Evan Masyr - CFO Edward Atsinger - CEO David Evans - President of Interactive and Publishing.

Davis Hebert - Wells Fargo Securities Lisa Springer - Singular Research.

Greetings, and welcome to the Salem Media Group First Quarter 2018 Earnings Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Evan Masyr, Executive Vice President and Chief Financial Officer. Thank you. Mr. Masyr, you may now begin..

Thank you, and thank all of you for joining us today for Salem Media Group's first quarter 2018 earnings call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website at www.salemmedia.com.

With me today are Edward Atsinger, Chief Executive Officer; David Santrella, President of Broadcast Media; and David Evans, President of Interactive and Publishing. We'll begin in just a moment with our prepared remarks. 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 and other public filings we have made with the Securities and Exchange Commission.

This conference call also contains a non-GAAP financial measures within the meaning of Regulation G, specifically station operating income SO -- or SOI, EBITDA, adjusted EBITDA and adjusted free cash flow.

In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the Investor Relations portion of the company's website at www.salemmedia.com. I will now turn the call over to Edward Atsinger.

Ed?.

Thank you, Evan, and thanks to all of you for joining the call today. I'll focus my prepared remarks first on an overall discussion of first quarter financial performance, with an update on recent M&A activity, and then I'll conclude my remarks with a brief comment on our dividend.

At that, I will turn the call back to Evan, who will provide a more detailed description of our Q1 financial performance and will provide guidance for the second quarter of 2018. For the first quarter of 2018, our total revenue was down 1.8%, expenses were down 1.9%, resulting in a slight decline in adjusted EBITDA of 1.3% or approximately $100,000.

If we take a look at the performance by division, on the Broadcast, revenue was up 0.5%, expenses were down 0.2%, which resulted in station operating income increasing 2.8%. On a same station basis, station operating income improved 4.8%. This is the first increase in station operating income since the second quarter of 2016.

Our national Christian ministry block programming revenue increased 1% during the quarter. We recently concluded our annual rate removal process with these national ministries and the result was a -- an increase of rates in low double -- at low single digits with about 95% of the programs renewing.

The best-performing segment of our Broadcast business was Salem national -- revenue from our national advertisers on our network and on stations was up 14.4%.

We mentioned on our last call that digital revenue from our local radio stations is a key growth initiative for us, and while it's still early, we did achieve an increase in revenue of 13.7% in that category. If we take a look at our national digital business, the revenue was down 2.7%, most of the decline can be attributed to Facebook.

Facebook recently made some changes to its News Feed algorithm, causing a further drop in traffic to our sites. Additionally, we lost a small number of advertisers to Facebook.

Even with the decline in Facebook traffic, however, overall traffic to our websites and our mobile apps was up, with both search engine traffic and mobile app business up double-digits during the quarter. However, this increase in traffic was not sufficient to offset the overall negative impact of Facebook on our performance during the quarter.

With regard to our digital businesses, I should mention that we continue to focus on controlling costs, which led to a 3.8% decline in digital expenses and a 1.8% increase in digital operating income. Primary Publishing revenue was down 17.6%. Salem Author Services - our self-publishing businesses, made up the largest component of the decline.

This was due to a slowdown in the number of new author acquisitions. That slowdown actually began in the later part of 2016, and it takes -- once a new author acquisition comes on board, it takes about a year or a little more sometimes to be able to monetize that acquisition.

Additionally, Publishing revenue was down due to the closure of four unprofitable magazines in May of 2017. There was some M&A activity. We entered into a few transactions during the quarter. On January 3, we entered into an agreement to sell WBIX in Boston for $685,000. This is a station that we acquired from Radio Disney in 2015 for $500,000.

So in addition to selling the station at a profit, we eliminated losses of approximately $8,000 a month. On March 1, we entered into an asset purchase agreement to acquire KZTS-FM, now designated KDXE-FM, in Little Rock for $1.1 million. We began operating that station on April 1 under an LMA and are broadcasting our news talk format on the station.

I might mention that we previously broadcast that format on KHTE-FM, another station that we were operating under a long-term LMA agreement that we terminated on April 3. We had an option to buy KHTE, but decided that the KZTS was a better signal at a lower price, so that's why we flipped and purchased that station in lieu of KHTE.

Also in Little Rock, we entered into an agreement to acquire KDXE-AM, now designated KZTS-AM and an FM translator accompanied with that -- accompanying that station for $200,000 on March 23. We began operating KZTS-AM under an LMA agreement on April 1. Finally, about our dividend.

On March 28, we paid $1.7 million in quarterly dividends or $0.065 per share. With that, I'll turn the call back to Evan for additional detail on the quarter and to provide guidance for Q2..

Thank you, Ed. For the first quarter, total revenue decreased 1.8% to $63.8 million. Operating expenses on a recurring basis decreased 1.9% to $53.6 million and adjusted EBITDA decreased 1.3% to $10.2 million.

I should mention that we did get approximately $700,000 in political revenue during the quarter, as compared to $100,000 in the first quarter of last year.

Net Broadcast revenue decreased 0.5% to $48.1 million and Broadcast operating expenses decreased 0.2% to $35.8 million, resulting in a 2.8% increase in station operating income to a -- of $12.3 million. On a same-station basis, net Broadcast revenue increased 0.4% to $47.3 million, and SOI increased 4.8% to $12.7 million.

These same-station results include Broadcast revenue from 110 of our 118 radio stations in our network operations, representing 98.4% of our net Broadcast revenue. I will briefly review our performance of our strategic formats. 40 of our radio stations are programmed in our Christian teaching and talk format.

These stations contributed 42% of total Broadcast revenue and decreased 2% for the quarter. Our 34 news talk stations had an increase of 6% in the revenue for the quarter. Overall, these stations contributed 19% of total Broadcast revenue.

Revenue from our 13 contemporary Christian music stations contributed 20% of total Broadcast revenue and decreased less than 1% for the quarter. Our network revenue increased 6% for the quarter and represents 10% of total Broadcast revenue.

Revenue from our Digital Media businesses decreased 2.7% to $10.4 million and represents 16% of our total revenue. Our Publishing revenue decreased 17.6% to $5.4 million and represents 8% of total revenue. And as of March 31, 2018, we had $255 million outstanding on our 6.75% notes and there was nothing outstanding under our revolver.

As of March 31, our leverage ratio was 5.50. For the second quarter of 2018, we're projecting total revenue to be between a decline of 1% and an increase of 1% from second quarter 2017 total revenue of $66.1 million.

We're also projecting operating expenses before gains or losses on the sale or disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense and amortization expense to be between a decline of 1% and an increase of 2% compared to the second quarter of 2017 non-GAAP operating expenses of $53.8 million.

And this concludes our prepared remarks. And we now would like to answer any questions that anyone has.

Operator?.

[Operator Instructions] We have a question from Mr. Davis Hebert, Wells Fargo Securities..

I wanted to focus a little bit on a couple of fundamental things and then on the balance sheet. So starting with fundamentals. Block programming, I think, I heard it was up 1% in the quarter. The past few quarters have been a little bit more volatile than I would've expected for this segment.

So I wonder if you could talk about some of the puts and takes there? And what your outlook is for the rest of the year on block programming?.

I think that I didn't say 1% on national ministry block programming, I think, we achieved about a 2% rate increase that which kicked in January 1, so that was what you were referring to..

Oh I see, okay. Thanks for the clarification.

What would be your outlook for, I guess, local and national block programming for the rest of the year?.

I think, it will be stable. I don't expect it to decline. And there is always a little bit of churn, there is always a little bit of inventory. And we normally are able to fill that with varying degrees of success. But I expect, it will be very stable. And I think we'll end the year on a positive note in terms of block program revenue..

Okay. Secondly, on the ad environment, I wonder if you could talk about what the trends you're seeing in terms of advertising? I mean, we've heard from other media companies that the trends are fairly soft.

Is that something you're seeing on the ground in terms of advertising?.

This is Dave Santrella. Yes, I mean, it's a softer environment, certainly. Although, we had some revenue categories that grew. Political obviously grew for us in the quarter, the movie business grew for us, financial and oddly enough to show some of our retail strength, the jewelry category grew for us.

The big categories that remained stable are medical, real estate, financial, auto and home improvement..

Okay, that's helpful. And on the expenses, it was a little bit lower than I had forecasted, where I think it was below your guidance, actually down 4% versus I think your guidance on the lower end was down 3%.

Was that just expense management? Should we expect that sort of trajectory to translate to second quarter as well?.

Certainly, you're seeing fact that with the tough ad environment that we're focusing on managing the bottom line and being aggressive where we can on expenses. Hard to forecast where it will be the rest of the year for that but I think you'll see some of that spill over into future quarters as we continue to trim expenses where we can..

Okay, helpful. And then on the balance sheet. You made a couple of smaller acquisitions, I guess, Little Rock being one of the -- a little over $1 million.

Are these leveraging, deleveraging, leverage-neutral?.

Well, it's a relatively modest investment.

We went into Little Rock a few years ago, because there was an opportunity to go in with a Christian teaching talk format, which is kind of a foundational form and in fact a number of our national ministries asked us to go into Little Rock, because the alternative that had been there had been declining and there were issues with it and the results have not been good.

It was an AM station and they wanted us to go in, and there was an opportunity to buy an FM station, so we did. And then we tried to build the cluster around it since then. We started with Christian teaching and talk and an FM. We bought a second station and did our FISH format, which is our contemporary Christian music format.

And then we also bought or actually entered into an LMA agreement with an option to buy on a third FM station on which we were doing -- we've been doing our news talk format.

And we had an option to buy that station at $1.2 million, we LMA-ed it for 4 years -- 4 or 5 years, I think 4 years and we just -- we were able to acquire this other station, which has a better signal in the metro, covers about 25% more people, and it was $100,000 less.

So we made the decision to buy that one and to not renew the LMA agreement on the other one. So it's really kind of a neutral move there. Now there was an AM station available for $200,000 and there was a translator with it and the opportunity if you own that station, you get a second translator. We pursued that active -- that opportunity.

It's still owned by the former licensee, we're LMA-ing it. But the agreement was that the former licensee or the current licensee that we're buying from would grant permission to file for the second translator. It was granted. It was not contested. So we will get that. And so -- that was a very modest investment.

We've entered into a -- we're running on an LMA agreement, and we're time-brokering the time right now. So frankly, it's cash flow positive in a significant way, simply on the basis of the LMA agreement we have. So I mean, I tried to answer your -- the overall thrust of your question. It's a smaller market. It is the capital of Arkansas.

It is influential in the state. We have built cluster of our 3 strategic formats. The fourth one, the AM station, is LMA to a third-party, strictly to assist the financial performance. It's not one of our strategic formats. That is a long-term LMA, we expect it to be in place for a long time.

And we're simply building the cluster and trying to bring it to profitability and then to our target cash flow..

Just last question for me and I appreciate taking all the questions. Leverage, would you say that this would peak leverage for the year? And glad to see repaid borrowings on the revolver.

Just curious, do you anticipate the revolver being undrawn for the rest of the year also?.

Yes, as far as peak leverage, the one challenge we do have is in Q2 and Q4 we do have to make the interest payments. In Q1 and Q3, there are no interest payments on the bond. So that does factor into leverage a little bit. But we're going to continue to be aggressive on paying down debt and getting that leverage ratio down..

The next question is from Lisa Springer, Singular Research..

One of the things you talked about last quarter was an increased emphasis on local digital product offerings and developing local digital specialists in all your markets.

Could you update us on that effort? And tell us how you're measuring the success of those efforts?.

Yes, it's actually going quite well. We have a number of what we're calling digital audience specialists in some but not of all our markets, in some markets it just makes sense to have one person that maybe handles a region. We've rolled out about a dozen products that we're selling to the retail market.

And I -- probably the best news is this that, while it's still early, we increased revenue by 13.7% in this category. And that's really with only a plan loosely in place..

There are no further questions at this time. I'd like to turn the conference floor back over to Mr. Edward Atsinger, Chief Executive Officer, for closing comments. Please go ahead, sir..

Thank you, operator. Again thanks to all of you for joining the call. We look forward to visiting with you again when we present Q2 results..

Ladies and gentlemen, the conference is now over. You may disconnect your telephone..