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Edited Transcript of EMMS earnings conference call or presentation 10-Jan-19 2:00pm GMT

Q3 2019 Emmis Communications Corp Earnings Call

INDIANAPOLIS Jan 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Emmis Communications Corp earnings conference call or presentation Thursday, January 10, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey H. Smulyan

Emmis Communications Corporation - Chairman & CEO

* Kate Healey Snedeker

Emmis Communications Corporation - Media & IR Contact

* Ryan A. Hornaday

Emmis Communications Corporation - Executive VP, CFO & Treasurer

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Presentation

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Operator [1]

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Welcome, and thank you for standing by. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this time. May I introduce your host for today, Kate at Emmis. Please go ahead.

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Kate Healey Snedeker, Emmis Communications Corporation - Media & IR Contact [2]

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Good morning. Thanks, everyone. Thank you for joining us for today's Emmis conference call regarding third quarter earnings. I wanted to extend a special welcome to all the Emmis employees who are joining us and listening in. We'll begin in just a moment with opening comments from Chairman and CEO, Jeff Smulyan; and Ryan Hornaday, EVP, CFO and Treasurer.

After opening comments from Jeff and Ryan, we will respond to questions that have been submitted via e-mail to ir@emmis.com. A digital playback of the call will be available for the next week. That number is (203) 369-1930.

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 has been posted under the Investors tab of our website, emmis.com. Jeff, we're ready to get started.

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [3]

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Kate, thanks. This has actually been a spectacular quarter for us. It's the best quarter we've had in over 4 years. We were up 5% in markets that were up 2%, so both very good signs. We grew revenues in all 3 months of the quarter. We grew revenues in all of our markets, and we've outperformed in New York, in Indianapolis and ratings have been very good. In New York, HOT 97 and WBLS are both not only top 5 18-49 but 25-54. In Indianapolis, B105 has been the #1 station pretty consistently with adults and women. In Austin, BOB-FM continues as the #1 commercial station. And just across the board with our properties have really done very well and through this, the first 3 quarters of the year for us, very encouraging. And what's also encouraging is calendar 2019 is off to a strong start. January and February are both pacing up mid-single to high single digits, and beyond that even March and April are pacing up. So we've really seen an uptick, which has been very gratifying. Five of the last 6 months of the year -- of the calendar year last year were positive and it looks like at least at this point, the first 4 months of this year. So very encouraging. In addition, Indianapolis Monthly has had a very, very good year, revenues up 7% through the first 9 months and our dynamic pricing business Digonex is moving on to another level, continues to grow its client base, continues to have great success with its clients, and we think that we've reached the tipping point in that business and now that business, we think, can be a major contributor, significant contributor to our company as we go forward.

The one hard part for us was that this was the quarter in which we significantly downsized NextRadio and TagStation. It was very tough. We had a vision for the industry, for our company, what we felt and still do believe is the future of what we needed to do. But it just wasn't possible to do this without much help from others. I want to take a moment to thank the employees of those businesses for their great contributions led by Paul Brenner, and I wish all of them the best as we move forward and they move forward. I'm very proud of it, probably as proud as anything I've done in all the years I'd been in business. But sometimes, you work hard and you just don't see the success that you think you should have seen. But we're very happy going into this year. As you know, Emmis has almost no debt. We have plans in place to deal with the remaining debt that we have, working on some things, and we're excited about the new directions this company will take. So I'm very pleased as we're into the first week of the -- second week of the new year, and I think this is going to be a very good year for us. Last year, we really solved a lot of problems, dealt with a lot of issues and I think we've positioned ourselves for a pretty exciting year. Ryan?

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [4]

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Thanks, Jeff, and good morning, everyone. This morning, we released earnings for our third fiscal quarter ended November 30, 2018. In the second quarter of the prior fiscal year, we sold KPWR in LA. In the first quarter of the current fiscal year, we sold our 4 radio stations in St. Louis. These sales caused our current period reported results to not be comparable with prior year results. 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. Pro forma for these asset divestitures, our radio revenues as reported to Miller Kaplan, which excludes barter and certain other revenues, were up 4.9% in Q3, our best quarter in over 4 years. According to Miller Kaplan, our radio markets collectively were up 2% in the quarter.

For the 9 months ended November 30, 2018, our radio revenues as reported to Miller Kaplan were down 2.2%, slightly outperforming our radio markets, which were down 2.5%. Looking at the individual months in the quarter and pro forma for asset divestitures, September was up 2%, October was up 11%, and November was up 2%. Political advertising was strong in the midterm cycle, particularly in Indianapolis. During our third quarter, we recorded $1.1 million of political revenue compared to $0.2 million in the same quarter of the prior year.

Healthcare was our largest category in Q3, representing 10% of our revenues. The automotive, cellular and services categories were strong in the quarter. Restaurants, beverages and entertainment were the weakest of our top 10 categories. Pro forma for the sale of our stations in Los Angeles and St. Louis, radio station operating expenses, excluding depreciation and amortization, were up 1.4% in Q3, and up 1% through the first 9 months of this fiscal year.

On our previous earnings call in October, we announced that we were planning to dramatically reduce the operations of our NextRadio and TagStation businesses and explore other means of eliminating the operating losses from these businesses in the coming months. After exploring several alternatives, we made the difficult decision to scale down our efforts in these businesses, resulting in the termination of 35 employees.

During the quarter, we recorded severance totaling $1.2 million and an impairment charge of $0.3 million relating to property and equipment used in these businesses. These actions will meaningfully improve our liquidity and profitability in future periods.

In the trailing 12 months ended November 30, 2018, the operating losses from these businesses totaled $8.4 million, inclusive of the aforementioned severance and impairment charges. As of November 30, 2018, we had $28 million of secured credit facility debt outstanding and approximately $7 million of unrestricted cash on hand. Our leverage was 2.4x EBITDA as defined in our credit agreement, in compliance with our covenant of 4x EBITDA. Our term loans mature on April 18 of this year, and we are evaluating several alternatives to refinance this debt prior to its maturity. We expect to complete this refinancing by the end of March.

Looking ahead to Q4, we are currently pacing up low single digits. While December was down 5, both January and February, as Jeff mentioned, are pacing up mid- to high single digits. Finally, we invested $0.2 million in capital expenditures in the first 9 months of this fiscal year and we expect capital expenditures for the full fiscal year to be approximately $0.4 million.

With that, Jeff, we have some questions investors submitted in advance of the call.

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Questions and Answers

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [1]

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Starting off. As we look into calendar '19, what are your expectations for radio industry revenues in the coming year?

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [2]

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Well, after the last number of years it's hard to be spectacularly upbeat. I mean, we've had an industry which has been flat to slightly up to some years slightly down. But I'm encouraged. We've seen, as we've said, 5 of the last 6 months of the calendar year were positive and very encouraging. You need to come back for first of the year and January pacing up, February, March and April. So I'm hopeful that maybe this will be a year where finally advertisers see some signs about the industry that are more positive and finally recognize the remarkable value the industry has. I haven't seen -- I saw the comment in 60 Minutes outtakes with Paul McCartney talking about radio the other day and a young interviewer asking, what is the other studio besides else to radio? And she said, you mean like regular radio? He said, "Yes." And he was -- she was incredulous. You mean, like rearrange, like FM, like you get in a car and you turn it on. So I think maybe it's sweeping into the back, people do listen to us more than anything else and there is this spectacular value in our medium.

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [3]

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In December, the SEC commenced the 2018 quadrennial review of media ownership rules with the local radio ownership rules front and center. What do you think should be done to improve the health and viability of local radio stations?

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [4]

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I have mixed emotions. I think if you look back at the consolidation, the deregulation of 96 and I was certainly a strong proponent of it. I think the results may be a net positive. But there were some clear negatives that were caused by that. And I believe that we need to have deregulation. You're competing against not your other 20 radio stations in the market, but you're obviously competing against Google and Facebook and every other form of advertising. And this is an industry that really needs capital. So I am hopeful, Chairman Pai has said that in spite of an industry that has not been unified of what everybody wants that I think you'll see some more deregulation. And I think -- as I've said a number of times, I think it will help attract capital in the industry that really has been starved for capital. That's -- it's been a very frustrating thing. When you look at every segment of the industry, there just has not been an inflow of capital to the American radio industry for the last number of years and we need it.

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [5]

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As Emmis scales down its NextRadio efforts, what does that mean for the radio industry? And will over the air FM radio continue to be available on smartphones?

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [6]

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It will, and we'll still be providing that. As I said in my opening remarks, it's a painful chapter for us. We believe strongly, at the beginning of the process and more strongly at the end that marrying the FM chip into all sorts of portable devices, automobiles and smartphones, was -- is very critical. We absolutely need to regain supportability, and I think the learning that we had was that the data that we can capture in this environment really is a game changer for the industry. And I think not only do we realize but a lot of other companies realized it. This industry has to have aggregated data. It's what allows us to compete with Google and Facebook. But having said that, we were just not willing or really able to build out the massive data capabilities that an industry needed on our own. And when we passed the hat, we had some wonderful companies who stepped up, but there are a lot of people who said, gee, just can't help do this. So we said, look, we can't do it alone, we're not willing to do it alone. Hopefully, the industry will figure this out, but it'll be for others to figure it out.

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [7]

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Along with the overall stock market, radio stocks have fallen precipitously since October, including Emmis. What can the radio industry do to reverse this trend?

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [8]

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Well, I think you have to change the perceptual problem. We've said that for a long time. I mean, like I said, I love the Paul McCartney interview, but the young reporter from CBS basically was like "Oh my gosh, you mean, people listen to radio." People do listen to radio, and I think we have to change that perception among advertisers and the public at large and decision-makers. We have to get a story out. And I think that will change. I think obviously, the top line has to grow. The most encouraging thing I've seen is that our top line is growing and that is very encouraging for Emmis and for the entire industry. I hope it's not a false positive because as you know, we've seen a few false positives in last 6 or 7 years. But if we can maintain, this industry could grow 3% or 4% a year and you'd attract a lot more capital and it would build upon itself with advertisers.

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [9]

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Any update on the land sale in Indianapolis or any other potential asset sales?

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [10]

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Well, we've said, we are having fun. We've sort of got 70 acres of land in the most desirable area. We're having a number of inquiries. We're in number of discussions. Nothing is done yet, but I'm very excited about that. As I've said, we are going to transform this company into some new areas that we think will be fun. We're exploring some now. Nothing is imminent or ready to be announced, but I think you will find that as we have this call a year from now, we will be looking at a different company. We're pleased. We -- this company, I think, Ryan, we paid down $1,200,000,000 in debt in the last decade. That's a lot of debt that we paid off and it leaves us in a position to navigate through the uncertain times with a clean balance sheet. So now it's the next step of where we go with that. As I've said over and over again, we've got a remarkable group of people here. Really smart, really talented, really hardworking, really good people. And I am just very anxious to give them a challenge and something that might grow nicely. So we'll see.

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [11]

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You basically almost answered the last question on the list. It's along the lines that we've mentioned we'd like to transition Emmis into higher growth businesses. Are there any areas of interest you'd like to share on the call today?

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [12]

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Probably not. We've -- in the last year, as we've ramped this up, we've looked at some fascinating things that people would probably -- sometimes say, well that makes sense to what is that? But we're really looking and we're trying to say, what can we do given the skill sets that we have? And we think we have some pretty unique skill sets around here and when we can find a company or an industry where there are opportunities that match our skill sets, we'll transition. People forget in the nearly 4 years of this company, it's not just a radio company, it's an international radio company, it's been a television company, it's been a research company, it's been a technology company, it's been a dynamic pricing company, it's been a Major League Baseball company. So it's done a lot of things. And the one thing that we've learned that's really served us well in the ups and the downs is that we -- I think we're smart enough to know what we don't know. So we go into a new area whether it's Major League Baseball or international radio or television, we've always been able to say, here's the things that we know, here's the things that we don't and been able to attract people who do know those things and it's served us well.

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Ryan A. Hornaday, Emmis Communications Corporation - Executive VP, CFO & Treasurer [13]

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Great. That's all we have in terms of questions. Jeff, any closing remarks?

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Jeffrey H. Smulyan, Emmis Communications Corporation - Chairman & CEO [14]

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Just to thank our people. They -- listen, anybody who has been in the American radio industry in the last 5 or 6 years, this has been at best a roller coaster. And I always close by saying the thing that matters most. We've survived and we've put ourselves in a great shape for the future because of the really the commitment and the dedication of our people, and I think it stems from a culture I'm incredibly proud of. So I thank our people, and with that...

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Kate Healey Snedeker, Emmis Communications Corporation - Media & IR Contact [15]

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Thanks, Jeff. Just a reminder for everyone that a playback of the call will be available until next Thursday. And that number is (203) 369-1930. Thanks for joining us, and have a great day.

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Operator [16]

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That concludes today's conference. Thank you all for joining. You may disconnect at this time.