Urban One, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Urban One operates radio broadcasting, syndicated programming through Reach Media, digital media, and cable television, primarily serving African-American and urban audiences. It reported 60 broadcast stations in 15 U.S. markets. CLEO TV, a lifestyle and entertainment network for women of color, launched in January 2019.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $98.4 million | $99.6 million |
| Operating income | $16.1 million | $7.3 million |
| Net loss attributable to common stockholders | $6.7 million; $0.15 per share | $22.6 million; $0.48 per share |
| Broadcast and digital operating income, a non-GAAP measure | $34.5 million | $32.5 million |
| Broadcast and digital operating margin, non-GAAP | 35.0% | 32.6% |
| Adjusted EBITDA, non-GAAP | $29.0 million | $28.5 million |
| Interest expense | $22.2 million | $19.3 million |
| Operating cash flow | $16.3 million | $22.0 million |
Revenue declined 1.2%. Radio advertising was $42.4 million, down 4.9%; digital advertising was $7.4 million, down 8.7%; cable TV advertising rose 6.6% to $20.2 million, and cable affiliate fees increased 0.8% to $27.5 million. Segment revenue was $36.7 million for radio, $7.0 million for Reach Media, $7.4 million for digital, and $47.8 million for cable television.
Operating income improved substantially, in part because Q1 2018 included $6.6 million of long-lived asset impairment charges (Charlotte goodwill and Detroit radio licenses); no impairment was recorded in Q1 2019. Operating expenses also declined. The net loss narrowed, but interest expense increased 14.9%, and the company recorded a $2.2 million income tax provision on a $4.3 million pretax loss. The stated effective tax rate was negative 52.4%, including discrete tax expense primarily related to state net operating losses.
Liquidity, debt, and material changes
At March 31, 2019, cash and cash equivalents were $5.8 million, restricted cash was $0.6 million, and current assets were $163.3 million against current liabilities of $109.6 million. Cash, cash equivalents, and restricted cash totaled $6.4 million, down from $15.9 million at year-end 2018. Operating cash flow fell year over year, which management attributed mainly to collection timing, accrued compensation payments, and higher content-asset payments. Investing cash outflow was $0.7 million; financing cash outflow was $25.0 million.
Total debt principal was $908.1 million, including $350.0 million of 7.375% senior secured notes, $323.1 million under the 2017 credit facility, $181.4 million under the 2018 credit facility, $50.5 million of MGM National Harbor debt, and $3.0 million under the asset-backed facility. Balance-sheet debt, net of current portion, discounts, and issuance costs, was $870.9 million. The remaining 2020 notes and the $11.9 million Comcast Note were fully repaid in February 2019. Q1 financing included $10.6 million of repayments on the 2018 facility and $0.8 million on the 2017 facility; the company also borrowed $3.0 million under its asset-backed facility.
Management reported compliance with financial covenants at quarter-end. The 2017 facility interest coverage ratio was 1.96x against a 1.25x minimum, and senior secured leverage was 4.80x against a 5.85x maximum. The 2018 facility gross leverage was 6.13x against an 8.00x maximum. The company reported approximately $1.4 billion in scheduled contractual obligations, including debt, interest, leases, and operating contracts.
Outlook, risks, and unusual items
- Management stated that cash from operations, cash on hand, and other liquidity sources were expected to be sufficient for foreseeable cash requirements. No specific revenue, earnings, or cash-flow guidance was provided.
- Radio revenue declined 7.0%; management cited declines in several markets, partly offset by growth in Atlanta and Washington, D.C. It reported that the markets it tracks, excluding Richmond and Raleigh, grew 0.3% in total revenue.
- ASC 842 lease accounting was adopted January 1, 2019. Adoption added approximately $49.8 million of right-of-use assets and $54.1 million of lease liabilities, and increased retained earnings by approximately $5.8 million net of tax. Lease expense was $3.2 million in Q1.
- Leverage, substantial interest obligations, refinancing needs, advertising demand, local economic conditions, competition, FCC regulation, and programming and talent costs are among the risks cited. The 2018 credit facility bears 12.875% interest unless specified principal repayment thresholds reduce the rate; the MGM loan includes 7% cash interest and 4% paid-in-kind interest.
- The company was negotiating a new agreement with BMI; failure to agree could lead to a court-determined royalty and potentially higher costs or limits on available music. It also disclosed routine legal proceedings, which management did not expect to have a material adverse effect, and $788,000 of cash-collateralized letters of credit.
- Goodwill and radio licenses totaled $845.7 million, about 66.5% of assets. Management identified no Q1 2019 impairment indicators, but noted some licenses have little or no valuation cushion. Deferred tax asset realization depends on future taxable income and is not assured.
Important facts for investors to verify
- Whether radio and digital advertising trends improved after Q1, and whether cable advertising growth and CLEO TV carriage and performance continued.
- Cash generation, liquidity needs, and debt repayment capacity given low cash balances, high leverage, and scheduled maturities and interest payments.
- Compliance with debt covenants and the terms and consequences of the 2018 facility’s high interest rate and mandatory repayment provisions.
- Whether the company’s tax forecasts support realization of deferred tax assets, and whether any valuation allowance or further discrete tax charges become necessary.
- Potential music royalty changes, lease commitments, and any exercise of Reach Media minority shareholders’ annual put rights.