Ed Atsinger - CEO Evan Masyr - CFO, SVP Dave Santrella - President, Radio Division.

Michael Tanzer - DG Capital Michael Kupinski - Noble Financial.

Hello, and welcome to the Salem Communications First Quarter 2014 Earnings Call. Today's call is being recorded. I would now like to turn the conference over to Mr. Evan Masyr, Executive Vice President and CFO. Please go ahead, sir..

Thank you, Camille. And thank you all for joining us today for Salem Communications' First Quarter 2014 Earnings Call. As a reminder, if you get disconnected at any time, you can dial in to area code (719) 325-4900 or listen from our Web site 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 & Publishing. We'll begin in just a moment with our prepared remarks. And once we are 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 Web site at www.salem.cc. With that, I'd now like to turn the call over to Edward Atsinger..

Imagine a World Without Her by Dinesh D'Souza. D'Souza offers a full flooded defense of America as a "force for good" in the world and challenges the myth that our wealth, that our influence are based on the evils of capitalism.

Additionally, we releasing the book, Blood Feud, the Clintons' versus the Obamas' by Ed Klein, being an interesting book Blood Feud pulls back the curtain on sometimes shocking and interesting and sometimes destructive relationship between what have become two world families of the democratic party.

Again, we are able to bring all of the Salem assets to their – all these book releases and we will continue to implement that as we move forward and we will update you about how that goes base – experiment [those again we can call] (ph) them progress and we will fine tune that I'm sure they will bring value.

Let me summarize our financial results; let me do it in all end basis including the impact of the Eagle acquisition. And then I will provide some numbers that exclude the impact of Eagle acquisition so we can kind of put it in perspective kind of on a year-over-year basis on a same-station perspective.

For the quarter, total revenue including Eagle increased 12%, with 16% increase in operating expense, which resulted in a 4% decline in adjusted EBITDA. Let me comment on the adjusted EBITDA decline, we projected that we commented on that on our last call.

First, as you recall, we strengthened our management team by filling the role of President and Chief Operating Officer, which has been vacant since about 2008, 2009. And we also launched a new division and the President of the newly created Radio Division, Salem Espanol.

Secondly, we had something of a negative impact in terms of the Gallagher simply the timing issue with regard to Easter, which I will comment in a minute. Let me dig a little deeper into the 12% revenue growth.

This was composed of 5.4% increase in broadcast revenue, which is very encouraging given the fact that the economy was flat and most of our peers were also flat and not down. We had a 32.9% increase in Internet and e-commerce revenue and 44% increase in publishing revenue. Obviously, the biggest driver of this growth was Eagle Publishing acquisition.

Let's put in a little different perspective, if you look at these results both with and without, you are still seeing some solid growth. Let me start with Eagle itself. Adding Eagle in the first quarter, Eagle itself generated $3.7 million in revenue on which $2.8 million was Internet related and $900,000 was publishing related.

If you exclude both revenue was still up 5.3%, this 5.3% increases in total non-Eagle revenue is composed of 5.4% increase in broadcast revenue, 3.9% increase in Internet and e-commerce revenue and 9.6% increase in publishing revenue. As I commented a minute ago, Easter last year was in the first quarter in March, this year it's in April.

So this resulted in a negative impact on our Q1 Internet revenue clearly because Easter is the biggest week for our Church e-commerce businesses, WorshipHouse Media and SermonSpice.

I guess the good news is that is that the same decline in Q1 this year will have a positive impact on Q2 since Easter will now appear in April and will get the benefit in Q2.

If you were to ignore the impact of the Easter timing Internet e-commerce revenue would have been growing about 9 plus percent, which is inline with what we have been reporting in recent quarters for organic growth for our Internet business.

As a result of our Eagle acquisition, Internet and publishing revenue in Q1 now represents 27% of our total revenue compared with 22% last year.

With the strong book releases scheduled at Regnery later this year, we think for the balance of this year, when those results were at least expecting a net publishing to probably see 30% of our total revenue by year end and emphasizing our multi-media and diversification strategy.

I will now probably finish by highlighting two items on the radio side of our business. As I said, our operating performance and acquisitions first as I said, I'm quite pleased with the actual 5.4% increase on the core radio business. And as I mentioned, we had a brutal winter and flat economy for the rest of the country, but we did quite well.

There are two important drivers underlying this growth. First, as always we saw solid block programming revenue growth of 5% on our Christian Teaching and Talk stations so that's continues to be there even when the economy slows.

Second, we saw a strong growth in Q1 in the film advertising category, the films like Noah, God's not Dead, Heaven is for Real are targeting our audiences and the industry, the studios are targeting our audience and spending money with us to reach them.

Looking at the rest of the year by the way, there are also a number of faith-based films slated to be released this year those that were at point are Exodus left behind, which will be interesting and Dad is going to Kill is all of which again will be of interest to our audience.

And it's encouraging to see that the studios are recognizing importance of our audience by not only making films that appeal to them they will be interested in, but also buying time on our platform to promote those films and for that we are really grateful, I suppose contrary to reports the film God is not Dead certainly seems to be a reality for Salem.

Let me finally conclude with a brief discussion of our acquisition activity. Late last year, we briefly mentioned the pending acquisitions of few radio stations, KRDY-AM in San Antonio, which we added to Salem Espanol, KDIS FM in Little Rock, Arkansas which has been added to our Christian Teaching and Talk group of stations.

These acquisitions closed during the quarter and we currently have two more station acquisitions pending. The first is WCOA-AM in Miami. We are paying $2.2 million for that station including the transmitter side and real property associated with it.

Additionally, we are acquiring WOLT-FM, which is licensed to Greer, South Carolina that's actually the Greenville, South Carolina market and (indiscernible) have now changed to [WRTH] (ph).

We quite made that acquisition is for – was made for $1.1 million and I think it probably is closing even as we speak the documents have been signed today and had been exchanged and I think we probably will consummate that acquisition today.

We have also closed on three FM translators, those were done last month, one was in Omaha, Nebraska another in Tampa, Florida and the third in Orlando. So it's been a good quarter for Salem in terms of our operating results and in terms of the development of our multimedia platform through acquisitions particularly Eagle Publishing.

So with that Evan, let me turn the call back to you for some more specific details..

Certainly, thank you, Ed. And I will provide a little bit more detail on some of the numbers some of them will be repeats of what Ed was talking about. For the first quarter, our total revenue increased 12.1% to $62.3 million.

Operating expenses on a recurring basis increased 16.9% to $56.4 million and adjusted EBITDA decreased to 4.3% to $10.7 million. For reference, we had approximately $700,000 in political revenue for the first quarter as compared to $200,000 last year and $900,000 in 2012.

Through the first three months our political revenue is pacing at 77% of our highest political was in 2012, when we had $5.5 million. So we are happy with the way they are starting and it's also the decline from 2012 has to be expected given that it's a mid-term election as compared to a presidential year.

Net broadcast revenue increased 5.4% to $45.6 million. Broadcast operating expenses increased 5.5% to $31.2 million which result in efficient operating income of $14.4 million or 5.2% increase.

On the same-station basis, net broadcast revenue increased 5.2% and SOI increased 5.2%, the same-station results include broadcast revenue from 98 of our radio stations and our networks operations and represents 99.7% of net broadcast revenue. I think a quick look at and break down some of our revenue by format.

40 of our radio stations are in foundational Christian Teaching and Talk format. These stations contributed 45% of total broadcast revenue and increased 4% for the quarter. Advertising revenue was up 9% while block programming on this format was up 3%.

We have 27 stations in News Talk and they increased 16% for the quarter, due to increase in political revenue. Overall, these stations contributed 17% of total broadcast revenue. Revenue from our 12 Contemporary Christian Music stations contributed 21% of total broadcast revenue, and decreased 2% for the quarter.

We have seven stations that have programmed in Spanish language Christian Teaching and Talk and revenue on those stations grew by 4% and that format is 2% of our total broadcast revenue.

And rounding out a main format we have 10 stations in a business talk format and this will now contributed 3% of total broadcast revenue increasing 2% for the quarter. Network revenue increased 17% and represents 9% of total broadcast revenue. Publishing revenue increased 44% to $3.8 million and represents 6% of our total revenue.

And revenue from our Internet and e-commerce business has increased 33% to $12.9 million and now represents 21% of our total revenue. Profit was up 8% but was impacted by the Easter timing as Ed already discussed. If we exclude the impact of the timing of Easter profit instead of being up 8%, it would have been up 17%.

During the quarter, we repaid $2.3 million of our Term Loan B at March 31st, and $289 million outstanding on the Term Loan B and $2.3 million on the revolver. Our leverage ratio was 5.52 compared to the covenant of 6.50. And interest expense for the quarter declined 34% to $3.8 million from $5.7 million last year.

With respect to next quarter, second quarter of 2014, we are projecting total revenue to increase 13% to 15% over second quarter 2013 total revenue of $60.1 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 16% to 19% compared to the second quarter of 2013, operating expenses of $49.7 million. Without the acquisition of Eagle, we would be projecting our revenue to increase in the range of 5% to 7% and our expenses to grow 6% to 9%.

And this concludes our prepared remarks and we would now like to answer any questions and I will turn it back over to you operator..

All right. Thank you. (Operator Instructions) And we have our first question from Michael Tanzer with DG Capital..

Hi, guys.

Hi, Ed, how are you?.

Very good. Thank you, Michael..

It was really great to see some of the robust revenue growth considering what your peers are doing on the broadcast side. My question – really my first question is with regard to the G&A reported on the income statement in your press release.

What was the substantial increase due to and going forward what do you think it's sort of a reasonable run rate to think about?.

When you are looking at G&A, are you talking just corporate expenses or are you looking at all of our operating expenses?.

I guess, I will get to the general operating expense, but I was just talking about corporate expenses to $6.83 million versus the $5.8 million you reported in the 2013?.

There were couple of key drivers on that expense growth part of it was the new hires that Ed had mentioned of Frank Wright, our President and Chief Operating Officer and Tony Calatayud, who is our President of Salem Espanol. Additionally, we became an accelerated [driver] (ph) this year, and so our auditors had to test our internal controls.

So we had an increase in expenses related to audit fees in the quarter, those were kind of the two big drivers of that expense growth..

And do you think, I mean, the two new employees that you hired were those sort of like signing bonuses or something like that or can we just sort of take the 6.8 number to annualize it and that sort of lift the ongoing [class] (ph)?.

I think 6.8 is a little high. There were some other things, we have annual managers meeting for example the two first quarters, so first quarter expenses are always a little bit higher, and I don't think you are going to see that swing percentage growth the rest of the year.

As we look, as I look at Q2, I don't see that same large growth in corporate expenses in Q2 as we did the first quarter..

Okay.

And then just on broadcast operating expenses and Internet operating expenses, I know we have asked this question from your guys before, but are we going to be able to perhaps see operating leverage and increases in EBITDA anytime soon?.

Yes. If you look at guidance for Q2, it looks like we are getting close there. Depend somewhat on the release of some of these books and how that plays out.

I do think the latter half of the year, we expect to see some operating leverage little but surely it all depends on the overall economy and where things are but at this point we see things will get there this year..

If we have a good political year that will certainly help. And we are hoping we will and it's gotten off to a decent start..

Okay. Great. And then just one more question for me.

When you look at your CapEx budget, excluding some of these acquisitions that you are doing, what will be sort of the budget for the year and then is $7 million or is it $10 million on an ongoing basis that you think is will be appropriate long-term rate?.

The CapEx budget that I think is the more normal CapEx number for us is about $8 million a year.

This year 2014, I expect it to be somewhere closer to $10 million and that's because we have this new situations where we are having to move for example in the San Francisco through eminent domain or building those was taken and so we had to move into how CapEx associated with that.

We have a similar situation in Seattle where the building where the leases been sold and new owners basically shoeing us out of there. And we also have a situation in Miami where a transmitter site in the Everglades has been taken through with the domain, so are going to have to relocate there.

So we have a few situations where CapEx will be elevated this year, in more normalized numbers probably somewhere in that $8 million range, but it will probably be in the $10 million range in 2014..

Okay. I think that's it for me. Thanks very much..

Great. Thank you, Michael..

(Operator Instructions) Our next question comes from Michael Kupinski from Noble Financial..

Hi.

Pardon, if you have addressed this question, but I was just wondering, did you have political advertising in the last quarter?.

We did. Political in the first quarter was $700,000 approximately last year in 2013; in the first quarter was $200,000..

Okay. And then in terms of the radio stations, what do attribute the outperformance of the radio stations, (indiscernible) current programming and so forth.

But, where do you introduce the outperformance, were ratings exceptionally strong, or your sales force doing a much more effective job and then obviously because of the variance of what we have seen with the rest of the industry are far ahead of like the other window peers are doing, I mean can you shed some light on, when do you think things are going right?.

Well, first off, we are pretty intentional about sales effort. This is Dave Santrella by the way. We were pretty intentional about our sales effort. And we have some pretty regimented activities that we do on a weekly basis. Transactional business is actually pretty soft. So our more rating based radio stations remain pretty stable in the quarter.

We are one of the beneficiary of additional revenue because transactional business was soft. Most of our growth came from as Ed mentioned the movie business; education business is very strong for us. A lot of ancillary direct retail business and then a fair amount of sports programming as well..

Okay. Those are all the questions I have. Thank you..

(Operator Instructions) And as we have no further questions, I would like to turn the call back to Ed Atsinger for closing remarks..

All right. Thank you, operator. And again, thanks to all of you for joining us. We look forward to visiting with you when we report on second quarter earnings later this year..

That does conclude today's call. We appreciate your participation..