With plans to sell almost all of its radio assets, the future of Emmis Communications was front and center with investors on the company’s quarterly earnings call Thursday. In fact, the hot topic occupied the entire Q&A portion of the call. While not disclosing specifics, CEO Jeff Smulyan outlined in broad brush strokes what lies ahead for the 38-year-old company.
Emmis intends to use the roughly $88 million in net proceeds from the sale of majority stakes in its radio stations in Austin and New York City to invest in non-radio companies with a “higher growth profile,” Smulyan told investors Thursday morning. “We’re now ramping up discussions but there’s absolutely nothing imminent.” Smulyan made it clear he’s not interested in acquiring a startup but would rather focus on “probably a couple businesses” with $10 million to $25 million in cash flow and a history of growth. “My sense is they would be several, relatively smaller businesses.”
Importantly, Smulyan said he is interested in companies or industries “where we believe that the skill sets we bring to the table can help enhance that growth.” Beyond radio and a magazine, Emmis owns dynamic pricing company Digonex and real estate in Indiana. During its nearly 40-year history, it branched outside the U.S. radio business to own TV stations, international radio stations, magazines and Major League Baseball’s Seattle Mariners. Its next move “could involve things that are peripheral to media that are intriguing to us but we’re really casting a wide net,” Smulyan explained. The goal is to identify attractive target companies this year and be “on our way” by the end of 2019.
“It’s been a long transition… a roller coaster,” Smulyan admitted, acknowledging that the company has endured ups and downs along the way. Since founding Emmis in the early 80s, there have been “times where the world was our oyster, and times where it seemed we were not likely to survive.”
Cashing Out Of New York
Another question on investors’ minds revolved around the structure of the sale of urban AC WBLS-FM and rhythmic CHR “Hot 97” WQHT-FM New York to Standard General. The New York investment firm will partner with Emmis to form a new public company, Mediaco Holding. Emmis will receive $91.5 million in cash, a $5 million note and 23.72% of the equity of the new company. The deal was structured to keep Emmis in the game with a minority stake in the new company while continuing to manage the two FMs.
Smulyan said the partnership with Soohyung Kim, CEO of Standard General, grew out of conversations the two have had over several years. “We thought this was a natural thing,” Smulyan said. “It’s solves some issues for him, it solves some issues for us.”
In addition to providing cash to chart a new course, the WBLS-WQHT deal allows Emmis to keep its New York management and staff in place while developing a working relationship with Kim’s investment company. “Soo would like to build a major company out of Mediaco,” Smulyan said, and the transaction lets Emmis be involved in the management and oversight of that. Taken together, the partnership with Mediaco and plans to broaden Emmis beyond radio will allow it to apply its core strengths of “building teams, solving problems and managing businesses” in new areas and “transform the company,” Smulyan said.
Q2 Pacing Up Double Digits
For its first fiscal quarter ending May 31, 2019, Emmis’ net radio revenues totaled $26.4 million, which is flat compared to the prior year. On a pro forma basis, accounting for the sale of its St. Louis cluster in April 2018, Emmis' first quarter radio revenues were up 3%, which matched the 3% growth in the radio markets where it operates.
Emmis closed on the sale of the four St. Louis stations April 30, 2018, and the reported results include two months of St. Louis revenues in the year-ago comparison. The pro forma results remove those billings from the equation. When political ad sales are subtracted, pro forma revenues were up 4%.
And its second fiscal quarter (June, July, August) is off to an even stronger start. Revenues are pacing up double digits, mainly due to the strongest ticket proceeds in the 26-year history of its Hot 97 Summer Jam concert in New York. “The quarter started strong, thanks to record-setting ticket sales for our largest concert, Summer Jam in New York, June 2,” Executive VP, CFO Ryan Hornaday offered. “We are seeing sustained advertising strength for the balance of our second fiscal quarter.”
Back to fiscal Q1 results, automotive was the company’s biggest category, accounting for 9% of revenues and up 3%. Each of its top 10 categories grew year over year.
Pro forma Q1 operating expenses shot up 9%, “abnormally high,” Hornaday explained, due to “unusually high healthcare claims, non-recurring debt recoveries and costs from supporting digital revenue growth.” The CFO said he expects expenses to cool down in Q2.
Emmis refinanced its debt in the first fiscal quarter, which brought its cost of capital down from 10.5% to 5.8%. Once the New York and Austin sales close, Emmis will have only $13 million in debt under the mortgage on its corporate headquarters in Indianapolis.
In other Emmis news, the company has promoted Traci Thomson to Senior VP, Human Resources. Thomson joined the company in 2004 as Director, Employee Services and spent the past decade as VP, Human Resources. Emmis says the member of the company’s senior leadership team has played a critical role in “all of the actions we’ve taken over the past several years to reinvent Emmis.” Her promotion also sets the stage for the role Thomson will play in the months ahead with the formation of Mediaco Holding, in a partnership with investment firm Standard General “and the next steps on our path to invest in the future of Emmis.”