing nearly 20% as U.S. auto sales continued to accelerate.

Wireless and financial services also exhibited strong growth at approximately 20%. Education and media also showed high mid-single-digit growth, high – mid to high single-digit growth.

Other top ten categories such as restaurants, entertainment, healthcare and retail showed flattish growth with beverages off during the quarter. Revenues in our publishing division were up 2% in the quarter as five of our six city regional titles exhibited positive revenue growth. For the full year ended February 28, we reported net revenues down 3%. Pro forma for the Merlin and WRKS transactions, net revenues were up 2%.

In radio, revenues were up 3%. Revenues in markets where Emmis competes, again, excluding barter, grew 0.7% for the year, whereas Emmis' pro forma radio revenues reported to Miller Kaplan on the same basis grew 3.4%. As Jeff mentioned, this is the second year in a row that Emmis has outpaced its markets by approximately 3%.

For the year, four of our five Miller Kaplan markets beat their respective markets – Los Angeles, New York, Austin and Indianapolis, each gained market share during the year.

We were able to beat our markets in each revenue category. National was up 5% for us, local up 3%, NTR was flat, and digital up 20% for the full year. We were at or better than market performance in 10 of the 12 months during the fiscal year.

During the full year, we sold 4% more minutes at 2% lower average rates. Automotive was our largest category, representing 10% of our revenues. It grew 14% during the year. Wireless was the other double-digit gainer, up 13% with healthcare and education both up 9%. Beverages and restaurants were the only two top ten categories showing modest year-over-year declines.

Revenues in our publishing division were flat for the year. However, when you exclude trade, revenues in publishing were up 5% for the full year with Los Angeles and Cincinnati showing double-digit growth and Atlanta and Texas also exhibiting growth during the fiscal year.

Looking forward, since our Q1 is very nearly over we thought we could give some additional color. Since many of our competitors are reporting calendar Q1, for comparative purposes, we were up 3% during calendar Q1 and markets up 2%. Performance in our first fiscal year, as Jeff mentioned, has strengthened. We were up 8.6% in March on markets up 5%. We completed April, up 8.6%. We don't have Miller Kaplan yet for April and we're pacing up mid-single digits for each of the next several months. Our publishing division is pacing flat for the first three issues of the fiscal year, but showing stronger pacings in Q2.

In terms of station operating expenses, excluding depreciation and amortization, Q4 expenses were down 5% and full-year down 8%. Pro forma for our station transactions, radio station operating expenses were down 3% in Q4 and publishing expenses up 10% in the fourth quarter, which includes a write-off of $1.2 million in direct response advertising expenses. During the quarter, we sold our two remaining international radio operations in Slovakia and Bulgaria for $22.9 million and used the proceeds to pay down debt and fund future legal expenses associated with seeking remedies for the unlawful taking of our Hungarian broadcast license.

Our case against the government of Hungary is proceeding at the International Centre for Settlement of Investment Disputes, and the arbitration process is expected to continue in 2013 and into 2014.

At 2/28/13, the company had $67 million outstanding under our senior credit facility with a weighted average cost of borrowing of 5.1%. Also on our balance sheet is $79 million of 98.7 FM non-recourse debt related to the WRKS transaction.

I recommend investors reference, the leverage calculation on our website, which reflects leverage at 3.4 times EBITDA as defined in our credit agreement, which excludes both the non-recourse debt and the related LMA payment.

We finished fiscal ‘13 with approximately $66 million in accumulated net operating losses. We spent $3.4 million on CapEx in fiscal ‘13 and we expect to spend slightly less than that amount in fiscal ‘14.

We're proud of our operating performance the past two years, and our ability to execute our operating strategy, retain our unique Emmis culture, all while executing a series of transformative transactions. I know Jeff joins me in thanking our colleagues at Emmis for their dedication and spirit during what has been both a turbulent and triumphant period for the company.

So, with that, Jeff, we've got a couple of questions submitted. I think we'll jump into the…

Jeffrey H. Smulyan

I think that's fair, Pat. Thank you.

Question-and-Answer Session

Patrick M. Walsh

So, Jeff, notwithstanding the positive results for Emmis, the radio industry has had tepid growth over the last few years, is there a catalyst to change the growth prospects?

Jeffrey H. Smulyan

Well, as we talked about, I think there is one catalyst and that's FM chips in cell phones. I think that is the one thing that will change the perception of our industry. We know that around the world, they see 10% to 15% more listening and simply because this is the one portable device that everybody, almost all over the world, carries with them all the time. And so, we think that listening will increase. That will help the industry. We know that there are significant back-end revenue opportunities.

We can, for the first time, do enhanced ads with coupons, location-based services. We think that could create a tremendous amount of new revenue for this industry. But most important, Pat, we need a shot in the arm. We need a perceptual change. I spent a lot of time speaking to college students and groups and civic groups and we have to have people think about radio in top of mind. Nobody thinks about the fact that we reach 93% of the population. We have much less fragmentation than newspapers and then, than television. And that on a six plus basis, we have over 275 million people a week listening to us.

We needed to drive that point home. We need to change perception. We think being in smartphones can do it, especially with what we've seen with the response to the interactive application. It's one thing to listen to radio, but when you can see album art and you can rate records and you could download coupons and you can really interact with the radio station the way you never have from the palm of your hand in a highly visual and highly engaging way, I'm hopeful that that's a game changer. And I think most of my peers in the industry feel the same way.

Patrick M. Walsh

Jeff, another question, kind of along similar lines. Do you see IP-based audio platforms like Pandora, Spotify, iHeart, TuneIn sapping AM and FM's radio audience and growth prospects? Do you see them increasingly as a threat in the digital dashboard and what's radio's answer?

Jeffrey H. Smulyan

Well, radio has to be everywhere. And we've said that. We're on TuneIn; we're on iHeart. We need to be everywhere our listeners are. But one thing we've learned, we also have to be aware of, is the terrestrial distribution mechanism, of which still about 90% of all of our distribution occurs, is a very profitable model.

We've been streaming like most of our brethren for almost 17 years and we haven't cracked the code. We know Pandora hasn't cracked the code. We know TuneIn hasn't cracked the code or Spotify, so we know that that's a challenge. I have one friend in the industry who says, let's be honest. When we take a terrestrial listener at a 35% or 40% margin and we can convert that same listener to an IP-based stream, that listener goes from a 30% or 40% margin to zero.

That is so far going to be a challenge. We'll never stand in the way of an idea whose time has come. But what we believe with data metering, when people start understanding that there is a real cost to them to listen in an IP environment, and that we can provide a free alternative over the air, we think that it will change the game.

Patrick M. Walsh

Couple of folks asked for an update on NextRadio, you've done some of that already. Folks want to know how much we're spending on the project, when do we expect it to launch on phones. What will the app do? And how will Emmis make money?

Jeffrey H. Smulyan

Well, that's a lot of questions. It is progressing nicely. I don't think we've revealed the costs, but it's been significant. And this has been a labor of love in this company on two fronts. One, meeting with members of Congress and the FCC and testifying before Congress and meeting with wireless carriers because we believe this would be the significant game change in the industry. So getting cell phones have radios was one. We spent a tremendous amount of money over the last five years, all on our own nickel, to make the case.

The second part was when the NAB believed that an interactive tuner was critical to our future. That was based on research. That was based on decisions and discussions with carmakers and cell phone manufacturers. The feeling is, we had to have interactivity. And Emmis was there, Paul Brenner and his remarkable team were there. We were the only one to ones who said, we'll build it. We are building it. The response has been spectacular. For those on the call, and the investment community or people in the industry who have not seen it, I urge you to see it, because we think it does change the game.

We believe that we'll have phones in the market probably in the next 60 days, and they will start. And we believe that this process – if the American public responds as we hope they will, and they see that radio can perform in a whole new light in a device that they carry with them, we think it is the game changer for the industry.

Patrick M. Walsh

Jeff, a question on the radio strategy. How have you been able to grow faster than larger players like Clear Channel, CBS and Cumulus. And does that formula make you want to buy more radio with your improved balance sheet?

Jeffrey H. Smulyan

Well. And Pat, you're one of the architects of that performance. But it's not just you. Whether it’s Alex Cameron in New York and her remarkable team or John Beck in St. Louis or Val Maki in LA or it's Charlie Morgan here or Scott Gilmore or James Conner, it’s people who consistently care about what they do, who create collaborative teams that are confident that work hard, that have a passion for the product they put out and that there's a reason Emmis is one of the only radio companies that always end up on best places to work lists. It's because there is a bond in this company.

I think the thing that's probably made me more excited and more proud is seeing employee surveys when we really asked our employees to do so much with so little in the last few years. And listen, this is still a challenging time, but it’s the culture of people who perform and people who just will take any hill. And I think that is different. Listen, I have wonderful friends in this industry at all the companies you named and many others. And I think they are all very good broadcasters. But I'm incredibly proud of what we've created at Emmis. We've done it sometimes with one hand, sometimes with two hands tied behind our back. This year, we don't have any hands tied behind our back. So we'll see what we can do and there will be some opportunities and we'll see what they are.

Patrick M. Walsh

I guess this is the opposite side of that same coin, if you're going to buy more radio, someone asked, you've sold a lot of radio, both domestic and international, your interactive business and the magazine in the past two years.

Jeffrey H. Smulyan


Patrick M. Walsh

Are you done selling? Are there more divestitures in the store?

Jeffrey H. Smulyan

I would be stunned if there are. Obviously, I mean, our debt listen, this company in the last six years has paid off over $1,100 million of debt. And now, we'll have, probably in the next year, less than $50 million of debt. You never say never in life. We've sold things we really desperately didn't want to sell, but we knew that in order to survive and thrive in the future, we had to fix our balance sheet. We're not unlike anybody else in American media. I think we were more adept at doing it because I think our people worked harder. So you never say never. I would think we're probably more of a buyer than a seller. But it's very clear. We're not talking to anybody about selling anything right now. And that's probably likely to remain that case. We're talking to people about buying things; we're not selling.

Patrick M. Walsh

A couple of questions about Hungary. I think we've already spoken of that, but there were other questions looking for an update on the ongoing litigation with the preferred shareholders.

Jeffrey H. Smulyan

Well, as you know, again, we try not to litigate very much around here, but we've had two pretty significant controversies. We feel like we'll be vindicated in the Hungarian matter and we feel like we had been vindicated already with the preferred shareholders. We won a pretty resounding victory in the first round with the preferred shareholders. We take the position that, as they want to continue to litigate, we're here. We certainly have a large war chest to keep spending, because we think that every time they litigate, they're going to lose again.

And we think that at some point it will be over, but we've also said – people who know us know – I used to have an uncle who said – he always was a pioneer who wanted to be an early settler. We always would like to settle. And we're willing to settle and we're willing to litigate. It's up to them.

Patrick M. Walsh

I don't know if this question came from your uncle, but...

Jeffrey H. Smulyan

If it came from your uncle, we've got a different call. (Inaudible) He was a lovely man. He passed away many years ago.

Patrick M. Walsh

You mentioned you're looking – on previous call, you mentioned that you're looking to partner with private equity on possible M&A.

Jeffrey H. Smulyan


Patrick M. Walsh

How is that process going? What are you looking at?

Jeffrey H. Smulyan

Well, we're looking at several different things. And we have had very intriguing talks with some very large private equity sources. We've identified one, possibly a second, and that's ongoing. I think what we do might be pretty interesting to people. And since we haven't done anything yet, there is none to announce.

Patrick M. Walsh

Last question. You're generating a lot of free cash flow relative to your stock price.

Jeffrey H. Smulyan


Patrick M. Walsh

A lot of that's going towards amortizing the $8 million to amortize to debt, but there is free cash flow on top of that. Free cash flow yield is really high, yet the stock price doesn't seem to move. What do you think it will take to get the price moving again?

Jeffrey H. Smulyan

Well, I think the industry needs a game change. And I’ve said that for several years. It's frustrating. I deal with a lot of friends in this business who are having big troubles fixing their balance sheet. There is an overhang in a lot of areas in the industry. I think the industry has to have a catalyst. It’s frustrating to me. It's frustrating to everybody in this company and in this industry to see the stocks languish because there just aren't many people paying attention. But I think if we do something, somebody is going to notice that this is a company that's producing pretty remarkable results and has some pretty remarkable assets and people and it's an industry that reaches an awful lot of people every week. That makes some big different in the lives of the American public. So, hopefully, something will notice. So that's why we've been so fanatical about radio and Smartphone’s because we think it will cause people to look at radio differently and that's what we need.

Kate Snedeker

Before Jeff’s closing comments, just a reminder, a playback of the call will be available until next week, May 15, at 402-998-0731. Jeff?

Jeffrey H. Smulyan

Kate, thanks. Again, I want to thank our employees first. They're the reasons that we've come through what we've come through. They're the reasons that we have a remarkable culture. They're the reasons that we innovate at a level that's different than anywhere else in this industry. And they're the reasons that we're poised to do some pretty significant things in the coming year and years ahead.

So, first, I want to thank them. I want to thank everybody for listening today. Stay tuned to the Emmis story, stay tuned to the American radio story. We think that there are some better times ahead. Thank you.

Kate Snedeker

Thank you.


And that concludes today’s call. Thank you all for participating. You may now disconnect.

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