Urban One, Inc. Q4 FY2023 Earnings Call

Welcome to Urban One's First Quarter Conference Call. During this conference call, Urban One will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. Urban One cautions you that certain factors, including risks and uncertainties referred to in the 10-K, 10-Q and other reports it periodically files with the Securities and Exchange Commission, could cause the company's actual results to differ materially from those indicated by its projections or forward-looking statements. This call will present information as of June 10, 2024. Please note that Urban One disclaims any duty to update any forward-looking statements made in this presentation. In this call, Urban One may also discuss some non-GAAP financial measures in talking about its performance. These measures will be reconciled to GAAP either during the course of this call, or in the company's press release, which can be found on its website at www.urban1.com. A replay of the conference will be available from 5:30 p.m. Eastern Time, 6/10/2024 until 11:59 p.m. 6/17/2024. Callers may access the replay by calling 866-207-1041. International is 402-970-0847. Callers may dial direct. The replay access code is 1372800. Access to live audio and a replay of the conference call will also be available on Urban One's corporate website at www.urban1.com. The replay will be made available on the website for seven days after the call. No other recordings or copies of this call are authorized or may be relied upon. I will now turn the call over to Alfred C. Liggins, Chief Executive Officer of Urban One, who is joined by Peter D. Thompson, Chief Financial Officer.

Thank you very much, operator. Joining Peter and I, as usual, are Jody Drewer, our Chief Financial Officer at TV One and CLEO; Kris Simpson, our General Counsel; and Karen Wishart, who is our EVP of Administration. Thank you. We haven't done a call in a while because we've been going through a long and arduous audit with a new audit firm, but as you have seen from the filings and the press release, we have finally completed the year-end 2023 audit as well as our first quarter 2024 audit results. We are officially back in compliance with NASDAQ, and we are very happy about that. It’s time to keep our eyes moving forward in terms of upcoming filings. You saw from the year-end results, we were in our guidance range. The guidance we've provided all along came in at $128.4 million of year-end adjusted EBITDA. A question we have been asked consistently, and we haven't been in a position to address, is about our expectations for 2024. At almost the six-month mark, we want to provide 2024 EBITDA guidance. We expect, depending on the robustness of political events, to achieve $110 million to $120 million of EBITDA in the 2024 calendar year. With that, you can triangulate where you think we are heading in terms of leverage ratios, etc. The political landscape is still developing, and we are hopeful about it, but it’s beginning to unfold. The primary season was not as robust as we would have liked, but we believe that the presidential landscape will be quite dynamic, and we are having really good conversations. With that, I will turn it over to Peter to delve into the specifics of the numbers more than usual because we are dealing with two reporting periods.

Thank you, Alfred. Just a couple of clarifications. We've got audited results for 2023. Q1 would technically be unaudited, although it's been reviewed by EY and signed off. It's not actually audited until they finish the annual audit. The guidance number Alfred referred to would be adjusted EBITDA in the $110 million to $120 million range. Consolidated net revenue was down 9.2% year-over-year for the quarter ending December 31, 2023, approximately $120.3 million. Net revenue for the Radio segment was $41.7 million, a decrease of 12.4% year-over-year and down 23% on a same-station basis. According to Miller Kaplan, our local ad sales were down 6.8% against the market, which was down 7.2%. National ad sales were down 37.2% against the market and down 24.5%. Political advertising was the largest driver of that decline in Q4, down $6.6 million in the Radio division or 76% year-over-year, which was expected. Net revenue for the Reach segment was $10.8 million in the fourth quarter, down 9.7% from the prior year. Adjusted EBITDA was $3.4 million, up 10.6% for the quarter. Net revenues for the digital segment decreased by 12.5% in Q4 to $21.2 million. Direct national sales were down while local radio, streaming, and podcast revenue were all up. Adjusted EBITDA was $3.5 million, which was up 82%. We recognized approximately $47.3 million of revenue from our cable television segment during the quarter, a decrease of 4.9%. Cable TV advertising revenue was up 1.9%, and an updated rate card reflecting current delivery drove the overall rate down but increased volume along with additional units applied towards ADU helped mitigate that rate impact. Cable TV affiliate revenue was down by 13.4% with favorable rate increases offset by net churn. Cable subscribers for TV One, as measured by Nielsen, finished Q4 2023 with 42.9 million subscribers compared to 44 million at the end of Q3. CLEO TV had 41.4 million Nielsen subscribers. Moving on to Q1 revenues, consolidated net revenue was down by 5% year-over-year at approximately $104.4 million. Net revenue for the Radio segment was $36.4 million, an increase of 3.3% year-over-year, but a decrease of 7.9% on a same-station basis. According to Miller Kaplan, our local ad sales were down 1.9% against the market, which was down 7.9%. Our national ad sales were down 18% against a market that was down 4.3%. Net revenue for the Reach segment was $8.5 million in the first quarter, down 22.4% from the prior year. Adjusted EBITDA was $1.8 million, down 47.7% for the quarter. Net revenues for the digital segment decreased by 7.3% for Q1 to $14 million. Direct national sales were down while CTV, local radio, streaming, and podcast revenues were all up for the quarter. Adjusted EBITDA was $3 million, down 20.1%. We recognized approximately $46.2 million of revenue from our cable television segment during the quarter, a decrease of 6.9%. Cable TV advertising revenue was down 1.8%; an updated rate card reflecting current delivery drove average unit rates down, but increased volume and Urban One sponsorships helped mitigate the rate impact. Cable TV affiliate revenue was down by 12.8% with favorable rate increases offset by negative churn. Cable subscribers for TV One, as measured by Nielsen, finished Q1 2024 at 40.7 million compared to 42.9 million at the end of Q4. CLEO TV had 38.5 million Nielsen subscribers. Turning to operating expenses for Q4. Operating expenses, excluding depreciation and amortization, stock-based compensation, and impairment of long-lived assets, increased to approximately $105.6 million for the quarter, up 1.6% from the prior year. Radio operating expenses rose by 6.5% or $2.1 million. The Houston Radio acquisition, which was effective August 1, 2023, added approximately $3.1 million of expense, so if normalized for that, expenses would actually be down. On a same-station basis, variable expenses relative to revenue such as sales commission, bonus compensation, bad debt, and national rep fees were all down. Reach operating expenses were down by 15.1%, driven by reduced variable expenses tied to revenue such as talent compensation and sales commissions. Operating expenses in the digital segment were down 17.2%, driven predominantly by variable traffic acquisition and sales expenses tied to lower direct advertising revenue. Cable TV expenses were down 4.5% year-over-year. Content amortization was up by $1.5 million, driven by an increase of $600,000 for 2023 originals and $1 million for pre-2023 write-offs related to programming tax credits. This was a non-cash item, added back to adjusted EBITDA. This increase was offset by a reduction in promotional media spend of $1.7 million due to the timing of series returns, $900,000 driven by reduced bonuses, and $200,000 in reduced travel and expenses for the quarter. Operating expenses in the Corporate and Elimination segment rose approximately $5.9 million, primarily due to a higher non-cash expense for the CEO's TV One award and higher third-party consulting and audit expenses. For adjusted EBITDA, we added back $2.8 million for the non-cash TV One award expense and $2.6 million for nonrecurring professional fees related to the audit, and $1.7 million for prior period balance sheet adjustments, including a write-off for computer hardware losses. For the first quarter, operating expenses, excluding depreciation and amortization, stock-based compensation, and impairment of long-lived assets, increased to approximately $88.3 million, which is up 11.6% from approximately $79.1 million incurred in the first quarter of 2023. Radio operating expenses rose by 13.1% or $3.5 million. The Houston Radio acquisition added approximately $3.2 million of expense. Most of the expense increase relates to the Houston acquisition. Reach operating expenses were down 10.9% driven by decreased affiliate station compensation expense and lower programming talent costs. Operating expenses in the digital segment were down 3.1%, largely due to lower traffic acquisition costs related to lower direct revenues. Cable TV expenses were down 1.5% year-over-year. Content amortization expenses fell by $2.1 million due to an increase of $800,000 for originals and a $2.9 million decrease from acquisitions going out of license. The $1 million increase in marketing and promotion expenses was due to the timing of campaigns, alongside a $0.5 million rise in travel for the Urban One Honors event. Operating expenses in the Corporate and Elimination segment increased by approximately $7.3 million, primarily due to higher third-party professional fees. We had a $5 million non-recurring professional fee related to the prolonged audit and remediation of controls, which was added back to adjusted EBITDA. Consolidated adjusted EBITDA was $26.4 million for the fourth quarter, down 30.5%. Consolidated broadcast and digital operating income was approximately $38 million, a decrease of 19.6%. Consolidated adjusted EBITDA was $21.5 million for the first quarter, down 28.9%. Consolidated broadcast and digital operating income was approximately $32 million, a decrease of 18.5%. Interest income for Q4 increased to $2.5 million compared to $0.5 million in the prior year. Interest expense decreased to approximately $14.2 million for the fourth quarter, down from $14.6 million in the prior year due to the lower overall debt balances. The company made cash interest payments of approximately $121,000 in the quarter. Interest income increased to $2 million in the first quarter from $300,000 last year. Interest expense decreased to approximately $13 million for Q1, down from $14.1 million last year due to the lower overall debt balances. The company made cash interest payments of approximately $26.8 million in the quarter. During the quarter, the company repurchased $75 million of its 2028 notes at an average price of 88.3% par. The next semiannual debt service payment is due on August 1. A $5 million impairment charge was recorded in Q4, primarily for our Washington, D.C. radio market, and there were no impairments recorded in the first quarter of 2024. The provision for income taxes was approximately $2.7 million for the fourth quarter and the company paid cash income taxes of $337,000. The provision for income taxes was approximately $2.5 million for the first quarter and the company paid cash taxes of approximately $1.6 million. Net loss was approximately $11 million or $0.23 per share compared to a net loss of $1.9 million or $0.04 per share for the fourth quarter of 2022. For the first quarter, net income was approximately $7.5 million or $0.15 per share compared to a net loss of $2.9 million or $0.06 per share for the first quarter of 2023. During the fourth quarter, the company repurchased approximately 396,000 shares of Class D common stock for $1.4 million. During the first quarter, approximately 256,000 shares of Class D common stock were repurchased for $1.3 million, which was related to the employee stock pool. Capital expenditures for the quarter were approximately $1.8 million. As of December 31, 2023, total gross debt was $725 million. Ending unrestricted cash was $233.1 million, resulting in net debt of approximately $491.9 million, which we compared to $128.4 million of LTM, adjusted EBITDA for a total net leverage ratio of 3.83x. Pro forma for the Houston Radio acquisition, total net leverage was 3.74x. As of March 31, 2024, total gross debt was $650 million. Ending unrestricted cash was $155.3 million, resulting in net debt of approximately $494.7 million, compared to $119.6 million of LTM reported adjusted EBITDA for a total net leverage ratio of 4.14x. Pro forma for the Houston Radio acquisition, total net leverage was 4.08x. With that, I will hand it back to Alfred.

That’s a mouthful. Circling back to the questions we've been asked. We provided the 2024 adjusted EBITDA guidance. Thank you for the correction on the Q1 numbers being reviewed, but not audited, Peter. For our full-year 2024 adjusted EBITDA guidance of $110 million to $120 million, we remain very focused on continuing to manage the company's leverage down. We do not have any M&A on the table at this time but are always looking at opportunities opportunistically. Our focus remains on continuing to lower the company's leverage, and we'll continue to do that. When we look at M&A opportunities, we prefer those that are both accretive and hopefully deleveraging as well, particularly in our current businesses where industry-level topline growth isn't assumed. Essentially, any M&A we pursue needs to fit into the synergistic category to be beneficial for us. That's where we stand in terms of potential opportunities and our intentions for the year. We have yet to make concrete decisions on capital allocation at this point in time, but these overarching goals guide our decision-making process. With that, operator, I would like to open the floor for questions from the participants on the call.

And I have a question from Tim Daggett with Schroders. Please go ahead.

Hey, guys. Thanks for taking the questions. How should I think about the fixed charges for 2024, specifically CapEx and the taxes? It looks like your cash interest is about $48 million per year now after the pay down. How much do you expect to spend this year on CapEx and taxes? Thanks.

Yes. CapEx is projected to be around $9 million or $10 million this year, up from our normal $7 million range due to a couple of large real estate projects we're undertaking. As for cash taxes, we aim to avoid being a federal taxpayer for another couple of years, so we're estimating around $3 million for this year.

And the significant CapEx project is our consolidation in Indianapolis. We purchased the MS cluster of radio stations in Indianapolis. We've been operating two separate facilities for a while now. We struck a deal with Radio One, Urban One's original landlord, to expand our existing facility. We'll save about $1 million a year in operating expenses there once the expansion is completed. That's what is driving the CapEx for this year.

Okay. Great. If I add that up, it totals about $60 million of fixed charges on interest, CapEx, and taxes. Is there anything else I should consider in terms of cash outflows at the midpoint of the $115 million of EBITDA less $60 million, which would yield $55 million of free cash flow? Is there anything else I need to consider for this year?

Yes. One aspect that can fluctuate is cash versus TV One programming. For this year, we expect additional cash outflows for programming that won't be amortized until future periods. You should probably pencil in about $10 million for that—this is the sort of big-ticket item that won't be easy to account for.

Okay. That doesn't necessarily come to pass, but that's just the current forecast as it stands.

And our next question comes from Dominic Wave with Stifel. Please go ahead.

Hi. Thanks for taking the question. Can you touch a little on how the national ad was down a bit more than the general market in the fourth and first quarters? Can you describe what you’re seeing there? Do you expect that to persist? Also, regarding your EBITDA target, does it depend on political outcomes? Can you provide any forecast on political ad spending for 2024?

Yes. We budgeted $10 million for political this year, which is low relative to the last couple of even-year cycles. However, we had strong results in Atlanta during the previous cycles. Therefore, $10 million is hopefully conservative. We see a portion of that starting to shift toward digital. Normally, about 80% of our political ad revenue comes from radio, but a lot of it is transitioning to digital. This could provide some political upside for our digital division that's not currently factored in. We've been outperforming on national advertising for a while now, but it has reversed as we've seen a decline in corporate sales, with some clients not returning as they did before. This has hurt us more than the market. However, in Q2, we are performing better on national than on local. Our national radio business can be largely impacted by losing one major client, which can range from $3 million to $4 million, particularly if they don't recur.

Okay. Thank you for the insight. Lastly, can you provide any read-through on how 2Q is shaping up? Any color, not necessarily official guidance, but just what you’re observing?

It's soft with the exception of political, while we continue to see churn in cable TV plus some softness in delivery there. Therefore, there's weakness in TV and digital. However, the political aspect is helping offset some of that.

We’ve informed on our radio guidance for Q2. The current outlook is that Q2 is not going to be a great quarter for us. All this is factored into the guidance we've provided. We are nearing the completion of Q2 now. We feel okay about our projections, but the reason the guidance is so broad is that many significant discussions are ongoing related to political, and we can't be overly optimistic until orders are placed. Although conversations are encouraging, we prefer to stay cautious.

That’s it for me. Thanks for answering the questions.

Next question comes from Hal Steiner with BNP Paribas. Please go ahead.

Hey, guys. Thank you for taking my questions. Could you elaborate on what's been driving the softness in digital and to a lesser extent, Reach for the last two quarters? What will you focus on this year to reverse these trends or improve performance?

The decline in ad spending can be attributed to a wave of diversity dollars that benefited minority-targeted media previously. The advertising climate has altered post-George Floyd, and with increased interest rates and general softness in national advertising, we are witnessing a decline across several media sectors. While some companies may have fared well, many traditional media companies, including us, are feeling this downturn. The decrease in diversity ad spending, particularly as the concept of E&I fades under certain political trends, contributes to this decline. We anticipated Q1 would be challenging, and we're navigating these three drivers: the shift from traditional to digital media, a general advertising recession, and the tapering of diversity dollars. The strategy to reverse this trend is still being formulated, and we currently don't have a solid plan to enhance our EBITDA. We may need to invest in our assets, explore accretive and deleveraging M&A, but it's a complex process, especially in light of market fluctuations.

Thank you for that insight, Alfred. One last question about SG&A expenses. It seems there's been an elevated investment in SG&A over the last two quarters. Can you provide some perspective on any plans to reduce these expenses moving forward?

Certainly. The increase in corporate SG&A expenses is driven by one-time audit and consultancy fees associated with an extended audit. There was an additional $5 million in expenses for Q1, which I should have mentioned earlier as a deduction on the cash flow question. There were also tidy-up entries adding about $1.7 million in Q4. We will look to reduce these expenses, but these related costs were unusual circumstances.

Got it. Thank you for clarifying that.

To address where we stand on cash, we have $162.9 million on hand today, which is an increase from quarter-end.

Great. Thank you for taking my questions.

We have no further questions at this time.

Thank you, operator, and we look forward to talking to you all next quarter. Thank you for your patience as we got these statements caught up today. Talk to you next quarter.

That does conclude our conference for today. Thank you for your participation. You may now disconnect.