Evan D. Masyr - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Edward G. C. Atsinger - Founder, Chief Executive Officer, Director and Director of Salem Communications Holding Corporation David P. Santrella - President of Radio Division David A. R. Evans - President of New Media

Peter Enderlin Barry L. Lucas - G. Research, Inc.

Hello, and welcome to the Salem Communications Second Quarter 2014 Earnings Call. Today's conference is being recorded. I would now like to turn the call over to Mr. Evan Masyr, Executive Vice President and CFO. Please go ahead, sir. Evan D. Masyr: Thank you. And thank you, all, for joining us today for Salem Communications' Second Quarter 2014 Earnings Call. As a reminder, if you get disconnected at any time, you can dial in to area code (719) 325-4750 or listen from our website at www.salem.cc. I'm joined today by Edward Atsinger, our Chief Executive Officer; Dr. Frank Wright, President and Chief Operating Officer; David Santrella, President of Radio; and David Evans, President of Interactive & Publishing. We'll begin in just a moment with our prepared remarks. And once we're done, the conference call operator will come back on the line and instruct you on how to submit questions. Please be advised that statements made on this call that relate to future plans, events, financial results, prospects or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available information. Actual results may differ materially from those anticipated and reported results should not be considered an indication of future performance. We do not intend and undertake no obligation to update our forward-looking statements, including forecasts of future performance, the potential for growth of existing markets, the opening of new markets or the potential growth from future acquisitions. More information on the risks and uncertainties that may affect our business and financial results are included in our Annual Report on Form 10-K for the year ended December 31, 2013, and other public filings we have made with the Securities and Exchange Commission. This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically station operating income, EBITDA and adjusted EBITDA. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the Investor Relations portion of our website at salem.cc. I'll now turn the conference call over to Edward Atsinger. Edward G. C. Atsinger: Thank you, Evan, and let me add my welcome to all of you who are joining us on today's call. I'm going to depart a little bit from my normal practice of starting with a review of the numbers and just visit with you for a few minutes about our strategic objectives and some of our operational objectives, then we'll look at the numbers briefly, and then I'll comment on some important developments that took place in the quarter. Then I will turn it back to Evan, who will provide some additional detail on our second quarter performance and give you some guidance for Q3. Let me begin by reminding you that our primary marketplace objective has always been to be the preeminent trusted provider of Christian and family themed and conservative opinion content. We see those as 2 distinct audiences. And by focusing on those 2 core audiences which to an extent overlap, Salem has been able to deliver consistent, stable, predictable revenue streams for many years and enabling us to outperform the radio industry in 9 out of the last 10 years. And this performance, of course, enables us to progress in our goals of achieving financial success, growing our EBITDA, growing free cash flow, improving our balance sheet. Because we focus on these specific audiences, I think we've found ourselves in somewhat of an advantageous position in terms of being able to take advantage of this changing technological environment. Early on, beyond 15 years ago, we began to make a major effort into developing Internet assets. We've continued with that objective in terms of acquiring additional new media assets and also in terms of acquiring other traditional media assets. As you will recall, it was on January 10 of this year that we closed on the acquisition of Eagle Publishing. Now, Eagle represented both new media assets and old media assets. We acquired redstate.com, humanevents.com, but we also got Regnery Republishing, which is a traditional book publisher and we got some other digital assets and other traditional assets as well. What are the objectives? The operating objectives is to diversify our platform. We still want to continue to focus on super serving these 2 audiences, but we want to do it and we want to do it in as many ways as we can, on as many platforms as we can. The Eagle acquisition is part of that strategy and it's probably not a bad time for us to reflect a bit on that strategy. How are we doing? What we're trying to achieve in super serving this audience in as many ways as we can, is we're trying to basically appropriate both convergence and synergy. We see these platforms as not being 1 plus 1 equals 2, but the proverbial 1 plus 1 equals 3. There is a dynamic that's released when you began to do -- cross across platform promotion and you find ways that the one enhances the other, and we certainly are finding that. One of our objectives in acquiring Eagle was to be able to use our extensive News Talk platform to promote a number of these books that we publish and promote authors and to be a more attractive vehicle for acquiring authors. So I think it would be fair for investors to begin to look at us in future quarters and ask how are you doing in implementing that strategy. I think it's a fair question, of course, it's one that we ourselves are pursuing aggressively. With that background, let's take a look at some of the numbers for the quarter. Now, these results, of course, will reflect the acquisition of the Eagle as I said, which was integrated into company on January 10 last quarter. So this quarter represents the first full quarter in which those results are incorporated. But with Eagle included for the second quarter, total revenue was up 14%, total expenses were up 21%, resulting in adjusted EBITDA going down 8%. If you look at our key business units individually, you can gain a little additional clarity on these numbers. The radio division had a 2% revenue increase, but a 10% expense increases, leading to a decline in SOI of 14%. Our Internet division had a 45% revenue increase, a 46% expense increase and providing a 43% increase in operating income. And finally, our publishing division had a 99% increase in revenue, obviously impacted by the Eagle acquisition and an 87% increase in expenses. A couple of observations are in order. Salem, as has been reported from others, saw noticeably soft radio advertising market in the quarter, but we also experienced a significant increase in operating expenses, and we'll drill down on those 2 areas in a little more detail. Let's talk about radio first. Based on our published reports and conversations with our radio industry colleagues, it appears that second quarter was particularly challenging. In fact, lower capital and data for the markets we serve show the entire industry down 6%. Yet, Salem's broadcast revenue was up 2% in these same markets. However, this positive industry outperformance might be seen as a bit of a 2-edged sword, in that much of our revenue growth was driven by nontraditional media, which includes concerts and events and other nontraditional media sources. Our revenue from theses sources typically tends to have higher associated expenses, which explains much of the increase in broadcast expenses. On a positive note, our block program revenue increased 3% during the quarter, once again, highlighting the stability of that portion of our platform. Our Internet division had another strong quarter growth here, with a combination of organic growth and growth driven by acquisitions. Organic growth of 13% was somewhat aided by the timing of Easter, as we mentioned on our last call. Last year Easter was in the first quarter, this year, it settled in the second quarter. Easter is the biggest season in terms of revenue for our church e-commerce businesses. Excluding the impact of Easter, total revenue -- total Internet revenue was up 8%. The quarter saw a strong page view growth, especially from mobile devices, and the growth in mobile traffic represents a significant opportunity, which we are prioritizing. Our publishing division also had a solid quarter with revenue up 99%. Naturally the Eagle acquisition contributed significantly to this growth, yet, organic publishing revenue growth was strong at 11%, with Xulon Press, our digital on-demand book publisher, realizing organic revenue growth of 22% in the quarter. So let's just take a few minutes and talk about Eagle and look at it in terms of the impact it's going to have going forward and the impact it had during the quarter. The growth of the Internet and publishing business has certainly been driven and impacted by Eagle. For the quarter, Eagle contributed $6.1 million of revenue, of which $3.2 million was Internet revenue and $2.9 million was publishing revenue, including an operating profit of $700,000. As I mentioned, even though one tends to think of Eagle Publishing as old media, it was a combination of both old and new media. And, in fact, the new media revenue piece is a little bit bigger than the old media revenue piece. I doubt that, that will continue to be the case, but in Q2, that was the case. Current performance, of course, in Eagle was driven by the success of, particularly of 2 books published by Regnery. The first one, titled America: Imagine a World Without Her, by Dinesh D'Souza; which released on June 2. This is an interesting book. D'Souza authors a defense of America as a force for good in the world and challenges the myth that our wealth and influence are based upon the evils of capitalists. It's been selling very well and is currently #1 on the New York Times bestseller list. Additionally, on June 23, we released Blood Feud: The Clintons vs. the Obamas by Ed Klein. Blood Feud describes the relationship between the 2 royal families of the Democratic Party. Well, that is currently #3 on the New York Times bestseller list. It was #1 3 weeks earlier. In fact, both of these books have been kicking around for 5 to 6 to 7 weeks on all of the bestseller lists. To have 2 books topping the bestseller list is a great achievement, and we're very pleased with that. And it begins to give some validity to our whole concept of synergy. We think we've had a -- we played a significant role in driving our book sales by increasing the number of author interviews we were able to accomplish with our own platform and using all of our assets to promote these books. We expect continued strong sales from these books for those reasons and others, and we have high expectations for 2 additional releases coming out soon, one by David Limbaugh, another by Marge Stein [ph] scheduled for Q3 and Q4. We are particularly excited about David Limbaugh's book, which will have a title we think will be Jesus on Trial, which give us an opportunity to promote it across our entire platform, not just News Talk, but also Christian Teaching Talk. So to be continued, we'll see how the synergy works out. We, so far, are quite pleased with it. As I've said in my opening comments, if our objective is to super serve the audiences interested in Christian family themed and conservative opinion content, and we want to super serve them, we can be a platform agnostic in one sense, but on the other sense, we are finding that there is a synergy and a dynamic that's release when you can cross promote to the same audience in a variety of ways, and we're certainly finding those benefits to be playing out. We hope to continue to see that in a positive way. And future quarters will let us know if -- the degree of success, we'll achieve. So let me finally conclude my remarks by simply saying that on June 30, we paid a cash dividend -- we paid a cash distribution of $0.06 per share or $1.5 million. This was a 4.3% increase from the previous quarter. This is the fifth time in the last 6 quarters that we've raised the quarterly dividend. Our policy continues to be devoting approximately 20% of our free cash flow to shareholder dividends. An announcement about the third quarter dividend should be made in early September. And I think, with that, I'll throw it back to Evan and let him give you more detail on the quarter and give you some guidance for Q3. Evan D. Masyr: Great, thank you, Ed. For the second quarter, our total revenue increased 14% to $68.6 million. Operating expenses increased 21% to $60.2 million and adjusted EBITDA decreased 8% to $13.1 million. We do see a nice gain from political revenue, which was about $0.5 million in the quarter as compared to $400,000 in the prior year. Political revenue has been a bit weaker than we had initially expected, but we still do expect a fairly solid political year, based on the fact that year-to-date 2014 political revenue is on pace with what we experienced in the last midterm cycle in 2010. And just as a reminder, that year, we finished with $3.7 million in political revenue. So we have reason to believe that we should have a good second half when it comes to political revenue. Net broadcast revenue increased 2% to $47.8 million and broadcast operating expenses increased 10% to $33.9 million, resulting in SOI of $13.9 million or a 14% decrease. On the same station basis, net broadcast revenue increased 1.1% and SOI decreased 13%. These same station results include broadcast revenue from 99 of our radio stations and our network operations and represents 99.4% of our broadcast revenue. I'll take a quick look at our revenue now by format. We have 41 stations that are programmed in our foundational Christian Teaching and Talk format. These stations contributing 44% of total broadcast revenue and increased 2% for the quarter. Advertising revenue increased 8%, while block programming in this format increased 1%. Our 27 News Talk stations had an increase of 9% in revenue for the quarter, in part due to an increase from the political revenue that I mentioned earlier. Overall, these stations represent 16% of our total broadcast revenue. Revenue on our 12 contemporary Christian music stations contributed 24% of total broadcast revenue and decreased 3% for the quarter. We have 8 stations that are programmed in Spanish-language Christian Teaching and Talk, and those stations grew revenue by 2% and that format also comprises 2% of total broadcast revenue. Finally, we have 10 stations in a business talk format. That format is also 2% of total broadcast revenue and saw a decline of 4% for the quarter. Network revenue increased 2% for the quarter and represents 8% of total broadcast revenue. Publishing revenue, as Ed mentioned earlier, increased 99% to $6.4 million and represents 9% of our total revenue. Finally, revenue from our Internet and e-commerce businesses increased 45% to $14.4 million and now represents 21% of total revenue. As you can see on a combined basis, Internet and publishing is now up to 30% of our total business. Acquisition activity was fairly quiet. During the quarter, we closed on 2 previously announced station acquisitions, WRTH-FM in Greenville, South Carolina for $1.1 million, and WOC-AM in Miami, Florida for $2.5 million. Additionally, we're in the process of acquiring KXXT-AM in Phoenix, Arizona for $600,000. At June 30, we had $289 million outstanding on our Term Loan B and $700,000 drawn on our revolver. Our leverage ratio was 5.64% compared to the compliance covenant of 6.5%. And looking ahead for the third quarter of 2014, we're projecting total revenue to increase 13% to 15% over the third quarter of 2013's total revenue of $58.5 million. We're also projecting operating expenses before gains or losses on disposal of assets, impairment losses, stock-based compensation expense to increase 17% to 20% as compared to the third quarter of 2013 operating expenses of $49.2 million. Now, if you exclude the acquisition of Eagle, our revenue projections would be increasing in a range of 2% to 4%. And expenses, we would expect to increase 4% to 7%. And that concludes our prepared remarks. We now are available to answer any questions, and I'll hand it back over to the operator for that.

[Operator Instructions] We'll take our first question from Pete Enderlin with MAZ Partners.

I guess the biggest thing that jumps out is the question about why the costs were up so much at the stations? Edward G. C. Atsinger: Well, as I mentioned, we have put quite an emphasis in recent quarters on developing more nontraditional businesses. And we've been successful at it and it's opened up a lot of new categories for us. But most of those businesses have much lower operating margins. The expenses to pull them off tend to be higher, and that has had something of an impact. There's been some increase in other categories, payroll's up a bit, but I think that's the biggest driver at the radio side. Evan D. Masyr: And when we think about, if we had additional revenue on just pure spot business, there's very little cost associated with it. But if you talk about a concert or an event, the margin on that is much smaller, so you see expenses up related to that.

And roughly what percentage or proportion of the radio station revenues comes from those nontraditional categories? Evan D. Masyr: Hard to give an exact number on that because sometimes you'll have events like we have a concert to celebrate freedom in Dallas, where you'll not only have nontraditional revenue where some of them will have booth space, let's say at the event. But there'll also be spot sales associated with it. So pretty difficult to get an exact number on that.

And I guess it's also not totally clear why the industry was weak, you didn't get a little more help from the late Easter in the broadcasting category. I mean, you mentioned that it helped the Internet related business... Edward G. C. Atsinger: Easter has never been a driver for radio. The reason it's a driver for the Internet, is not Internet per se, it's our e-commerce Internet business, and so that was -- that business primarily sells videos for use in church services and those are downloaded by churches. And so, Easter is one of the biggest times of the year, actually, the biggest season for that activity. So that's a big driver in that area, but it's not a driver on the radio side.

Okay, fair enough. And then when will you start to see some significant increments from election spending? I mean, I suppose it'll be later in the quarter, but you should see some in the third quarter, I guess, right? Evan D. Masyr: Well, we're beginning to see some in the third quarter and we expect third quarter and fourth quarter will be -- that fourth quarter will be the biggest but we're beginning to see some substantial activity. David P. Santrella: This is Dave Santrella, Pete. Traditionally, in Q4, you'll see the biggest jump in October and even with just a few days in November. November, typically, is extremely meaningful because there tends to be a real heavy up of political advertising, almost closest to the point of purchase, so to speak.

Sure. The bestseller performance from those 2 in particular was really impressive. How much of it do you think really resulted from your cross promotions and the synergies that you talked about in marketing? Edward G. C. Atsinger: Well, of course, that's the $64,000 question. I mean we think it's significant and it's consistent with the experience we had in the past in terms of operating synergies, but time will tell. But, I think, look, the success of these 2 books has been very good. I think we'll see more impact in Q3 than we saw in Q2 because they continue to be on the bestseller list. And there are some other benefits that may not play out as much in terms of the financial impact quarter-to-quarter. But we also believe having a platform as extensive as we have will allow us to attract more authors and we think that already has been the case. So it's an advantage that we have over other publishers that don't have that marketing platform, and so we'll see how it plays out. But so far, we think it's been significant, time will tell.

Then one sort of detailed question. Can you give us a little granularity on the 24% increase in D&A expenses for the quarter versus a year ago? Evan D. Masyr: Yes. The biggest you have is related to Eagle and some of the assets we acquired there. Also to a lesser extent, Twitchy. So you have, in particular, when we're buying nonbroadcast assets in particular, Internet assets, you have things that have a shorter life from an accounting perspective, so that's why you see the increase.

Okay. And then one more, and that is interest expense was up 9%. That surprised me a little bit, given that the level of debt seemed to be pretty flat and interest rates seemed to be pretty flat. Evan D. Masyr: I have to look to see what drove it. I think we had during the quarter though, because of the acquisition of Eagle, we're paying down debt. Compared to last year, we didn't have -- weren't carrying that. So we have a little bit more on our revolver during the quarter in 2Q this year versus last year.

And then the end of the quarter was down to almost 0, but during the quarter it was higher? Evan D. Masyr: Yes, correct.

[Operator Instructions] We will go next to Barry Lucas with Gabelli & Company. Barry L. Lucas - G. Research, Inc.: Let me throw 2 out, if I may. If core radio advertising is in the -- growing at kind of the slow single-digit pace, what would you say you can really, seriously hold expense growth on the radio side to? Because that's been a perennial thorn, I think. And the second item, if you would, maybe describe the backlist at Eagle Publishing, because while we don't like to look necessarily quarter to quarter, I'm looking out towards second and third quarter '15 and thinking how do you replace the revenues on hit titles. So is there a serious backlist that consistently sells out of Eagle? And your comments are greatly appreciated Edward G. C. Atsinger: With regard to the second question, I'm going to let David Evans answer that, who is head of that division. With regard to the first one, we are trying to develop the nontraditional sources of revenue, trying to take it, trying to make it a more significant piece of our business and hope that we can get some more operating efficiencies and improve the margins there. But this quarter, I think a lot of the story was we had internally budgeted about a 4% increase in revenue and it turned out to be 2%, which was a disappointment. If we'd had the 4% increase in revenue, the expense side would have been less painful, obviously, but second quarter was disappointing in that regard. I suppose if there's a silver lining, most of our colleagues had negative results. If you followed some of the public conference calls the last couple of days, they were all in negative territory, so we can take some comfort in that. I mean, this company has never -- we probably aren't the one that's going to be hitting the grand slam home runs every quarter or even every year, but we get more than our fair share of singles and doubles. The stability of our platform has always been the keynote. So I don't know that I can give you -- our hope is that we can get those expenses under control and then we can improve the margins, and that will certainly be an objective. David, you might want to talk about the backlist problem. David A. R. Evans: Yes, in terms of backlist, Regnery is a frontlist publisher. Most of the titles are very news-sensitive, political cycle-sensitive titles. So backlist as a percentage of total revenue is in the single digits. So yes, we're going to have a tough comp next year because of these 2 titles. And the opportunity and challenge for Regnery every year is lining up the authors and titles to consistently have a strong year. If you look back at history, Regnery has averaged about $10.5 million of revenue per year. But in a strong year, that's as high as $13 million or $14 million. In a soft year, that is as low as $7 million. Even numbered years, i.e. political years, tend to be much stronger and odd numbered years tend to be on the weaker side. And that's just a challenge that we're going to deal with. So yes, tough comps next year.

It appears there are no further questions at this time. Mr. Masyr, I'd like to turn the conference back to you for any additional or closing remarks. Evan D. Masyr: Thank you, all, for joining us to discuss Q2, and we'll connect with you again in 3 months' time to discuss the third quarter. Thanks again.

This concludes today's conference. Thank you for your participation.