Emmis Communications Corporation (NASDAQ:EMMS) Q1 2017 Earnings Conference Call July 7, 2016 9:00 AM ET
Kate Snedeker - IR
Jeff Smulyan - Chairman, CEO, and Founder
Ryan Hornaday - EVP, Treasurer, and CFO
Unidentified Analyst -
Welcome and thank you for standing by. All participants will be in a listen-only mode until the question-and-answer session of today's conference call. [Operator Instructions]. This call is being recorded. If you have any objections you may disconnect at this moment.
Now I would like to turn the call over to your host, Kate, you may now begin.
Thanks Ron. Good morning everyone. Thank you for joining us for today's Emmis Communications 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 this morning.
We'll begin in just a moment with opening comments from Emmis' Chairman and CEO, Jeff Smulyan and Ryan Hornaday, EVP, CFO and Treasurer. After opening comments from Jeff and Ryan, we will respond to the questions that have been submitted via e-mail to firstname.lastname@example.org. A playback of the call will be available until 6 PM on Thursday, July 21st by dialing 203-369-0514.
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 the non-GAAP financial measures has been posted under the Investors tab on our Web site, www.emmis.com. Jeff, we're ready to start.
Katherine, thank you. This was a better quarter that we had. Our performance was improved from Q4. According to Miller Kaplan, our radio revenues in Q1 were flat while our markets were up 3% and the weakness was solely confined to Los Angeles. If you take out Los Angeles, we would have been up 5% versus markets plus 3%. And given what we are seeing with our ratings and pacing's in Los Angeles, we are encouraged that we have turned the corner there.
New York, I want to point out was exceptionally strong and I want to give that shout out to Charlie Morgan and her whole team. In the quarter on our plus four market, Emmis New York was up 11%. We think that is a spectacular showing. Because expense cuts were implemented in January, we were able to grow operating income and net income for the quarter. Our ratings have been very encouraging. In Los Angeles, our ratings were up year-to-year over 2% for the quarter and we are now consistently beating our direct competitor in the 18-34 demo, which is our key demo.
New York Hot 97 has consistently been a top performer in 18-34, WBLS consistently in the top five in 25-54. St. Louis really has probably been the most remarkable rating story. KSHE has had record high numbers as number one 12 plus and 25-54. The point is number one 18-34 and 18-49 and number two, 12 plus, excuse me, number two 25-54. So those two stations are number one in every key demo.
In Indianapolis, HANK is the top three station in its key demo, B-105 in the top four of 25-54, and again across the board in these markets strong performance. And in Austin as usual, top three stations in 18-49. BOB, KROX, and KLBJ-FM, and Emmis Austin station is number one in every single key demo, so we are very proud of that.
As far as NextRadio, it has been another very, very rewarding quarter. As you know, we are now on almost every carrier, and today we can announce that the Samsung Galaxy S7 and S7 Edge which are the top selling phones in the world will soon be available across all wireless carriers in the United States. This is a very big break through. This is the first time that major phones will be available on every carrier. Expect more news to come soon on that.
Internationally, we launched in Canada last week, last Friday on Canada Day. We have also launched in Peru and we are looking forward to a launch in Mexico. And with handset makers, the unlocked phones, Alcatel has now joined Blue by featuring NextRadio as a native FM tuner on its devices and as you know the unlocked phones are the very best growing segment of the wireless industry. Expect more announcements in that area from other handset manufacturers.
And in the last quarter, we launched our first paying advertiser, Home Depot. We are going to announce some results in the next few weeks. We are very encouraged. We have also had a number of other test advertisers and I think this is the catalyst that we believe our industry desperately needs because with data attribution we can now provide our advertisers with something that has never been available and over the radio before. We think it is a game changer and we think it simplifies pretty remarkable progress that we are making with NextRadio.
We believe that our industry needs a catalyst. We are proud of the things we do every day and the job our people do, and we think NextRadio provides that catalyst for the entire American radio industry. So with that the only other point I want to mention is that our one for four reverse stock split becomes effective tomorrow and with that I want to turn it over to Ryan Hornaday.
Thanks, Jeff and good morning everyone. This morning we released earnings for our first fiscal quarter ended May 31, 2016. We encourage those on the call to refer to the supplemental financial information we have posted under the Investors tab of our website www.emmis.com.
Our results for the first quarter were much improved from the fourth quarter due to improving market conditions and better performance by our radio clusters. Our radio net revenues reported to Miller Kaplan during the first fiscal quarter which excludes certain barter and syndication revenues were flat compared to markets which were up 3%.
Our relative underperformance was due to our Los Angeles radio station which took on a new competitor in Q1 of last year. Excluding Los Angeles, Emmis' remaining radio portfolio would have been up 5% and market is up 3%. The revenue declines in Los Angeles stemming from the launch of the new competitor in the prior year is expected to last through Q2 of this year but beginning in our Q3 we will have fully anniversaried the impact of the new competitor and we expect our year-over-year reported results to improve.
In Q1, our New York, St. Louis, and Indianapolis clusters grew market share with our New York radio cluster up 11% in a healthy up 4% New York radio market. As Jeff said earlier, our ratings are strong across our radio portfolio and we are rebuilding the ratings at our Los Angeles radio station.
Digital was our strongest line of business, up 35% in the quarter. National and local spot were both down low-single digits. Looking at the monthly results, March and April were each down less than 2%, May was up 3%. We saw robust political spend in late April, early May, particularly in the Indiana primary. We recorded $860,000 of political revenue in the quarter. During Q1, our number of minutes sold was down 2.6% compared to the prior year with average minute rates up 1.4%.
Automotive remains our largest category representing 13% of radio revenues, and our auto revenues were flat in the quarter. Restaurants and cellular were up in the quarter, financial and media were the weakest of our top ten categories. Revenues in our publishing division were down 16% in the quarter. Approximately one half of the decline relates to the timing of custom publications. Several projects that printed in Q1 of the prior fiscal year have been moved to the back half of the current fiscal year. The remaining decline is mostly attributable to weaker national advertising sales.
Radio and publishing station operating expenses excluding depreciation and amortizations were down 7% in Q1, primarily due to the cost reductions we implemented in January 2016. We continue to invest in our two emerging technologies, NextRadio and Digonex and combined expenses for these businesses were up 600,000 in Q1.
Looking ahead to Q2, our radio division is currently pacing down 5%. Approximately one half of this decline is attributable to weather related issues at our largest outdoor concert Summer Jam in New York which was held the first weekend of June. Strong thunderstorms forced the cancellation of all preconcert events and a delayed start to the concert significantly impaired walk up ticket sales. June finished down 5% in radio predominantly due to these factors. July is currently pacing down and April was pacing up.
As of May 31, 2016 excluding debt that is non-recourse to Emmis we had 185.6 million outstanding under our senior credit facility and weighted average borrowing cost of 7%. Our leverage was 5.43 times EBITDA as defined in our credit agreement in compliance with our covenants of 6.5 times EBITDA. We expect to finish the fiscal year with a leverage ratio of around five times through the combination of EBITDA growth and continued repayment of debt outstanding. Finally we invested 0.4 million in capital expenditures in Q1 and we expect to invest approximately 3.5 million for the full year.
With that Jeff we have some questions investors submitted to us in advance of the call.
Q - Unidentified Analyst
Radio is distancing itself from television as a number one reach medium in the United States, why do you think radio has been able to grow listening while television is declining?
Well I think the lack of fragmentation for radio as opposed to TV. When you look at TV's fragmentation because of the over the top services because of Hulu, because of Netflix, Amazon, and I think -- also I think radio has gotten little bit of a benefit from some improvements in the Nielsen system, which I think has helped us a little bit, but I think those are the two main reasons.
The Wall Street Journal has reported that Apple is in talks to purchase streaming music service title following the bankruptcy of Rdio last fall and Twitter’s recent investment in SoundCloud, what do you think the future of streaming music looks like?
Well, Ryan I am going to give you the same answer that I have probably given for each of the last 20 years. We have been streaming for over 20 years. We stream because it is a service to our listeners. But I have not seen anyone yet find an economical model. I had to look at the SoundCloud statement which said I think they had $63 million of expenses and $14 million of revenue last year, and they talked about how that meant that the valuation was up to like $750 million. And then about two weeks later, Twitter said well we put $75 million in to keep the doors open. So, you get this great disconnect between the economic reality of these businesses. There was a great article I think in Fortune the other day about exactly this, the economic reality of these businesses versus the perception that they are the next big thing. We will stream, we are happy to stream, but the economics of the streaming business are very, very challenged not only here but all over the world.
Can you discuss the future of connective cars and the potential impact for radio?
Well, we have taken a significant role in that, Paul Brenner and our team are working right now with the NAB and with especially Sam Matheny and Gordon Smith and others at CBS and Entercom, Hubbard, Beasley. [ph]. It has really been a unified effort for every company in the industry to ask the NAB to take a leadership role, to device the best common solution for the American radio industry. We believe at the end of the day that if we do our job, we will maintain our position of dominance in the industry, in the automobile industry, but it is going to require a unified American broadcast group. And that is why we and almost every company from the very largest IR to the smallest have said the NAB needs to lead this, a unified effort to make sure that the automobile radio of the future comports with not only our listeners needs but automakers needs.
The next question deals with political, what are your expectations for radio political advertising this fall?
Somewhat optimistic. I think that the Presidential election is going to be different because one of the two candidates is not apparently raising money and preparing to spend it on media. I think he looks at pretty much earn media, social media. So I think that is something that we never faced before. On the other hand, we are not a battle ground state anyway. And so from Presidential election standpoint, we only have one real battle ground state and that is Missouri. So, I am more optimistic that because of this particular dynamic, it is going to put almost every race in play. So, senate races in Indiana, Missouri, gubernatorial races, probably there will be more total spend because of down ballot races than we have ever seen before. And again that will be helpful. We are never wildly optimistic about radio political spend, but optimistic that it should be a nice bump.
So if you noticed this morning about our outperformance in New York and we have a question, do you believe there is room for our New York cluster to continue to outperform?
Absolutely, I think Charlie has re-energized our team. I think that some recent additions are giving us the ability to compete more vigorously, and I think their recent rating successes portend good things for our performance in New York, absolutely.
Shifting gears to NextRadio, is getting the large major carrier and Apple essential to the success of NextRadio?
Well, if you look, I think what we are and we were not – I mean we were saying will be on all carriers. So that is really the last carrier as well that is coming in stages. We still need Apple and we like Apple, but right now if we just roll out among all the carriers, all the Android phones, you have probably over 175 million phones in United States that is about 61% to 62% of phones. And I think among heavy radio listeners, the Android share is even a little bit higher. So, we have said we won't quit until we have everybody and the last everybody is Apple. But I hope broadcasters are heartened by the fact that with all of the carriers, we will now have distribution in hundreds -- over a 150 million phones as this rolls out. And we have a chance now just with the agreements we have made to change the landscape of radio forever. But that doesn’t mean that we are not going to come to the industry very soon and say okay, the last piece of the puzzle is Apple, here is what every broadcaster can do to help make sure that Apple joins the FM chip movement in the American radio industry.
Next question came from an investor that was asking about our emerging technologies and his question was while the revenues are small I did note that the revenues were down year-over-year, when should investors expect to see significant growth from these business lines and specifically we are talking about Digonex and NextRadio?
Right, I think with Digonex, we were very encouraged by what we are seeing. We are introducing dynamic pricing to a lot of people. The results of the clients we have had have been very, very good. Year-to-year, it is encumbered upon businesses to sort of understand and embrace new technology, and this is new technology. But what we have seen in the last six months is that a number of people coming to the fore and saying we are ready to sign. It is not profitable yet but I would say in the next year to 18 months we think we will cross over that line. Very encouraged by what we see. We believe with both Digonex and NextRadio these are ideas whose time have come. The question is when is exactly that tipping point when it starts getting profitable. We are not there yet but we do business.
The last question is around M&A on both sides, does it make sense to strategically sell one or more assets to reduce leverage and on the flip side are acquisitions at the top of mind or off the table currently?
Well, I would say you never say never to anything. We are -- our number job is managing our balance sheet and having the resources to compete in the areas that we think we have to compete in, especially our new growth areas NextRadio and Digonex. Having said that you always look at your opportunity and I would say it would be more likely that we sort of stay the course rather than being aggressive buyer and aggressive seller. But those things change depending on circumstances.
And that is all we have in terms of questions. Jeff do you have any closing remarks.
No, I think it has been a good quarter for us. I would like to say the radio industry is just spectacularly rolling along. It is not but is better. It is better for us, it is better for our peers. Most of us believe the back half this year will be better because of general trends in the economy, because of the election. But I think we have weathered some tough times. This company beat its industry five straight years, it didn’t beat it last year. We think we are about to beat our markets this year which is sort of return to normal for us. And I think that is always the case that we do better because of the spirit and culture of this company, the fervor of our people, their dedication, their hard work, their commitment to their listeners and their readers and their communities, and the spate of innovation. And I couldn’t be prouder. Let's say it has been a tough time for the American media industry but we persevere, we celebrated our 35th anniversary on Monday and I could not be prouder of what this company stands for and what it does. And I am an optimist but some pretty exciting things are ahead for us. So, with that I thank all of our people and I thank our investors and the people who have stayed with us, were believers and we hope you are too. Thank you.
Thanks Jeff, thanks Ryan. Just a reminder that a playback of the call will be available for two weeks by dialing 203-369-0514. Thanks everyone.
That concludes today's conference. Thank you for your participation. You may disconnect at this moment.
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