Bad Reception for Radio One

Deteriorating Ad Market, Heavy Debtload Paint Gloomy Outlook

The outlook for shares of Radio One (ROIAK) - Analyst Report has not improved, despite the 58% drop in their price since we downgraded it to a Sell on September 19, 2008. As expected, Radio One's 4Q08 financial results, reported on February 19th, reflected falling revenue and earnings, hurt by the advertising recession and secular migration away from radio.

Excluding one-time items, EPS fell 28% to $0.18 for 4Q08 from $0.25 in 4Q07. Including charges for intangible asset impairment and other one-time items, EPS was negative $0.09 in 4Q08, compared with negative $3.91 in 4Q07. The outlook is getting worse as the decline in ad revenue accelerates -- ad revenue pacings are off 31% year-over-year for 1Q09 and are down 50% for 2Q09.

Operating Costs, Capital Spending Cut to the Bone…

As the deteriorating ad market shrinks revenues, the company is stringently cutting costs by eliminating staff in August 2008, reducing bonuses, suspending 401K matches, curtailing excess corporate expenses, including marketing spending, and reducing interest expense by paying down debt.

Excluding CCI, net revenue declined 6%, while operating expenses fell 15% in 4Q08. Capital spending for 4Q08 and the full year 2008 was cut to $1.1 million and $4.6 million, respectively, from $6.2 and $10.6 million in 4Q07 and 2007, and should remain rock bottom. Management indicated that it has cut out all capital spending that isn't vital to staying on the air.

High Leverage Limits Share Repurchases, Acquisitions -- Posing Risk of Default

Radio One's high leverage (the leverage ratio stands at 6.2x) poses liquidity and default risks if operating cash flow should drop faster than expected. The company has been making strides in reducing debt and in the latest quarter, it comfortably covered $13.1 million in net interest expense by 2 times with adjusted EBITDA of $26.5.

However, with first-quarter pacings down 30%, cash flow is set to fall. Stringent cost-cutting has propped up EBITDA recently as revenues decline, but radio operations are fixed-cost intensive, limiting the amount of costs that can be wrung out of the system. Any further significant asset sales would be unlikely with asset values depressed and credit markets tight. The company's heavy debtload is also limiting its ability to invest in the main driver of its future growth -- its Internet operations.

Read the full analyst report on ROIAK