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Edited Transcript of ROIAK earnings conference call or presentation 2-May-18 2:00pm GMT

Q1 2018 Urban One Inc Earnings Call

LANHAM Jun 26, 2018 (Thomson StreetEvents) -- Edited Transcript of Urban One Inc earnings conference call or presentation Wednesday, May 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred C. Liggins

Urban One, Inc. - CEO, President, Treasurer & Director

* Peter D. Thompson

Urban One, Inc. - Executive VP & CFO

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Conference Call Participants

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* Aaron Lee Watts

Deutsche Bank AG, Research Division - Research Analyst

* Juliano Torii

* Mark Kaufman

* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst

* Robert Claiborne

* Adam Jacobson

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Presentation

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Operator [1]

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Thank you for standing by. And welcome to Urban One's 2018 First Quarter Earnings Conference Call. I've been asked to begin the call with the following safe harbor statement. During this call, Urban One may share with you certain projections or forward-looking statements regarding future events or its future performance. The company cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs and other reports periodically filed at the Securities and Exchange Commission could cause the company's actual results to differ materially from those indicated by its projections or forward-looking statements. This call will present information as of May 2, 2018. Please note that Urban One disclaims any duty to update any forward-looking statements made in the presentation. In this call, Urban One may also discuss some non-GAAP financial measures in talking about its performance. Certain measures will be reconciled to GAAP either during the course of this call or in the company's press release, which can be found on its website at www.urban1.com. An audio replay of the conference will also be available on Urban One's corporate website at www.urban1.com under the Investor Relations page -- pardon me, the Investor Relations section of the web page. The replay will be made available on the website for 7 days after the call. No other recordings or copies of this call are authorized or may be relied upon.

I will now turn the call over to Alfred C. Liggins, Chief Executive Officer of Urban One, who is joined by Peter D. Thompson, the company's Chief Financial Officer. Mr. Liggins?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [2]

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Thank you very much, operator, and welcome to our first quarter results conference call. As you've seen from the press release, we’ve got a bit of good news in terms of our radio performance in Q1. Even in a tough market, we outperformed which is something we haven't seen in a bit of time. We've been working on the turnaround so it's like we've kind of latched a number of the competitive issues that we have. So I'm really proud of the radio management team in order to execute on that performance.

We also have made an asset sale in the radio business of one of our Detroit radio stations, which we feel really good about as well, getting $12.7 million in for the station and the key to that being a good deal for the company is that we're going to actually take the intellectual property. It's one of our inspirational stations and we're going to move it to one of our existing translators plus 3 other translators that we're picking up from the buyer EMF. So we are planning to preserve a good deal of that business and the multiple on that sale is somewhere north of 20x when we look at what we expect to retain. So it's just part of our deleveraging plan to continue to march towards getting down to the low 6s by the end of the year. And we're continuing to look for deleveraging dispositions where they make sense or deleveraging acquisitions where they make sense. TV One continued to have some ratings challenges but we feel like they're bottoming out in Q2. So we'll talk a little bit about that. Also MGM is doing great. We'll talk some more about that.

I'm going to let Peter jump in to the details of the numbers and will circle back and provide some more color.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [3]

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Thank you, Alfred. Net revenue was down 1.6% for the quarter ended March 31, 2018, at approximately $99.6 million. A breakout of revenue by source can be found on Page 5 of the press release and a breakout by segment can be found on Page 7.

The radio segment net revenue was down 0.6% in the first quarter. Cleveland, Richmond, Philadelphia, Dallas, Houston and Cincinnati clusters posted the most significant net revenue growth for the quarter. Overall, our clusters outperformed their markets by 190 basis points and outperformed the spot markets by 230 basis points. Advertising sales were up in services, entertainment, automotive and government/public sectors while the retail, health care, financial, food and beverage and travel transportation sectors were all down. Telecommunications, our biggest sector, was flat. McDonald's revenue was down approximately $700,000 in the quarter for the radio division and we’re in dialog with McDonald's concern in their advertising plans for the year. Q2, our radio stations are currently pacing down mid-single digits, partly driven by lower event revenue. After a weak April, May is pacing significantly better and we believe June pacings will improve as we go through the quarter.

Net revenue for Reach Media was down by 14.9% for the first quarter. The decline is related primarily to the Tom Joyner show and a decrease in affiliate of audience. General market pricing is down year-to-date and African American only network budget is still down. Our expense savings, primarily from contractual talent compensation offset the revenue declines allowing Reach Media to post adjusted EBITDA growth in the quarter.

Net revenues from our digital segment increased 47.9% in the first quarter, driven by an increase in direct sales and the integration of the newly acquired Bossip, Hip-Hop Wired and Madame Noire brands into our existing portfolio. Revenue growth for the combined digital business exceeded our acquisition expectations for the quarter and adjusted EBITDA growth was in line with our expectations. We recognized approximately $46.2 million of revenue from our cable television segment during the quarter, a decrease of 4.9%. Cable TV advertising revenue was down approximately 10% driven by lower unit rates due to double-digit delivery declines. This was partially offset by an increase in the number of units by converting some of our promo units to ad units.

Cable TV affiliate sales were down 0.3% with a 5% increase in rate and a 6% decrease in paying subs offsetting each other. Cable subscribers as measured by Nielsen finished Q1 2018 at 58.4 million down from 59.0 million at the end of Q4. We recorded approximately $1.6 million of cost method income for our investment in the MGM National Harbor casino equal to 1% of the net gaming revenue reported to the state of Maryland. This is an increase of 12.7% from the first quarter of 2017; in fact MGM National Harbor set a new single month record for both slot machines and table games in March.

Operating expenses, excluding depreciation, amortization, impairments and stock-based compensation decreased by 0.4% to approximately $76.1 million in Q1. Radio expenses were up 3.1%. The increase in radio program and in technical expenses is mainly due to the tower sale and leaseback expense, which was up $300,000 and an increase in music royalty expense, which was up $640,000 with a onetime credit that we’ve had in Q1 of 2017. SG&A expenses were down mainly due to lower sales commissions and reduced outside advertising spend.

Reach expenses were down by approximately $1.4 million driven by savings in talent and staff compensation and commissions. Operating expenses in the digital segment were up 56.3% due to the integration of newly acquired Bossip, HipHop Wired and Madame Noire brands. Included in this increase was a noncash charge of approximately $1.5 million to record the liability for the future payout of the contingent portion of the BHM acquisition consideration.

Cable TV expenses were down by $2.5 million year-over-year with programming and technical savings due to lower content amortization and SG&A savings due to lower marketing spend. Corporate SG&A expenses were down by 10.7% due to lower outside professional service. For the first quarter, consolidated broadcast and Internet operating income was approximately $32.5 million, down 7% from $34.9 million in 2017. Consolidated adjusted EBITDA was $28.5 million, an increase of 2.7% year-to-year.

Interest expense was approximately $19.3 million for the first quarter compared to approximately $20.3 million for the same period in 2017. Company made cash interest payments of approximately $18.4 million in the quarter. Company repurchased $11 million of our 9.25% 2020 notes of discount, resulting in a gain on the retirement of debt to the amount of approximately $239,000. We recorded a noncash provision for income taxes of approximately $12.8 million in the quarter and we paid cash taxes in the amount of approximately $748,000 in the quarter.

Net loss was approximately $22.6 million or $0.48 per share compared to a net loss of approximately $2.3 million or $0.05 per share for the first quarter of 2017. For the first quarter capital expenditures were approximately $914,000 compared to approximately $1.5 million in CapEx in Q1 of 2017. Company repurchased 1,000,455 shares of Class D common stock in the amount of approximately $1.9 million. Company also purchased 567,791 shares, Class D common stock in the amount of approximately $1 million to satisfy employee tax obligations in connection with the 2009 employee stock plan.

Bank covenant purposes pro forma LTM bank EBITDA was approximately $136.3 million and net senior leverage was 4.82x against the covenant limit of 5.85x. Net debt was approximately $929.4 million compared to $137.8 million of adjusted GAAP EBITDA for a total leverage ratio of 6.74x. We recently signed a definitive agreement to sell the assets of WPZR 102.7 FM in Detroit for $12.7 million to Educational Media Foundation. As part of the consideration from EMF, Urban One will receive 3 FM translators that service the Detroit Metropolitan area. These signals will be combined with the existing FM translator to multicast the Praise Network, which allows us to continue to serve our listening community who value the format. Transaction represents a high double-digit sales multiple and will further help us to reduce our net leverage. Pro forma for the asset sale and net leverage ratio at March 31, 2018, was approximately 6.68x.

And with that, I'll hand back to Alfred.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [4]

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Thanks, Peter. And that's a good jump off point with the asset sale. We continue to be hyper focused on deleveraging. Discussing our leverage this morning Peter and I, remember when this company was levered north of 9x and now we're below 7x and we are marching towards a goal to be in the low 6s this year. We're going to use our free cash flow to continue to pay down debt. We, again, will look for any transactions whether they are dispositions or acquisitions that can help us with that deleveraging. We are always trolling and looking at stuff and so we believe there are some options out there. They will be a combination of singles and doubles that hopefully we will add up to be meaningful as opposed to 1 large transformational acquisition or disposition. And for 2018 from a guidance standpoint we -- both Peter and I, feel comfortable that we can get the company to $140 million of combined EBITDA which is where we're comfortable and focused on and signaling to the market about this year's combined performance. So that's a new piece of information that we haven't put out there before. But we're feeling pretty good that we can get there. MGM, as Peter told you, is doing exceptionally well. We believe that they will continue to take market share and that deal will be a very good deal for us, at a minimum coming on top of our expectations for it and highly probable that it exceeds our expectation. There will be real value created there that we will be able to do something with in terms exploring how this asset could help us with our refi. I think people will be able to get comfortable that we're going to get our distribution, which seems to be increasing, but our equity stake also has real value and so we've been exploring options of how to you use that value to help reduce the company's net leverage in particular in the context of a refi.

TV One ratings, as I said before, have been a problem, part us, but part also the universe shrinking. We feel like we're bottoming out through April. The first month of Q2 we were flat to up a bit. We've got a new schedule coming in May that we're hopeful will give us even some more forward momentum and we're also working on some new acquisitions that will hit about mid-year. We've got the return of Empire this summer and then Q4 we're going to get access to the entire library of the old Empire episodes.

So we continue to be diligent, pay down debt, which you can expect us to continue to do and executing in a tough market. But I think all in all we're feeling pretty good about our prospects. On the $140 million of EBITDA for 2018, with our free cash flow generation, we see a clear path of getting down to the low 6s of leverage. We're now trying to figure out how we get below 6. We've talked to a number of investors about where we should be and it seems like anything below 6 is a great place for us to be. So we don't have the clear path to that just yet but we're focused on it and we're probably a single or a double away from being able to achieve that.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [5]

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Yes. And just to clarify that, you mean within the course of this year, I mean that's approximate over time, but we would like to accelerate.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [6]

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Within the course of this year, I'm talking about between now and the end of 2018, correct. Thank you for clarifying that.

With that, operator, I'd like to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will first go to the line of Aaron Watts with Deutsche Bank.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [2]

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A few questions, I'll start with radio. I guess looking at the slight decrease in revenue in the first quarter for radio broadcasting, you cited a bunch of markets that were up and some that were down. As you look at kind of the differences between those markets, is it competitive differences, more impact from digital, is it share shifts between you and your peers? What's going on between those markets?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [3]

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Good question. And no, it's not competitive. Just we got 4 big markets that kind of drive the company's radio segment. And you know what 2 of them Baltimore and Atlanta are down really big and nothing's changed from a competitive standpoint in that market. They are just...

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [4]

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Again to clarify, it's only about the market being down double digits.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [5]

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Exactly.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [6]

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We are beating the market, but the market itself is down double digit.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [7]

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And I don't know why. I mean Atlanta, one could argue that Baltimore has old line East Coast Town, used to have manufacturing base, and yes maybe it's diversifying or it is diversifying but not a growth market. Atlanta, you can't make that argument. So I have no idea why that is. I've never been able to figure out what drives one market down and another market up at any given time. So I think right now that's just kind of -- that's just -- that's the effect of our particular mix of markets.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [8]

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The Miller Kaplan for our markets for Q1 is down 3.2% and the other big 4 markets, Houston as a market was down 1.3%. We beat that market, we were up a couple of points. Washington was down 2.8%, we were down 2.5% in D.C. So that gives you a flavor for the big 4 markets.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [9]

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Okay. And as I think about moving into 2Q, I know you said down mid-single digits. Although some of that due to lower event revenue. Are you able to kind of separate out the events and how does the market or your pacings feel excluding those events versus…

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [10]

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Again another good question. I think at the moment those events are costing us a couple of points of pacing. And I suspect so that when we will just look at the spot business, I suspect we are in line with where the markets are at judging where Q1 came in. So if the markets were down [3 and change] in Q1 if they stayed in that zone, we are probably -- we're probably close to that excluding the couple of events that we were talking about.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [11]

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Okay. And Alfred, based on what you're hearing from advertisers, any reason to hope that radio can push towards a flat or even growth story this year? I know you've got probably a little bit of benefit from political helping that as a tailwind as well.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [12]

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Yes, I mean, I believe that -- look a recession aside, I mean there's been this talk about are we -- I think I was watching CNBC, I guess, the shape of the yield curve right now some people believe is predicting a coming recession. I don't know, I'm not an economist, right. But short of a recession coming, I think that radio definitely has a chance to finish flat to up this year. And our goal is to outperform that. The company has historically outperformed the radio market. The fact of the matter is our underperformance in the last 2.5 years has been largely related to competitive dynamics, where we took a competitor in Houston, we took a competitor in Columbus, we took a competitor in Indianapolis. Those 3 scenarios cost us $15 million of cash flow.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [13]

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Okay. Let me ask you just one on the TV side of things. You spoke about the subscriber losses or subscriber count declines. Can you give any more color around that? I know we heard from some of the MVPDs over the last week or 2 and it's echoed that picture. But maybe you can talk a little more about that and maybe also any strategy you have to try and offset those sub count declines, whether it's through kind of getting out over-the-top services or direct to consumer efforts?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [14]

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Yes, I mean look, you echoed it. I mean all of the operators have been down because they've lost more video subs than people had expected. And so we've seen more churn than we have expected, particularly at charter, the package that we're on churned more than we had thought it was going to and that's largely that package that was in the old Time Warner systems and as Charter sort of works through their migration. I don't believe over-the-top is an answer for us today because one, it's a business that won't have an immediate impact. It's not like we've got -- it's not like we've got sports content or we are CBS. Our showtime where we put a direct consumer product out there and immediately people see some price value relationship that's really attractive that makes them want to cut the cord and buy CBS all access. So for us it would be a direct-to-consumer package that we would have to go get other content for, then market it and then try to get to some critical mass of subs to make money and that sounds like a long money-losing slog. That wouldn't solve our immediate issue. So how do we mitigate? First of all, we have been mitigating the churn. I mean our overall -- lots of people are down on subs and we're kind of flattish. But we are focused on opportunities where we can get more subs from people of which we still have some of those opportunities. So we're talking to some of the OTT folks. We're talking to distributors where we still have upside because we're not fully distributed. We are looking at opportunities to launch a new service that would be license fee free because the marketplace is probably not that receptive to paying for more new networks, but because we already have a platform if we have a concept that fills a void that doesn't cost operators anything, we think we've got significant enough relationships where we could secure the distribution, which would give us another platform to hang off of -- another network to hang off of our existing platform and to get more audience and impressions of which to monetize. So we're focused more on that kind of opportunity. And also in cable TV, we continue to look at any sort of JVs from a programming standpoint, combinations. We continue to look at any sort of M&A opportunities that would allow us to create value and be levered and be deleveraging. So no OTT, probably more likely that we launch a second network that's license fee free and won't cost us a lot of money to launch because we already have a platform and try to get some additional distribution with our existing partners.

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Operator [15]

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And for our next question we will go to the line of Mark Kaufman with Ramirez & Co.

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Mark Kaufman, [16]

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Nice job this quarter and over the past year where you've been reducing the leverage in the company. Listening to the stakeholders, I think it's good. I have a question about your thoughts and outlook for Reach Media. I know there has been some changes there personality wise or just exposure. And also I think as it relates to that if Tom Joyner is moving over or has already been on the Internet, let's say, as opposed to being over the Airwaves Radio, does that change the cash flow that you're realizing? Does it have any positive impact on digital revenues and negative obviously on radio revenues? Or does it all flow through Reach Media? Or is it a combination of the 3?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [17]

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Yes, so Reach had a tough Q1 on ad revenue, but I think as Peter pointed out they were able to save on expenses and they actually grew EBITDA year-over-year. Reach had a really tough 2017. The EBITDA got cut basically in half from like $9 million to $4.5 million, if those are kind of like the numbers.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [18]

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Yes. Yes.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [19]

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We see that rebounding this year even with our tough Q1 to probably $7-plus million of EBITDA. Q2 ad revenues significantly -- doing significantly better than Q1. And so we feel good about Reach's recovery this year. Tom is already on the Internet. We stream his show. There is no plan to move that show to exclusively online. And if we were to do something like that, yes, it would have a dramatic negative impact on the revenue and cash flow for that show. Which is why we don't plan to do it. Yes, I know Tom has -- we redid -- we re-signed Tom for another, what was it, 2 or 3 years, I don't remember. Yes. And he made an announcement that he was retiring at the same time. That Tom's announcement, maybe he does. The company -- I think Tom is still going to be a viable source of good radio entertainment 2 years from now. The show may not be as big as it was 10 years ago, but he is still going to have an audience, and I know I for one. And the company, we're open to talking about what that future holds. I don't know what Tom said is because we just did the extension. But I believe that there is going to be sort of life after this next contract. And that's just me pontificating. We still -- it's still a robust business for us. It's just a declining business. But we just got Rickey Smiley and D.L. Hughley and our inspirational shows that are also rounding out that portfolio. So we're pretty diversified there.

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Mark Kaufman, [20]

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Could you -- next question if you don't mind, can you elaborate a little more on some of the parameters or valuations or cash flows from MGM these days or revenues or whatever the numbers that you could possibly share?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [21]

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Well, look, they are a public company, so you can -- got to do some digging into what that -- we know what their gaming revenue is, because...

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [22]

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Yes, and as that 12%, 13% growth rate continues, our distribution from it should be north to $6.5 million this year, call it, $6.7 million. So that's $600,000 more than we got last year. As Alfred said their analyst report is out there talking about their EBITDA, ultimately fully baked, put right, I say fully baked once it's been -- once with 3 years out, we're at 7x EBITDA. So when we own 6 2/3%. So it's relatively straightforward to run the math. But we think that, that stake, as Alfred said, from an equity standpoint is valuable.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [23]

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It's probably worth $70-plus million today and it's probably going to be worth north of $90 million. So the idea that we make 3x our money on it is pretty tangible.

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Mark Kaufman, [24]

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I appreciate you saving me the time of looking through the MGM number. That's terrific. I will step off now.

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Operator [25]

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We'll go to the line of Adam Jacobson with Radio & Television Business News.

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Adam Jacobson, [26]

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My question is in regards to your divestment in Detroit. Congratulations on that. Familiar with the Washington D.C. market for many years, you have a smaller format of radio station, [4.1], given the buyer in Detroit, Educational Media Foundation, those certainly looking to expand in a lot of markets. And I'm wondering if there’s any further discussions with EMF and any further discussions internally regarding the Praise format of stations that are in some of the cities like Washington?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [27]

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No, not at this time. In order for us to decide whether or not divest something ultimately the stick value has to be higher than the amount of cash flow it's generating times the multiple we are trading at. And that just happened to be the case in Detroit given our ability to move that programming over to these translators. So we have -- so we're not actually leaving the format. We're staying in the market. That station -- that dynamic would not exist in Washington for Praise. That station in D.C. does exceptionally well and makes a lot in -- and makes a lot of money. It's probably -- it's our best performing Praise station with the most revenue on it in our home market. So it's worth more to us from a cash flow standpoint than somebody would pay for it as a stick.

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Operator [28]

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We have a question queue from the line of Michael Kupinski with Noble Capital Market.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [29]

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As you know typically June makes the quarter and I was just wondering what are you seeing in terms of the improving trends in the quarter, any dynamics of categories that's attributing to the improving trends in that back half and are you expecting McDonald's to come back in the quarter?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [30]

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We had a good meeting with McDonald. I didn't -- look they just had -- they had a shift. They went more national, less local. We voiced our position, our thoughts on the importance of local radio. We are getting more money at TV One and at digital. I think that they are constantly assessing where they're at and what they've done and how it's affecting their business. So I think we still have a great relationship with them. We will continue to have a great relationship and I don't know if -- they're going to be an advertiser. Unfortunately in Q2 they spent 20% of what they did last year -- excuse me in Q1 they spent 20% of what they did last year. Can we improve upon that in local radio? I don't know yet, but it was a productive dialog. But I didn't get any definitive answers from them.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [31]

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And some have been saying is that auto is coming back. I know it sounded like your auto was pretty good in the first quarter. Auto seems to be coming back for the industry a little bit in the second quarter. Are you seeing those trends as well?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [32]

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I heard it from one of our Regional Vice Presidents who said that they were starting to see a return of auto in Q2. But that's just one channel check in the company.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [33]

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Yes, and in Q1 we were up 5% in the auto category. So that does...

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [34]

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Yes, you did well.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [35]

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Yes, and congratulations on Detroit. I just have a quick question about that. It seems like a unique situation where you are able to stay in the market. Would the company consider exiting a large market like that or only if there was a way to stay in the market? I mean it's an important...

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [36]

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So look, I -- I'm going to make this statement because you got rumors around and it affects your employee base and all that other kind of stuff. But just officially to go on the record, I mean, we're not a venture capital fund. So we're not just a pure economic animal where we just want to make some money and get out of the media business. We built the media company over 35-plus years for a reason. But it is a business and we have a leverage profile which needs to come down. So given the fact that we're always in the business of creating value, I mean we don't do it just because we want it to be broadcasters, right. We are in the broadcasting business. So we do it because we love being broadcasters and serving our community and this audience. But we also want to create value and earn our living at it. We need to always rationalize our portfolio, particularly if you have a goal of having to reduce your leverage for the primary purpose that you can continue to serve your community for another 38 years because we just saw an industry where more than half of it went bankrupt, including the 2 largest players. And I'm happy that we didn't end up being in that boat. So yes, where we have underperforming assets that somebody would deem more valuable than they would be in our hands that would allow us to continue to reduce our leverage so we can get to a safe leverage zone where the company doesn't have any issues even in a recessionary environment, we're open to that. And that's either a disposition or an acquisition. We don't rule out the opportunity for us to combine or get larger somewhere where we can create value because you can create those synergies going either direction, but we are absolutely in the market. And by the way, this has always been our viewpoint. Prior to the 2008 recession, we sold out of a bunch of markets that we didn't view as strategic, including Los Angeles, California; Dayton, Ohio; Louisville, Kentucky; Minneapolis and we ended up picking some other assets in places that gave us a bigger presence and allowed us to make more money. So I think that's my job as the CEO to continue to do that and that's been the company's history and our track record. So people should -- you should always expect that. And this message is probably more for our employee base than anything else. The best way not to be considered an underperforming asset is to have it performed and then you don't look at it, right. It's like somebody asked me a question about our (inaudible) station in Washington, that station does great, makes us a lot of money. Actually the reality is if you think about radio as a business at the right leverage level, it's a great business and has great free cash flow. If you can do a 30% or 40% margin on some of the return, the cash-on-cash return of dollars invested in that radio asset are pretty stout and probably better than you could get in the equity market and the bond market and certainly in any sort of safe money market fund. I mean radio is a good business from a return standpoint. I've actually had D.C. companies call me to get my view of the radio business because they're thinking about buying radio stations and just holding them for the cash generation. So that's how I think about it and that's how we're going to be executing in the future.

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Operator [37]

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The next question will come from the line of Juliano Torii with Descartes.

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Juliano Torii, [38]

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Well, yes, most of my questions have been answered. I just wanted to see if you could clarify a bit more of the structure of the Detroit transaction, basically what stays and what leaves the company and how are you going to continue to make money from that market, if you could explain that. And then maybe elaborating on the previous questions, which markets do you think that this could potentially be a solution as well?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [39]

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I don't understand the last. But Detroit station WPZR is what's being sold and it's a (inaudible) radio station, inspirational is another name for the format, its doing a couple of million bucks of revenue right now and contributes about $1 million of cash flow. And we're selling that particular station and we're taking the format, the intellectual property and we're moving it to essentially 4 smaller radio stations that will all -- that will cover different parts of the city. 3 we're picking up from EMF and one that we already own. And we believe that we will preserve at least half of that revenue and continue to serve that audience and do a respectable amount of cash flow, probably half the cash flow.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [40]

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So we think it costs us about $0.5 million of adjusted EBITDA by making the switch from the 1 big signal to the 4 smaller signals. Obviously we have to prove that out, but that's how we feel about it based on our research.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [41]

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And it's not just research, we actually have experience of doing this format on the smaller signals and translators in smaller markets and we know what kind of revenue we're doing on those. And so we have empirical real world experience in what this particular configuration might look like. And we're not -- and we don't have any current plans to do that anywhere else today. This was a particular situation.

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Juliano Torii, [42]

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Okay. That makes sense. So basically you are not selling out of the market. You are not consolidating anything, right, because you're not selling -- you are not completely exiting so you are not selling (inaudible).

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [43]

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No. No, no, no.

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Juliano Torii, [44]

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Okay. That makes sense. I mean, I'm just curious to understand why do you pay such a high multiple considering that you should be competing with them. What has -- what changed there?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [45]

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I'm sorry, say that again.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [46]

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Yes, one (inaudible) surprise...

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [47]

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They have their own business model. They are a Christian broadcaster that operates kind of essential -- they operate multiple formats, 2 formats, but their primary format is a central format called K-Love that they broadcast out of California. They are not really in the local radio business. It's a national business model where they're just looking to get as much audience as possible and I think they derive -- they are nonprofit. They derive their revenues from donations. They don't sell ads to my knowledge. And they've got some internal formulas as to how much population they reach and what's the expected -- the expected income from those donations are. I am not privy to it. They decide what stations work to them. They actually have a small -- they own -- their distribution in Detroit is the translators currently. So they're looking to have a wider reach and we're looking for a low power radio station. We've actually been talking to them for over 2 years about it and just we ultimately decided to move forward with the transaction in this manner. So other than that I can't...

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [48]

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They essentially don't value it on a cash flow multiple, right, and our cash flow is our cash flow. It's not relevant to them. So that's why the deal works, right. It works for us and we get to preserve the format and they ascribe the value to the station that its worth for them, but their metrics are probably different to our metrics.

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Operator [49]

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Then we have a question in queue from the line of Robert Claiborne of Insight Investment.

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Robert Claiborne, [50]

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I'm sorry, I jumped on a little late, so maybe if you already addressed this. On the Detroit sale, is this all cash?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [51]

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Yes.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [52]

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Well, actually it's $12.7 million in total, of which approximately $12.2 million is cash and approximately $0.5 million is the value of the 3 translators that have been exchanged.

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Robert Claiborne, [53]

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Okay, great. And then the other question I had is I don't know if it's too early, but if you have any color or thoughts on how the political advertising outlook is shaping up at this point?

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [54]

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Too early. There's probably some color, because I'm sure there is some races that have happened regional but we weren't prepared to -- it's not a big number. So we weren't prepared to really have that.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [55]

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Yes. Well, in terms of what -- where we are at so far. I mean I agree with what you said but as a rough number we're expecting, call it, 4.5 million-ish of political this year.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [56]

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Of which most of that's going to come in Q4.

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [57]

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Q4, yes.

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Robert Claiborne, [58]

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Okay, great. That's helpful. Yes, and I think the -- continuing to focus on deleveraging and buying back the bonds with free cash flow makes a lot of sense to continue to delever and get your multiple down.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [59]

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Yes, that's what we're doing. Thank you, Robert.

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Operator [60]

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(Operator Instructions) We'll go to the line of [Ben Brogadir] with [Odin].

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Unidentified Analyst, [61]

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Just kind of a little bit of a housekeeping issue with respect to your debt docs, is there any limitation in terms of how many of the subordinate bonds you can buy back in the open market? And you guys have an undrawn ABL? Is there a potential for you guys to use that facility to further fund bond buybacks?

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [62]

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Yes, they’re a permitted investment. So there’s no limitation on how many of those we can buy back, but there is a governor because that tests our net leverage. So to the extent that you’d take cash and buyback the junior debt, you're going to tighten your ratio on the 5.85x test. So that's really the governor. So you can buy back as many as you like providing you are in compliance with your 5.85x net senior leverage tests. And obviously, we don't want to get too tight on that because you would hate to get caught out in the downturn. So it's really a balancing act for us. It's not so much about taking all of our cash and buying back those bonds, it's about just balancing how much cash you want on hand and how much debt you want to retire.

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Unidentified Analyst, [63]

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Understood. I appreciate that. And then just to kind of be clear, we should probably expect further open market purchases of those 20s as kind of the year progresses. Is that fair?

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Peter D. Thompson, Urban One, Inc. - Executive VP & CFO [64]

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Yes, I think so. I think -- yes, we want to take that balance down, our most expensive capital with the exception of the small Comcast now and we've got a refi coming due on that in the not too distant future. So it makes sense to take that down.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [65]

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Operator?

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Operator [66]

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We have no further questions in queue at this time.

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Alfred C. Liggins, Urban One, Inc. - CEO, President, Treasurer & Director [67]

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All right. Thank you everybody again. As usual we're available offline. Talk to you next quarter.

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Operator [68]

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And ladies and gentlemen that will conclude your conference call for today. Thank you for your participation and for using AT&T's Executive TeleConference Service. You may now disconnect.