Urban One, Inc. (NASDAQ:UONE) Q4 2022 Earnings Call Transcript
Urban One, Inc. (NASDAQ:UONE) Q4 2022 Earnings Call Transcript July 7, 2023
Operator: Ladies and gentlemen, thank you for standing by and welcome to Urban One's 2022 Year-end Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. During this conference call, Urban One will be sharing with you certain projections and other forward looking statements regarding future events or its future performance. Urban One cautions you that certain factors including risks and uncertainties referred to in the 10-Ks, 10-Qs and other reports it periodically files with 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 07/07/2023. 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. These 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. A replay of the conference call will be available from 12:00 PM Eastern Time, 07/07/2023, until 11:59 PM, 07/14/2023. Callers may access the replay by calling 866-207-1041 within the US. International callers may dial direct 402-970-0847. The replay access code is 8019907. Access to live audio and a replay of the conference call will be available on Urban One's corporate website at www.urban1.com.
The replay will be made available on the website for seven days after the call. No other recordings or copies of this call are authorized or may be relied upon. I'll now turn the call over to Alfred C. Liggins, Chief Executive Officer of Urban One, who is joined by Peter D. Thompson, Chief Financial Officer.
Alfred C. Liggins: Thank you very much, operator. And we also have Jody Drewer, the Chief Financial Officer for TV One with us and, Kris Simpson, who is the General Counsel of the company who is also joining us. Finally, our year-end earnings report in the middle of the year. Thank you everyone for bearing with us as we got through an unexpected lengthy audit. But we're happy to report that the year ended as expected with us right on top of our year-end guidance of $165.6 million of EBITDA, leverages was below 4 times, which was a great outcome and we've indicated that, that was our goal and that's where we landed. Couple of things, just to give you highlights before I turn it over to Peter. You probably also know and seen in the press release, we monetized our MGM National Harbor investment.
I think we did that in April. It ended up being a fantastic investment for us. We invested $40 million of cash in the project. We ended up pulling that $40 million out in dividends over the length of time that we held it. And then our equity investment in the end is worth $137 million. So it's probably roughly 4.5 times our money investment. Why did we do it? We did it because we thought that their 2022 performance was number one, a high watermark for the property. That was not expected. It was well ahead where we had expected it to be. We also felt that given the macroeconomic environment and a number of other things that it probably was not particularly likely that we were going to do better than that going forward. Things can happen. We don't know for sure.
But that was our calculus. The third thing is that, on that $137 million, we were earning approximately $8.8 million of dividends, which is about a 6.4% return on the value of it, since the tremendous return on $40 million, but on $137 million, it's just a 6.4% return. And we thought that we could do better than 6.4% investing that capital in other things. And the first place we started was, even though we're not doing better, with US Treasuries where we're getting about 5% on that money. So fact of the matter is we're not giving up a ton of current income right now holding that in treasuries and we're sitting on a bunch of cash right now as we live through an uncertain economic time, hoping that the uncertainty actually moderates, feels like maybe there's not going to be a recession, but who knows?
And we've got a number of things coming up where we may need to deploy that cash, whether it's -- debt -- continued debt buybacks, which we haven't been billing particularly since we hadn't filed our financial statements, but I haven’t checked in a minute. The last I checked, our bonds are yielding like 10% -- north of 10%, 10.3%. So even that is a better investment than just continuing to hold the equity and get a 6.4% return. We are in the process of gearing up to run another referendum in Richmond for our casino project with our new partner at Churchill Downs. We believe that there is an exceptionally high likelihood that we will be running that referendum. We've got some assurances, some public assurances by the Virginia Senate budget negotiators that a Richmond referendum or this casino referendum being blocked to potentially move to Petersburg as a non-negotiable item.
For them, that was recently in the news press in Virginia. So we've got some real support there. City Council has voted it out, we're at the Virginia Lottery now for approval. And then we'll go to the Circuit Court to get the referendum scheduled. Early vote would start September 22nd, 2023. Friday, September 22, and election day would be November 7. So if we're successful with the referendum, we'll obviously need cash in order to fund that. Although the partnership in Richmond is different now, we are not the sole equity provider at this point in time. It's a fifty-fifty equity investment with us and Churchill Downs. They're a great, well capitalized company. The CEO is very engaged in this. We couldn't be luckier to have them as a partner.
We also recently -- I don't want to say recently, a few months ago, announced the acquisition of four Houston radio stations from Cox Media Group. We expect -- for $27.5 million. We have also signed agreements to spin-off two stations that we can't own because we'll be over the limit for a total of $10.5 million. So we're going to be into that acquisition for about $17 million and some change. We expect that, that cash flow from that acquisition will equate to at least $5 million as we step into it. So a very attractive multiple that we were able to acquire that, once you factor in the amount of money that we got for the spins. We also think that there are a number of other potential radio acquisitions that are out there that if you -- right now radio -- the radio companies are trading kind of like in the 5s in terms of an EBITDA multiple.
And so if you were to buy radio at a 5.5 times multiple, you're talking about close to a 20% return, which is also better than our 6.4% that we were getting on the MGM investment. So there are a number of things that we think that we can do going forward, that will ultimately net us a better return. So whether it's paying down debt at 10%, whether it's buying radio in the 5s that net you a 20%, if getting our referendum one and investing in the Richmond casino is another. There is a process going on that you guys have probably seen in the business press where Paramount is looking to sell the BET Media Group, which includes BET and VH1. Our name is not -- never mentioned, but we are involved in that process, but with a number of other parties.
Still doing our diligence on it. Don't know where we land, but we're engaged. We think that we have exceptionally complementary assets with the TV One and CLEO assets that could potentially create a lot of value. However, we remain disciplined from an acquisition standpoint. We're fully aware of the challenges that the pay-TV ecosystem has, one of the reasons why we think that finding scale in this business could make a lot of sense as well. So we're doing our work and staying engaged on that. 2023 guidance. We are expecting 2023 EBITDA to come in better than our 2019 pre-pandemic EBITDA, if you go ex-MGM dividends. So that's our goal. We feel pretty good about being able to achieve that. We’re thinking leverage will continue to be below 4 times, call it 3.7-ish by the end of the year.
And given the macroeconomic backdrop, I think we'd also pretty good about that an outcome should that come to pass. So with that, I am going to turn it over to Peter Thompson to go more specifically into the numbers.
Photo by Austin Distel on Unsplash
Peter D. Thompson: Thank you, Alfred. And before we enter numbers, let me talk a little bit about the delayed filing and the MGM restatement. Since the inception of the MGM deal, we've been carrying our stake in that as an equity investment at that cost. However, once the put option that we had became exercisable, we should have reclassified the investment as a debt security available for sale. So really it's a technical change in that and how we should have carried it on the balance sheet. And once you end up in that bucket, that is a debt security available for sale, you should then revalue it every quarter and we didn't do that. And obviously, we knew what it was worth. And I think we've done a decent job of telling our investors what it's worth, but when the put crystallized that.
So the end state value of $136.8 was known, but we have to go on hire an outside valuation specialists to appraise the asset for each quarter of 2021 and 2022 using multiple methodologies, which took some time to work through. Separate from this, but also contributing to the delay in filing, ours is required additional documentation around the company's ASC 606 revenue recognition policies. And that required us to bring in a consultancy firm to write a bunch of technical accounting memoranda. We're not a big shop. We didn't have the resource to do that internally. And so we had to go and find someone to write those technical accounts and memos for us. And then finally, there was significantly increased substantive order testing around journal entries and other things as a result of a lack of reliance on internal controls, but in prior years, had been deemed sufficient, but weren't this year.
And all of that meant that it took many additional weeks of work to get the accounts signed off, which had been frustrating both for the company and the investors. And I thank you all for your patience and support. I've been speaking to as many of the investors as I can just to try and keep people appraised of what's going on. And we appreciate you being patient and bearing with us while we worked through all of that. Turning to the numbers themselves. Consolidated adjusted EBITDA was $31.7 million for the quarter, which was down 2.3% from last year. Full year consolidated adjusted EBITDA was $165.6 million, in line with the company's guidance and up 10.2% year-over-year. Fourth quarter consolidated net revenue was up 1.6% year-over-year. The Indianapolis radio acquisition added approximately $4.2 million, and there was the absence of the Reach cruise event which generated $7 million last year in the fourth quarter in ‘21.
Normalizing for those two things, net revenue was up 3.9%, or down 1.4% excluding $6.6 million of incremental political advertising. Net revenue for the radio segment increased 23.8% year-over-year and by 14.1% on a same-station basis. According to Miller Kaplan and on a same-station basis, our local ad sales were on par with the market at minus 1%, and national ad sales outperformed, we were up 41.9% against the market that was up 17.4%, helped by heavy political spending and also our corporate sales effort. We recorded $8.1 million in net political ad revenue, of which $7.2 million was radio compared to $1.5 million in prior year. Government and public was our biggest radio advertising category for the quarter, up 97.6%, healthcare was up 53.6%, auto was up 86.3%, retail was up 12.7%, entertainment was up 8.9%.
Services, financial, telecoms, food and beverage, travel and transportation were down in the quarter. Q1 2023 Radio revenue, excluding digital, was up 2% on a same-station basis or up 3.1% same-station, excluding political. Q2 is currently pacing down 5% excluding digital on a same-station basis, or down 0.9% excluding political. So we're holding well on a same-station basis, ex political. Net revenue for Reach Media was $11.9 million in the fourth quarter compared to $12.3 million last year, excluding the cruise event. Adjusted EBITDA was $3.1 million, down from $3.8 million in prior year. Our full year adjusted EBITDA increased by 13.3% to [$15 million] (ph). Net revenues for our Digital segment increased by 24.1% in fourth quarter to $24.2 million.
The direct sales team had an exceptionally strong finish to the year, driven by continued demand to Reach black audiences at scale and increased midterm political revenue. Adjusted EBITDA was $1.9 million for the quarter and $21.8 million for the year, up 24.1% year-over-year. Our Radio, Reach and Digital segments, saw our audio business, had combined Q4 adjusted EBITDA of $20.8 million for the quarter, up 12% year-over-year. We recognized approximately $49.7 million of revenue from our Cable Television segment during the quarter, a decrease of 8.2%. Cable TV advertising revenue was down 8.4% with a favorable rate volume impact of $900,000 offset by unfavorable timing variance of $1.7 million, free video on demand, and $1.6 million unfavorable AVU burn-off.
Cable TV affiliate revenue was down by 7.4% with a favorable rate increase of $1.2 million being offset by $2.4 of net churn, $650,000 increased financial support. Cable subscribers for TV One as measured by Nielsen, finished Q4 at $46.5 million compared to $43.6 million at the end of Q3, and CLEO TV had $41.8 million Nielsen subs. You're having trouble hearing us. Okay. Sorry, I just heard the sound quality is poor. We turned the air conditioning off here and moved the microphones around. Hopefully, that will be better. We recorded approximately $2.6 million of investment income from our stake in the MGM National Harbor property for the quarter, up 30% from prior year. Operating expenses, excluding depreciation, amortization, impairments and stock-based compensation, were approximately $104.2 million in fourth quarter to the $105.6 million in Q4 of 2021.
Event expenses decreased by $6.9 million due to the absence of the Reach cruise event, which returned in May of this year. Cable TV content amortization decreased by $5.3 million and the non-cash charge for the CEO's Employment Award decreased by $3.5 million. Employee compensation increased by approximately $5.6 million, including incentive compensation across the organization for superior annual performance against plan. Revenue variable expenses increased $4 million. Travel, entertainment and office expenses increased by $2.2 million and outside services including contract, talent, and consulting fees increased by $2.5 million. About $3.3 million of those increased expenses were in relation to the Indianapolis radio acquisition and is included in those totals.
Radio operating expenses were up by $4.8 million. The Indianapolis cluster adding just over $3 million of that increase. Expenses related to revenue increases such as sales commissions and bonuses drove the rest of the increase. Our Reach operating expenses were flat, except for the cruise event. Operating expenses in the Digital segment were up 36.9%, driven predominantly by variable expenses related to traffic acquisition costs, which were up $2.3 million, and ad production and marketing, which was up $2 million and content and streaming music royalties, which was up by $1.7 million. Cable TV expenses were down $4.9 million with content amortization expense down by $5.3 million due to some write-downs in prior years that didn't recur. Operating expenses in the Corporate and Elimination segment were down by 4.7%.
It was a favorable variance of $3.5 million for the non-cash TV One employment award charge, which was offset by increases in employee compensation, including annual performance bonuses outside legal fees, third party software license fees, T&E, recruiting and marketing. For the fourth quarter, consolidated broadcast and digital operating income was approximately $47.6 million, an increase of 7.9%. During the quarter, the company repurchased $25 million of its 2028 notes at an average price of approximately 86.4%, resulting in a net gain on retirement of approximately $3 million. An additional $25 million of the 2028 notes was repurchased in the first quarter of 2023 at an average price approximately 89.1%, bringing the total gross debt balance down to $725 million today, down from $825 million at the start of 2022.
So we've now paid down $100 million of the debt. Interest expense decreased to approximately $14.6 million for the fourth quarter, down 8% from last year due to the debt paydowns. Company made cash interest payments of approximately $625,000 in the quarter, including the accrued interest on the retired notes, and the semiannual interest payment was paid on February 1st, ‘23. A non-cash impairment of $10.3 million was recorded for our radio market broadcasting licenses in Cincinnati, Dallas, Houston and Raleigh and also for our Philadelphia market goodwill balance. Provision for income taxes was approximately $3.9 million for the quarter. Company paid cash taxes in the amount of approximately $1.1 million. Net income was approximately $856,000 or $0.02 a share compared to $5.3 million or $0.10 a share for the fourth quarter of 2021.
Capital expenditures were approximately $1.5 million. Company repurchased 13,577 shares of Class D common stock in the amount of $57,000. As of December 31, ‘22, total gross debt was $750 million. The ending unrestricted cash balance was $94.9 million, resulting in net debt of approximately $655.1 million, which compared to $165.6 million of LTM reported adjusted EBITDA, gives a total net leverage ratio of 3.96 times. Pro form for the Indianapolis acquisition, total net leverage was 3.91 times. On 03/08/2023, the company issued a put notice with respect to 100% of its interest in the MGM National Harbor, LLC. On 04/21/2023, we closed on the sale of the put interest. Company received approximately $136.8 million of proceeds at the time of settlement.
During the quarter ended 03/31/2023, the company also received $8.8 million representing the company's annual distribution from MGM National Harbor with respect to fiscal year ‘22. Pro forma for the MGM put, total net leverage was 3.21 times, including $145.5 million of cash receipts from MGM and excluding the LTM adjusted EBITDA for the MGM stake of $8.8 million. On 04/11/2023, the company announced it had signed an asset purchase agreement with Cox Media to purchase the Houston radio cluster. Urban One will divest two stations to comply with FCC ownership regulations. Transaction is subject to FCC approval, and is anticipated to close either late in the second quarter or early in the third quarter of ‘23. And until that time, we'll -- we and CMG will continue to operate our respective stations.
And then finally, with the MGM proceeds, our current cash balance today is approximately $235 million. And with that, I will hand back to Alfred.
Alfred C. Liggins: Great. Thank you. Operator, I'd like to open the line up for Q&A, please.
Operator: [Operator Instructions] We will first go to the line of Aaron Watts with Deutsche Bank. One moment while we open your line. You may go ahead.
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