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

Juan Bejarano - Noble Financial Group, Inc., Research Division Barry L. Lucas - G. Research, Inc. Peter Enderlin

Good day, and welcome to the Salem Communications Third Quarter 2014 Earnings Call. Please note that today's call 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 today for joining us for our Third Quarter 2014 Earnings Call. As a reminder, if you get disconnected at any time, you can dial in to area code (719) 325-2214 or listen from our website at www.salem.cc. I'm joined today by Edward Atsinger, Chief Executive Officer; Dr. Frank Wright, President and Chief Operating Officer; David Santrella, President of Radio; and David Evans, President of Interactive and Publishing. We will begin in just a moment with our prepared remarks. And once we are done, the conference call operator will come back on the line to 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 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, adjusted EBITDA and free cash flow. In conformity with Regulation G, information required to accompany the disclosures of non-GAAP financial measures is available on the Investor Relations portion of our website at salem.cc. I would now like to turn the call over to Edward Atsinger. Edward G. C. Atsinger: Thanks, Evan, and thanks to all of you for joining us for this call. I think it will be appropriate today to begin just with a reminder of Salem's unique position on the media marketplace and why we think we should have a particular appeal to investors. And then I want to provide a broad overview of third quarter results, with a brief discussion on some strategic developments. And then I'll turn the call back to Evan, who will give you more detail on the quarter's performance and provide some guidance for fourth quarter. Salem occupies a distinct and influential space in the media landscape. We strive to be the preeminent trusted provider of audio, video and text, providing Christian-themed content and conservative-themed views, analysis and commentary. We're a niche broadcaster, a niche media company. This distinctively -- these seemingly distinct audiences really have a very significant degree of overlap. Both audiences exhibit that most desirable quality of listener, viewer and leader loyalty. As one of the few media companies that has an integrated multimedia platform, all parts of which serve the same target audience, we can leverage that audience across divisional activities. And we're able, I think, to consistently get good results from that targeted cross-multimedia platform. Our primary financial objective continue to be increasing both adjusted EBITDA and free cash flow. That said, our total revenue in the third quarter increased by 19%. Recurring operating expenses were up 22%, resulting in an increase in adjusted EBITDA of 14% and free cash flow improving by 30% to $9 million. We're especially pleased with this improvement, given the continued soft advertising environment. Over the last 12 months, our free cash flow was $28 million or $1.11 per share. That's up 46%. At the current stock price, our free cash flow yield is 14%. As we continue to use free cash flow to pay down debt, we expect to see continued progress in these important metrics. And this is one of the reasons why the analysts that cover our stock have an average target price of $12 per share, and we remain optimistic about the upside for our stock from its current level. Let me drill down into some of the divisions, and in a way, it's -- in a way, it all really works together, but we break these down by division and even though there's synergy and there's value added between the divisions. Let me do it, first of all, including Eagle, which we acquired in January, and then we'll later look at it with Eagle out. Broadcast revenue was up 2%. With a 6% increase in broadcast expenses, that's led to a 5% decrease in station operating income. Internet and e-commerce revenue increased 55%, while Internet operating expenses were up 65%, yielding a 30% increase in Internet operating income. Lastly, our publishing revenue grew by 165%, with a 105% increase in publishing expenses, resulting in a $1.4 million profit in publishing compared to a loss of $200,000 last year. Obviously, the Eagle component wasn't in, in Q3 last year. It has not been a good year for the radio industry in general, and softness continued into the third quarter. And you'll recall that all of the so-called weather-related softness in Q1 will not continue on through Q3. And the Miller Capital reports show that revenue was down 5.4% in the media markets, in those media markets that we're in, despite it being a political year, yet our radio revenues grew by 2.1% in the quarter. And this outperformance highlights some of the key differences in our business model. First, our city Block Programming segment continues to perform for us, delivering a 2.9% increase. Additionally, our Radio Network, which provides news, talk and music programming to more than 2,600 radio stations across the country, performed well for us, with a 4.1% growth in revenue for the quarter. As I mentioned earlier, our Internet revenue was up 54.5%, and our publishing revenue was up 164.7%. Clearly, these growth rates are benefiting by the January acquisition of Eagle. Before I give more details on Eagle, let me just mention that excluding the Eagle, publishing revenue was up 1.3%, while Internet revenue was up 8.5%. You might note that the Internet revenue growth has slowed from prior quarters even though we continue to see very strong page view growth. We have page view growth of 38% over the last year. The slowing revenue is due to 2 factors. First, our page views are shifting from desktop to mobile, where modernization of mobile pages presents a greater challenge than that of desktop. But we see the whole industry making this transition. We're encouraged by the progress made by companies -- big companies like Google and Facebook in terms of determining how to monetize the transition to mobile. A large portion of our page view growth is monetized also at lower-value remnant ads. As we added redstate.com and humanevents.com, we bring a lot more inventory. And in those initial quarters, we will have an additional inventory that we will end up monetizing through lower-value remnant ads. Now that normally just as prime as we absorb those assets and we're able to develop a better fit for the inventory that we have available. Again, we see this as an area of future opportunity for higher direct great sales. I expect to see continued softness later at numbers in Q4 only because in the fourth quarter of 2013, we received a large traffic lift from several Facebook algorithm changes that lasted for most of the quarter but has not recurred since. And so the costs between Q4 of 2013 to Q2 2014 will be a little soft, given that big bloat that we had last time. Long term, we're encouraged by the continued growth of unique visitors, page views and Internet revenues. We discussed on our last call the rationale for acquiring Eagle. The assets we acquired are highly complementary to our existing business and existing target audience. It's the same audience that we have targeted with our old media platform, with our Internet assets and now with publishing assets. We believe that because of our marketing platform, we can be more productive with those assets than they would be on their own and, we think, than they have been with their prior ownerships simply because of that significant advantage that we have, it's a built-in marketing platform. It's still a work in progress, but the first few quarters have been very encouraging. And our basic rationale for that acquisition, I think, is proven to be -- is to be very sound one. The third quarter was another fantastic quarter. Eagle generated $4.3 million of Internet and e-commerce revenue and $5 million of publishing revenue and had approximately $2 million in profit for the quarter. And these results far exceeded the projections we put together at the time of the acquisition, and we're extremely pleased with what Eagle has achieved for us so far. Much of the current success has been a result of few strong books. Blood Feud: The Clintons vs. the Obamas by Ed Klein spent 8 weeks in the New York Times Best Sellers List, while America: Imagine a World Without Her by Dinesh D'Souza had a 9-week run on the Best Seller List. Both of these titles were released in June and had a significant impact on our Q3 results. Also, we released David Limbaugh's the Jesus on Trial in early September. It also was in New York Times Best Sellers, spending 5 weeks on the list. We had one big release in Q4, Mark Steyn's The Undocumented Mark Steyn, which was released on October 20. With the success we have seen with these titles this year, we are confident in our ability to take a good book and add to its success by leveraging our multimedia platform. We've done things like advertising books on air, on our websites, hosting local radio station events with our authors, having go to a national radio host interview our authors. And this kind of success, we believe, will feed upon itself as it helps and it will help us with the acquisition of future books and future authors. So we're optimistic that our rationale for the acquisition of Eagle will prove to be very sound. So far, we couldn't be happier. I'd like to briefly discuss our quarterly cash distribution. We call it a distribution, not a dividend; because it is actually return of capital and that we're still not a taxpayer. In early September, we announced the 4.2% increase through the distribution of our sixth increase in the last 7 quarters. We paid the cash distribution on September 30. It was $6.25 per share or $1.6 million. Our policy continues to be to devote approximately 20% of our free cash flow to shareholder distributions. And an announcement about the fourth quarter distribution should be made in early -- sometime in early December. Let me just conclude my remarks with an update on our business diversification strategy. Given that publishing revenue now accounts for 33% of our total revenue this quarter, up from 21% a year ago and 14% 5 years ago, we certainly evolve from the pure-play radio operator into a diversified multimedia company. Our revenue is a mix -- our revenue mix is very close to 1/3 Block Programming, 1/3 niche radio advertising and 1/3 Internet and publishing. We like the synergies of our integrated platform, and we're not done. We will continue to look for future opportunities. We continue to drill down our multimedia platform, both through acquisitions and investment in organic growth. With that, Evan, let me hand the call back to you, and you can provide the more details for Q3. Evan D. Masyr: Thank you, Ed. For the third quarter, our total revenue increased 19% to $69.6 million. Operating expenses on a recurring basis increased 22% to $59.9 million. And adjusted EBITDA increased 14% to $15.0 million. We also had a great quarter of free cash flow, as Ed talked about, growing 29.5% over the last quarter to $9 million. We did see a nice gain from political revenue, which was $1.1 million for the quarter as compared to $300,000 in the prior quarter last year. This is still on the same pace as we had in the 2010 midterm elections. On a year-to-date basis, we have booked $2.4 million of political revenue, the same amount we had through the 3 quarters of 2010. And as a reminder, we finished that year 2010 with $3.7 million in political revenue. Net broadcast revenue increased 2% to $47 million, and broadcast operating expenses increased 6% to $32.6 million, resulting in station operating income of $14.4 million or 5% decline. On a same station basis, net broadcast revenue increased 1%, and SOI decreased 5%. These same station results include broadcast revenue from 99 of our radio stations in our network operations, representing 99% of our net broadcast revenue. I'll now break down our broadcast revenue by format. We have 41 of our stations that are in our foundational Christian Teaching and Talk format. And these stations contributed 44% of total broadcast revenue and had a 1% increase during the quarter. Our 27 News Talk stations had an increase of 12% in revenue for the quarter, in part due to an increase in the political revenue. Overall, these stations contributed 16% of total broadcast revenue. Revenue from our 12 Contemporary Christian Music stations contributed 23% of total broadcast revenue and had a decrease of 4% for the quarter. In niche stations that we have programmed in Spanish language, Christian Teaching and Talk grew revenue 12%, and this format now comprises 3% of total broadcast revenue. Finally, with respect to our main formats, we have 10 stations in a business talk format. This format also contributed 3% of total broadcast revenue and had a decrease of 1% in revenue for the quarter. Our network revenue was up 4% for the quarter and represents 9% of total broadcast revenue. Publishing revenue increased 165% to $8.1 million and represents 12% of our total revenue. And finally, revenue from our Internet and e-commerce businesses increased 55% to $14.5 million and now represents 21% of our total revenue. During the quarter, we repaid $5 million on our Term Loan B, leaving a balance of $284 million outstanding as of September 30. We also had $2.8 million drawn on our revolver as of September 30. Our leverage ratio dropped from 5.64 as of last quarter to 5.42 versus a compliance covenant of 6.50. This meaningful decline was due to both the growth in EBITDA and the reduced level of debt. For the fourth quarter of 2014, we're projecting total revenue to increase 6% to 8% over fourth quarter of 2013 total revenue of $62.7 million. We are also projecting operating expenses before gains or losses on the disposal of assets, impairment losses and stock-based compensation expense to increase 8% to 11% as compared to the fourth quarter of 2013 operating expenses of $52.3 million. Without the acquisition of Eagle, we would be projecting our revenue to be down 1% to up 1% and our expenses to be down 1% to up 2%. This concludes our prepared remarks. And now we would like to turn the call back to the operator to answer any questions. Edward G. C. Atsinger: Operator?

[Operator Instructions] And we'll take our first question from Michael Kupinski with Noble Financial. Juan Bejarano - Noble Financial Group, Inc., Research Division: This is actually Juan Bejarano in for Michael Kupinski. Just wanted to quickly get a sense of how you are seeing the radio spot business. I know it's not a large portion of your business, but we've seen in some of the few years auto has been weak. Can you speak on that category and maybe the overall spot business as it relates to you? Edward G. C. Atsinger: Where you're asking clarification on, did you say rating spot business or radio spot business? I didn't quite understand. Juan Bejarano - Noble Financial Group, Inc., Research Division: Sorry, the radio spot business, how you're seeing that overall business. David P. Santrella: Yes, this is Dave Santrella, President of Radio Division. The spot business in general has been a bit sluggish. The automotive category has had its ups and downs in Q3. Right now, in Q4, we see that business is pretty tepid. The good news, again, as Ed mentioned earlier in the call, Salem has such a niche audience, very specific targeted audience, and we do a good job in gaining local spot from advertisers that want to appeal to that audience. So what we don't get from the regular transactional marketplace, we do make up with very targeted business. Juan Bejarano - Noble Financial Group, Inc., Research Division: Okay. And then how are you thinking of M&A going forward? And do you have any interest in the Disney AM stations that are up for sale? Or are you more focused on digital property going forward? Edward G. C. Atsinger: Well, we always survey the entire landscape. We certainly have looked at the Disney stations, and we're evaluating them, and there may be some new -- there may be some opportunities. We're in the process of evaluating that. But as I said in my comments, we continue to want to build the platform and even the old media assets. And most of the Disney assets are old media assets. Most of them are AM stations. There is a decline in that business, on the one hand; on the other hand, in our model, where it all works together, if there's value added, we can take old media assets, and we can bring value to publishing, for example, for Internet assets and vice versa. So Juan, I don't have anything that I can announce or anything specific, but we'll continue to make -- investigating and make prudent acquisitions when it seems to add up. Juan Bejarano - Noble Financial Group, Inc., Research Division: Okay. And just I missed this. Excluding Eagle, what was publishing and Internet in the quarter? David A. R. Evans: Internet revenue, organic, so excluding Eagle was up 8%. And publishing revenue, organic, was up 1%. Juan Bejarano - Noble Financial Group, Inc., Research Division: Okay. And do you expect growth in Q4, x Eagle? Evan D. Masyr: Well, the guidance we gave says we can be kind of in a range between down 1% and up 1%, excluding Eagle, so that's the guidance that we gave for the quarter, for Q4. Edward G. C. Atsinger: Excluding Eagle. Evan D. Masyr: Correct.

And we'll take our next question from Barry Lucas with Gabelli & Company. Barry L. Lucas - G. Research, Inc.: I know you just talked a little bit about order, Dave, but maybe you could flush out some of your other categories or -- either by category or by geography, what's happening out there in the weeds? David P. Santrella: Yes, well, certainly, education and finance continue to be very, very strong categories for Salem. And plus, Barry, just I think it's always important to remember that Salem draws an awful lot of revenue from -- as you've heard from other broadcast companies, from nontraditional means. Events, in particular, have become a very significant revenue category for us. And that generates a lot of new income that makes up for local spot, for kind of a tepid atmosphere in local spot. But specifically fit categories that are strong for us, education remains a strong category for us. Finance remains a strong category for us. Home improvement is always strong for us because of the large home ownership of our audience base. And then, of course, because of our niche business, we did quite well and will continue to do quite well in Q4 as people get into churches, get into things like their -- they're inviting -- Christmas is a wonderful time to invite new folks to the church to see their Christmas pageants and whatnot. And so that all gets advertised in our Teaching and Talk radio stations and our CCM stations as well. Edward G. C. Atsinger: Yes, there was -- probably, they'll continue -- you asked what categories, and most of the categories that are transactional, particularly national transactional. But also local transactional has been particularly weak on the CCM stations. David P. Santrella: Yes, our CCM stations are the stations; Barry, that play for most of the transactional business that's out there. And as you look at Miller Capital, Miller Capital is driven largely by transactional business, and that's what's been down pretty significantly. And you see that reflected in our data, where we said that our 12 CCM radio stations had risen revenue because those stations are more reliant on the transactional business. We make that up with what we do on News Talk and on Teaching and Talk, with our very specialized appeal to those audiences and with the events that we can do on those categories as well. Barry L. Lucas - G. Research, Inc.: And David, do you see any regional variation? Was that material as you look across the markets? David P. Santrella: I look at that every quarter, and I look at business categories by quarter on a regional basis. And I'd love to tell you that there's some fantastic regional change there. It's really not -- there's really not a significant regional change. Some of what, on the events side, will dictate a regional significance would be, for instance, if we're doing a book tour with one of our authors from Regnery, what cities do they go to? If they go to Washington, D.C., and they go to Atlanta, we'll do better in those markets in those -- in that region because they were there, and we'll do an event in that market. Barry L. Lucas - G. Research, Inc.: Okay. You touched on this a little bit earlier, Ed. But what does the pipeline look like on the Internet side? Is there a lot available that really fits your criteria out there? You've been awfully successful with a number of the properties that you put thus far, but what's out there? What's left, I guess? Edward G. C. Atsinger: Let me let David Evans, who's President of that division, comment because he's the most active in that area. David A. R. Evans: There's nothing specific out there right now that we're looking at, Barry. The approach we tend to take is we'll make an acquisition and -- as we did in January with the Eagle acquisition. And then we believe it's important to make sure that we integrate that acquisition, get it off to a solid start and make sure that we've identified and have implemented the cross-divisional opportunities that Salem is able to take advantage of. So my focus for us has been primarily on making sure that Eagle gets off to a good start. Looking ahead, we've, obviously, gotten off to a very good start. And looking ahead, I expect to be out there looking for additional digital properties that we can tuck in and add on to our platform. And yes, they always seem a little harder to find, but we always seem to be able to find them. So I think there's going to be some interesting opportunities out there as we kind of move from focusing on making sure Eagle gets off to a good start to looking for the next acquisition.

[Operator Instructions] And we'll take our next question from Pete Enderlin with MAZ Partners.

I'll start with the same question that came up the last time, which is why -- and it's -- the disparity is as great as it was in the second quarter. But why are the expenses up more than the revenues, especially in the station operations? Evan D. Masyr: Well, I look at -- if you look at some of our large categories of where we had increase in expenses; it's where you would expect some of these things. Regardless of revenue you're going to have, our biggest expense is payroll, and you just have wage increases year-over-year. That's part of it. And you saw the Miller Capital numbers we showed, which was the industry is soft. We certainly did better. But as Dave also alluded, we've been doing more events and things like that, that have a lower margin and a higher cost associated. So our 2 big drivers of expenses are payroll and, we call it, events-type expenses, banquets and special occasion-type expenses.

So does that suggest that you will have a more intensive focus on cost going into 2015? Or is it going to be more or less the same kind of pattern that we've seen? Evan D. Masyr: We certainly have a very intense focus on expenses. As a matter of fact, we put company-wide cost controls in place for the remainder of this year and, certainly, will impact our 2015 budgeting. That's part of why you saw the decrease in expenses and as you said, a lesser disparity this quarter than last quarter in station operating income. Edward G. C. Atsinger: A lot of it is related. It's not so much a growth in expenses as a lag in revenue. We budgeted to achieve certain revenue levels. The markets have been very soft. It began with Q1, with the so-called weather-related turndown. And the Miller Capital numbers indicate that revenue is lagging. We did 2% growth. Well, I think with the expenses we budgeted, if it's been 4%, we would have had a very positive result there. What is not reflected there, however, which I think these results, overall, do speak to, is the fact there is value added that isn't monetized or isn't quantified. All of these events that we do in the markets benefit the publishing. All the interviews we do with authors at our radio platform benefit the publishing. All of the publishing we can do on the Internet properties benefit the publishing and vice versa. I mean, there is cross-promotion as well because we can -- when we can take our authors and bring them into markets and do events and have them available to us because they are author and because they're on a contract and have them available on attractive terms, that helps the radio. But there's real value added in these great publishing numbers that is not really identified in the traditional way that we report.

Yes, that makes sense. I mean, that's the basic rationale of the integrated media complex that you have. Evan D. Masyr: Correct.

And Evan, can you just give maybe a little color on the gain that you had on the fair value of the Internet for Eagle and Twitchy? I think it was about $500,000. Evan D. Masyr: Correct. We -- every quarter, we have to analyze the likelihood of making payouts for the contingent earn-out associated with both those acquisitions. Twitchy was based on page views in 6-months periods. Eagle was based on the various business units' revenue. And so every quarter, we are going through and figuring out what the likelihood is of the -- and the fact that we're going to have to pay additional money or pay less money. And what you see reflected there is just the change in the possibility-weighted assumptions. David A. R. Evans: It's actually good news. The higher that number is, the more successful those acquisitions are.

Right. But in those case, it's a low one. Evan D. Masyr: No, actually, it's an expense. It's an expense. David A. R. Evans: It's an additional expense saying it's more likely we're going to be paying out incentives because the business has outperformed.

Right. But in this quarter, you had a gain from that, which implies it was a negative adjustment. David A. R. Evans: No, we actually had spent. It's an expense. Evan D. Masyr: I think we had an expense. David A. R. Evans: It's a $545,000 expense.

Do you still expect Eagle to be accretive for the year? David A. R. Evans: Yes, absolutely.

Okay. How fast can we anticipate additional paydown of debt? Evan D. Masyr: It really depends on acquisition activity. We will continue to use excess free cash flow without any acquisitions. We will continue to pay down debt. You saw that we paid down $5 million in the third quarter. We will continue to pay down more in the fourth quarter unless some acquisition opportunities present themselves. So I would say keep looking for more paydowns in the future. Edward G. C. Atsinger: And we hope to, certainly, reduce debt by a full term of leverage within the life of our current credit facility, if not more. So that's kind of a broad target, both among management and among the board.

And that's to 2017? Evan D. Masyr: This piece of paper that we have, the Term Loan B, goes to March of 2020. And so we're really trying to get ourselves in a much better leveraged position by the time we have to refinance that, which will be a year before. So think about the end of 2018, beginning of 2019. Edward G. C. Atsinger: And we could probably get it done under current market conditions. We could get it done, our current leverage, but we got our eye on the past. I mean, we all went through a very painful Great Recession, where there was no money available. So we want our leverage to be in a place where we don't ever have to worry about that.

And it appears that there are no further questions at this time. I will now turn the call back over to Edward Atsinger for any additional or closing remarks. Edward G. C. Atsinger: Well, again, thank you, all, for joining us. And I think the story in this quarter is that the Eagle experiment seems to be -- seemed to be a valid one and seems to be paying dividends. We'll -- stay tuned. We've got some good finals in the pipeline for Q1, Q2 next year. So we're very optimistic, and we'll continue to watch it. But the story, I think, is that this integrated platform is working. We're uniquely positioned to do it because we have this audience that is a specialized audience that we super serve. So with that, we look forward to visiting with you again in 3 months.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.