Emmis Communications F1Q08 (Qtr End 5/31/07) Earnings Call Transcript

| About: Emmis Communications (EMMS)
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Emmis Communications Corporation (NASDAQ:EMMS)

F1Q08 Earnings Call

July 10, 2007 9:00 am ET

Executives

Kate Snedeker - IR

Jeff Smulyan - Chairman, CEO

Pat Walsh - CFO

Rick Cummings - President, Emmis Radio

Analysts

Victor Miller - Bear Stearns

Laraine Mancini - Merrill Lynch

Lee Westerfield - BMO Capital

Jonathan Jacoby - Banc of America

Marci Ryvicker - Wachovia

Jim Boyle - C.L. King

Presentation

Operator

Welcome and thank you for joining today's Emmis first quarter earnings conference call. (Operator Instructions) Now I will turn the meeting over to Kate Snedeker. Ma'am, you may begin.

Kate Snedeker

Good morning and 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, and those of you listening in from our website www.Emmis.com.

We'll begin in just a moment with opening comments from Emmis Chairman and CEO Jeff Smulyan and Pat Walsh, 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 today is Rick Cummings, President of Emmis Radio. A playback of the call will be available for the next week by dialing 203-369-3744.

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 be found under the investors tab of our website.

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Jeff Smulyan

Kate, thanks. While it was certainly a challenging quarter, there were a couple of very bright spots for us. With the exception of our new station Movin in Los Angeles and the challenges we face at KISS, the rest of our domestic radio portfolio actually beat our markets this quarter.

Having said that, our markets have continued to be challenged. As you know, there's been softness in the radio industry as a whole and in the largest markets that's even been more pronounced, but at least we're seeing some encouraging signs, and also seeing some encouraging signs at KISS and Movin.

KISS had its best last couple of trends in nearly a year, as well as some of the improvements in local sales that we're seeing in New York and specifically at KISS; actually, across our New York cluster. We're quite encouraged, especially by our local trends.

In Movin -- while we're certainly not ready to suggest that we're over the hump with Movin -- it's last two trends have shown dramatic increase. It's last trend specifically showed significant gains, especially in our target demographics and in the last two months we picked up about 200,000 listeners so we feel pretty good about it.

We've invested a lot of money in marketing, the next few months should tell us a bit more about Movin, but clearly that's a major opportunity for the company and a major challenge right now.

A few other things. Again, as I've said, our local sales efforts and initiatives in almost all of our markets have outpaced our national efforts. We are encouraged by what we see there, especially with some of the sales development that we've done. That's taking hold and as we can transition the company as well as the industry away from some of the more transactional sales, we think that bodes well for our future.

We also had a wonderful quarter in our international group, specifically Slovakia has had a remarkable year as well as continued strength in Hungary and Bulgaria and growth in Belgium.

Our interactive group as well as our publishing group are also doing some very, very good things. Very good growth in publishing this quarter and our interactive group with its outreach to the rest of the industry and some other major initiatives with our new investment in Expedentia all bode well for the future.

Again, we feel that in an industry that's challenged that needs to reinvent itself, we think at Emmis we're on the front lines in a number of ways and while none of us are here to pronounce that radio has turned the corner -- it certainly hasn't -- we are seeing some signs of life with both our initiatives and with industry initiatives.

With that, for more details, I'll turn it over to Pat Walsh, our CFO.

Pat Walsh

Jeff, thanks and good morning to everyone. Let me walk you through some of the financial highlights for the quarter. For the first quarter ended May 31, 2007 our diluted net loss from continuing operations was $0.07 per share, the same as the first quarter ended 5/31/06. Net revenues for the fiscal first quarter were $87.3 million, a 2.8% decrease compared to the first quarter of '07.

As has been the case in recent quarters, weakness in our domestic radio operations, in particular our New York and Los Angeles markets, was offset to some degree by continued revenue expansion in our international radio and publishing divisions.

Radio revenues for the first quarter of 2008 were down 5.5% with domestic radio net revenues off 9% during the quarter, compared to our markets being down 2.7%. Our performance in our key New York and Los Angeles markets was the primary contributor to our shortfall.

During the first quarter, our revenues in New York were off 14% compared to the prior year, while the New York market was down just 1%.

In Los Angeles, continued ratings improvements at KPWR enabled the station to improve its revenue performance during the quarter. However, these advances were more than offset by revenue declines at the former KZLA, now KMVN, where the impact of our format change and related marketing expenditures are only now beginning to generate impact. Our Los Angeles net revenues were off 16% in the quarter while the market was down 3.3%.

In our third large market, Chicago, Emmis revenues were off 7% in the quarter while the market was down 3.6%. Our St. Louis and Indianapolis clusters also trailed their markets with only our Austin market meeting its market performance.

Our international radio division continued its strong performance with revenue gaining by 28% in the first quarter. Each of our four European operations demonstrated strong revenue gains during the quarter.

Finally on the revenue side, Emmis Publishing revenue increased 6.1% during the quarter. The quarter saw strong revenue performance at our two flagship city regional magazines with Texas Monthly gaining 8% during the quarter and Los Angeles Magazine up an impressive 20%.

We are guiding second quarter fiscal year 2008 radio revenues to decrease mid to high single-digits compared to the prior year based on continuing challenges in our domestic radio operations, particularly in New York and the format change at KMVN. Excluding the format change in Los Angeles, we expect revenue performance to be in line with mid single-digit declines in our markets.

Some additional color on our domestic radio performance during the quarter. Our performance was negatively impacted by both local and national business. Our local business was down 7.2% while our markets were off 2.5%. Emmis national business, as Jeff alluded to, was down 20.5% with our markets being down 5.2%.

In terms of category performance, automotive continued to be our single largest category, representing 11% of our total revenues. This is down from it representing 13% during last year's fiscal first quarter. Automotive was off 18% for the quarter. We suffered double-digit revenue declines in media, financial services, beverages, movies and home improvement while recording gains in restaurants, entertainment and cellular. For the first quarter of '08, sell out was up 3.6% and average unit rate down 15%.

Turning to the expense side, total operating expenses increased 2.8% during the quarter. Radio operating expenses increased 4.5%. The increase attributable to three principle factors: (1) the unprecedented marketing initiatives at KMVN in Los Angeles; (2) operating expenses associated with our expanding our Emmis interactive platform to begin marketing their services to other media companies; and (3) growth in international sales expenses associated with the revenue expansion in our European markets.

Absent the marketing spend at KMVN and Emmis interactive expansion, domestic radio expenses would have decreased 2% in the first quarter compared to the prior year, which is in line with our revenue decline. We expect radio operating expenses to increase mid to high single-digits in the second quarter 2008 compared to the prior year, primarily as a result of the three factors I noted above.

Publishing expenses during the quarter were down 1% and as we detailed in previous calls, we expected our corporate expenses to be down -- and they were -- during the quarter by 6.7%.

On the balance sheet at May 31 we had $480 million outstanding under our $600 million credit facility. Our leverage ratio excluding non-cash comp was 5.6X EBITDA as defined in our credit agreement.

Subsequent to the quarter close we completed the sale of KGMB TV to HITV Operating Company, a portfolio company of MCG Capital, for $40 million in cash. As a result of the television station sale, we have seen a net decrease of an additional $30 million in or indebtedness such that we currently have $450 million outstanding under our credit facility. Our weighted average cost of debt at 5/31/2007 was 7.14%.

A couple of additional notes before we start Q&A, First , we continue to actively market the sole remaining television station in our portfolio, WVUN New Orleans. As outlined in the 10-Q, we continue to report the stations results in discontinued operations and expect to sell the station in the next three to 12 months.

Finally, many of you may note that our effective tax rate in the 10-Q is unusually high, based on a combination of low pretax income and a discrete immaterial tax matter skewing the first quarter rate. We expect our effective tax rate to return to more normalized levels during the balance of the fiscal year.

With that I'll turn things back over to Kate for the question-and-answer session.

Question-and-Answer Session

Kate Snedeker

Great. Thanks, Pat. I think we're ready for questions now, if you could give everyone the instructions.

Operator

The first question comes from Victor Miller - Bear Stearns.

Victor Miller - Bear Stearns

Thank you, good morning. I have two questions. One for you, Jeff, just philosophically and then if I could ask Rick a question.

Obviously, there's a lot of speculation on you potentially looking at QCD and some asset sales to delever, potentially looking at a privatization; all speculation. Maybe you can give us an update on where you are at philosophically in regard to that topic?

Secondly Rick, as LA comes along with PPM next year and you've got New York at the end of this year and the numbers in Philly -- although they have improved month to month especially in the urban side being 25% better in the last month versus a month ago -- but still the numbers down 50% or so in terms of ratings. How are you preparing for that eventuality knowing what might come? How are you talking to advertisers to prepare them for that kind of change so that you can minimize the impact to you on a revenue side? Thanks.

Jeff Smulyan

Vic, I think my thinking has always been the same. I believe in these industries long term, I know they're challenged, whether our structure is public or private, we would like to continue to seek answers in these businesses for the long term. We think we've got a culture that over time, over now 26 years as of last week, has always performed very well in every environment. As we've said we'll continue to look at the going private but we haven't made any decisions yet and there's a lot of speculation -- some of it accurate, some of it absolutely inaccurate -- but what we want to do is figure out the best way to position this organization for the future, in not only conventional media but in some things we see in non-traditional media.

Rick Cummings

Regarding PPM, the encouraging things as you noted is the trends in Philadelphia the last three, four weeks have shown a better story for WDAS and for the urban stations than it showed initially. I think we're still trying to learn exactly how African American dominated stations are going to perform in this new measurement system, but that's the critical part and it's one of the things we're doing.

We put together a coalition of both black owned and non-black owned operators who have urban stations. We met in New York in early June and began to discuss how we point out and how we sell this new measurement system. There are some great stories inside this measurement system for urban radio and we're putting those together and we'll be taking those out and presenting those to buyers.

I've had a number of people say boy, you've got three, essentially three urban stations in New York and you've certainly got stations in Los Angeles that have ethnic composition; why would you be for PPM? The answer is very simple. The Procter & Gambles of the world have basically said until you guys have electronic measurement we're not interested in investing in your medium.

We see it as up to us to develop a great sales story which we are doing; and again, there's some very compelling stories there. But we're not also just going to accept what we're seeing in Philadelphia and making it a sales case. We're also looking at all of the options we may have in a place like New York. We're constantly doing research to look for better solutions for those frequencies.

So we're doing everything we can. We're doing things to make those stations as good as they can be in the current rating system and hopefully even better in the new rating system which begins to rollout this fall in New York. We are looking at other options in case there is a better answer and at the same time we're developing great sales stories. Those are really the three things we're doing.

Operator

The next question comes from Laraine Mancini - Merrill Lynch.

Laraine Mancini - Merrill Lynch

In Chicago you said that your cluster was down 7% versus a market that was down 4%, but your ratings have actually looked pretty good in Chicago which was a very low margin market for you. Can you talk about the process there of monetizing those ratings and how long we can expect to see before it comes into the numbers?

Similarly with L.A., you mentioned the last two trends on Movin looked good. When can you monetize those and can you talk a little bit about what you're seeing in those trends?

Rick Cummings

First Chicago. We trail the market by about 3 points, 4 points, something like that. It's $250,000 or $300,000, it's not a lot of money and it's mostly because of some disappointment in the ratings at the loop which was pretty flat. We expected it to do better and it still may with the very next trend. You just never know but it's been a little disappointing in terms of overall performance, although Brandmeier continues to be a top five morning show.

Q101 has done very, very well. We've recovered significant ratings over the last five or six months with this new morning show. We knew we were going to take a hit with Mancow, and month after month that ratings picture has gotten a little bit better. Now, we think when PPM hits that market next January, of the top three markets, it will be kindest to us in Chicago so we're hoping to see increased performance there both on the ratings and the revenue front in the next 6, 8, 9 months.

What was the other question?

Laraine Mancini - Merrill Lynch

Movin, when you think you'll start to be able to perform.

Rick Cummings

Well, it's hard to say but if we get one more month that is as good as the month we just turned in it should have immediate impact. The station added significant cume in May, about 150,000 listeners but it washed out the TSL, so the overall number in May was not great. We were a little disappointed in that but the June number came back at a 2.2 share 25 to 54 adults, which is in the money. If we put on another month like that, we'll have a great spring book, and our folks feel that they will see immediate impact from that book. There's just no guarantee.

We've certainly made the marketing effort. We realized, I think, that it's really tough when you change a country station to anything but country, you've got a teaching process for about 98% of the market and I think we did not realize when we changed it just how tough it was to teach Los Angeles this is not a country station anymore. The last trend showed us that we're finally making some progress there.

Laraine Mancini - Merrill Lynch

When you originally launched that station you thought that you would quickly return to the level of cash flow that you had had at the country station. What are your thoughts now?

Rick Cummings

Well actually, no. We thought it would take us over a year, in fact close to 18 months to get back where we were. The reason we changed it is that we saw an opportunity that was about the same size in terms of musical appetite as country but with the addition of a star talent like Rick Dees, a considerably bigger opportunity.

We had seen country eroding here for some time and we just felt like boy, with this opportunity, we have to take it while it's there. I think we're still several months away from knowing whether this was a great decision but the last month we certainly indicated we're finally popping a little bit. When you go from basically 1 share to over a 2 share in a month, that's a very good sign.

Operator

The next question comes from Lee Westerfield - BMO Capital.

Lee Westerfield - BMO Capital

Thank you, gentlemen, good morning. Two quick questions. First Pat, in the international radio side where you were stronger in the quarter, what was the impact from currencies versus, if you will, like-for-like constant currency in the quarter?

Second Jeff, you made a comment and I wanted to get some more color on it, about web media investing. I think you said preparation for web media partners or if I am misquoting you then if you could just elaborate a bit on what you're referring to when you discussed preparation for web media partners?

Pat Walsh

Yes, I can knock the international question off pretty quickly. I think that the weak dollar or I guess our Hungarian and Slovakian folks would say their strong local currencies, that was probably about half of the result. The other half was actually performance in those local markets and what we would characterize as real revenue gains so it pretty much broke half and half.

Jeff Smulyan

Lee, the other part as we mentioned in our last call, I've been very proud of the fact that Emmis Interactive has been sought out by a number of other companies to do some work. We think we found some ideas in terms of audience engagement in our websites and our web presence have been very successful for us and other people have come to us and we think that by bringing other companies to the table we make radio’s web presence much stronger which helps transform the industry. We've been very encouraged by it.

Operator

The next question comes from Jonathan Jacoby - Banc of America.

Jonathan Jacoby - Banc of America

Can you break out the second quarter guidance between domestic and international? It sounds like just the overall domestic marketplace continues to be weak and I just want to get a sense there.

Secondly, do you have any interest perhaps in looking at large market FM's that might become available in New York City and Los Angeles?

I believe that Google Audio left beta mode testing at the end of June and is now live. I know it's very early but are you seeing any differences as it moves from beta to become a real product? Thanks.

Pat Walsh

Let me tick off the first one, Jonathan. I would expect that domestic radio would look very similar to our guidance for the radio revenues overall. It will be down mid to high single-digits.

Jeff Smulyan

Jonathan, we're always considering our options and I think in terms of large markets, it's always been our focus. We know it's challenged but we would rather be in the largest markets, we feel very comfortable with that. So when things come up we'll always look at them.

Rick, I'll turn to you on Google.

Rick Cummings

Hi, Jonathan. Regarding Google, we in fact had a conversation with them again yesterday and I love the way they're thinking. We've been talking to them about a bigger relationship, a group-wide relationship and they came back to us just yesterday and said we still want to do that but we did our Clear Channel deal and we want to make sure that we do not put too much inventory out there in the world. We want to make sure that we're creating value here and not flooding the markets with inventory, which I thought was great thinking on their part.

I think they really do realize that their key to being a partner in this business is creating value for this industry and I applauded their thinking on that, so we're continuing to have discussions with them but we haven't seen any difference since they went from beta to live with Google Audio yet. It's just too early to tell.

Operator

The next question comes from Marci Ryvicker - Wachovia.

Marci Ryvicker - Wachovia

Do you still expect expense growth to moderate in the second half of the year and if so to what magnitude?

Secondly, in the 10-Q, it says that due to industry weakness and weakness at your stations you've been forced to discount rates. I don't think that you're the only company to do this in the industry. How do you get out of this cycle of weakness in discounting rates so that you can eventually regain pricing power?

Jeff Smulyan

Well, Marci, I'm going to take the second question and obviously it's inducing demand. It's going out and developing more business. It's trying to transition away from transactional business that's been the hallmark of the industry.

On the other hand, it's also getting more players in the game. The reason we're intrigued by the Google Demarc process and some of the other online systems is Google reaches 10 times as many advertisers as we do as an industry and if we can transition some of those, it's simply a question of pushing more demand. More demand will raise pricing. We have got to induce more demand in this industry.

Pat Walsh

On the expense side, Marci, we do think the expense growth, while it will continue in the second half of the year, that it will moderate particularly towards the fourth quarter as we're able to execute on some of the marketing initiatives at KMVN and the Emmis Interactive expansion plan, we would expect particularly in the fourth quarter of the year that the expense growth will moderate to some degree.

Operator

The final question comes from Jim Boyle - C.L. King.

Jim Boyle - C.L. King

Jeff, radio has two constituencies, audience and advertiser. Radio gets almost all its revenue from the advertisers. Is there any reason other than it hasn't been done before by mainstream radio groups that the radio stations constituency, your most loyal fans, can't be monetized?

Jeff Smulyan

Well, Jim, this is the age-old question. Is this a business that is capable of having paying per sub fees? I think I'd submit after about $7 billion or $8 billion of losses the satellite business hasn't answered that in the affirmative.

Jim Boyle - C.L. King

That's subscription. I'm talking about selling stuff.

Jeff Smulyan

There may be a subscriber notion. I don't know of anything other than a per sub fee basis. We've kicked that around with HD Radio but again, no one has ever made any money anywhere on the planet on subscriber radio. The characteristics are totally different than television.

Listen, I think you look at every possible alternative but so far, the satellite history certainly doesn't prove any viability. Now admittedly they've got other challenges, they may have overpaid for programming, they've got very unique, difficult distribution costs, but I think that the jury is still very, very far out.

Jim Boyle - C.L. King

Final question. You've often said you frequently talked with everyone about potential M&A even though that doesn't guarantee a deal actually occurs. Are you still talking with everyone on many subjects in this environment or are you just concentrating on turning around New York, LA?

Jeff Smulyan

I was talking to another group head yesterday and I'm kind of kidding about the fact that in an industry that's been as challenged as ours, we have to talk about everything. Now the fact that we carry on conversations and it ends up in one of your reports the next day doesn't always thrill me but that's life and the reality is that we talk about a whole host of things; only about probably 5% of them ever get printed.

The reality is in a challenged industry, we are all looking for answers as to how to turn this industry around and the more we talk and the more creative we get the better our opportunities are.

Kate Snedeker

Thanks everyone for joining us. A reminder, a replay of the call will be available until next Tuesday at 203-369-3744 or by visiting our website. Jeff, did you have any closing comments?

Jeff Smulyan

Just that I want to thank all of our people again. I am always amazed at how hard our people work. I think you appreciate it more in really challenging times and there's no mistaking these are challenging times not only at Emmis and not only in American radio, but for all of traditional media. I think that our passion and our creativity of our people is starting to lead us to some answers that we think are around the corner. I just hope the corner is shorter than it's been. I want to thank everyone.

Kate Snedeker

Thank you.

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