Slowdown in Salem's growth means downturn in share price.

SALEM Communications Corp. has been impressing Wall Street for years with double-digit revenue growth fueled by acquisitions and its domination of the Christian/family radio market.

Weighed down by startup costs from recent acquisitions and with no election-year political advertising to bolster revenues as in 2004, Salem reported fourth quarter results in line with expectations, but with executives providing only modest guidance for the coming year.

Wall Street is accustomed to setting the bar high for the Camarillo-based broadcaster. On March 8, it sent share prices plunging 6 percent to a 32-week low, closing at $13.11. Shares, which have fallen 37 percent over the past 12 months, were trading at $13.51 on March 14.

Salem is a growing presence in conservative talk radio, and has a distinctive revenue source at its Christian teaching/talk stations, which sell blocks of airtime to ministers for sermons and Bible lessons. It's a steady source of revenue, with 90 percent of 2005 purchasers renewing for this year.

"Block" programming, which accounts for 28 percent of total net broadcasting revenues, rose 5 percent on a same-station basis in the quarter, but is expected to become a smaller percentage of revenue over time. Salem is converting many of its acquisitions to formats such as conservative news/talk and contemporary Christian music that have a more volatile revenue base.

Salem's guidance "will likely outperform (the) industry, but hardly implies the type of growth investors had come to expect of Salem until late 2005, when broader secular trends, and perhaps a greater reliance on spot vs. "block" revenues, began to impact," David Bank, an analyst for RBC Capital Markets, told investors.

Salem has grown rapidly. It now owns, or is in the process of buying, 104 radio stations, including 66 stations in 24 of the top 25 markets. That compares to the 59 stations it controlled in late 1999.

Its youngest format, conservative news/talk, has been a main growth driver, posting 24 percent revenue growth in the quarter. In the Los Angeles market, the company has four stations reflecting all three formats. News/talk KRLA-AM (870) has the highest Arbitron ratings in the local group, with a 0.8 share of listeners ages 12 years and older.

The company also owns Christian music station KFSH-FM (95.9), and teaching/talk KKLA-FM (99.5). KXMX-AM (1190), is a multi-cultural station that sells programming blocks for news and inspirational programming in Korean, Vietnamese and other languages.

The company has built up its Salem Radio Network, which syndicates talk, news and music programming to approximately 1,900 affiliates, and Salem Radio Representatives, a national radio advertising sales force. Through acquisition, the company also has become a publisher of Christian music and teaching content.

Despite a net debt of $320.7 million, the company is considered to have a strong balance sheet and on March 2 announced a $25 million increase in its stock repurchase program, since the $25 million program approved in 2004 was nearly complete.

The lack of political advertising was a contributing factor for lower fourth-quarter profits. Salem earned $3.3 million, or 13 cents a share, in the quarter, down from $3.7 million, or 14 cents, in 2004. Revenues were $54.5 million, up 5 percent from $51.7 million a year earlier.

For the year, net income was up for the company, coming in at $12.7 million, or 49 cents a share, on revenues of $211 million. That compares to 2004 profits of $7.3 million, or 29 cents, on revenue of $195 million. Capital expenditures, largely from acquisition-related expenses grew 25 percent from 2004 to $22.3 million.

Salem still outperformed the industry, which saw a 3 percent decline in revenues in the quarter, according to the Radio Advertising Bureau. Its same-station revenues outperformed the overall market by more than 400 basis points, notes analyst Victor Miller, who covers the company for Bear Stearns.

For 2006, the company expects capital expenditures of about $16 million. The company anticipates same-station national block programming to increase by about 5 percent in 2006.

"Looking further into 2006 and longer term, we are optimistic," said Chief Executive Edward Atsinger. "Nearly half of our radio stations are in a start-up or early development stage and we are focused on developing these stations to maturity."

Salem Communications Corp. (SALM)

Stock Prices

YEAR (Dec. 31)                  2005     2004

Revenue (millions)            $211.8   $196.9
Total Expenses (millions)      168.2    156.9
Operating Income (millions)     43.7     38.7
Net Income (millions)           12.7      7.3
Earnings Per Share             $0.49     0.29

Quarterly Net Income (millions)

SUMMARY

Business: Christian/Family broadcaster
Headquarters: Camarillo
CEO: Edward Atsinger
Market Cap: $343.6 million          Dividend Yield: 0.0%
Total Liabilities: $396.8 million   P/E Ratio: 27.6
Long-Term Debt: $326.7 million