Tom Allen, executive vice president and chief financial officer at ACME Communications Inc., sees some sunshine in an otherwise dismal 18 months of soft advertising sales.
“The good news is there doesn’t seem to be any signs that it’s getting worse,” Allen said. “The only question seems to be whether we’re going to drag here at the bottom for a prolonged period of time or starting bouncing back up.”
That’s been a burning issue for Santa Ana-based ACME, the WB Television Network’s third-largest affiliate group, covering 5.4% of the nation’s television households. The company, which has 350 employees, owns and operates 10 TV stations in nine medium-size markets, including St. Louis, Portland, Salt Lake City, Albuquerque-Santa Fe and Dayton, Ohio. None are in California.
And, just like other broadcasters, ACME “is being negatively impacted by the sluggish economy,” said W. Timothy Wallace of Banc of America Securities in a recent analysis.
For the second quarter, ACME’s revenue dropped 1.4% to $18 million and broadcast cash flow decreased 18% to $4.5 million vs. the year-ago period. Advertising revenue was down in each of ACME’s nine markets, according to Jamie Kellner, ACME’s chairman and chief executive, in a recent earnings report.
The tough times started late last year, and rolled well into 2001, with July and August revenue figures pacing down 8% and 6% respectively. ACME’s stock was trading at 6.60 last week, down from a 52-week high of 18. Like other media companies, ACME is heavily indebted.
“We as an industry are early indicators (of a slow economy) because it’s so much easier for corporate America to turn the faucet down on media spending,” Allen said. “They can shore up earnings by cutting back on spending and they don’t have negative publicity from laying off people.”
But the “good news,” according to Allen, is his industry also is a leading indicator “on coming out of recessions, too.”
Just like everyone else, Allen said ACME is “hopeful” that there will be a rebound in the fourth quarter. The company says so far revenue for September is pacing “ahead of September 2000” by 6%,a sign that perhaps ACME has seen the worst, according to Allen.
Yet his optimism remains cautious.
“Certainly everyone in TV is not giving guidance outside the next quarter. We have no visibility,” Allen said. “We’re tired of trying to guess.”
ACME, however, has fared relatively well in tight times.
One reason, according to Wallace at Banc of America, is ACME’s focus.
“Because of ACME’s niche programming to the younger demographic, we continue to expect ACME to outperform the overall television industry in both the second quarter of 2001 and for the full year,” Wallace wrote in a recent report.
That focus on younger viewers,shared with the WB Network,and midsize markets also buffered ACME from one-time blips in the system, such as dot-com and political spending in 2000.
“The dot-com spending really only took place in the top 10 markets in the country (ACME’s markets are in the No. 20-to-No. 80 range). So we were never a benefactor of that spending,” Allen said. “And we also didn’t benefit from political spending. Most political spending in last year’s election was focused on older viewers.”
Though times were tough and overall ad revenue took a big hit, the company kept moving ahead. ACME was able to increase its market share in seven of its nine markets, according to Kellner, who is also chief executive of AOL-Time Warner Inc.’s Television Networks division. He founded ACME in 1997 with industry veterans Allen and Douglas Gealy, president and chief operating officer.
The three began acquiring independently owned or under-performing stations, which became WB affiliates and began broadcasting that network’s programming. They also built new stations.
Network shows comprise up to 15% of a station’s revenue. The rest comes from syndication product or news.
Popular WB shows include “Dawson’s Creek,” “7th Heaven” and “Charmed.” New syndicated shows, which will be aired on select ACME stations, include “Everybody Loves Raymond” and “King of the Hill.”
Since the majority of the stations still are being developed, Allen said it’s been easier to increase revenue.
“That’s not hard to do when you have these stations because there’s clearly more headroom with a new station vs. a mature station,” Allen said.
It takes ACME about two years to break even at a station once it takes control, Allen added.
The second-quarter gains were offset by ACME’s flagship station, 40-year-old KPLR Channel 11 in St. Louis, one of the best performing WB affiliates in the country. In 2000, it posted No.1 or No.2 rankings in key demographics, including adults ages 18 to 49.
KPLR has seen about a 10% drop in revenue, reflecting a market that’s down by the same amount, according to Allen.
“Because KPLR is virtually half of our revenue, it kind of washes out the gains we’ve had with the other stations,” Allen said.
But ACME has seen other gains.
According to Banc of America’s Wallace, seven of eight ACME markets showed ratings increases for the 5 p.m.-to-midnight time period in the May book.
“The adult 18-to-34, 18-to-49 and 25-to-54 demographics posted impressive ratings increases of 38%, 35% and 39%, respectively,” Wallace said.
In the meantime, the WB Network “continues to have strong ratings momentum in its key demographics,” according to Wallace. He said the adult 18-to-34 age range is up 19%,outpacing CBS, Fox, NBC, ABC and UPN.
Higher ratings usually mean that a station has more wiggle room to increase rates, but the soft economy has ACME calculating its next move.
“We continue to build ratings and distribution at our stations, which we aren’t fully able to take financial advantage of right now,” Allen said.
While competitors have chosen to slash rates to attract buyers, Allen said ACME can’t afford to. He said the company already offers rates “at the low end of the totem pole.”
“We held our rates,” Allen said.
Instead, ACME has been focused on “new business opportunities,” which Allen said are “overused industry buzzwords Wall Street wants to hear.”
“They want to hear we’re looking for new revenue streams,” Allen said. “We’ve focused on that from day one.”
The company was founded in 1997 with $50 million from company execs and four equity investors.
It since has acquired 10 stations throughout the country, one of which (KASY-TV, Channel 50 in Albuquerque-Santa Fe) is a UPN affiliate.
ACME raised an additional $115 million through an initial public offering in 1999. And the company used some of the cash to complete its last purchase, KASY, the same year.
The broadcaster plans to continue building its network of stations, but has faced some delays.
ACME has agreements with undisclosed third parties to get permits to build four new stations. The process is tied up with the Federal Communications Commission, which must approve the applications.
And, the company is continuing to be selective in its purchases,particularly since it’s expensive to develop stations. The company has debt of $245 million,about twice its market value as of last week,and $26 million in cash. ACME wants to raise an undisclosed chunk of cash in the next six to 12 months.
“It’s key to expanding,” Allen said.
The company would look to tap either private sources, existing or strategic investors, or an acquisition through stock. The WB Network, which is owned by AOL-Time Warner, wouldn’t be a likely candidate for now because it would cross ownership rules regulated by the FCC, according to Allen.
“Our focus, being somewhat limited to the middle market tells us that there’s really an opportunity over time to acquire a dozen or so stations just with the inevitable consolidation that’s going to take place,” Allen said.
And while things have been tough for the past year or so, Allen said he still believes the broadcasting industry “is a good business long term.”
“I think everyone feels that way,” Allen said. “I guess it’s a question of when it’s going to turn back.” n
