Nov 9, 2009
Operator
Good day, everyone and welcome to the Gray Television’s third quarter earnings release conference call. Today's call is being recorded.
For opening remarks and introductions, I would like to turn things over to our moderator, Hilton Howell; go ahead please.
Hilton Howell
Good afternoon everyone and welcome to the Gray Television third quarter earnings call. As I was introduced, my name is Hilton Howell, I’m Vice Chairman, and Chief Executive Officer of the company.
And I’m joined by Robert Prather, our President and Chief Operating Officer and James Ryan, our Senior Vice President and Chief Financial Officer. Together we will be giving you some highlights of the quarter and then finishing with a short question-and-answer session at the end.
In what remains a spotty but essentially slowly improving advertising market we are pleased that we have found it necessary to raise the high end of our guidance for this quarter. Although our total revenue dropped by approximately 20%, this drop was against a Presidential election year last year.
The driver of this improvement was primarily political advertising related to the national debate on healthcare reform. We believe that this portends well for the fourth quarter and for all of 2010.
In fact the television business report on October 21 released a report predicting that approximately $3.3 billion in political advertising dollars will be spent in 2010 and importantly for us, they call Gray Television the clear winner of all broadcast groups with 37% of our consolidated revenues coming from states and districts within their words, hot races next year. It is also exciting that with regard to our new media efforts this quarter Gray has launched iPhone applications for essentially all of our local television [inaudible] stations.
And as an iPhone addict personally and an Apple aficionado, I can tell you that I’m particularly excited about this endeavor. And in fact this past week was able to follow with great attention, the catastrophe out of Port Hood on our iPhone applications for both KTWX in Waco, Texas and KBTX in College Station, Texas.
Also on July 24, we launched our Mobile Digital Television signal at our NBC affiliate, WOWT in Omaha, Nebraska. As Jim Ocon, our Vice President of Technology said, its like having a television in your pocket.
We are pleased that we were one of the very first broadcast groups in the nation to be successfully operating this new technology. I would also like to mention that our extensive local college and local sports broadcasting in Knoxville, Tennessee, via our CBS affiliate WVLT, was prominently highlighted by TVNewsCheck which demonstrates our continuing efforts to broadcast on a very, very local basis.
We’re excited about this coverage and by the hard work as evidenced by all those individuals involved. With that I’ll bring my comments to a close and let Robert continue.
Robert Prather
Thanks very much Hilton, welcome everybody. I guess let’s start out with the good news.
I think business is definitely getting better. I always say I think for things to get better people have to start feeling better.
I can tell you all our GMs feel like business is getting better in their markets both on the advertising side and just the general tone in the economy in these markets. Also some more good news, we are once again for third quarter right at the very top of our industry in all our performance metrics and we’re very proud of that.
I think that is once again attributed to our General Managers and their staffs. And the markets we’re in.
I think the fact that we’re in markets that have been hit less hard by this economic downturn is attributed to our strategy of being in as many state capitals and university towns as we are. So I feel very good about that.
I’ve used this saying before, but I’ll use it again. Confucius said over a thousand years ago, may you live in interesting times and I think these are very interesting times.
I think we all do. I don’t think anybody of us has probably lived through anything like this economic downturn we’ve had especially the television and broadcasting industry.
It’s the steepest decline, the longest lasting decline in advertising that television has ever seen. But here again I think it’s the strength of our company, that we’ve operating at the very top of the industry as far as our performance goes and we feel like 2010 could be a very good year.
A couple of things that I want to mention that we’re continuing to look at controlling cost. We’ve come up with a plan, probably going into next year to save between $700, $800,000 on some of our mobile internet expenses which we think will make that side of our internet operation very profitable.
I’m still a huge believer that we’re in a three-screen world now. We’re in a television screen, a computer screen and a mobile screen and we’ve got to be top of mind for all those screens to continue to grow in this business.
Mobile is becoming more and more important. [inaudible] mention a live mobile test that we’re doing right now.
I think that will be available hopefully to everybody in the next 12 to 18 months once the testing is done and the standard is already set so I think it’s just a matter of getting some other issues resolved around how to distribute it, whether its going to be a subscription model or an advertising model. But I think its going to be a huge growth area for us in the future and I think its something that will help continue us to spread our brand, to spread our local news coverage, the things we do best.
Just to give you an example of how strong the internet is for us these days, year to date we’ve had over 442 million website page views. This is up almost 26% over second quarter and up almost 27% over last year.
Our monthly unique visitors are almost eight million. That’s up 20% over 2008.
Our mobile so far this year we’ve had 94 million plus page views, up 38% from 2008. We’ve had 50,583 iPhone application downloads that Hilton mentioned.
This is a 45% increase month to month. And this continues to grow.
We’re also going to make sure we have apps available for the Android. The Android I think was introduced on Friday, the Google Phone and so we will definitely have that.
We’re working on apps for Blackberry also soon. To give you another example and we think, I think this is a very important thing for us in our industry.
We’ve sent over 14 million text messages to viewers who want to get our news, weather, sports, updates by text so far this year through September and we think this is going to continue to grow. Another area that I wanted to mention that I know a lot of your are asking questions about in the world today is what’s going on with network affiliates.
Very fortunately we’ve got our CBS stations are all due in 2014, our ABC are 2013, nine of our 10 NB’s are 2012, the others 2015. So while there’s a lot of speculation, a lot of interest out there in the network affiliate world right now and I know all of you probably heard about they’re looking for retrans and getting part of retrans.
Fortunately we will have several years to see how this shakes out before we’re faced with this directly. I think its something that we as an industry need to really work hard on trying to make sure that the networks don’t use the old divide and conquer and the affiliates need to use their affiliate boards, NAB, as much as they can to have a united front on this effort to maintain our retrans.
We’ve worked very hard to get retrans from the cable industry led by Sinclair, NextStar, a few years ago, they were the first guys to really step out there and get it. Virtually every TV broadcaster is getting retrans revenue right now but its based on our work and nobody else’s work and I think we ought to work hard to keep 100% of it.
But I think that’s something we’re all going to be faced with in the future. But I feel very, very good going into next year.
Hilton mentioned those figures on political. I think political is going to be huge.
I think these Republican wins in Virginia, New Jersey have made Republicans feel like they can maybe retake the House especially so I think there’s going to be a huge effort spending wise, to elect Congressmen and Senators and Governors next year. There should be 36 Governor’s races also next year.
And I think we’ll be as the article mentioned, the forefront of all that, but also we’ve got the Winter Olympics next year in Vancouver. Any time the Olympics are in North American continents, they always do much better ratings wise, much better advertising wise so we feel very good about that.
And we’ve got the Super Bowl in early February on 17 of our CBS affiliates, that was on FOX last year and we’ve got only five small FOX affiliates. So I’m looking very much forward to 2010.
I think its going to be a great year and I think we’re going to be positioned to take full advantage of it. At this time I’d like to turn it over to James Ryan.
I’ll let James go over some specific numbers.
James Ryan
Thanks Robert, hello everybody. I’m going to keep my remarks relatively short.
I think most of the main points are laid out pretty clearly in the release and we’ve also filed our 10-Q today as well. As Robert mentioned and Hilton mentioned, total revenue is down about 20%.
A lot of that is reflective of the strong political from last year. Our local revenue while down 11% for the quarter did show improvement from first quarter and second quarter so we are pleased with that.
And I would note that TVB’s survey for the quarter indicated that industry-wide local was down nearly 17%. We were down only about 11% and again I think that reflects the strong positions of our stations.
And as you see in our guidance for fourth quarter we’re seeing continuing improvement especially on the local front and we think we’ll be back to positive territory by about 1% in fourth quarter. So I feel like we’re beginning to, we found the bottom and we’re beginning to pull out of the ad recession.
Political for the quarter was $3.1 million and we were very pleased as people have already mentioned, we increased our expectation on political by about $2.5 million, as we went through the quarter and a lot of that $2.5 million was reflective of the national healthcare debate. That’s obviously continuing through fourth quarter as well.
We’re seeing activity both October and November and it looks like there may be a possibility of that activity continuing into December as well. As far as the categories go, our legal category was up about 27%, 28% for the quarter.
That was the only category that was up. Auto is still showing pressure but some improvement from earlier in the year.
Our auto business was down about 32.6% representing about 17.9% of our total time sales. All other categories are still in the negative territory as well.
We’re pleased again that the operating expenses are coming in about as we had planned for the year. We were 7% for the quarter and for the total year it looks like we’ll be down 14.5% to 15% and actually we’ll be working hard to try to be as aggressive as we can before the end of the year on that.
A couple of quick comments again on year to date, again our local revenue, core revenue was down 12.6% compared to the TVB national averages of 21.9%. We’re very pleased with that comparison.
Our national was basically in line with industry averages. On a combined basis our local and national is down about 16.6% compared to an industry average of 23.3%.
And again keep in mind in Q3 2008, we had about $3.4 million of Olympic revenue that we were going against this year both in the quarter and year to date. So that was an additional hole we had to be filling.
Political for the nine months is tracking to about $5 million, again better then expected. It looks like if the current pace continues and based on guidance we should be north of $7 million by the end of the year which basically puts us on pace to at least tie the best off year performance we’ve had before and we did $7 million as well in 2005 in an off year based on the strength of the highly contested Kentucky Governor’s race that year.
Again for the quarter, year to date auto is down about 41% but showing some improvement as we move through the quarter. For October we actually, our auto was up about 1.5%.
Now that’s somewhat reflective of a slowly improving situation. Its certainly also reflective of displacement of the very large amount of political we had fourth quarter last year as well.
But it is nice to see it score in positive territory and year to date the rate of decline is slowing a little bit. Turning to some balance sheet items for a moment, our leverage is defined under our credit agreement which is on a trailing eight-quarter average.
At the end of Q3 was 8.22 as defined in the credit agreement against the covenant of 8.5. Our cash on hand was $8.2 million.
Our total debt for purposes of compliance with the credit facility was $806.4 million. Everyone should remember that what they need to do is include the accrued facilities fee on the facility as part of the debt number and thinking about compliance thresholds.
That facility fee is actually treated as accrued interest for GAAP purposes. Again the ratio, our covenant came in at 8.22 against an 8.50.
Looking ahead to fourth quarter and guidance, again we’re pleased to see that the local is moving into positive territory. We’ve actually since the beginning of October, increased our internal forecast for fourth quarter.
We hope we’re still being conservative in our guidance and that the quarter continues to slowly improve as we move through it. At this point Robert, I’ll turn it back to you.
Robert Prather
At this point we’d like to open it up for questions.
Operator
(Operator Instructions) Your first question comes from the line of Marci Ryvicker - Wells Fargo
Marci Ryvicker
Can you talk about the performance of your different affiliates specifically how your CBS stations are performing versus your NBC stations. Obviously CBS is doing really well, NBC is not doing so well for obviously reasons.
Robert Prather
Our CBS clearly are performing better right now. Obviously they’re, got a strong program and lineup.
NBC’s program and lineup has been weak. It looks like its getting weaker.
I think the Leno experiment is not working so far. I’m sure they’ll stick with it longer then they need to just to, their ego won’t let them probably get rid of it soon enough but its definitely hurting the lead in to the 10 o’clock, 11 o’clock news in some of our markets.
And NBC is very important to us, they’re actually, their cash flow in their 10 spaces is almost identical to the 17 CBS because they’re in some of our bigger markets. That’s something we’re keeping a close eye on but they need some programming pizzazz which they don’t have right now and this, interesting going on obviously with Comcast and what’s going to happen there.
I’ve been reading where they may turn around and Comcast even if they do the deal spin-off NBC and the [O&O’s] to a third party and just keep the Universal Studios for the movie content. But anyway I think CBS is clearly riding pretty high right now and I think they got a lot of things going good for them.
So and the good news is, like I said we’ve got 17 CBS affiliates.
Marci Ryvicker
And is there anything about the Young stations that have surprised you either good or bad.
Robert Prather
Yes, I think the Young stations is really interesting. We’ve had our regional GM spend a good bit of time visiting the station, evaluating the markets, evaluating the stations, and I would say in general I think the Young stations are stronger and better then we probably thought they were going to be.
They’ve got some upside to them we believe. At the same time I think they’ve got a good overall market position in most of their markets.
They’re very strong in several of their markets. And we think there’s a big upside opportunity for us there.
Operator
Your next question comes from the line of Aaron Watts - Deutsche Bank
Aaron Watts
Just a few questions from me, you talked about some of the impressive page views you’re getting and also the mobile apps acceptance, how are you converting those views though into advertising dollars. How are you propping those to your advertisers, what’s kind of the acceptance there, is it something people are buying independent or is it getting bundled in with your over the air ad sales.
Just maybe if you could just talk about that.
Robert Prather
We’ve got a dedicated, at least one in some cases two, dedicated internet or new media sales person in all our locations and their job is to go out and sell the internet, sell mobile. Ideally we are, we encourage them to go after non-traditional TV type advertisers.
In a lot of cases we try not to the word bundle is a bad word for me because I think sometimes you, that means you’re giving one piece of it away. So we try and stay away from that as much as possible.
And we’ve done extremely well. Our internet operations have been profitable since day one and our mobile operations are profitable.
Should be much more profitable next year, as I said we worked out a new deal with a carrier that’s going to save us some considerable money going forward and going to allow unlimited text messages which I think could be a huge upside for us because I think texting is getting more and more important. Plus texting you can, with a text you can direct people back to watch the news later in the day or some special sports, weather, whatever it is going on in the local market, you can really use that as a way to keep in touch with people on an hour-by-hour basis.
So my goal is for the internet and the mobile to continue to grow almost virtually independent of what our TV stations are doing. So I think its important that we keep them separated from a sales standpoint and we want to combine as much as we can on an operation just for efficiency purposes but I’m really trying to get all our stations to realize that breaking news needs to be on the internet first and then we need to promote it to our regular news and have more in depth coverage on our regular news.
But we need to be as many times as we can first on the net with a story in these local markets especially if it’s a story of news generating like the Waco thing or weather generating like we’ve had in a lot of our markets. We want to be the first on the web and the first on television, both of those kind of stories.
Aaron Watts
And I’m just curious, I guess my natural instinct just historically has been when I want news online I go to the local newspaper.
Robert Prather
We’ve got to break you of that habit.
Aaron Watts
Any feedback from those dedicated sales guys on sort of how your page views compare to the local newspaper, whether you think you’re stealing some of their share and if advertisers are kind of [picking up] to that.
Robert Prather
I think we are and the one big advantage we’ve got over newspapers in all our markets, we’ve got a tremendous promotion engine with our stations that they don’t have and its incumbent upon us as, and I encourage this all the time with our GM’s, if they do more and more promotion of our mobile product and our internet product on the air because its easy to wind it into your newscast and into all kind of things where you incorporate that promoting, as don’t forget to go to our website to check sports and news, whatever, and the same with weather and same thing with mobile. And we encourage the sign up of more and more text messages as much as we can to, and as I said, that’s the one thing we’ve got the best promotion engine in our market of any of other media source by far and its incumbent upon us to use it.
Aaron Watts
And just one other one, I may be jumping the gun a little bit on this one, but just thinking about next year, and sort of Q pieces, one you talked about how your stations are well aligned for political in 2010, do you think that if you compare it 2006 or even 2008, how do you see political shaking out and then on the expense side, you’ve done a lot of cost cutting this year. As I think about next year, do you see expenses being up versus 2009 or down versus 2009 or how do you feel about that.
Robert Prather
I’ll start with the expense, our goal and we’re finishing up our budgeting right now, is to be flat at the least. We want to be flat to 2009.
Ideally we want to be down but we definitely want to be flat. The one thing you always have to overcome when you go into a political year is you’ve got depending on the political dollars, but just say its $50 million, you got about a 6%, 7% commission rate to your national [rep] firms on most of those dollars so that’s $3 million plus dollars there that can go out in political commissions that you’d normally, is kind of an add-on expense.
But we are budgeting very tight. Like I said we’re still looking for ways to save money in all areas of the company and we think political could be easily be better then 2006 and hopefully could be a record year.
I don’t know.
Hilton Howell
Let me just share just a few numbers that might help answer your question just a little bit. Among the 2010 contested Governors’ races within our broadcasting profile, we have 12 contested Governors’ races.
For contested Senate seats we have 15. This compares to three Governors’ races in 2008 and 14 contested Senate races in 2008.
So it’s a quantum number, a quantum jump between those two years.
Operator
Your next question comes from the line of Matt Slope - Broadpoint Capital
Matt Slope
Can you talk about what that study was you mentioned earlier.
Hilton Howell
Excuse me, was this the political article.
Matt Slope
Yes.
Hilton Howell
Yes, its from, the radio business report and television business report and it ran October 21, 2009 and I will quote to you the paragraph with regard to our company. It says, “the clear winner is Gray Television which has 37% of its consolidated revenues in states and districts with hot races next year.”
So it goes through and talks about that in just general lines and we were kind of pleased to have that noted and wanted to make note of it in this call so that people realized that we really do have we think a great upside in 2010.
Matt Slope
And can you tell us, auto for fourth quarter of 2008 how that faired versus fourth quarter of 2007.
James Ryan
Yes I can tell.
Matt Slope
And maybe while he’s pulling that, can you talk a little bit either anecdotally or with numbers if you have them on what the Leno impact has been on your local news at your NBC’s.
Robert Prather
We don’t have any specific numbers yet. As I said just the weakness of Leno overall though is hurting our lead in on our 10 o’clock news in the Midwest and our 11 o’clock news in other markets and like I said we’ve got Omaha, we’ve got a strong NBC there.
We got a strong NBC in Madison, Wisconsin, a very strong NBC in Huntington, West Virginia. Strong NBC in South Bend, all those markets are, it hadn’t hurt us bad, but if it continues like this, people will gradually be watching other things before the 10 o’clock hour and a lot of times people just stay on the same station.
So in the long run it could hurt us. Like I said, I don’t know how long they’ll keep this experiment going.
And guys like that sometimes have a revival and all of a sudden people start watching but we’re going to keep a close eye on it and we’re going to let NBC know what our feelings are regarding Leno as it goes down the road some.
Hilton Howell
I will say, it will be interesting to see when we’re on reruns and on non-fresh programming how Leno stacks up to the competition at that point. So I know NBC is looking just on an annualized basis and we’re looking at it with the start of the fall broadcasting season and it will be interesting to see how it all leads in through the course of the year.
James Ryan
To answer your question in Q4 2008 auto compared to Q4 2007 auto, was down 34.2%. So it certainly was down.
In total year 2008 versus total year 2007 was down 16.8%. A little bit you’d have to keep in mind in a political year, a strong political year we would expect our auto to be displaced a little bit but certainly everyone would recognize that by second half of last year and certainly by Q4 of 2008 we were all well into the recession so how much of the down last year is recession versus political, it would be almost impossible to tell.
Matt Slope
And so given all that, do you think auto can be up for the fourth quarter of 2009. You said you were up for October already, right.
James Ryan
I would be a little cautious on it being up for the whole quarter and its still very hard to tell. We were up a little bit in October as I said.
And certainly you’d expect to be up a little bit, I think at least to some extent with filling in some of the political from last year. I think it’s a little too early to tell whether we’re up for the whole quarter or not, but certainly things are, have been picking up and it feels like we’re moving in the right direction.
Although the visibility on revenue is still continues to be extremely short, the visibility hasn’t lengthened significantly over the past couple of months.
Matt Slope
And then maybe just a last one, have you looked at the first quarter when your maintenance covenant and your bank debt steps back down, have you started talking to you bank debt holder group about what you may do if you trip that covenant.
Robert Prather
We’ve reached out to Wachovia who is the lead bank and talked to them about once we get closer to the end of the year what our year end numbers and our, we’ll have our budgets done at that point and we’ll be sitting down sometime between now and the end of the year and talking with our lead banks about what things are looking like for next year.
Matt Slope
Okay, but that’s premature at this point.
Robert Prather
Yes.
Operator
Your next question comes from the line of Larry Havarty - Gamco
Larry Havarty
I’m just kind of curious in the retail area there, a couple of folks that I would think would be good customers that could be loosening their purse strings fairly significantly and one would be the auto parts guys where business is really pretty good and the other would be Radio Shack which just got a concession to sell the iPhone and then in the general retailing, it looks like things are getting better progressively by the day as opposed to last year where they were getting worse progressively by the day and I’m thinking that your assumptions on retailing could prove monumentally conservative and what you’re seeing in the trends in business in that area.
Robert Prather
Well I hope you’re right and you’re one of the smartest guys I know, so you probably will be right. But we don’t actually break out auto parts from auto, we might ought to do that but I guess people like Auto Zone and some of these guys could be, O’Reilly Auto Parts, a lot of those guys, I’ll definitely check into that, that’s a good point, we ought to be keeping a closer eye on and Radio Shack, we get a lot of good advertising out of them and hopefully that will continue.
I think that, like I said all our managers are feeling better about the tone of business and about things picking up in their individual markets so I hope you’re right on with your ideas.
Larry Havarty
Do you have any comments on what your trend is in retail versus your expectations.
Robert Prather
James, do you have any numbers there broken out on the retail side.
James Ryan
I can tell you that, and this is Q3, furniture and electronics we’re still, was down 14.7, department and discount stores were down 21 quarter over quarter, supermarkets were only down 2%, so we’re still seeing some, through the third quarter, we’re still seeing the downturn in the economy. Now again in October only we’re seeing ups in most categories.
Furniture is still down but –
Robert Prather
That will be the last to come.
James Ryan
But department stores in the month of October were up 10, supermarkets were up 40-some percent but again a part of it is I think things are improving, part of it is we sold $27 million plus worth of political last year and used inventory and obviously and that’s fourth quarter, most of that was October, so obviously we’re using that inventory this year to sell non-political. So there’s some just the natural cycle and the political especially in our case when its always so heavy for us in October on a political year.
But its nice to see some positives. I was certainly expecting positives in October.
I’d hate to be sitting here looking at negatives.
Larry Havarty
Well hopefully November and December will be a lot better.
Robert Prather
I hope so too. If you’re thinking that I feel pretty good.
Larry Havarty
Yes I’m thinking it.
Operator
Your next question comes from the line of [Larry Schnurmacher]– Unspecified Company
[Larry Schnurmacher]– Unspecified Company
Just kind of a general question about how Gray properties is doing versus peers, if you could specify anything that’s exciting or not, if you could.
Robert Prather
I think the main thing that we got going for us is I think our local has held up much better then most cases then most of the other public companies reported. Like I said, ex political I think we’re right at the top of the Industry and here again I think that’s attributed to our stations strength in these local markets and the strength of the markets in general.
I think these university towns and state capitals in most cases have not been as hard hit. We’ve got a couple of markets, Reno has been pretty hard hit market because it was such a boomtown for a while there.
I think in 2007 Reno had the highest home price increase in the United States, the average home price increased 39% that year. So they’ve had a pretty drastic fall back like Las Vegas, not as bad as Las Vegas but I think the other area that where we’re probably hurting even though it is a university town and a state capital is Lansing, Michigan.
Obviously the economy there is pretty tough and South Bend the economy is heavily auto oriented there too, so its not as bad but I think those kind of areas are not as robust as a lot of our areas. But overall, I feel very good about the markets we’re in, the fact that the local economy in most of those markets is stronger then national average.
Operator
Your next question comes from the line of Bishop Cheen – Wachovia
Bishop Cheen
Hi.
Robert Prather
You’re supposed to be first in line not last.
Bishop Cheen
Yes well I like to hear all of the color. Let’s just go back to the balance sheet a second, I know that you’re going to be as some many of the companies have, trying to get flexibility, restate your covenants, etc., talk to me about the preferred.
The preferred, remind me again when you come up with any kind of maturities are put from that preferred.
James Ryan
The preferred has a put right by the holders in June of 2015 so that would be the first possible date so there’s quite a ways between now and then.
Bishop Cheen
And then the preferred is not really eating any kind of cash maintenance because its all picking.
James Ryan
No, well we suspended the dividend on the preferred which we had the right to do. When we did that and went three quarters in arrears on the cash payment of the dividend the dividend rate moved to 17%.
It does not pick, it accumulates. And so if you look at the balance sheet quarter over quarter you’ll see the line that will say accrued dividends in arrears and that will obviously, it will grow and obviously with leverage where it is and the terms of the senior facility, we are prohibited from paying a cash dividend on the preferred for the immediately foreseeable future.
Bishop Cheen
The classic trade off of P&L to balance sheet, you’re putting pressure on your equity to relieve your P&L, because you don’t have to do any cash maintenance on that. So it really comes down to the maintenance and the servicing of the big term debt.
James Ryan
Yes, and that from a amortization standpoint we only have a requirement to pay $8 million a year. The term loan matures, the rest of it bullet point matures at the end of 2014 so there’s still a lot of time on that.
The interest rate when we amended last March obviously moved up significantly from where we were. We’re now at LIBOR 650 which was a significant step up last March and the, not to overly confuse things but the three percentage points, the 300 points of facilities fee that currently accrues is part of what I referred to as the [L] plus 650 will go cash pay in April of next year when our current interest rate swaps and we basically channel the dollars that we had been paying to the swap counterparties and we’ll pick up the 300 points in cash on the senior facility at that point.
Bishop Cheen
So aside from the, if the capital event in April, is also the accrual which is growing, part of the covenant calculation in your trailing eight quarters.
James Ryan
Yes it is which is why I said that for covenant purposes at the end of the quarter that the defined term for debt in the actual calculation you would need to use 806.4 million.
Bishop Cheen
And the last thing in this grand inquisition just to make sure I have it right, existing covenants which are the key covenants right now, in the bank facility, 7x begins in Q1 and then the next step down would come year end 2010 to 6.5x and thereafter--
James Ryan
That would be correct.
Operator
Your next question comes from the line of Barry Lucas – Unspecified Company
Barry Lucas
I’ve got several items but just to beat that horse that Aaron was riding, if you’re looking at auto in Q4 up a bit in October, not sure what its going to be, what is built into your plus one percent guidance for local with regard to auto.
James Ryan
The plus one percent would represent everything we’re currently looking at and based on our current forecast for the quarter so its, the local is embedded, the up one is just reflective of the whole book of business.
Barry Lucas
On the political side, I think we’ve got an early look or what should be an early window in Texas which is fairly important to you, have you written any business either from K. Bailey Hutchinson or Rick Perry and/or what’s the state of requests for avails or anything like that.
Robert Prather
Very little so far. We expect that to be a big race though and we got three Texas stations that should benefit tremendously from it because they’re all number one stations and dominant in the markets they’re in but that should be a real good one for us.
And in Texas normally is not a real good political state because Republicans have been so strong out there for the last few years. They hadn’t had much of a race either locally or Presidential where we were able to get a whole lot of political but this year could be with two Republicans running against each other for Governor could be a big race.
Barry Lucas
You’ve got a mobile delivery system up and running or at least testing, any thoughts about what the business model is eventually going to look like there.
Robert Prather
That’s the big question, the open mobile correlation which we’re a member of, I think its got about 26 different groups in it, there’s a lot of debate there. Some people think it ought to be a subscription model, other people think it ought to be an advertising based model.
I personally think advertising probably in the long run we can do better with that because we know how to do that business and if you got a subscription model there’s going to be a lot of hands out wanting a piece of it from the phone, the telephone people would probably have to be involved in that all the way through the networks, through the syndicators, through the CNN, AP, all those people would want a piece of the action if you were charging some kind of subscription fee. Where if its basically free over the air, which is what our TV model, hopefully we can, there’d be a measurement system which we think there will be, that we can show people that if there’s a 100,000 mobile phones on the market that are watching live mobile X hours a day or whatever, that we can tack on some advertising based on that.
And I think mobile is going to continue to grow. Chrysler has already announced, I think the other car manufacturers all want to have more mobile TV devices in cars and trucks and things like that going forward and I think you’re going to see it be pretty much a standard item by the next couple of years in cars which obviously is going to increase the availability of people being able to watch and we’re testing for example, our engineers have driven down the road 70 miles an hour between Omaha and Lincoln and gotten a perfect picture on our NBC station out there on mobile device.
We think it could just be a huge upside for the whole industry.
Barry Lucas
Last area, you’ve always been, I won’t say always, but a little bit outspoken on retransmission fees, so why don’t we move to topic du jour of late and that is spectrum and the possibility of the government trying to recapture some of that spectrum, how would you feel about it, what would you want to get paid for, would you like it at all.
Robert Prather
I would be very opposed to it in general first of all, the TV industry over the last 10 years has spent way over $3 billion getting ready for digital TV. Part of the promise of that was being able to multicast which we’re doing now and we’ve got 40 multicast channels on the air right now and they’re profitable for us.
Not to mention mobile, we plan to use part of the spectrum for our mobile live TV. I would be very, very much against us giving up any of it.
I think the government would have a hard time making a case even if they tried to buy it. I don’t think they could do anything where they could force it and if Congress tried to pass a law something like that, I think it would wind up in Supreme Court and I think it would have a hard time at the end of the day prevailing.
There’s plenty of other spectrum out there they can go after if they need some spectrum but I do think that its incumbent upon local broadcasters to make sure that we continue to put a good product out there that serves the community. Its important for emergency situations.
I mean I think our TV station, we were on wall-to-wall coverage for example out there in Waco with the Bryan and College station covering the shooting at Fort Hood, no commercials. I mean we were there with live trucks covering every second of what was going on and those kind of cases we’re the only ones that can do something that good I think and I think we’ve got to be judicious in our use of our spectrum, make sure we use it for the right things but one of the reasons television stations have the spectrum in the first place is we’re supposed to be a semi public servant as well as a profitable business.
And I feel that way about ourselves, I think most, all our stations are very, very good corporate citizens and are considered part of the fabric of the communities they’re in and part of the what makes these communities vibrant and growing is the fact that our TV stations are there covering everything that goes on all over and I would be very much against anything where we were trying to get spectrum taken away from us or even selling it. I think if stations wanted to make that individual choice that’s one thing although I don’t see that happening anywhere.
Like I said, I think everybody is very interested in live mobile and you got to have spectrum to be able to put live mobile all over broadcast.
Operator
Your next question comes from the line of Jeff Tobias – Unspecified Company
Jeff Tobias
I spoke to Jim Oak just about a month ago, we had a good chat on the phone, and we were talking about this application, mobile application. Do you have any idea when these mobile applications will be out or what.
Robert Prather
That’s a good question, the testing is going on right now and its going to continue obviously through the end of the year, probably into next year. I think at that point everybody, there’ll be some bugs I’m sure that will need to be worked out and then once everybody feels like the equipment is really 100% ready to go, I would think it would be the end of next year and the following year before you actually see.
Also you’ve still got to have mobile devices that can pick up the live and some of these new iPhones and Androids, these kinds of things, probably will be able to do without much modification but I think you’ll see, you obviously got to get the devices out there in the market also.
Jeff Tobias
I spoke to Jimmy Oak and he said he was doing testing, we were on the phone, he’s from Washington state, and I said yes I’m ready for one of those, we’ll have to get me one. I’m testing and doing this and that and we had a good chat for an hour.
Robert Prather
He knows the business real well and he’s on the OMBC board and—
Jeff Tobias
He’s a great guy, I’ll tell you that.
Robert Prather
He definitely is and we’re lucky to have him.
Jeff Tobias
You know, Washington State, Mercer Island, I told him yes, that’s where I’m from. I appreciate it and do you think after this New Jersey race and [with West Virginia it was, I think it was stunning] do you think, do you see any, I just think there’s going to be a huge political races—
Robert Prather
I think its going to be tremendous, like I said—
Jeff Tobias
I really think so also.
Robert Prather
I think the folks now feel like they can win in a lot of areas and—
Jeff Tobias
Of course, that’s right. And you guys will have a, will be able to pick up some dollars from that or what.
Robert Prather
We certainly think so, yes, we think we’re hoping in the $50 million plus range ideally if everything hit just like we wanted it to.
Jeff Tobias
Are there any races in Atlanta, Georgia coming up.
Robert Prather
There’s a Mayor’s race going on right now. We don’t have any stations here so it doesn’t do us much good but there’s a Mayors run off, its going to be next week as a matter of fact, they had the regular election a few weeks ago and two candidates wound up in a run off and I think its next Tuesday.
We don’t have any local coverage here. We’re in Augusta, Georgia, we’re down in Albany and down in Thomasville, but not Atlanta.
Jeff Tobias
I was kind of shocked, I [am a shareholder of great intelligence], I’m a shareholder of Cumulus Radio which is on Peachtree.
Robert Prather
Yes, they’re right down the street from us.
Jeff Tobias
I was stunned.
Robert Prather
They’re about three miles from here and Lou Dickey is a really good guy and they run a good company and they’re in a lot of same sized towns we’re in too. We’re there, I think nine, they’re in nine towns that we’re in and they’ve got.
Yes, they’re right down the street.
Jeff Tobias
And the Dickey family, they’re great people.
Robert Prather
They’re great people, no doubt about it.
Jeff Tobias
Do you guys ever have lunch or something.
Robert Prather
Yes, I see Lou all the time.
Jeff Tobias
Well it was great talking to you.
Robert Prather
Thanks a lot Jeff.
Operator
Your final question comes from the line of Steve Carbone – Unspecified Company
Steve Carbone
Quick question, once the mobile program is up and running how will it actually function, will it only function as you sending out a signal through your own means and your own spectrum or will it be something that you could actually send through the web, I guess where I’m going with this would someone be able to pick up your programming outside your normal distribution range.
Robert Prather
That’s going to be hard because ideally what we’re going to do and here again you’d run into some real serious overlap with your affiliate problem if you did that. We’re basically going to be broadcasting the exact same signal that we’d be broadcasting with the TV signal so it will cover our DMA whatever that covers, and it would be very difficult I think to expand any farther then that both for technical reasons and I think even legal reasons.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Robert Prather
I want to thank everybody for joining us today. We appreciate your support.
As you know any of us can be reached any time you can call us here. We try to answer our own phones and we’ll look forward to talking to you after the first of the year with the year-end results.
So thank you everybody.