Urban One, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for being here. Welcome to Urban One's 2020 Second Quarter Earnings Conference Call. I will start this conference call with a statement regarding forward-looking information. During this call, Urban One will discuss certain projections or forward-looking statements about future events or performance. Urban One cautions you that various factors, including risks and uncertainties mentioned in the 10-Ks, 10-Qs, and other reports filed with the Securities and Exchange Commission, could result in actual outcomes differing significantly from the company's projections or statements. This call provides information as of July 30, 2020. Please note that Urban One is not obligated to update any forward-looking statements made during the presentation. Additionally, we may discuss some non-GAAP financial measures regarding our performance, which will be reconciled to GAAP either during this call or in our press release available on our website at www.urbanone.com. A replay of this conference will be available from 12:00 p.m. Eastern time on July 30, 2020, until midnight on August 1, 2020. Callers can access the replay by dialing 1 (866) 207-1041, and international callers can dial (402) 970-0847. The replay access code is 2877475. Live audio and replay access will also be available on Urban One's corporate website at www.urbanone.com, and the replay will be accessible on the website for 7 days after the call. No other recordings or copies of this call are authorized. I will now hand the call over to Alfred C. Liggins, Chief Executive Officer of Urban One, accompanied by Peter D. Thompson, Chief Financial Officer. Mr. Liggins?

Thank you, Operator. And also joining me as usual is Jody Drewer, the Chief Financial Officer of TV One in case we need to drill down there; Karen Wishart, our Chief Administrative Officer; and Kristopher Simpson, who is our General Counsel. You've seen the press release. As expected, Q2 was a very tough quarter because of COVID. We guided, we let you folks know where our business was pacing down to, and it came in pretty much as expected. I think our EBITDA came in better than we had expected. The company cut an extraordinary amount of costs to minimize the impact on the EBITDA, and I just want to take my hat off to the management team and all the employees who have done an amazing job of really battening down the hatches as this virus was really ravaging the economy and our advertisers and businesses, etcetera. Radio was the most impacted. We see Q2 as the bottom, fortunately, and we're starting to see sequential improvement going into Q3 for sure. Our cable business is helping us a lot, and we'll actually see EBITDA at TV One grow year-over-year in 2020 in spite of COVID. Given the current climate for social justice, we're also seeing a lot of new interest in our audience and platform as well. I'm going to go into some more detail after I turn it over to Peter, who's going to drill down on the numbers, and then he'll hand it back to me and I'll give you a little more color after that.

Okay. Thank you, Alfred. So net revenue was down 37.5% for the quarter ended June 30, 2020, at approximately $76 million. As Alfred said, the impact of COVID-19 was felt most strongly in our radio segment where net revenue was down 58.4% in the second quarter. National ad sales were down 49.1%, while local advertising sales were down 61.2%. On a same-station basis, which excludes Detroit, our radio segment net revenue was down 56.6%. And excluding political, it was down 57.1%. The worst affected categories were entertainment, which was down 90%, food and beverage, down 83%; travel and transportation down 72%; auto down 71% and telecom down 68%. Net revenue for Reach Media was down by 66.6% in the second quarter, of which approximately 45% is attributable to the postponement of the Tom Joyner Fantastic Voyage cruise. Adjusted EBITDA was down regionally by approximately $1.7 million or 51.6% year-over-year. The Tom Joyner Fantastic Voyage event generated $1.7 million of adjusted EBITDA in the second quarter of 2019. It was postponed this year due to the pandemic. Net revenues for our digital segment decreased by 20.4% in the second quarter, and adjusted EBITDA for the digital segment decreased by approximately $129,000. We recognized approximately $43.8 million of revenue from our cable television segment during the quarter, a decrease of 5.7%. Cable TV advertising revenue was down 4.4%, driven by lower demand due to the pandemic, leading to an average unit rate decrease of approximately 14%, which was partially offset by higher delivery. Cable TV affiliate revenue was down by 7.4%, with rate increases of approximately $1.3 million, offset by churn of approximately $3.3 million. Cable subscribers, as measured by Nielsen, finished Q2 at $51.4 million, down from $51.8 million at the end of Q1. We recorded approximately $40,000 of cost method income less administrative expense for our investment in the MGM National Harbor property for the quarter compared to $1.7 million last year. The decrease is as a direct result of the casino closure due to COVID-19 Maryland state mandates. The casino is now reopened at 50% capacity with enhanced health and safety protocols. Operating expenses, excluding depreciation, amortization, impairments and stock-based compensation decreased by $31.9 million or 37.6% to approximately $53 million in Q2. Due to COVID-19, all special events scheduled to take place during the second quarter were either canceled or postponed to a later date. In 2019, Tom Joyner Fantastic Voyage generated expenses of approximately $8.7 million. Other Reach Media events generated expenses of $600,000 and radio station events generated expenses of approximately $2.9 million during the second quarter of 2019. We saved approximately $7.1 million in employee compensation expense reductions through a combination of layoffs, furloughs, and temporary pay cuts. We've also incurred savings of approximately $4.1 million in reduced or delayed marketing spend, $2.3 million in lower programming content amortization, $1.8 million in contract labor and talent cost savings, and $1.4 million in reduced travel and office expenses. In addition, there were lower variable expenses such as commissions and rep fees, traffic acquisition costs, and music license fees of approximately $3.2 million. Radio operating expenses were down 34.7%. Radio SG&A expenses line was down 37.7% from lower revenue, variable expenses such as sales commissions and national rep fees, cancellation of station events, employee compensation, and discretionary marketing and promotions productions. Radio programming and technical expenses were down 28.9%, mainly from lower employee and talent compensation and lower music royalties. Reach operating expenses were down 68.5%. Programming and technical expenses were down 26.1%, driven by lower talent and employee compensation expense. Reach SG&A expenses were down 87.9%, mainly due to the cancellation of the cruise and other events. Corporate SG&A expenses at Reach were down 15.3% due to staff compensation savings. Operating expenses in the digital segment were down 20%, driven by lower traffic acquisition costs, reduced sales and ad operations costs and lower editorial content costs. Cable TV expenses were down 32.7% year-over-year. Sales and marketing expenses was down by $4.1 million. Programming content expense decreased by approximately $2.3 million. Compensation and benefits were down by $1.1 million, and T&E was down by $400,000. Operating expenses at the Corporate and Elimination segment were down by 12%, including a favorable variance of $800,000 for adjustments to the company's employee agreement award liability and severance, which are excluded from adjusted EBITDA. Net of those adjustments, corporate SG&A expenses were up by approximately $130,000 with lower employee compensation offset by higher legal fees and higher operating lease expense. For the second quarter, consolidated broadcast and digital operating income was approximately $30.2 million, down 33.1%. Consolidated adjusted EBITDA was $24.5 million, a decrease of 38.1% year-to-year. Interest expense was approximately $18.4 million for the second quarter compared to approximately $20.6 million for the same period in 2019, a decrease of 10.6%. The company made cash interest payments of approximately $22.4 million on its outstanding debt in the quarter. The senior secured MGM National Harbor term loan balance increased by PIK interest of approximately $525,000 and a draw of $3.6 million. The proceeds from this draw were used to pay down the senior unsecured term loan by the same amount. So including amortization, that loan was paid down by approximately $8.4 million, and the Term Loan B was paid down by approximately $824,000. Provision for income taxes was approximately $465,000 in the quarter, and there were no cash taxes paid. Net income was approximately $1.4 million or $0.03 per share compared to net income of approximately $6.6 million or $0.15 per share for the second quarter of 2019. For the second quarter, capital expenditures were approximately $1.2 million compared to $1.4 million last year. The company repurchased 3,208,288 shares of Class D common stock in the amount of approximately $2.4 million and executed a stock vest tax repurchase of 155,771 shares of Class D common stock in the amount of $140,000. For covenant purposes, LTM EBITDA was approximately $129 million. Net senior leverage was 4.87x against a covenant of 5.85x. Net debt was approximately $830.4 million compared to $123 million of LTM reported adjusted EBITDA for a total net leverage ratio of 6.75x. And with that, I'll hand back to Alfred.

Thank you, Peter. The recovery will largely depend on local radio and its trajectory, which is a significant variable for us. We made certain assumptions about how we expected things to rebound after reopening. Initially, we believed things would bounce back, and the good news is that they have, but it's still too early to determine the exact percentage decline for Q3. Our July is ending down in the low 40s, decreased from the high 50s we saw in Q2, indicating progress. Q4 will be crucial as we anticipate political ad spending will come into play. We've initiated in-depth discussions with the Biden Campaign and are optimistic about their desire to reach our audience. Regarding other business areas, we feel positive about Reach Media, our national radio segment, which is not locally dependent. We forecast their EBITDA to remain roughly flat compared to 2019 at around $7 million. TV One has been performing well, projecting an increase in EBITDA from $82 or $83 million in 2019 to about $90 million this year. Recently, TV One launched its first virtual MVPD over-the-top service with Philo, reaching 700,000 customers, which is beneficial for the network. Ratings have been strong at TV One, and although there's nothing good about the pandemic, it has led to increased television viewership. MGM National Harbor constitutes a smaller yet significant part of our business and was closed for most of Q2, reopening at the end of June at 50% capacity. I've visited multiple times and spoken with staff there, and I've seen a strong recovery in activity with good compliance on health and safety measures. Even at half capacity, I believe they're likely to achieve decent revenue. I'm still learning about this business, which, like many others, follows the 80/20 rule. We're starting to see revenue from this sector this month at a respectable level. I previously mentioned increased advertiser interest in our platform, notably from Procter & Gamble, which has committed to using African-American-owned media. We've had additional business from them and are nurturing this relationship further. They are the leading global advertiser and set a standard for others, showing a genuine commitment to social justice along with their financial investment. We're also experiencing positive dialogues with companies like Google, Capital One, Bank of America, and Target, along with increased interest from pharmaceutical firms due to COVID, particularly regarding its impact on African-American communities. As part of our agreement with MGM, we have a marketing pact where they were to invest a predetermined amount over five years, expiring on December 31, 2021, and I expect them to fulfill this agreement, which likely has about half of the original $5 million commitment remaining. This should provide some momentum as we approach the latter half of this year and into next year. Overall, we consider ourselves fortunate not to be in industries like restaurants or fully closed casinos. Despite the challenges faced by radio, there was still a considerable amount of revenue streaming through the business. Our diversification has positioned us with other divisions that have managed the pandemic's impacts better than the radio sector, allowing us to navigate the current situation. We hope for improvements sooner than anticipated, but recent rollbacks have been detrimental, especially in major markets like Houston, while other areas are performing better. Operator, I would like to move on to the Q&A session to address questions from our online participants.

Our first question will be from Aaron Watts.

Alfred, just trying to think about the overall radio ad environment, do you feel that your ad performance and pacings were relatively in line with the overall marketplace? Are your stations outperforming or lagging a little bit? And any reason you might think that could be?

Look, I don't know for sure yet because I haven't seen anybody else's numbers. I think you're going to find that we're going to do better. Look, I've been channel checking, I've been talking to other people. And the folks that I've checked with, we definitely have been outperforming those pacing numbers. So I'm going to wait and see how things roll in. But if I had to bet, I think you're going to see us outperform.

Yes. And look, to back out for Q2, we got the Miller cap data in, and on a total spot basis, we beat the market by about 4 percentage points.

Yes. We've got a number of things going in our favor, not the least of which is some renewed interest in our platform. Our stations are still performing pretty well ratings-wise, even though overall ratings went down. But yes, I think you're going to see our radio business outperforming.

Yes. And your comments around some of your advertisers having an increased focus on African-American owned and operated focused businesses. Do you think those efforts will benefit across your platform? Or do you think it's going to be more focused on TV or radio specifically?

They've been cross-platform conversations. The Procter & Gamble conversation was digital, radio, and TV.

Okay, got it. And last one for me, it seems as though traffic volumes have increased or recovered a lot over the last few months. And I know there's some ebbs and flows to that as COVID kind of dovetails or improves in some areas. But traffic improving seems to be a theme. You're still seeing some pretty steep down pacing for third quarter, down 40%, give or take. What do you think it will take for the advertising to come back and follow those sort of traffic volume improvements that we're seeing out there?

We need to stabilize our way of life. Businesses are currently operating at limited capacities, with restrictions on how many people can be in a store and the necessity of maintaining distance and wearing masks. These conditions dampen the experiences we used to have. Right now, our focus is on safety and preventing illness, as the consequences are severe. For businesses to recover, we need to see better control over the virus, with a clear decrease in infection rates and information about vaccine progress. I spoke with someone from a major pharmaceutical company who is optimistic about vaccines being available by the end of the year. That's a crucial factor. The uncertainty of our recovery, especially for the third quarter, can be linked to varying infection rates, as we've seen in places like Houston where cases surged after reopening. Despite fluctuations, we've noticed an uptick in local advertising activity, but the environment remains unpredictable, and people are understandably cautious. The back-to-school situation adds another layer of complexity, particularly for working mothers managing both work and home schooling. Businesses need to adapt. While I might be going on, I believe a return to normalcy is essential, as people are yearning for it. The emotional impact of the current situation is significant, and everyone wants to return to their previous routines, but it all hinges on ensuring safety first.

That will come from the line of Ben Briggs.

I have a quick question. I heard you project EBITDA for TV One in 2020 to be around $90 million, which is an increase of about 10% from the 2019 EBITDA of approximately $82 million to $83 million at TV One. You mentioned that reach would remain roughly the same. Did I miss the guidance for the radio EBITDA?

You didn't miss it. We didn't provide that information. Yes, it's just too early to tell. I really don't have clarity yet. In another month, I'll have a better understanding after we see how the third quarter starts to unfold. We're already a month into the third quarter. I can tell you that for July, we added money almost every day. There were more positive additions than cancellations on a daily basis. That was the first month we've experienced this. Although July wasn't filled with great news and was quite choppy, I remain hopeful. To me, the question isn't if things will return to a certain level of normalcy, but rather when they will, and who will be able to endure the prolonged challenges.

Yes. So in that vein, I know you ended the quarter with a pretty strong liquidity position, and you had $70 million of cash. Just in that vein of it's not an if, but a when, I know liquidity is at the top of people's minds right now. Could you give a cash balance as of today or even a more general view? Do you guys feel comfortable with your current liquidity position and your liquidity position looking forward?

We currently have around $76 million, assuming all the unpresented checks clear. Our liquidity has held up very well, and we feel comfortable with that. At some point, we may consider paying down some or all of the ABL, but for now, we'll keep it outstanding as a precaution. Overall, our liquidity has been quite robust.

Sure. Okay. And then last thing, are there any talks? I know capital structure is always at the forefront of your minds right now. Are you having any thoughts related to the capital structure, kind of take a backseat as you guys manage through the COVID-19 crisis? Or are there any thoughts you're having on the capital structure right now?

Capital structure and maturities are a top priority for us, and we are engaged in discussions about various solutions to increase liquidity and address our maturities while communicating regularly with our existing debt holders. We are exploring multiple options and maintaining a strong focus on ensuring we remain covenant compliant to avoid any default issues. We feel confident about our progress. Additionally, we are monitoring the business trajectory and managing accordingly, while also considering options for resolving our upcoming maturities and alleviating some of the pressure. Our focus remains intense.

We'll go next to the line of Kirk Lucky.

Very impressive on the cost reduction side. I think you've mentioned in the past that some are temporary, and some are longer term. Can you give us a range of what a normalized run rate might be on some of these line items like programming, SG&A, corporate?

Yes. It's tough to do that because there's just so many variables. Obviously, we've got a pretty strong handle on the Q3 cost base and where that's going to come out. I mean the employee piece of that is probably around $6 million compared to the $7 million that we saved in Q2. The programming piece for Q3 is about $2.8 million less year-over-year. So slightly more savings there in content amortization. The marketing spend is about $1.5 million of savings in Q3. Contract labor is about $900,000, travel and office expenses, about $0.5 million. Variable expense is projected to be about $2.6 million down. Events are about $1.5 million down at the radio stations and about $3.1 million down at Reach. So if you total that lot up for Q3, there's about $20 million of savings in Q3 that are embedded in our current projections. I can't really annualize our run rate at the moment because things are so fluid, particularly around events and that kind of thing. But hopefully, that gives you a sense of the scale of what we're doing and what that would look like rolling it forward another quarter.

That's very helpful. Thank you. A couple of revenue-related questions. I'm curious with respect to events, is there a way to pivot from kind of the traditional in-person events to virtual events? And do you have anything on the horizon that might generate that?

Sure, you could consider that option, but many of our events depend on people attending and purchasing tickets. For instance, our Women's Empowerment event in Raleigh, North Carolina typically sells around 12,000 to 15,000 tickets. While it's possible to organize virtual events and conduct seminars, the reality is that it's uncertain whether people would be willing to pay for an online experience. Additionally, the advertising revenue generated wouldn't come close to matching the profits from in-person events. We are exploring some options, such as a virtual event for our Urban One Honors awards show in Q4. The BET Awards were successfully held virtually, but they were usually accompanied by a full BET experience with concerts and multiple days of activities. Ultimately, the revenue potential for in-person events is unmatched. Can we execute virtual events? Yes, but they won't be nearly as profitable.

That's helpful. On National Harbor, can you get to your old revenue-sharing number even though the casino is only open 50%?

I don't know. The answer is no, we're not going to reach last year's $7 million. However, it will be better than we anticipated at 50% capacity. I will have those numbers in six days when they are released, as they typically report to the state of Maryland during the first week of the following month. I can tell you that in the very first week they were open, they made around $8 million to $10 million towards the end of June. July has been strong, so I believe we will be satisfied with the results. I'm not expecting us to reach normalized revenue levels for any of our businesses. When I provided the EBITDA guidance numbers, some were quite positive. I didn’t mention our digital business, which achieved about $1 million of EBITDA last year, and it's likely to double this year. This increase is largely due to minimizing revenue and significantly reducing costs in those businesses. It’s important to note that these EBITDA numbers aren't rising because revenue is increasing year-over-year. I do not expect us to match last year's revenue across any of our units, but the focus is on generating more cash flow. The advantage of the casino is that every dollar contributes to our cash flow.

Got it. And then one last question, if I may, on the capital structure. You mentioned you bought some shares during the quarter. The stock went crazy. Do you have any perspective on the stock market activity other than it's, I would think, a pretty bullish sign that you think you can get this refi done?

We bought those shares. We bought Brigade, the hedge fund that also happens to be our largest debt holder, and they were the second largest equity holder after the family. We stay in close contact with them. We made that deal with them for a couple of reasons. One, we didn't want a big hunk of that stock hit in the market. From our perspective, it was really kind of a bet that we're going to make it through this. The stock was trading below $1 when we did it. We also did it with our largest debt holder. So we were kind of in sync with that. It wasn't a lot of money for the purchase given where the stock was trading. Plus, it also gives us the ability to continue to fuel employee incentives and things of that nature that you need during this period of time. I had no idea that the stock was going to rocket like it did. I originally thought maybe there was a short squeeze, but there wasn't a very big short position. I really think that it was just pure coincidence because you have a large shareholder that sells, and it was just pure coincidence that at the same time, there was a lot of retail interest that started to develop in our company and some other African-American owned companies. A couple of banks, one Broadway Financial, another Carver, Carver Bank at the same time. I think it was just pure coincidence that happened at the same time. The level of trading that's continued, even though the stock has come down, the level of trading and activity has still been very, very robust. This retail trading phenomenon is unbelievable. I saw something on CNBC where a guy was saying that with financial information on the internet, a lot of folks that are trading have just as good information as people who do it for a living at hedge funds. So that's what I think has happened with us. Certainly, the interest in our audience and social justice has been helpful to that.

We have no one else waiting to ask questions at this time. You may proceed.

Well, thank you, Operator, and thank you, everybody, for tuning in. Again, as always, we are available offline for any questions. Thank you very much.

Ladies and gentlemen, that will conclude your conference for today. Thank you for your participation and for using AT&T for the teleconference. You may now disconnect.