Urban One, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Urban One targets African-American and urban audiences through radio, syndicated programming, digital media and TV One cable television. The company reported 56 broadcast stations in 15 U.S. markets. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where applicable.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenue | $112.1 million, up 1.1% from $110.9 million | $331.0 million, down 3.4% from $342.7 million |
| Operating income | $3.5 million, versus $24.5 million | $32.1 million, versus $71.1 million |
| Net income (loss) attributable to common stockholders | $(7.9) million, versus $(0.4) million | $(9.4) million, versus $2.9 million |
| Adjusted EBITDA | $34.0 million, versus $34.9 million | $98.4 million, versus $105.5 million |
| Broadcast and digital operating income margin | 36.3%, versus 38.8% | 35.5%, versus 38.4% |
| Operating cash flow | Not presented for the quarter | $19.8 million, versus $34.6 million |
Adjusted EBITDA and broadcast and digital operating income/margin are non-GAAP measures as defined by the company. Cash, cash equivalents and restricted cash totaled $52.9 million at September 30, 2017. Current assets were $218.3 million and current liabilities $83.4 million. Stockholders’ deficit was $80.2 million.
Revenue and segment trends
- For the quarter, cable television revenue increased to $48.4 million from $46.8 million, digital revenue rose to $8.1 million from $6.4 million, and radio broadcasting revenue was $45.2 million versus $45.5 million. Reach Media revenue declined to $10.5 million from $12.2 million.
- For the first nine months, radio revenue declined 4.2% and Reach Media revenue declined 13.1%; digital revenue increased about $1.4 million. Cable television revenue was $142.3 million versus $143.8 million.
- Management attributed Reach Media’s weaker results to advertising demand. Digital growth reflected the 2017 acquisition of digital brands and websites, alongside higher investment in video content. Cable’s quarterly increase included international licensing revenue and higher affiliate fees; year-to-date results reflected lower advertising and affiliate sales, partly offset by international licensing.
Debt, liquidity and cash flow
- Total debt principal was approximately $1.005 billion at quarter-end; balance-sheet debt carrying value was approximately $990.8 million, including current debt and net of discounts and issuance costs. Debt included $348.3 million under the new 2017 Credit Facility, $295.0 million of 9.25% notes due 2020, $350.0 million of 7.375% secured notes due 2022, and an $11.9 million Comcast note due 2019.
- The April 2017 $350 million secured term facility refinanced and replaced the prior 2015 facility. The company reported an average 2017 rate of approximately 5.24% on the new facility. Interest expense was $19.9 million for the quarter and $60.1 million year to date.
- At September 30, covenant interest coverage was 1.70x versus a 1.25x minimum; senior secured leverage was 5.23x versus a 5.85x maximum. The company reported compliance with its financial covenants. A $25 million asset-backed revolver had no borrowings outstanding, subject to borrowing-base availability.
- Year-to-date operating cash flow fell to $19.8 million, primarily due to the timing of receivable collections and accrued compensation payments. Investing activities provided $15.5 million, including $25.0 million of sale-leaseback proceeds; financing activities used $29.1 million. Cash and restricted cash increased $6.2 million from the beginning of the year.
Material changes, outlook and risks
- Impairment: The company recorded noncash impairment charges of $16.4 million in Q3 and $29.1 million year to date against Houston and Columbus radio broadcasting licenses. No goodwill impairment was recorded, but management cited weaker Reach Media revenue and cash flows and revised its projections downward. Management noted that some broadcasting licenses have little or no valuation cushion and could require further impairment.
- Sale-leaseback: A May 2017 transaction generated $25.0 million of proceeds and a stated total gain of approximately $22.5 million. $14.4 million was recognized in the first half; $8.1 million is deferred and to be recognized over the 10-year lease term.
- Debt and capital actions: The refinancing generated a $7.1 million loss on retirement of the old facility. The company repurchased about $20 million principal amount of 2020 Notes during Q3, recognizing a $0.7 million gain. It repurchased $3.4 million of Class D shares under its program year to date.
- Outlook: The filing provides no quantitative revenue or earnings guidance. Management described market-level advertising conditions as mixed and reported declines in several radio markets. The company’s substantial leverage, interest burden, covenant headroom, competition and advertising demand are key risks.
- Other exposures: The Reach Media noncontrolling shareholders may begin exercising annual put rights on January 1, 2018; the company could pay in cash and/or registered Class D stock, and management could not estimate whether or when the rights would be exercised. BMI music-license negotiations remained unresolved, with interim fees in effect; GMR licensing was temporary through March 31, 2018. Routine legal proceedings were not expected by management to have a material adverse effect. The company maintained a full valuation allowance on deferred tax assets for substantially all entities and jurisdictions.
- Reporting and governance: The company changed its name from Radio One, Inc. to Urban One, Inc. effective May 5, 2017. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether advertising trends, especially in radio markets and Reach Media, improve or further weaken after quarter-end.
- Whether license valuation assumptions or annual impairment testing result in additional charges, and the remaining valuation cushion for affected markets.
- Debt-service capacity and covenant headroom, particularly given the 5.23x secured leverage ratio and significant 2020 debt maturity.
- The sustainability and cash impact of reported operating cash flow, excluding the one-time sale-leaseback proceeds that supported investing cash flow.
- The eventual cost and form of any Reach Media put-right settlements, and outcomes of BMI/GMR licensing negotiations.