July 03, 2007
Research Analyst: Aditya Nathany, M.Fin.
Editor: Deepa Agarwal, M.Fin, M.Com
Sr. Editor: Ian Madsen, CFA; ; 1-800-767-3771, x9417
www.zackspro.com 111 N. Canal Street, Suite 1101 l Chicago, IL 60606
Radio One Inc. (ROIAK-NSDQ) / $7.47Note to the Reader: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q07 Earnings Update Previous Edition: May 31, 2007
Recent Events - SUMMARY
June 25, 2007: ROIAK released its 1Q07 earnings results.
June 13, 2007: ROIAK announced the sale of KTTB-FM station.
May 18, 2007: Radio One announced an Asset Purchase Agreement to sell all of its radio stations.
Overview
Analysts have identified the following issues in evaluating the investment merits of ROIAK:
Key Positive Arguments / Key Negative Arguments· Continued share buyback program
· Solid long-term growth prospects / · Negative secular trends
· High leverage
· Weakening topline growth outlook
· Lesser-than-expected guidance
· Weakening free cash flow outlook
· Radio ratings remain under pressure
Radio One, Inc. engages in the acquisition, ownership, and operation of radio broadcasting stations in the United States. As of December 31, 2005, the company owned approximately 36% of TV One, LLC, and a cable television network that broadcasts lifestyle, entertainment, and news-related programs targeting primarily African-American viewers. It owns 51% of the common stock of Reach Media, Inc., which operates the Tom Joyner morning show and related businesses. As of the above date, the company owned and/or operated 70 radio stations, including 33 FM and 9 AM radio stations in 22 markets serving African-Americans. Radio One was co-founded by Catherine L. Hughes in 1980. The company employs nearly 1,100 people and is based in Lanham, Maryland. More information is available at its website: www.radio-one.com.
NOTE: The Company’s fiscal year ends on December 31.
Recent Events - DETAILS
On June 25, 2007 ROIAK released its 1Q07 earnings results. Following are some of the highlights of the results.
· Net revenues in 1Q07 were $82.5 million, versus $81.6 million in 1Q06.
· Net income in 1Q07 was $0.7 million versus $2.96 million in 1Q06.
· Diluted EPS in 1Q07 was $0.01 versus $0.03 in 1Q06.
On June 13, 2007, Radio One announced an Asset Purchase Agreement to sell its radio station KTTB-FM in Minneapolis, Minnesota, to Northern Lights Broadcasting, LLC. The transaction price is approximately $28.0 million representing a purchase price multiple of approximately 16.7x based on 2006 station operating income for the station, which is expected to close during the second half of 2007.
On May 18, 2007, Radio One announced an Asset Purchase Agreement to sell all of its radio stations in Dayton, Ohio and five of its six radio stations in Louisville, Kentucky, to Main Line Broadcasting, a portfolio company of Arlington Capital Partners, a Washington, DC-based private equity fund. The transaction price is approximately $76.0 million, which represents a purchase price multiple of approximately 12x based on 2006 station operating income for the stations being sold. The transaction is expected to close during the second half of 2007.
Revenue
Net broadcast revenue increased to approximately $82.5 million in 1Q07 versus $81.6 million in 1Q06, up 1.1% y/y. According to Zacks Digest average net revenues were $82.2 million, up 0.1% y/y versus $82.1 million in 1Q06. 1Q07 results include the results of ROIAK’s new magazine Giant. Excluding the impact of Giant, net revenues would have decreased 0.6% y/y. Overall radio revenues were down but revenues increased in Dallas, Atlanta and Cincinnati, however these gains were partially offset by decline in L.A market.
Most of the analysts are of the opinion that the revenue was negatively affected by the poor performance of the Los Angeles segment offsetting the positive impact of the Baltimore, Cincinnati, Louisville and St. Louis. One analyst (Lehman) expects FY07 revenues of $367.6 million, primarily due to the consolidation of Giant magazine. Another analyst (Stanford) expects 2Q07 revenues to be down y/y to $96.0 million.
Total Revenue ($ in Million) / 1Q06A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009ETotal Revenue / $82.1 / $82.2 / $96.4 / $98.7 / $89.0 / $366.3↓ / $372.8↓ / $383.5↓
Digest High / $82.1 / $82.5 / $99.6 / $104.1 / $93.2 / $379.4 / $388.7 / $387.3
Digest Low / $82.1 / $80.6 / $91.0 / $95.3 / $85.2 / $354.0 / $355.0 / $379.8
Year-over-Year Growth / 6.6% / 0.1% / -1.4% / 0.4% / -0.2% / -0.5% / 1.8% / 2.9%
Sequential Growth / -10.0% / -7.9% / 17.3% / 2.4% / -9.9%
FY07 total revenue projections by analysts range from $354.0M to $379.4M, with an average of $366.3M (↓as compared to the previous estimate of $370.9M). FY08 revenue projections range from $355.0M to $388.7M, with an average of $372.8M (↓as compared to the previous estimate of $380.1M). FY09 revenue projections range from $379.8M to $387.3M, with an average of $383.5M (↓as compared to the previous estimate of $388.9M).
Please refer to the Zacks Research Digest spreadsheet of ROIAK for specific revenue estimates.
Margins
For 1Q07, ROIAK reported an operating income of $20.9 million, down 7.2% from $22.7M in 1Q06. Zacks Digest Average operating income was $20.8 million, down 7.5% y/y versus $22.5 million in 1Q06. Operating margin was 25.3% in 1Q07 versus 27.4% in 1Q06. Station operating income (SOI) was $33.6 million, down 5.1% y/y versus $1Q06. Pre-tax income in 1Q07 was $2.6 million versus $5 million in 1Q06. Zacks Digest average pre-tax income was $2.5 million in 1Q07 versus $4.8 million in 1Q06. Pre-tax margin was 3.1% versus 5.8% in 1Q06.
Operating expenses increased by 5.9% y/y, with programming and technical expenses up 6.6% y/y and SG&A expenses up 5.4% y/y. Excluding Giant, programming and technical expenses were up 1.6% y/y, and SG&A expenses were up 3.7% y/y. Corporate overhead increased by 9.4% to $7.3 million. The increase reflects professional fees associated with the company's stock option grant review. Excluding these fees, corporate expenses would have decreased by 6.1%. However Zacks Digest average corporate overhead expenses were $7.1 million in 1Q07.
Depreciation and amortization expense decreased 2.0% to approximately $4.3 million in 1Q07 versus $4.4 million in 1Q06. 1Q07 EBITDA were $26.3 million, down 8.5% y/y from 1Q06 EBITDA of $28.7 million. EBITDA margins decreased to 31.2% in 1Q07 from 34.0% in 1Q06. However, Zacks Digest average EBITDA was $25.6 million in 1Q07 versus $27.9 million in 1Q06.
One analyst (Lehman) forecasts EBITDA excluding non-cash compensation of $134.3 million, down 7.6% y/y, above its prior estimate of $131.6 million, as the analyst expects operating expenses to increase 4.9% y/y. The analyst further anticipates expense growth could drive margin compression, with EBITDA margins expected to contract 320 basis points in 2007E to 35.1% from 37.8% in 2006. Another analyst (B. of America) lowered its same station revenue growth estimate to -2% for 2Q07 and 0.3% decrease in FY07.
Margins / 1Q06A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009EEBITDA / 34.0% / 31.2% / 39.2% / 40.7% / 37.1% / 36.9%↓ / 36.7%↓ / 35.4%↓
Operating / 27.4% / 25.3% / 33.7% / 34.9% / 30.6% / 31.4%↓ / 31.4%↓ / 30.9%↓
Pre-Tax / 5.8% / 3.1% / 14.8% / 19.4% / 10.6% / 11.6%↓ / 12.8%↓ / 14.7%↓
Net / 3.2% / 0.9% / 8.4% / 11.4% / 6.0% / 6.5%↓ / 7.1%↓ / 7.8%↓
Please refer to the Zacks Research Digest spreadsheet of ROIAK for more details on margin estimates.
Earnings per Share
According to the company net Income in 1Q07 was $0.7 million versus $2.7 million in 1Q06. Zacks Digest average net income was $0.7 million in 1Q07, down 72.5% y/y versus $2.6 million in 1Q06. Diluted earnings per share were $0.01 in 1Q07 versus $0.03 in 1Q06.
Minority interest in income of subsidiaries increased to approximately $0.9 million in 1Q07 versus $0.7 million in 1Q06.
One analyst (Stanford) expects EPS of $0.08 per share in 2Q07 and $0.25 for FY07.
EPS / 1Q06A / 1Q07A / 2Q07E / 3Q07E / 4Q07E / 2007E / 2008E / 2009EZacks Consensus / $0.09 / $0.26 / $0.33
Digest High / $0.03 / $0.01 / $0.10 / $0.11 / $0.08 / $0.29 / $0.35 / $0.38
Digest Low / $0.03 / $0.00 / $0.07 / $0.09 / $0.05 / $0.23 / $0.22 / $0.32
Digest Avg. / $0.03 / $0.01 / $0.08 / $0.10 / $0.06 / $0.25↓ / $0.28↓ / $0.35↓
Digest YoY Growth / -57.1% / -75.0% / 4.7% / 25.0% / 435.9% / 22.4% / 12.4% / 23.9%
Sequential Growth / -70.0% / -34.4% / 1016.6% / 19.4% / -38.8%
Company Guidance Before FAS 123
Company Guidance After FAS 123
Company Guidance (GAAP)
For FY07, EPS estimates by analysts to range from $0.23 to $0.29, with the average expectation of $0.25 (↓as compared to the previous estimate of $0.26). For FY08, EPS estimates vary between $0.22 and $0.35, with the average expectation of $0.28 (↓ as compared to the previous estimate of $0.31). For FY09, EPS projections range from $0.32 to $0.38 with an average of $0.35 (↓as compared to the previous estimate of $0.37).
Please refer to the Zacks Research Digest spreadsheet of ROIAK for more extensive EPS figures.
Target Price/Valuation
Of the 9 analysts covering ROIAK, 4 have given positive ratings, 4 have given neutral ratings, and 1 analyst has given a negative rating.
The average of price targets quoted by 9 analysts is $7.86 (↑ as compared $7.67 from the previous report). Target prices range from $6.00 (Stanford) to $10.00 (Merrill). The analyst (Merrill) at the high end has based its target price on takeout value, a target multiple value, and DCF valuation analysis, while the analyst (Stanford) at the low end has used 13 x 2007 free cash flow to compute the valuation.
Rating DistributionPositive / 44.4%
Neutral / 44.4%
Negative / 11.1%
Max. / $10.00
Min. / $6.00
Avg. Target Price / $7.86 ↑
No. of Analysts with Target Price/Total / 9/9
Please refer to the Zacks Research Digest spreadsheet of ROIAK for more details on valuation.
Capital Structure/Solvency/Cash Flow/Governance/Other
For 1Q07 net debt was $906 million, up by $1 million from FY06. This does not reflect the company's agreement to sell KTTB-FM in Minneapolis for $28 million; its Dayton radio stations and 5 of its 6 Louisville radio stations for $76 million; and the option to acquire WPRS-FM (formerly WXGG-FM) in Washington, D.C. for $38 million. Also during H1, ROIAK entered into agreements to acquire WDBZ-AM in Cincinnati and WPRS-FM in Washington, D.C. for a total of $40 million. One analyst (Stanford) expects free cash flow per share at $0.08 for 2Q07 and $0.49 per share in FY07.
Potentially Severe Problems
There are none other than those discussed in other sections of this report.
Long-Term Growth
Long-term growth rates for ROIAK range from 13% (Wachovia) to 15.2% (RBC Cap.), with an average of 14.4% versus 15.8% from the previous estimate.
Secular trends are causing core radio growth to be negative in recent months. Beyond FY06, visibility is limited; however, analysts are more optimistic about the company’s long-term growth prospects given management’s new reinvestment plan. Radio One plans to invest heavily into new business initiatives, with the hope of being the ‘Gateway’ to content for African-Americans by providing diversified media and entertainment across its various platforms. Management has not ruled out M&A as a way of growing its Internet platform. Additionally, the company plans to invest in film/DVD releases, with the first being a $1.5M investment in ‘Preaching to the Choir.’ The company will also participate in the subsequent DVD release, and then eventually show the film on cable television. Additionally, ROIAK plans to re-launch a new talk radio network (Syndication One), which will include various TV personalities such as Al Sharpton and Michael Eric Dyson. The company is looking to fill a void of talent at its AM stations, which has left for larger news/talk formats on FM stations. Analysts await further clarity on the progress of these growth initiatives, as visibility into revenue and earnings growth (derived from these reinvestment plans) still remains vague.
Analysts note that the company holds valuable assets, which could be used to de-leverage the balance sheet (i.e. asset sales). However, management is more focused on reinvesting into new business ventures, leveraging its large base of listeners. Additionally, management prefers to buy back shares rather than institute a dividend.
Individual Analyst Opinions
POSITIVE RATINGS
B. of America – Buy ($8 price target): 06/25/07 – The analyst has maintained a Buy rating with a 12 month target price of $8 based on the weak outlook for radio revenue growth. INVESTMENT SUMMARY: The analyst believes radio’s new initiatives will continue to drive growth. Further, the analyst believes that Radio’s L.A. station will continue to show improvement with new initiatives being implemented by the company.
Bear Stearns – Outperform ($8.25 price target): 06/25/07 – The analyst has maintained an Outperform rating and the target price of $8.25.
Lehman – 1-Overweight ($8 price target): 06/26/07 – The analyst has maintained the target price of $8, with an overweight rating. INVESTMENT SUMMARY: The analyst believes Radio One will continue to focus on diversifying its business mix by making substantial investments to expand and promote its cable TV, Internet, and content businesses. In addition to this, the analyst believes that any turnaround at L.A station is likely to be challenging.
Merrill – Buy ($10 price target): 06/13/07 – The analyst has maintained a target price of $10 with a Buy rating on the stock. INVESTMENT SUMMARY: The analyst believes that ROIAK will continue to face competition in the urban market. Further weakness in L.A market would affect the company’s top-line growth given its revenue exposure in single KKBT-FM station. However, the company’s new strategies to reform the L.A market could provide upside to the stock.