Spanish Broadcasting System, Inc. (NASDAQ:SBSA) Q1 2016 Earnings Conference Call May 18, 2016 11:00 AM ET
Brad Edwards - IR, Brainerd Communications
Albert Rodriguez - COO
Joseph Garcia - CFO
Robert Castro - VP of Finance
Juan Garcia - EVP
Patrick Fitzgerald - Robert W. Baird
Jason Bernstein - Odeon Capital Group
Jonathan Sacks - Stonehill Capital
Ron Silverton - ALJ capital
Welcome to the Spanish Broadcasting's First Quarter 2016 Conference Call. [Operator Instructions]. I would now like to turn the conference over to Brad Edwards of Brainerd Communications. Please go ahead.
Thank you, operator and good morning, everyone. Before we begin, please recognize that certain statements on this conference call are not historical fact. They may be deemed, therefore, to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. In particular, statements about future results expected to be obtained from the Company's current strategic initiatives are forward-looking statements. Many important factors may cause the Company's actual results to differ materially from those discussed in any such forward-looking statements.
These risks and uncertainties are described in further detail in the Company's filings with the SEC. You're directed to these filings for more detailed information. Spanish Broadcasting System undertakes no obligation to publicly update or revise its forward-looking statements. Please also note that we will be discussing non-GAAP financial measures within the meaning of the SEC rules. The Company believes that operating income or loss before depreciation and amortization, loss or gain on the disposal of assets, net and impairment charges and restructuring cost or OIBDA, is useful in evaluating its performance because it reflects a measure of performance for the Company's stations before considering costs and expenses related to capital structure and dispositions.
This information is not intended to be considered in isolation or as a substitute for net income or loss calculated in accordance with U.S. GAAP. A reconciliation of the Company's U.S. GAAP information to OIBDA is provided in the table attached to the Company's 2016 first quarter earnings release which is available on the Investor Relations section of the Company's website at www.spanishbroadcasting.com.
I would now like to turn the conference call over to Mr. Albert Rodriguez. Please go ahead.
Thank you Brad. Good morning, ladies and gentlemen. Welcome to the SBS 2016 first quarter earnings conference call. On today's call, we will provide an overview of recent operating developments and review our financial results. Joining me today are Joseph Garcia, our Chief Financial Officer, Juan Garcia, our Executive Vice President, Robert Castro, Vice President of Finance and Frank Soricelli, Corporate Controller. Now turning to our first quarter operating highlights. During the first quarter, we continued to execute against our strategic plan and made progress, expanding our overall reach and further enhancing our digital offerings and capabilities.
Our Radio Station group remains in a strong position across major Hispanic markets and we continue to grow our multi-platform audience by leveraging industry-leading content and strong artist and talent relationships. We have also further expanded our mobile and social media presence and our LaMusica app continues to generate strong downloads and engagement metrics. Through our unique combination of assets, we deliver our advertising partners a highly engaged, multi-platform audience that connects their brands and offering with multiple attractive demos. One of our key strategic vehicle is our AIRE Radio Network. To date, AIRE currently reaches over 11 million weekly listeners across an affiliate group of 100 stations in 53 markets. AIRE's currently footprint includes Hispanic DMA coverage of 90%, with a presence in all of the top 10 and 30 of the top 30 markets. The network delivers a number of attractive demographic groups, including millennials, young adults and families.
AIRE Network sales decreased during the first quarter which was disappointing. The decline was mostly due to sales management issues which we have moved swiftly to address. Earlier this week, we announced the addition of two new veteran sales executives to our AIRE team. Both Michelle Marino and Erika Marrero are highly seasoned industry veterans with proven revenue-generating capabilities and strong industry relationships. We believe both will be an invaluable additions and play prominent roles in the future of growth of AIRE. We continue to have a number of avenues to further expand AIRE's reach, advertising partners and revenues this year and we're hard at work executing on those growth opportunities. Turning now to our Audio group.
Core audio revenues increased 3% during the quarter, excluding the impact of special events revenue and barter sales. This was driven primarily by higher national, local and digital sales which were offset by lower network sales in the quarter. As I mentioned, our radio stations remain well-positioned across key Hispanic markets. In New York, our flagship station WSKQ Mega 97.9 FM remains the most listened to Spanish language station in the country and the most listened to station in all of New York for three consecutive Nielsen Books, with over 2.5 million average weekly listeners and in Los Angeles, KLAX La Raza continues to be the number one rated regional Mexican station in the entire city, with over 1.5 million weekly listeners, in fact, La Raza remains one of the most listened to radio stations in the entire U.S.
The strength of our overall market positioning and content offerings is demonstrated by continued outperformance of the broader industry when compared to Miller Kaplan estimates, our domestic station group beat the general industry by 67 basis points, this marks the 10th consecutive quarter our station group has outpaced the overall radio market. In Puerto Rico, our stations continued to deliver the top three rankings, this includes WMEG La Mega which is ranked number, one with adults 25 to 54 and number three, adults 18 to 49. In addition, WZNT Zeta 93 is in second place, with men 25 to 54, behind our own WMEG and WODA La Nueva 94 is number one, adults 18 to 34 in all day parts. Across our group, audio advertising categories that showed particular strength during the first quarter include automotive, telecommunications and QSR. Categories that were down include media and banking.
Turning to our video group. Core video revenues increased 15% during the quarter, excluding the impact of special events revenue and barter sales. In video, the categories that were up included healthcare, automotive and telecommunications. Turning now to digital world. Our expanded capabilities and focus on mobile engagement is driving both revenue and audience growth. We continue to see strong downloads and engagement metrics for our recently launched LaMusica app. As we discussed on our last call, LaMusica app delivers a truly one-of-a-kind music experience designed by Latinos, for Latinos and in particular, the Latino millennial audience which significantly over-indexes on mobile usage as well as audio streaming.
The app has generated strong interest from consumers and our current engagement metrics are highly positive. Our mobile teams are -- also continue to utilize social media and digital channels to target U.S. Hispanic millennials through custom branded stations and client branded campaigns. Total digital revenue for Q1 2016 increased by 9% versus the same period last year, this revenue growth was driven by an expansion of our digital product portfolio and an increase in audience on our mobile platform, LaMusica. As of March 31, we had approximately 2.5 million monthly unique visitors across our digital platforms including online, mobile and social, this represents a 50% increase in unique growth compared to the same period last year. This growth was generated to increase content and focused social media strategy.
During the first quarter, we delivered 5.4 million audio sessions. We also continued to grow our social media following which as of March 31, had surpassed 5.3 million cumulative followers. All in all, we made additional progress, expanding both our digital capabilities as well as our total audience share. We continue to generate strong revenue growth in innovative offerings, such as our LaMusica App, are driving engagement gains with key audience demos, including millennials. As we have previously stated, advancing our digital platform remains one of our core strategic initiatives, as we look further to deepen our connection with the rapidly expanding Latino population and grow our multi-platform audience shares. Finally, turning to our Events business.
During the first quarter, event volume was down compared to last year due to less events and an arrangement we entered into with promoter that will result in lower ticket sales and related concert expenses going forward. As we have previously discussed, Event revenue can vary quarter to quarter based on changes in the number of events being held. As we look ahead in 2016, events will continue to be part of our overall content strategy given our strong industry relationships and ability to leverage engaging Event-related content across our multi-platform assets. In summary, we made additional progress executing our growth strategy during the first quarter, our digital platform continues to deliver solid revenue growth as we benefit from our strengthened offerings and expanding audience and our radio stations remain well-positioned across U.S. Latino markets.
Today, we're connecting brands with attractive and highly engaged audiences across radio, online, mobile through integrated advertising solutions. Moving forward, we remain focused on continuing our transition to becoming a multi-platform media Company by further expanding AIRE as well as our overall digital capabilities and reach. We also continue to be highly enthusiastic about political advertising in 2016. We operate strong media assets in a number of important states. The Latino population is growing rapidly in terms of numbers as well as influence. The Latino vote is more important now than ever before and we expect our attractive market position will translate into a strong political year.
Now let me turn the call over to Joseph Garcia for the financial overview.
Thank you, Albert. Turning to our results for the first quarter, consolidated net revenues totaled $31.6 million, down 2%, compared to $32.1 million for the same prior-year period. Excluding Special Event revenue and barter sales, for the respective periods, our consolidated net revenues totaled $28.7 million compared to the $27.5 million for the same prior-year period, resulting in an increase of 4%. Our Radio net revenues decreased 2%, primarily due to decreases in network sales and lowered concert activity, offset by increases in national, local and barter sales.
Our national sales increased in our Los Angeles, New York and Puerto Rico markets. Excluding the special event revenue or barter sales for the respective periods, our Radio net revenue totaled $25.6 million compared to $24.9 million for the same prior-year period, resulting in an increase of 3%. Our television net revenues of $3.1 million were up 6% during the first quarter due to increases in local and national sales, offset by decreased concert activity. Excluding Special Events revenue and barter sales, our television net revenues were up 16%. Consolidated OIBDA, a non-GAAP measure, totaled $5 million compared to $7.1 million for the same prior-year period.
Our Radio OIBDA of $9 million was down 11%, mainly due to an increase in operating expenses and the decrease in net revenues. Radio station operating expenses were $19.5 million in the first quarter, up from $19 million in the prior-year period. The increase was mostly due to increases in professional fees, employee compensation and benefits and audience research fees, partially offset by reduced concert activity. Television station operating expenses of $4.1 million were higher by approximately $200,000, primarily due to increased professional fees of barter expenses which were offset by decreases in special event expenses. Corporate expenses of $3 million were up 39%, primarily due to increases in non-cash and stock-based compensation and professional fees.
Finally, our operating income totaled $3.8 million compared to $5.8 million for the prior-year period. The decrease in operating income was primarily due to the increase in revenues and increases in operating and corporate expenses. Our first quarter capital expenditures totaled $600,000. As defined by the indenture governing our notes, our secure leverage ratio was 7.1 times as of March 31, 2016. The Company currently has $262 million in federal NOLs and approximately $50 million in cash and banks.
As previously disclosed, we have filed applications to participate in the FCC television spectrum incentive auction, with stations in Miami, Houston and Puerto Rico. Please remember that we're in a quiet period with respect to the FCC Incentive Auction and subject to strict FCC prohibitions from directly or indirectly communicating both internally and externally, information regarding our bidding strategy or the status of our bids in the auction. As such, we will not take any questions related to the auction.
And this will conclude our formal remarks and I would like to turn it over to the operator for any questions and answers, please. Operator?
[Operator Instructions]. Our first question comes from Patrick Fitzgerald of Baird. Please go ahead.
So could you just provide a little bit more color on what happened with AIRE in the quarter and the strategy going forward?
We had placed a management, a sales management team last July and we have brought some new people. They were not delivering the expected revenue growth that the Company expected. So we just basically made a change in the last few weeks. And we have two new seasoned veterans that are 100% experienced in the network space. They come from our competitor, Michelle Marino and Erika Marrero, we expect them to take the AIRE sales team and to the direction where the Company expects the revenue growth.
Okay. And is the problem -- is it that you need more affiliates? Or you need to sell advertising at higher prices? What's kind of been the problem? Or I mean, I think that--
We have the affiliate base. We have the coverage which is 90%. We're in the markets where we need to be. We have amazing ratings. So there's no issue with ratings. We just did not have the right people in the sales process, but we do now. So I feel very confident that it's going to continue to grow and AIRE is in its infancy stages. AIRE has been around for two years. So I expect that AIRE to continue to have a double-digit growth that we've seen in the last two years and it's going to continue to grow, I would say, for three years. So I'm very optimistic about the new team.
Why was radio engineering and programming up $600,000 in the first quarter year over year?
Primarily related to investments that we're making in our digital platform, due to media LaMusica. We indicated in the past that we have developed and launched a new application and right now, we're currently in the process of developing content which requires not only content producers but also software engineers. That's pretty much the -- on the engineering part. Regarding SG&A, we did have increases in professional fees. Basically related to the additional legal and tax work required for the disposal of three radio licenses in Puerto Rico related to the Puerto Rico swap as well as some employee matters.
Okay. And you said no questions on the spectrum auction, but assuming you guys sell your stations or recover market cash from the spectrum auction, what would be the tax impacts?
Well, we're working through that. I would just like to mention that we do have $262 million of federal NOLs will protect most of the spectrum -- the proceeds that we would receive. There will be some residual taxes, maybe at the state, perhaps, local level. But I will classify them overall about 5% to, say 7%.
Okay. What is the adjusted EBITDA TV from a covenant perspective at this point?
Overall, when you're talking about the adjusted EBITDA, as you know, we have a six-month testing period that just ended in December and the next test period will be in June. In the December period, we broke even for the covenant exercise. And we look forward to at least be able to meet that requirement on the June 30 testing period.
And then how is second quarter pacings, from like a core station perspective?
Patrick, we're not giving formal guidance but I will give you some color. In April, for audio, we were up single digits, in national, we were up single digit, AIRE, we were up single digit. In Video, we were up mid-double digits and I expect that to continue and we were up in digital as well for April.
[Operator Instructions]. Our next question comes from Jason Bernstein of Odeon. Please go ahead.
Can you give us a little color on how the second quarter is tracking?
Yes, I just previously mentioned. Local, I mean, we're not giving formal guidance but I will give you some color on April. April, we were up mid-single digit on audio, we were down in national and in AIRE, on our digital property, we were up low double-digit and our video division, we were up double digits across the board in every category.
Okay. And maybe on the cost side? Because I think the last, on the last update, it looked like the quarter had closed and everything was tracking well but then some cost came into it. Do you expect cost to be in line or are those one-time expenses when we were talking about the programming costs that you went through a few minutes ago?
We think that the fixed operating costs will come down from the first quarter. In addition to the ones that I've mentioned before, we did have, now that you bring it up, we did have some of, what I would call, a one-time events related to, as an example, we incurred retroactive common area charges in one of our San Francisco properties, as well as we received an occupancy tax auditing in another one of our properties. Plus, we increased temporarily our facilities and security expenses during the quarter here in the Miami area. That adds up, all of those items, they're up roughly $634,000. Out of the variances in radio which were up, as I mentioned $455,00. So that $634,000 should be not recurring again. So I hope that gives you some color regarding your question.
And the last question. If the auction were to go another four, five, six months or however long it does, are you contemplating any -- you mentioned hiring advisors, is there anything that's going to happen before the auction is over?
We have hired advisors, as a matter of fact, that we asked Juan Garcia to join us as well to help us with the refinancing and the auction as well. So is that the question you're looking for or you want?
I'm just wondering in terms of the timeline, the auction seems to be a moving target in terms of when it's actually going to wrap up and then it's a matter of time until you would potentially get some proceeds. Are you contemplating doing something prior to the auction wrapping up?
Yes, we're currently working with Evercore and have been already entertaining certain reverse inquiries from several of our holders. We're also looking at a number of the strategies around our real estate assets. And with regard to the auction, we can't comment, but we definitely refer you to the SEC site, where clearly, as of May 31, the auction will start and we anticipate that the FCC is going to wrap this up before year end.
With regards to proceeds, that is something that we're currently working on a number of alternatives that would provide us some flexibility around the actual funding. But once the action is complete, we feel comfortable our lead -- deep note holders will be comfortable with the process of them having those proceeds forwarded to them under the indenture.
The next question comes from Jonathan Sacks of Stonehill Capital. Please go ahead.
Most of my questions were answered but I still have two small ones. Your Radio margin this quarter was the lowest it has been in awhile and I think you've touched a bit on some of the reasons why, including certain one-time expenses. Do you have a target Radio margin in mind or where you think that should be on a more normal basis?
Well, I think historically, first quarter revenues are the lowest in the year in terms of for most broadcasters. So that's probably part of the answer to that. And Juan, I don't know if you want to answer anything else?
Well, I wanted to say right now, our margins for the quarter were in the -- for radio were in the neighborhood of 32% which that margin, like Albert said, it's -- was affected of course, by the revenue decline in AIRE. But the more normalized margin should be in the mid-30%s, 35%, 36%.
Okay. And then based on the changes you made at AIRE as well as some of the onetime expenses, do you expect margins to be in a more normal range for the rest of the year?
Absolutely. You'll see historically for the broadcasters, the revenue in the second quarter of any calendar year is one of the highest so you should see improved margins.
And then one other small question. In terms of political advertising revenue which quarters or which months do you expect that to be strongest in?
I want to say we have a strong sales team that's very prepared and, obviously, the Latino vote is more important than ever in this election cycle. We took a look at what we did in 2012 and we're basically in line with what we did in the first quarter and we're basically off a little bit and we're going to see a huge impact in the third quarter ad in November of this calendar year. So we're expecting a lot of revenues for the political.
The next question comes from Ron Silverton of ALJ capital. Please go ahead.
I did have just two quick follow-ups. Typically on the call, you guys say where the cash balance stands today. I was wondering if you would be able to share that with us?
Yes. $15 million was our cash in banks today.
And then, obviously, AIRE was a little bit soft in the fourth quarter. We already saw a little bit of that. Clearly, you mentioned in the first quarter and taking action in terms of replacing the team is helpful and constructive. It sounds like it's -- sorry, pacing for AIRE in April was still a little soft, is what I understood. What's the time frame, you think, forgetting that -- how long do you think we should think about it before you can really turn that around? I know this started the Q&A but again, anything more you can offer on the outlook and the opportunity. I mean, you've talked before about that being a $20 million opportunity for you.
Absolutely. We believe that the audio network space is an estimate of anywhere, the overall with our Hispanic competitors, is anywhere from $90 million to $100 million. And we have top owned-and-operated stations. We have an affiliate base of over 100 stations. We have great ratings in all of the key demographic groups. So we don't have an issue in terms of affiliate base, in terms of the reach that we have with the Hispanic audience and all of the key demos and we have great ratings and obviously, great properties.
Our issue was sales management and from the commencement of AIRE, AIRE immediately had double-digit revenue gains across the board. And we had an amazing ride and we're going to continue to have that ride. We had a bump. We had made some changes with respect to certain sales management. It did not pan out but we wanted to let our investors know and our partners that we took immediate action and we hired some of the top people in the network space. How long is it going to take? Well, I think they started this week, they're going to make an impact immediately.
But overall, I think to be fair in assessing what the vehicle is going to deliver, it's probably going to take 60 to 90 days. They will have a huge impact in the 2017 upfronts which are going to take place in June. So I'm very confident we have the right team.
This concludes our question-and-answer session. I would now like to turn the conference back over to Albert Rodriguez for any closing remarks.
Thank you. This concludes our first quarter 2016 earnings conference call. We look forward to reporting to all of you our second quarter earnings results on our next call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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