Kate Snedeker - IR Jeff Smulyan - CEO Ryan Hornaday - CFO

Welcome and thank you for standing by. At this time all participants will be on a listen-only-mode over throughout the duration of the conference. Today's call is being recorded. [Operator Instructions]. Now, I'd like to turn the call over to Ms. Kate at Emmis. Ma'am, you may begin.

Thank you. Thanks, Spence. Good morning, everyone, and thank you for joining us for today's Emmis Communications conference call regarding fourth quarter earnings and full year 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 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 questions submitted via e-mail to ir@emmis.com. A playback of the call will be available for 2 weeks until Thursday, May 25, by dialing (402) 998-1514. 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 are ready to start.

Kate, thanks. Obviously, this report is a look back to our fiscal year which ended February 28, and a lot of things have happened since then. I thought I would highlight that because obviously, the most important thing is that we announced the sale of Power 106 for $82.75 million the other day. That is part of a continuation of a plan to significantly alter the capital structure of the company. The sale of Power 106, along with one other divestiture which is in the process, of WLIB in New York will reduce well over 60% of our outstanding indebtedness and change the financial flexibility of this company, which I think is critical. As far as Q4 ex L.A., we were down about 4.8% on markets that were down 0.2%. Our stations in Austin and St. Louis significantly outperformed their markets. A particular shout out to St. Louis which has been plus 10% in a market that was just a little bit over flat. For fiscal year '17, ex L.A., we were down 0.3%, our markets were up 0.5%. So obviously, the remaining stations in our portfolio are close to market, still have work to do. Make no mistake about it, this is an industry that you've seen with all the other reports, that has been challenged in the last 4 or 5 months. And we're hopeful that with a much more flexible balance sheet, significantly less debt, it will allow us to perform and do some things that we think will help our performance. I want to talk about NextRadio as well. This is the quarter in which we introduced the Dial Report, which really provides the data measurement and big data analytics for radio. As we've said, this is another part of this process which advertisers, broadcasters, agencies have said to us is really game changing for radio. As part of our data evaluation, we've entered into an agreement with Nielsen. We've also announced that streaming will be incorporated into NextRadio. We think that's important because it opens up every one of the 270 million smartphones in the United States. And we think it's important for our industry and it was really done at the urging of a number of broadcasters and we agreed with them. In addition, the Sprint cash commitment has been fulfilled. This allowed us to get a three-year renewal with Sprint, without any more cash. I think we've said that, after the original Sprint agreement this industry has gotten agreements with AT&T, Verizon, T-Mobile, U.S. Cellular and a renewal with Sprint, without the requirement of any cash on behalf of broadcasters. In this quarter, also, we launched in Colombia and Argentina. We now are in Mexico, Brazil, Colombia, Argentina, Peru, excuse me, I forgot Brazil is coming later in the year. We're in Mexico, Peru, Argentina and Colombia and Canada, and we're excited as much about the fervor for what we're doing with the smartphone with NextRadio everywhere, not just the United States. And as we said, we're averaging over 0.5 million downloads a month. It's growing, we still need to continue awareness, and we have had a renewed fervor from other companies in the industry to really, now that we are on all the carriers, take NextRadio to the next level. So with that, I want to turn it over to Ryan Hornaday and he'll give you more detail on the financials.

Thanks, Jeff, and good morning, everyone. This morning, we released earnings for our fourth fiscal quarter and full year ended February 28, 2017. During the fourth quarter, we closed on the sale of our Terre Haute radio stations, as well as the sale of four of our magazines to Hour Media. These sales, coupled with the sale of Texas Monthly magazine in Q3, cause our current period reported results to not be comparable with prior year results. In addition, on May 8th, we entered into an agreement to sell our radio station in Los Angeles, Power 106, for $82.75 million, a transaction that meaningfully improves the credit profile of the company. 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. Our radio net revenues reported to Miller Kaplan during our fourth fiscal quarter, which exclude certain barter and syndication revenues, were down 7.1% compared to markets which were down 0.1%. We underperformed in New York, L.A. and Indianapolis but outperformed in St. Louis and Austin. Excluding Los Angeles, we would have been down 4.8% in markets down 0.2%. Digital was the only line of business where we saw growth versus the same quarter of the prior year. National, local and NTR were all down. Looking at the individual months, December was down 8%, January was down 3% and February was down 9%. During Q4, our number of minutes sold was down 2.6% compared to the prior year, with average minute rates down 5.4%. Automotive remains our largest category, representing 12% of radio revenues in Q4, and automotive advertising was down 7% in the quarter. The media and government categories were strong in the quarter. Healthcare, cellular, entertainment and financial were the weakest of our top 10 categories. Pro forma for the sale of our radio stations in Terre Haute, radio station operating expenses, excluding depreciation and amortization were down 6% in Q4, primarily due to lower revenue-related costs and nonrecurring severance costs incurred in the prior year. Expenses for our emerging technologies were up $4.2 million in Q4. $3.35 million of this increase relates to proceeds from non-recourse loan to NextRadio from a third party. The proceeds from the loan were remitted to Sprint during the quarter to help satisfy the remaining obligations due to Sprint, and were expensed on the books of NextRadio at the time of the remittance. An additional $0.65 million was received pursuant to the same nonrecourse loan in the first quarter of fiscal '18 and remitted to Sprint. All cash obligations due to Sprint have now been satisfied. The remaining growth in emerging technologies expenses in Q4 relates to ongoing investment in our NextRadio product and team. In Q4, we reported -- recorded an impairment charge of $6.9 million related to our FCC licenses as part of our annual impairment review. The impairment charge mostly relates to a decline in expected long-term market growth rates. At February 28, 2017, excluding debt that is non-recourse to Emmis, we had $152.2 million outstanding under our senior credit facility, with a weighted average borrowing cost of 7%. Our leverage was 5.2 times EBITDA as defined in our credit agreement, in compliance with our covenant of 5.75 times EBITDA. On March 24, 2017, we repaid $1.9 million of term loans, with the net proceeds from the sale of 4 magazines on February 28, 2017. On April 18, we entered into an amendment to our credit facility that replaced the total leverage ratio covenant with a minimum EBITDA covenant through May 31, 2018. In addition, Emmis committed to enter into agreements to sell assets that generate at least $80 million of proceeds within 9 months, with closing occurring within 15 months. As discussed earlier, on May 8, we entered into an agreement to sell Power 106 in Los Angeles for $82.75 million. This satisfies the 9-month requirement in the credit agreement and we expect the transaction to close in the back half of 2017, well within the 15-month requirement. While we have a very low tax basis in Power 106, we expect to shield a substantial portion of the taxable gain with accumulated net operating losses and certain tax credits. Our current estimate of the cash tax liability relating from this transaction is $6 million. Estimated net proceeds will be used to repay more than 50% of our credit facility debt outstanding. We are projecting to be comfortably in compliance with the maintenance covenants that were part of the recent amendment to our credit facility. Looking ahead to Q1, business remains weak, with Q1 pacing down 10%. March finished down 5%, April finished down 14% and May is currently pacing down 9%. Contributing to the weakness is our Los Angeles radio station and $860,000 of political revenues in Q1 of the prior year. Excluding these items, Q1 would be pacing down mid-single digits. Finally, we invested $1.4 million in capital expenditures in Q4 and $2.9 million in fiscal '17. We expect this amount to be in the low $2 million range in fiscal '18. With that, Jeff, we have some questions investors submitted to us in advance of the call.

All right. Thanks, Ryan. A - Ryan Hornaday: With the sale of most of the magazines in fiscal 2017 and the recently announced sale of Power 106 in Los Angeles, what do you see as the strategic focus of the company moving forward?

I think it is to continue to operate, as you know we have a very strong cluster in St. Louis and Indianapolis and Austin, as well as a very significant presence in New York. And what this really does is, at the end of the day, we're done everything our debt will be probably under $65 million. It gives us the kind of flexibility to operate the businesses that we have in a way that we'd like to operate them. And I think that's really key. This is a challenged industry. And as a challenged industry, really we need more flexibility, not less, and that was why we made a difficult decision. Refinancing Emmis where it was, was doable, we had already talked to institutions. We were not comfortable with leverage in the mid-5s. And so we felt that selling Power, which is a very painful decision, was the right decision. So I think we're going to be more focused, we're going to have more flexibility, and we're going to obviously continue to put a lot of emphasis on NextRadio, both domestically and internationally. And we're also going to continue to build out Digonex, but I think that's the thinking and just assess the world. When you're in media, things change every day. But I think flexibility is the key for us.

You mentioned the WLIB-AM sale was progressing. Can you give the folks on the call an estimate of anticipated proceeds? And are there additional asset sales being contemplated?

There are no additional asset sales being contemplated. I'd rather not talk about additional proceeds. It's been published that we've been looking for $10 million, I'll leave that comment there. We're talking to three potential buyers. And I think we're moving along, getting closer.

And I'll note that the trailing cash flow for WLIB is in the $700,000 range for folks that are running different models.

Right.

Given the increasing importance of the New York market to Emmis' performance, how is the health of the New York radio market and the Emmis New York cluster?

Well, the market has, all of the larger markets have been challenged, especially, certainly New York, Los Angeles. Our position actually has improved a bit. WBLS is as strong as ever, it's always been one of the top 4, 5 stations in that market, 25, 54 and 6 plus. HOT has done nicely better in ratings in the last six months, and is nicely ahead of its significant competitor. So I think we're poised to do well. We are seeing a lot of changes that Charlie Morgan has put in place that we think are starting to bear fruit. We feel pretty comfortable with the back half of this year, starting in our second fiscal quarter. We feel like New York is moving up, but it's been a challenge.

Can you elaborate on the data evaluation agreement between NextRadio and Nielsen?

Well I think Nielsen is seeing what we have seen, and that is that we have the ability to really learn more about our listeners than has ever been learned from the over-the-air setting. It's a unique data proposition. I'll leave it to the experts to elaborate on. But suffice it to say the fact that Nielsen has seen what we've seen is quite encouraging.

Going back to NextRadio and international expansion. We announced that it's now live in Argentina, Mexico, Peru and Colombia, with as you said earlier, Brazil expected to be added later this year. Why South America and what opportunities do you see in Latin America?

Well one of the things that we have seen, and we've seen it with cell phone OEMs and we're seeing it in automobiles too, the more that we can have an entire North and South America strategy, the more it helps us. We are on the verge of announcing some agreements with manufacturers. And we think that having a uniform look, and the other thing we're seeing is that the value of over-the-air radio is pretty significant all over. And having a uniform proposition that broadcasters love and it's compelling to advertisers and frankly, it's compelling to anybody who relies on the data of our listener [ph] is important. So we felt that we needed to invest and I'm pleased we have. We're early stages. People forget that the entire NextRadio project is very early stages. We've just gone on all the carriers, we're just ramping up with OEMs, we always knew this is a long-term process but we also thought that long term it is critical to the future of our industry.

I think we've got one more question about the emerging technologies, NextRadio and Digonex. What are your expectations for when they will achieve profitability?

Well I think they are both long-term investments. We would like to see significant progress along the road to profitability in the next 12 to 18 months. There's never a guarantee, but we see so many encouraging signs in both of these businesses. There's no doubt in my mind, dynamic pricing is going to be the future. What we see is when people sign up, and they use it, they are very pleased. The retention rate has been terrific, the customer satisfaction rate has been terrific. So I think that -- we just need to make sure we have the team that can see that through. And we've provided the capital to see that through. And on NextRadio, obviously, we've been convinced that winning the battle on the smartphone, making radio more relevant in the automobile, providing -- regaining portability for radio is life or death for our industry. And we think that the industry needs that catalyst. And I think the most gratifying thing is a number of broadcasters have said, "Look, we have -- this is our future." And what we said to the guys, "We agree wholeheartedly." And I think you will see dramatically greater involvement by other members of the industry in the ownership and management of NextRadio in the future.

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

Again it's been a very eventful period of time for our company. We made some tough decisions. I said yesterday that selling Power 106, that we've owned since 1984 was very, very difficult. Some of the finest people I've ever known work there. And yet we found a buyer in the Mereulo Group that is as passionate about the radio station as we are, that has the resources to really do things that we couldn't, as a public company with leverage constraints. So I think it's the best decision for our people, I think it's the best decision for our listeners. Obviously, looking at our capital structure, it's the best decision for this company going forward. So I'm pleased with it. I think it was the right decision and I feel that we're doing some things here to look to the future and I feel comfortable we'll be rewarded.

Thanks, everyone, for joining us. Just a reminder, a playback of the call will be available for the next 2 weeks until May 25, at (402) 998-1514. Thank you.