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Salem Beats Industry Rivals With Diversification Plans

While most analysts are presently bearish on radio broadcasting stocks, the Camarillo-based Salem Communications Corp. has won their approval with its focus on expanding its media holdings and consistently turning a profit. Most recently, Salem acquired Christianity.com, an online provider of Christian content and a wide range of ministry resources, for approximately $3.4 million. Since 1999, Salem has expanded its Internet holdings, seeking websites that share the company’s Christian themed focus. Christianity.com will be Salem’s sixth non-radio website, in addition to the 104 radio stations it already owns. “There were several motivations for our purchase of Christianity.com. We love the URL. Christianity.com shares the same values that Salem stands for. It was like Kroger, buying the URL grocer.com,” Jim Cumbee, Salem’s president of non-broadcast media said. “We were in so many complimentary businesses between Crosswalk.com (another Salem website) and Christianity.com that we knew that we could leverage our operating infrastructure and increase our revenue. As a sheer business enterprise it was a no-brainer.” For Salem, the websites represent another opportunity to tap into its core audience: the religiously devout who place an emphasis on traditional family values. The company sees the websites as a complement to its radio stations, as another way in which it can connect to its audience. While its profits have often been modest, Salem has managed to stay in the black in every quarter since March of 2003. In its most recent quarter concluded September of last year, Salem posted net income of $2.6 million, compared to net income of $1.5 million in the same period in 2003. Salem has also increased revenues year-to-year, grossing $49.7 million in the last quarter, compared to $44.5 million in 2003. Selling for $22.50 a share, as of the close of the market on February 23, Salem’s stock price has flagged of late, compared to a 52-week high of $33.65 on April 23, 2004. But despite this recent pricing downturn, analysts remain high on the company. Just this month, Banc of America Securities upgraded its rating from “neutral” to “buy.” “Salem is a rarity in radio it’s a growth story. We like Salem’s growth strategy with a focus on low-cost acquisitions, swaps and reformats. We expect to see margin improvements as the company matures,” Jonathan A. Jacoby, an analyst for Banc of America wrote in a February 3 report. “The company is not suffering from the same top-line certainty as a traditional broadcaster. Remember approximately 40 percent of revenues come from block programming which is a highly predictable revenue stream. Over 90 percent of block clients re-up with historical annual price increase of 5 to 7 percent.” Satellite competition The radio industry has been maligned by analysts as not being a growth sector. Compounding this dearth of growth, radio companies have been attacked by another type of competition: satellite radio. With the growing popularity of both the XM and Sirius satellite radio networks, traditional radio faces a war to maintain its profitability. Jacoby addressed this quandary in a recent report issued on February 17. Entitled, “Radio at a Crossroads: Turning Pt. 1,” the paper analyzed the lack of growth companies in radio, but signaled out Salem as being one of the industry’s bright spots. “The radio industry is stuck in a bind. All the drivers of revenue growth ,listenership, CPM and inventory have been trending in the wrong direction over the last few years. A) Listeners have been declining at a rate of 2 percent per year, while b) pricing has declined 2 percent or more for the past two years and c) inventory levels have continued to increase,” Jacoby wrote. “We believe that the market is beginning to price in better first quarter 2005 results and therefore we advise selectivity. Our preference is for operators that have the ability to post growth ahead of 2005 expectations Salem is one of our favorite names.” By combining its radio entities with a nascent presence on the Web, Salem seems to have positioned itself for growth in the coming years. According to David A.R. Evans, Salem’s executive vice-president and chief financial officer, Christian radio is the faster growing segment of the industry. “Our niche within radio is growing 38 percent listener growth over the past 5 years makes religious radio the fastest growing radio format. Radio listenership as a whole is basically flat if not down. The Christian audience is a large and growing audience that has been relatively underserved from a media standpoint. Salem Communications is the dominant market leader serving this audience,” Evans said.

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