Emmis Corporation (EMMS) Q3 2016 Earnings Call Transcript
Published at 2016-01-07 11:25:06
Kate Snedeker – Media and Investor Relations Jeff Smulyan – Chairman and CEO Ryan Hornaday - EVP, CFO, and Treasurer
Welcome and thank you for standing by. At this time all participants line are in listen-only mode. Today's call is being recorded. If you have any objections you may disconnect at this point. Now I will turn the meeting over to your host Kate of Emmis Communications. Ma'am you may begin.
Hey Al thank you. Good morning everyone and thank you for joining us for today’s Emmis conference call regarding third quarter earnings. I want to extend a special welcome to all the Emmis employees who are joining us and listening in this morning. We’ll begin in just a moment with opening comments from Emmis’ Chairman and CEO, Jeff Smulyan and Ryan Hornaday, EVP, CFO and Treasurer. After opening comments from Jeff and Ryan, we will respond to the questions that have been submitted via email to ir@emmis.com. A replay of the call will be available until Thursday, January 21st by dialing 402-220-9730. 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.
Kate, thanks. This certainly has been a challenging quarter for us which is not a surprise given the state of the industry and our particular challenges especially in Los Angeles. Having said that, we finished the quarter down five against markets that are up two tenths of a percent which is encouraging because for the first nine months of the year our markets are down [too] [ph]. For the first nine months of the year we are down four and this means that probably for the first time in six years we will not beat our markets which is discouraging but a five year streak is we think demonstrates a pretty significantly strong performance of this company. And good news is that our ratings at Emmis are very, very good lately. New York HOT 97 is now number one 18 to 34 in the latest ratings books, WBLS is tied for first 25-54. The Point in St. Louis number one 18-34 and 18-49 and KSHE, our rock station number one 25-54 and our new format KNOU is growing very, very nicely. In Indianapolis Hank-FM is number two 18-34, B105 is number three 25-54, and in Austin, KROX number one 18-34 and BOB-FM is our perpetually number one station both 18-49 and 25-54. So while we have challenges in Los Angeles we have a remarkably talented team there and really our ratings and performance across the rest of the company are very encouraging. But it has been a challenging quarter not only in the radio business but magazines and I think that comports with what we see as challenges that all media have. We think 2016 is going to be a better year. We have political, there is a lot more highlight especially on radio getting additional political dollars. But we want to be proactive and we have made some changes and they are painful changes. Yesterday we let 32 employees go. This is always very, very hard for us, that is about 3% of our workforce. These employees will be dearly missed and again this is a very tough situation for us but we felt that we needed to make those changes and we needed to reflect the realities of the economics that we are in. We also made significant cuts in non-personnel spend. So when combined with personnel cuts, reduced operating expenses by approximately $7.5 million. One of the most challenging cost reduction actions was that we did not renew the contract of Deon Levingston who was our General Manager in New York City. Deon is a wonderful guy and we thank him for his service. Deon had worked for Emmis and then was brought in when we acquired WBLS and WLIB and a very good guy and this was a difficult decision. Our current General Manager in Indianapolis, Charlie Morgan who has just done a remarkable job here will oversee New York on an interim basis for the next six or so months until we decide exactly what course of action we will follow. There was one other significant event this quarter and that is that in December we reached an agreement with the holders of more than 80% of our preferred stock to convert the preferred stock into common stock at a rate of 2.80 shares of common stock for each share of preferred stock. As you’ll recall the Seventh Circuit ruled in our favor this summer and that substantially resolved the litigation that had been ongoing since 2012. However there were a few outstanding issues and this settlement allows us to resolve those and remove the preferred stock from our capital structure upon the delisting of the preferred stock from NASDAQ. The shareholder meeting to formally adapt the amendments to the terms of the preferred stock is schedule for February 17th which is also the expiration date of a 180 day grace period for the continued listing of the preferred stock on NASDAQ. So, we are very pleased with this result obviously. We were able to prevail at all levels and now have finalized what has been a challenging but ultimately rewarding situation for the company. So with that this has also been a very, very good quarter and a very, very good year for NextRadio. We said last January that we thought 2015 would be a year in which people saw a significant surprise with NextRadio and that’s exactly what it was, [indiscernible] in that. Not only did we continue our relationship with Sprint in ramping up phones but we reached an agreement with AT&T and then in this quarter also reached an agreement with AT&T for their prepaid division Cricket. In addition I think you all know of our ongoing agreements, negotiations and rollout with T-Mobile, U.S. Cellular. We also reached an agreement this quarter with BLU which is the largest I think its unlocked carrier, forgive me, and BLU phones about 10 million of them will be hitting the market starting in the first quarter with NextRadio as a native radio app. That is another very encouraging development and discussions with others both on the handset business and carriers are ongoing and very encouraging. On an international basis we are also in discussions in Canada, all over Latin America, Germany and Australia. And what we are seeing is what we’ve said before, this is an idea and its time has come. I think broadcasters recognize that and they recognize that there is a remarkable resiliency and strength in our terrestrial distribution system. And because NextRadio gives consumers interactivity with almost no daily usage and very limited battery drain it’s a tremendous opportunity for all of us at Radio to demonstrate our strength. We have decided because this is the year that we will plan to start reaching out to advertisers and making agreements we decided to make TagStation which is the heart of interactivity for NextRadio on a significantly reduced price for our broadcasters and by doing that a few months ago it has really led to a sort of stampede of broadcasters saying, we want to be on. We think that’s important because we are getting people ready for when millions and millions of phones hit the market this year NextRadio enabled. And as we said last year, last year will be a breakout year, this year is the year that we think people will start to see the monetization of interactivity, the very beginning stages of that, and also see the further ramp of NextRadio. Over 2016 into the middle of 2017 we think will probably be up to about a 100 million phones which have the ability to get NextRadio. Remember with NextRadio we have to do this one phone at a time. We have to reach an agreement with the carrier and with the manufacturer to basically connect the FM chip, it’s in all smart phones and then make it available. So it’s not as simple as just saying okay it is there and 300 million phones get it. We have to do it one phone at a time. But I think the incredible support that we’ve seen from our industry, from government, and now from carriers and handset manufacturers give us belief that this is an idea as I have said whose time has come. And it is important for our company, it is as important for our industry, and it gives us hope against the background of an industry that’s frankly been challenged for the last number of years with flat to down growth. So while it has been a tough quarter and it certainly has been a tough year. We see bright spots on the horizon and we think 2016 is going to be breakthrough year for NextRadio and for our company and our industry. So with that, Ryan?
Thanks, Jeff, and good morning everyone. This morning we released earnings for our third fiscal quarter ended November 30, 2015. We encourage those on the call to refer to the additional financial information disclosed at our website www.emmis.com to assist with better understanding our financial results. Our results for the third quarter were weak but not unexpected given the recently launched format competitor we are facing in Los Angeles. Our radio net revenues reported to Miller Kaplan during our third fiscal quarter which excludes certain barter and syndication revenues were down 5.2% compared to markets which were up 0.2%. Our Austin, St. Louis, and Indianapolis clusters all grew market share during the quarter. Substantially all of the underperformance of our radio group in Q3 related to our Los Angeles Radio operations. While ratings have stabilized in Los Angeles, the presence of a direct competitor will continue to negatively impact revenues for the next two to three quarters. We have a remarkable team in Los Angeles and we are confident Power 106 will win this competitive battle. As has been the case for most of the year, national spot business was the weakest line of revenue for us, down 12% in the quarter. Local spot was down 5.5%. Digital posted the best performance up 8.5% in the quarter. Looking at the monthly results, September finished down 2, October was down 11, and November was down 1. During Q3 our number of minutes sold was down 1.5% compared to the prior year with average minute rates down 4%. Automotive remains our largest category representing 12% of Radio revenues and the Auto categories saw revenues decreased 9% during the quarter. The Wireless financial and service categories were all up double digits while the Beverage and Media categories were down double digits in the quarter. Revenues in our publishing division were down 7% in the quarter, after a very strong first half of the fiscal year Texas Monthly in particular had a difficult quarter consistent with Radio market declines we witnessed in Austin during the period. Station operating expenses excluding depreciation and amortization were down 3% in Q3. The decline principally related to lower revenue related expenses partially offset by continued investment in our emerging technologies NextRadio and Digonex. Looking forward to our fourth fiscal quarter pacing information has been volatile as we move into calendar 2016. As of yesterday our Radio business is pacing down mid singles for Q4, with December having finished in the same range. Given current business trends we have implemented a series of personnel and non-personnel expense reductions to improve liquidity and provide additional debt covenant compliance cushion. We estimate that these actions will result in approximately 7.5 million of expense savings in fiscal 2017, as compared to fiscal 2016. Approximately 5.3 million of these savings relates to our radio division, approximately 1.5 million relates to our publishing division, and approximately 700,000 relates to corporates. These actions are expected to result in severance charges of approximately 1.3 million which will be included in operating expenses in Q4. In addition we have completed a reorganization that allows us to exclude on a pro forma basis the operating results of TagStation, NextRadio from the maintenance covenants included in our credit facility. Furthermore the assets and stock of TagStation and NextRadio are no longer collateral under our credit facility. As Jeff discussed we have scheduled a shareholder vote on February 17, 2016 to increase the conversion ratio of our Series A preferred stock from 2.44 shares of Class A common stock to 2.8 shares of Class A common stock and make the Series A preferred stock mandatorily convertible under the Class A common stock on the fifth business day following a delisting of the preferred stock which is expected to occur in March 2016. In our financials we already include the conversion of the Series A preferred stocks into Class A common stock and our fully diluted shares outstanding but this increase in the conversion ratio will increase our fully diluted shares outstanding by approximately 300,000 shares. As of November 30, 2015, excluding debt that is non-recourse to Emmis, the company had 188.7 million outstanding under its senior credit facility with a weighted average borrowing cost of 7%. Our leverage was 5.47 times EBITDA as defined in our credit agreement in compliance with our covenant of 6.75 times EBITDA. Finally, we have invested 1.9 million in capital expenditures through the first nine months of this fiscal year and we expect to spend approximately 3.7 million for the full year. With that Jeff we have some questions investors submitted to us in advance of the call. Q - Unidentified Analyst: First question is a question around the radio industry and our outlook for 2016?
I think it looks a little bit better and I don’t -- certainly we won't be Pollyannaish, industry has really not shown much growth for quite a while. Because it’s a political year, it is an Olympic year, because we’ve seen so much data out of Nielson about the receptivity of people to Radio ads and the responsiveness and the fact that Radio audiences have remained stable for 30 years, we’re hopeful but it is frustrating that we don’t see growth. So I think the Radio industry should grow a little bit this year. I don’t think it is going to be monumental but any positives for the American Radio would be encouraging.
CES is going on in Las Vegas currently, what's NextRadio's presence at CES?
Well we have a pretty significant presence. We are doing an event with BLU. As we said BLU is the largest unlocked phone company and you buy their phones at I think Wal-Mart, Amazon, Best Buy places like that. That’s a big breakthrough for us. We also are demonstrating at Ford. The NextRadio automotive app that we developed at the request of Ford is now being demonstrated there and we are really very excited about that. Along with that we have discussions with lots of manufacturers and carriers and international companies so we will have a pretty sizeable impact out there this year.
A couple of investors asked if there are any updates with other carriers namely Verizon and of course Apple?
We’ll have news when we have news but I am obviously very optimistic that this is as I have said this is moving forward and nothing is ever over until is over. But we are very encouraged by the conversations we are having.
Jeff recently Nielsen announced that it intends to roll out total audience measurement in 2016, which would capture a station’s over the air audience and online audience in one platform. What’s Emmis' thoughts on that?
Well, we’re pleased. Obviously it has been something that’s taken a long time but anytime that -- listen, we have a long history of saying streaming is a very challenging business and it is simply because the cost are different. But every time we have a listener there is a way to monetize them whether it is over the air or adding streaming we are very, very pleased. So we are happy that they are getting that result.
Fed recently raised interest rates and has indicated more rate hikes are coming in 2016. Is Emmis concerned with its ability to service its debt in a rising interest rate environment?
No, I guess the answer is a dual answer, yes and no. No, we know the steps we’ve taken are just more insurance. But if you look at this company, its cost of debt, not only its interest but its principal repayment and you see our cash flow, we continue to de-lever the balance sheet every day. We are not in a situation where we are not paying our principal. We are not in a situation where are not paying our interest and I know others have those challenges, we do not, but that doesn’t mean we don’t want to be prudent. We know this is a challenged industry. We know that we have to have money to invest in our growth not only in NextRadio but in Digonex which we are very, very high on. But no, there is not any question about us having any challenges with our covenants or with our interest or with our principal repayments are just not accurate.
The only thing I would add to that is our senior debt does have a 1% LIBOR floor so we are somewhat buffered from the first fee rate hike, which are already baked in.
Emmis recently received the delisting notice from NASDAQ because the common stock has been trading below a dollar. What is Emmis doing to address the low stock price and do you intend to keep the common stock listed?
Well, yes, we do. And we are working on this. I think the most important thing is we can show some growth and we have a number of initiatives which will show growth. There are a number of ways that we can get this -- get out of this area. This has happened to us before. The most important thing we can do is to show growth and also to see the American Radio industry have a little bit better perception. We have always said that biggest challenge the industry has is not one of listenership but one of perception and I have been quoted as saying you look at Spotify which has a market capitalization of $9.5 billion and yet loses $200 million. And that Spotify market capitalization is really four times the entire market cap of the entire American radio industry, equity value and that is frustrating. It is disappointing. I also don’t think it comports with reality but we have not had the ability as an industry to attract capital and we hope some of the things that we are doing with NextRadio and some other initiatives will start to get people to look at radio and realize it is a pretty vibrant media and it reaches just about every American every week.
I think we have got one more question Jeff around Digonex, an investor just looking for an update on the dynamic pricing company we acquired majority control of last summer?
Well we, again we believe the dynamic pricing is an idea, its time has come. Greg Loewen has put together a good team there. And the clients that we had have had remarkable success with dynamic pricing and some of their testimonials have been very helpful. We have a very, very active pipeline. We think that this is a year in which we break through with Digonex and we think that can be a very good growth in turn for the company going forward.
That's all we have in terms of questions. Jeff do you have any closing remarks.
No, again this is sort of a quarter where certainly performance was not what we wanted not either for us or industry. On the other hand there are some ways of life that billing will be up in our fiscal fourth quarter and throughout the calendar year 2016. We are seeing some positive signs. From a company standpoint ratings have been very, very good. Good in just about every market and in our most challenged market Los Angeles, we see a lot of encouraging signs and also we said that our best management team is in Los Angeles and they have been able to weather just about anything and they are doing just fine in this challenge. And then on NextRadio we have followed up 2015 with some remarkable breakthroughs and we think that we will follow it up this year with now the beginning of the sales cycle which will demonstrate the value to every broadcaster of why for the first time through our trust [ph] segment we can have interactive advertising which should be tremendously valuable to our advertisers, to our listeners, and most importantly to the stations in our industry. So, we are very, very excited about that and I would like next January just to be able to say 2016 was a year when things turned the corner and I am hopeful again.
Thanks Jeff and Ryan. Just a reminder that a replay of the call will be available until Thursday, January 21st by dialing 402-220-9730. Thank you and again thanks for joining us.
And that concludes today’s conference. Thank you for participating. You may now disconnect.