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Edited Transcript of BBGI earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Beasley Broadcast Group Inc Earnings Call

NAPLES Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Beasley Broadcast Group Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara Caroline Beasley

Beasley Broadcast Group, Inc. - CEO & Director

* Marie Tedesco

Beasley Broadcast Group, Inc. - CFO

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Presentation

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Operator [1]

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Good morning, and welcome to the Beasley Broadcast Group's Third Quarter 2019 Conference Call.

Before proceeding, I would like to emphasize that today's conference call and webcast will contain forward-looking statements about our future performance and results of operations that involve risks and uncertainties described in the Risk Factors section of our most recent annual report on Form 10-K, as supplemented by our quarterly reports on Form 10-Q.

Today's webcast will also contain a discussion of certain non-GAAP financial measures within the meaning of the Item 10 of Regulation S-K. A reconciliation of these non-GAAP measures with their most direct comparable financial measures calculated and presented in accordance with GAAP can be found in the morning's news announcement and on the company's website.

I would also like -- I would also remind listeners that following the completion, a replay of today's call can be accessed for 5 days on the company's website, www.bbgi.com. You can also find a copy of today's press release on the investors or press room section of the site.

At this time, I'd like to turn the conference over to your host, Beasley Broadcast Group CEO, Caroline Beasley. Please go ahead.

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Barbara Caroline Beasley, Beasley Broadcast Group, Inc. - CEO & Director [2]

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Thank you, and good morning, everyone. Thank you for joining us for our third quarter operating results. I'll first review several quarterly highlights, and then hand it over to our CFO, Marie Tedesco, who will provide some more color on the quarter.

So let me begin by reviewing the accretive and deleveraging acquisition of DMK in Detroit, which we completed on August 31. And the total purchase price was $13.5 million and was funded by a combination of debt and cash on hand. The addition of DMK and the 3 translators to our broadcast portfolio is complementary to our 3 existing radio stations and digital operations in the Detroit market. Consistent with Beasley's disciplined approach to growing our platform, the acquisition of DMK is immediately accretive to free cash flow and will contribute approximately $2.6 million in pro forma station operating income, and this includes synergy, while moving us closer to our goal of achieving 30% revenue share in the market. The integration over the last 8 weeks has been as expected. And as such, we look forward to realizing the full financial and strategic benefits of this transaction in 2020.

Now looking at the quarter, revenue increased by 1.5% on a year-over-year basis to $66.1 million driven by our Boston, Charlotte, Detroit, Fayetteville, Philly and Wilmington clusters. Looking closer at the year-over-year revenue comparison, in last year's third quarter, we recorded approximately $240,000 of nonrecurring USTN traffic revenue and $300,000 of nonrecurring revenue related to a canceled spectrum license. In addition, Q3 '19 revenue levels were impacted by a $375,000 decline in political revenue from $700,000 in prior year. As such, excluding the combined $915,000 of revenue related to these items, our 3Q '19 net revenue would have grown 2.9%.

Now on a same-station basis and not adjusting for the nonrecurring revenue items and higher levels of political, revenue for the quarter was essentially flat or a minus $43,000, with third quarter same-station spot advertising flat while excluding political. In addition, we continue to make progress with our digital growth initiatives as digital revenue grew almost 37% year-over-year in third quarter and accounted for 7.4% of our total third quarter revenue. And this is up from 5.4% into comparable year ago quarter. This trend is also evident on a year-to-date basis as digital revenues represented 7% of revenue in the 9 months ended September 30 compared to 5.9% in the same period a year ago.

Now looking past the revenue line, our strategic accretive acquisitions, combined with our focus on margins and synergy realizations, drove a 12.7% increase in reported third quarter SOI to $16.7 million. Third quarter SOI was also strong on a pro forma and same-station basis, rising by 4.6% and 6%, respectively.

Moving on, we're pleased with our results from XTU as the station generated a 16% year-over-year revenue increase on a pro forma basis. With the return of a heritage country station to our Philly cluster, we drove pro forma third quarter revenue increases in the market of 5.4% or $800,000, and we had a revenue share of just over 28% in the third quarter and 29% year-to-date. And one of the reasons we targeted this acquisition last year was the prior experience and successes that we had with this format in Philly. And I would like to congratulate our teams in Philly and at WXTU for a job well done.

As we previewed our expectations on the call earlier this year, third quarter 2019 free cash flow was $4.6 million compared with $5.9 million in the third quarter of last year. And this is due to the fact that the growth in year-over-year quarterly SOI was more than offset by increased corporate overhead related to our investment in digital platforms. Higher CapEx related to the now near-completed build-out of our Philadelphia studios and increased costs related to our additional borrowings and increased taxes. And as noted on calls earlier this year, we expect full year '19 free cash flow to reflect a year-over-year decline related to the lack of political, the higher interest expense related to the addition of XTU, increased CapEx and the investments we're making to expand and diversify our platform.

We continue to allocate our free cash flow to pay down debt; return value to our shareholders through quarterly cash dividends; to complete strategic transactions, including investments in digital and esports; and other businesses that leverage our brands, content and strong market positions.

And with that, I'm going to turn it over to Marie who's going to take a deeper dive into the quarter.

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Marie Tedesco, Beasley Broadcast Group, Inc. - CFO [3]

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Thanks, Caroline. Let me start with a review of the third quarter results, and then I will review our balance sheet. Third quarter net revenue increased 1.5% or $968,000 to $66.1 million, and we saw year-over-year net revenue increases in our Boston, Charlotte, Detroit, Fayetteville, Philadelphia and Wilmington clusters with net revenue at our remaining clusters comparable to the levels in third quarter '18.

As Caroline mentioned, the year-over-year comparison was impacted by approximately $240,000 of USTN revenue in third quarter '18, $300,000 of nonrecurring spectrum revenue and approximately $375,000 of nonrecurring political revenue which, combined, would be equivalent to an additional 1.4% growth in net revenue for the quarter.

Station operating expenses for the quarter decreased 1.8% to $49.4 million mostly related to the nonrecurring $1.7 million write-off of USTN that occurred in third quarter '18, which was partially offset by operating expenses from the Philadelphia and -- WXTU Philadelphia and WDMK Detroit acquisitions. As a result, the $1.5 million increase in net revenue led to a 12.7% increase in station operating income to $16.7 million on an actual basis.

Looking at our revenue categories for third quarter on an actual basis. Consumer services remained our largest revenue category, representing around 26% of our revenue, and we generated a 12% year-over-year revenue increase in this category during the quarter. Our consumer services category includes advertisers such as medical, dental, construction, insurance and other service-oriented businesses. Our second largest category in third quarter was retail, which represents almost 16% of our revenue, and the retail category was up 1.5%. Entertainment was our third largest category for the quarter, and we were flat year-over-year. Auto, our fourth largest revenue category, representing about 13% of our revenue, was down around 5%. And the top 4 categories accounted for approximately 69% of our total third quarter net revenue. On a same-station basis, consumer services increased 10%, retail declined 1.5%, entertainment was down 3% and auto was down 6.5%. Another category that had strong performance in the quarter was telecom, which rose 5% on a same station basis.

Corporate G&A expenses for the quarter increased $1.7 million compared to the same quarter a year ago to $5.3 million. Breaking it down, the year-over-year increase in corporate G&A is primarily related to timing differences compared to prior year and a continued investment in our digital initiative as we build out our platform. To quantify this investment, we spent approximately $750,000 in the third quarter and $1.7 million year-to-date. This increase reflects our ongoing transformation from a pure-play radio company to a diversified audio-focused media and digital entity. As indicated on prior calls, these investments will continue throughout the year and will result in an expanded digital platform, digital content portfolio, digital sales team and corporate staff. We expect our corporate expenses to stabilize once this digital build-out is complete, and we should then see a decrease as some of these expenses at that point will be moved into the market.

Noncash stock-based compensation was up 31.7% at $603,000 in third quarter. Our income tax expense for the quarter was $1.7 million, and our effective tax rate for the quarter was 37% as a result of certain expenses that are not deductible for tax purposes. Reported third quarter 2019 operating income was approximately $9.4 million compared to $9.3 million in the year ago quarter, while third quarter net income increased 15.6% or $410,000 to $3 million primarily as a result of higher station cash flow. Total third quarter interest expense increased approximately $300,000 year-over-year to $4.4 million reflecting an overall increase in borrowing costs from additional borrowings related to our recent acquisitions.

We made $2.5 million in voluntary debt repayments for the quarter and repaid $9 million in the year-to-date period. We ended the quarter with cash on hand of $11.8 million. Inclusive of the WDMK transaction, total outstanding debt at September 30 was $253 million compared to $245.5 million at June 30. Our LTM consolidated operating cash flow as defined in the credit agreement was $54.3 million, resulting in a leverage ratio of 4.66x as of September 30, 2019, compared to 4.66x as of June 30. Our credit agreement allows the company to receive the benefit of up to $20 million of our total cash on hand in calculating net leverage. And reflecting our balance sheet cash, net leverage was 4.44x compared to a maximum leverage covenant of 5.75x, and that compares with 4.43x on the same basis at June 30, 2019.

We spent $2.2 million in CapEx during the quarter compared to $1.2 million in the prior year third quarter and $6.9 million year-to-date, which compares to $3.3 million year-to-date 2018. For the third quarter, Beasley Broadcast Group's free cash flow decreased from $5.9 million in the prior year third quarter to $4.6 million in the current quarter. The $1.3 million variance reflects a $1 million increase in capital expenses, which includes the build-out of our Philadelphia studio; a $1 million increase in corporate G&A -- a $1.7 million increase in corporate G&A expenses primarily related to digital investments, which I reviewed a moment ago; a $320,000 increase in current income tax expense; and a $330,000 increase in interest expense related to higher-end borrowing costs due to the acquisitions. These increases were partially offset by a $1.9 million increase in station SOI. As noted by Caroline earlier, we expect another quarter of positive free cash flow in the fourth quarter.

As has been our practice, we will continue to allocate our free cash flow to pay down debt; return value to our shareholders through quarterly dividend payments; to complete select strategic, accretive transactions; and to reinvest in our stations for research, promotions and other initiatives that build revenue share, leverage our brand and content and strong market position.

And with that, I will turn it back to Caroline.

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Barbara Caroline Beasley, Beasley Broadcast Group, Inc. - CEO & Director [4]

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Thank you, Marie. As we discussed, we are in the midst of aggressively rolling out a digital expansion and transformation across the company. And during the third quarter, we continued our investment in the development and diversification of our digital platform. After an extensive search, we identified and hired Todd Handy kind to fill the newly created position of Chief Digital Officer. Handy has been at the forefront of the digital media space for more than a decade, having spent 6 years in local media responsible for sales, advertising strategy and products, ad operations and analytics, programmatic sales and native advertising. He also led publisher development, implementation and customer success for an AdTech video start-up and worked with blue-chip digital pure plays in display, audio, video, mobile, performance marketing and retargeting and affiliate sales. And with Todd's background and digital expertise, our digital team will be that much stronger, and we expect to see the benefit going into 2020.

The development of our digital support teams continue to be in progress. This team will help in developing custom marketing solutions as turnkey and efficient as possible, including lead generation, custom presentation, proposal development, campaign activation, optimization, recording and final campaign recap report. These teams have been very well received by both advertisers and by our internal teams, and we're seeing increased renewal rates due to highly performing campaigns and increased digital revenue. So to reiterate, I'm happy to report that we saw an almost 37% increase in digital revenue year-over-year in the third quarter and a 22.5% increase in digital revenue on a year-to-date basis.

Our commitment to growing content and audiences within our digital space continues in full force as well. Specific content editors are now in place and are continuously creating new, relevant and exciting content. We're also in the process of rolling out our first series of BMG-produced syndicated music videos. We continue to work with our on-air team to expand their on-air brand to the digital side. And as a result, our digital expansion efforts are showing record growth, including an increase in users year-over-year of 68%, and page views are up 31%. And these are just a few examples of early successes that we're seeing.

Finally, let me review our current portfolio of esports businesses as we are very excited about this space and its potential opportunity. In 2018, we invested in content via Checkpoint XP. We entered into a partnership with Sun Radio Group for the syndication of this content, and the show can now be heard on approximately 70 stations in North America. And the team is live on Twitch for approximately 5 to 7 hours a day, Monday through Friday, and it is offering podcast as well.

Earlier this year, we invested in team Renegades, which includes players from 5 different teams competing in different games such as Fortnite, Smite and Rocket League. In September, we entered into a partnership with UNLV where we created Checkpoint XP On Campus, a new college-based endeavor with the Hank Greenspun School of Journalism and Media Studies. Checkpoint XP On Campus is positioned as the voice of collegiate esports produced for students, by students with a show that airs weekly, and it's a great tie-in with one of esports primary demographics while creating further catalysts for social media integration regarding our esports interest. And we continue to work on other esports investments and look forward to sharing these with you as appropriate.

Now moving on and looking into the balance of '19. Due to the October and November comparisons with last year's political cycle, actual Q4 revenue is currently pacing down high single digits. However, December is more representative of what we've seen throughout the year and is pacing up in the low single digits. And as a reminder, in Q4 '18, we recorded approximately $3.3 million in net political revenue.

So to recap our third quarter performance, inclusive of the investments we have made to date, we saw revenue and SOI increases on an actual basis. We'll focus on investments that diversify the company on a long-term basis, particularly in digital and esports, and we're managing our capital structure and leverage, and we continue to return capital to shareholders.

So with that, I thank you for your time today. And Marie, do we have any questions that have come in?

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Questions and Answers

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Marie Tedesco, Beasley Broadcast Group, Inc. - CFO [1]

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Yes. Thanks, Caroline. So we received a few -- or a handful of questions. Now most of them have already been addressed except for a few. And so I'm going to dive right into them. First question is can you, Caroline, provide some color on our digital segment's EBITDA and whether that is cash flow positive.

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Barbara Caroline Beasley, Beasley Broadcast Group, Inc. - CEO & Director [2]

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Sure, yes. I mean definitely, the digital segment EBITDA -- and we're not reporting in segments, but the digital EBITDA is cash flow positive, and we're looking at margins in the 30-plus percent range. We're very excited about this area. And as I just mentioned earlier, we just hired Todd Handy to come onboard, and we're looking for even higher increases next year in our digital revenue than what we reported in third quarter.

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Marie Tedesco, Beasley Broadcast Group, Inc. - CFO [3]

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Excellent. Thank you. Second question is, please, can you please provide some color on our M&A strategy going forward.

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Barbara Caroline Beasley, Beasley Broadcast Group, Inc. - CEO & Director [4]

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Yes. So for M&A, I mean we are -- I would like to break it into 3 buckets. We have our core business of radio, and we will look at any potential strategic acquisitions that make sense for our company. In addition to that, we're looking at growing our digital and esports area and -- because we see these 2 areas as providing significant increase and long-term value for our company and also near-term revenue growth for our company.

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Marie Tedesco, Beasley Broadcast Group, Inc. - CFO [5]

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Great. Thank you. And the final question is, does our leverage target remain at 4x by year-end. And the answer is yes. 4x is our target and has been our target, and we expect to get closer to that by the year-end from both organic growth and from additional debt repayments.

And those -- that concludes our questions.

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Barbara Caroline Beasley, Beasley Broadcast Group, Inc. - CEO & Director [6]

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Okay. Great. So again, thank you all for participating on the call. And should you have any questions, please feel free to reach out to Marie or myself. Hope you all have a great day.

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Operator [7]

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Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.