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

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

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

Thank you. And thank you, all, for joining us today for Salem Communications' Second Quarter 2014 Earnings Call. As a reminder, if you get disconnected at any time, you can dial in to area code (719) 325-4750 or listen from our website at www.salem.cc. I'm joined today by Edward Atsinger, our Chief Executive Officer; Dr.

Frank Wright, President and Chief Operating Officer; David Santrella, President of Radio; and David Evans, President of Interactive & Publishing. We'll begin in just a moment with our prepared remarks. And once we're done, the conference call operator will come back on the line and instruct you on how to submit questions.

Please be advised that statements made on this call that relate to future plans, events, financial results, prospects or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available information.

Actual results may differ materially from those anticipated and reported results should not be considered an indication of future performance.

We do not intend and undertake no obligation to update our forward-looking statements, including forecasts of future performance, the potential for growth of existing markets, the opening of new markets or the potential growth from future acquisitions.

More information on the risks and uncertainties that may affect our business and financial results are included in our Annual Report on Form 10-K for the year ended December 31, 2013, and other public filings we have made with the Securities and Exchange Commission.

This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically station operating income, EBITDA and adjusted EBITDA.

In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the Investor Relations portion of our website at salem.cc. I'll now turn the conference call over to Edward Atsinger..

The Clintons vs. the Obamas by Ed Klein. Blood Feud describes the relationship between the 2 royal families of the Democratic Party. Well, that is currently #3 on the New York Times bestseller list. It was #1 3 weeks earlier. In fact, both of these books have been kicking around for 5 to 6 to 7 weeks on all of the bestseller lists.

To have 2 books topping the bestseller list is a great achievement, and we're very pleased with that. And it begins to give some validity to our whole concept of synergy.

We think we've had a -- we played a significant role in driving our book sales by increasing the number of author interviews we were able to accomplish with our own platform and using all of our assets to promote these books.

We expect continued strong sales from these books for those reasons and others, and we have high expectations for 2 additional releases coming out soon, one by David Limbaugh, another by Marge Stein [ph] scheduled for Q3 and Q4.

We are particularly excited about David Limbaugh's book, which will have a title we think will be Jesus on Trial, which give us an opportunity to promote it across our entire platform, not just News Talk, but also Christian Teaching Talk. So to be continued, we'll see how the synergy works out. We, so far, are quite pleased with it.

As I've said in my opening comments, if our objective is to super serve the audiences interested in Christian family themed and conservative opinion content, and we want to super serve them, we can be a platform agnostic in one sense, but on the other sense, we are finding that there is a synergy and a dynamic that's release when you can cross promote to the same audience in a variety of ways, and we're certainly finding those benefits to be playing out.

We hope to continue to see that in a positive way. And future quarters will let us know if -- the degree of success, we'll achieve. So let me finally conclude my remarks by simply saying that on June 30, we paid a cash dividend -- we paid a cash distribution of $0.06 per share or $1.5 million. This was a 4.3% increase from the previous quarter.

This is the fifth time in the last 6 quarters that we've raised the quarterly dividend. Our policy continues to be devoting approximately 20% of our free cash flow to shareholder dividends. An announcement about the third quarter dividend should be made in early September.

And I think, with that, I'll throw it back to Evan and let him give you more detail on the quarter and give you some guidance for Q3..

Great, thank you, Ed. For the second quarter, our total revenue increased 14% to $68.6 million. Operating expenses increased 21% to $60.2 million and adjusted EBITDA decreased 8% to $13.1 million. We do see a nice gain from political revenue, which was about $0.5 million in the quarter as compared to $400,000 in the prior year.

Political revenue has been a bit weaker than we had initially expected, but we still do expect a fairly solid political year, based on the fact that year-to-date 2014 political revenue is on pace with what we experienced in the last midterm cycle in 2010. And just as a reminder, that year, we finished with $3.7 million in political revenue.

So we have reason to believe that we should have a good second half when it comes to political revenue. Net broadcast revenue increased 2% to $47.8 million and broadcast operating expenses increased 10% to $33.9 million, resulting in SOI of $13.9 million or a 14% decrease.

On the same station basis, net broadcast revenue increased 1.1% and SOI decreased 13%. These same station results include broadcast revenue from 99 of our radio stations and our network operations and represents 99.4% of our broadcast revenue. I'll take a quick look at our revenue now by format.

We have 41 stations that are programmed in our foundational Christian Teaching and Talk format. These stations contributing 44% of total broadcast revenue and increased 2% for the quarter. Advertising revenue increased 8%, while block programming in this format increased 1%.

Our 27 News Talk stations had an increase of 9% in revenue for the quarter, in part due to an increase from the political revenue that I mentioned earlier. Overall, these stations represent 16% of our total broadcast revenue.

Revenue on our 12 contemporary Christian music stations contributed 24% of total broadcast revenue and decreased 3% for the quarter. We have 8 stations that are programmed in Spanish-language Christian Teaching and Talk, and those stations grew revenue by 2% and that format also comprises 2% of total broadcast revenue.

Finally, we have 10 stations in a business talk format. That format is also 2% of total broadcast revenue and saw a decline of 4% for the quarter. Network revenue increased 2% for the quarter and represents 8% of total broadcast revenue. Publishing revenue, as Ed mentioned earlier, increased 99% to $6.4 million and represents 9% of our total revenue.

Finally, revenue from our Internet and e-commerce businesses increased 45% to $14.4 million and now represents 21% of total revenue. As you can see on a combined basis, Internet and publishing is now up to 30% of our total business. Acquisition activity was fairly quiet.

During the quarter, we closed on 2 previously announced station acquisitions, WRTH-FM in Greenville, South Carolina for $1.1 million, and WOC-AM in Miami, Florida for $2.5 million. Additionally, we're in the process of acquiring KXXT-AM in Phoenix, Arizona for $600,000.

At June 30, we had $289 million outstanding on our Term Loan B and $700,000 drawn on our revolver. Our leverage ratio was 5.64% compared to the compliance covenant of 6.5%. And looking ahead for the third quarter of 2014, we're projecting total revenue to increase 13% to 15% over the third quarter of 2013's total revenue of $58.5 million.

We're also projecting operating expenses before gains or losses on disposal of assets, impairment losses, stock-based compensation expense to increase 17% to 20% as compared to the third quarter of 2013 operating expenses of $49.2 million.

Now, if you exclude the acquisition of Eagle, our revenue projections would be increasing in a range of 2% to 4%. And expenses, we would expect to increase 4% to 7%. And that concludes our prepared remarks. We now are available to answer any questions, and I'll hand it back over to the operator for that..

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

I guess the biggest thing that jumps out is the question about why the costs were up so much at the stations?.

Well, as I mentioned, we have put quite an emphasis in recent quarters on developing more nontraditional businesses. And we've been successful at it and it's opened up a lot of new categories for us. But most of those businesses have much lower operating margins. The expenses to pull them off tend to be higher, and that has had something of an impact.

There's been some increase in other categories, payroll's up a bit, but I think that's the biggest driver at the radio side..

And when we think about, if we had additional revenue on just pure spot business, there's very little cost associated with it. But if you talk about a concert or an event, the margin on that is much smaller, so you see expenses up related to that..

And roughly what percentage or proportion of the radio station revenues comes from those nontraditional categories?.

Hard to give an exact number on that because sometimes you'll have events like we have a concert to celebrate freedom in Dallas, where you'll not only have nontraditional revenue where some of them will have booth space, let's say at the event. But there'll also be spot sales associated with it. So pretty difficult to get an exact number on that..

And I guess it's also not totally clear why the industry was weak, you didn't get a little more help from the late Easter in the broadcasting category. I mean, you mentioned that it helped the Internet related business....

Easter has never been a driver for radio. The reason it's a driver for the Internet, is not Internet per se, it's our e-commerce Internet business, and so that was -- that business primarily sells videos for use in church services and those are downloaded by churches.

And so, Easter is one of the biggest times of the year, actually, the biggest season for that activity. So that's a big driver in that area, but it's not a driver on the radio side..

Okay, fair enough.

And then when will you start to see some significant increments from election spending? I mean, I suppose it'll be later in the quarter, but you should see some in the third quarter, I guess, right?.

Well, we're beginning to see some in the third quarter and we expect third quarter and fourth quarter will be -- that fourth quarter will be the biggest but we're beginning to see some substantial activity..

This is Dave Santrella, Pete. Traditionally, in Q4, you'll see the biggest jump in October and even with just a few days in November. November, typically, is extremely meaningful because there tends to be a real heavy up of political advertising, almost closest to the point of purchase, so to speak..

Sure. The bestseller performance from those 2 in particular was really impressive.

How much of it do you think really resulted from your cross promotions and the synergies that you talked about in marketing?.

Well, of course, that's the $64,000 question. I mean we think it's significant and it's consistent with the experience we had in the past in terms of operating synergies, but time will tell. But, I think, look, the success of these 2 books has been very good.

I think we'll see more impact in Q3 than we saw in Q2 because they continue to be on the bestseller list. And there are some other benefits that may not play out as much in terms of the financial impact quarter-to-quarter.

But we also believe having a platform as extensive as we have will allow us to attract more authors and we think that already has been the case. So it's an advantage that we have over other publishers that don't have that marketing platform, and so we'll see how it plays out. But so far, we think it's been significant, time will tell..

Then one sort of detailed question.

Can you give us a little granularity on the 24% increase in D&A expenses for the quarter versus a year ago?.

Yes. The biggest you have is related to Eagle and some of the assets we acquired there. Also to a lesser extent, Twitchy. So you have, in particular, when we're buying nonbroadcast assets in particular, Internet assets, you have things that have a shorter life from an accounting perspective, so that's why you see the increase..

Okay. And then one more, and that is interest expense was up 9%. That surprised me a little bit, given that the level of debt seemed to be pretty flat and interest rates seemed to be pretty flat..

I have to look to see what drove it. I think we had during the quarter though, because of the acquisition of Eagle, we're paying down debt. Compared to last year, we didn't have -- weren't carrying that. So we have a little bit more on our revolver during the quarter in 2Q this year versus last year..

And then the end of the quarter was down to almost 0, but during the quarter it was higher?.

Yes, correct..

[Operator Instructions] We will go next to Barry Lucas with Gabelli & Company..

Let me throw 2 out, if I may. If core radio advertising is in the -- growing at kind of the slow single-digit pace, what would you say you can really, seriously hold expense growth on the radio side to? Because that's been a perennial thorn, I think.

And the second item, if you would, maybe describe the backlist at Eagle Publishing, because while we don't like to look necessarily quarter to quarter, I'm looking out towards second and third quarter '15 and thinking how do you replace the revenues on hit titles.

So is there a serious backlist that consistently sells out of Eagle? And your comments are greatly appreciated.

With regard to the second question, I'm going to let David Evans answer that, who is head of that division.

With regard to the first one, we are trying to develop the nontraditional sources of revenue, trying to take it, trying to make it a more significant piece of our business and hope that we can get some more operating efficiencies and improve the margins there.

But this quarter, I think a lot of the story was we had internally budgeted about a 4% increase in revenue and it turned out to be 2%, which was a disappointment. If we'd had the 4% increase in revenue, the expense side would have been less painful, obviously, but second quarter was disappointing in that regard.

I suppose if there's a silver lining, most of our colleagues had negative results. If you followed some of the public conference calls the last couple of days, they were all in negative territory, so we can take some comfort in that.

I mean, this company has never -- we probably aren't the one that's going to be hitting the grand slam home runs every quarter or even every year, but we get more than our fair share of singles and doubles. The stability of our platform has always been the keynote.

So I don't know that I can give you -- our hope is that we can get those expenses under control and then we can improve the margins, and that will certainly be an objective. David, you might want to talk about the backlist problem..

Yes, in terms of backlist, Regnery is a frontlist publisher. Most of the titles are very news-sensitive, political cycle-sensitive titles. So backlist as a percentage of total revenue is in the single digits. So yes, we're going to have a tough comp next year because of these 2 titles.

And the opportunity and challenge for Regnery every year is lining up the authors and titles to consistently have a strong year. If you look back at history, Regnery has averaged about $10.5 million of revenue per year. But in a strong year, that's as high as $13 million or $14 million. In a soft year, that is as low as $7 million.

Even numbered years, i.e. political years, tend to be much stronger and odd numbered years tend to be on the weaker side. And that's just a challenge that we're going to deal with. So yes, tough comps next year..

It appears there are no further questions at this time. Mr. Masyr, I'd like to turn the conference back to you for any additional or closing remarks..

Thank you, all, for joining us to discuss Q2, and we'll connect with you again in 3 months' time to discuss the third quarter. Thanks again..

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