Q3 2019 Earnings Call

I'll now turn it over to Collin Jonah field.

President of corporate development strategy, Sir you may be you May proceed.

Thank you operator, welcome everyone to our third quarter 2019 earnings conference call before we start. Please note that certain statements in today's press release and discussed on this call may constitute forward looking statements under federal Securities laws actual results may differ materially from the results expressed or implied and forward looking statements. These statements are based.

On management's current assessments and assumptions and they are subject to a number of risks and uncertainties. In addition, we'll also use certain non-GAAP financial measures. We believe the supplementary information is useful to investors, although it should not be considered superior to the measures presented in accordance with gap a full description of these risks as well as financial reconciliations to non-GAAP .

Terms or in our press release NFC. She filings the press release can be found in the Investor relations portion of our website at <unk> SEC filings, including our Form 10-Q will be available tomorrow morning.

A recording of today's call will be available for about a month details for how to access that roughly can also be found on our website with that I'll now turn it over to our president and CEO Mary Berner, Larry Thanks, Colin and thanks, everyone for joining us on veterans day.

Before we start I like to acknowledge and thank all of the men and women who served at our serving in our armed forces, including our CFO , John Abbott, who joins me today.

Oh, we're happy to be reporting another quarter of strong results today revenue in the quarter was up 3.9% and EBITDA was up 2.2% on a same station basis, excluding political.

This performance was driven primarily by increases in our digital businesses as well as in national spot and network broadcast revenue channels on expense side net increases were predominantly driven by the variable crop cost of our growing revenue streams and certain other onetime increases.

Our EBITDA growth reflects continued and focused execution against our key strategic priorities, which will update you on shortly.

But before I do you'll note in our 10-Q and press release, but this quarter, we have moved to risk reporting on a single segment basis with more detail provided on our revenue streams that presented previously.

During the quarter, we assess the appropriateness of our segment reporting in light of changes in how the company is organized and how we operate the business and concluded that we have one reportable segment.

Said another way this reporting change was necessary because we operate the business through a single company lens and that's reflected in this year's financial performance. This approach has yielded many benefits ranging from the incremental revenue gained by moving inventory among all of our channels to the more efficient operations derived from managing important functions are initially.

Good such as finance and accounting digital and revenue and expense management with a holistic view of the company.

And as I said in addition to the enhanced level disclosure, we have been providing in the last quarter or too. We're now also providing more detail that we had previously on our revenue streams and we believe that you will find a more helpful. Then the old segment reporting that have become less reflective of how we operate the business.

So back to the drivers of the performance in the quarter.

Our multi prong digital strategy continues to result in meaningful and profitable revenue growth with combined digital revenue growing 51% corridor.

C suite, our local digital marketing services platform and our streaming business both reach milestones in September each booking over 2 million of revenue that month.

Collectively these revenue lines grew 40% in the quarter as we capitalize on the evolution of our local sales effort to more deeply engage in the relationships. We have with over 30000 local businesses by selling marketing solutions that combine radio and digital products.

We do this with a relentless corporate focus on ensuring strong and efficient execution.

For example to make integrated radio and digital campaigns easier for both our local sales organization to sell at our local advertisers to buy this quarter. We introduced the cumulative creative called two years and exclusive white label platform that provides a coordinated spot and digital created to local advertising.

There's significantly simplifying the process of selling and buying those integrated advertising campaigns.

In September we also saw the highest percentage of streaming and C suite attachment that we've experienced to date attachment I mean that nearly 40% of our local direct clients also bought a streaming schedule and almost 10% bought a C suite product reflective of the increasing value where abrams able to draw.

Arrived from our customer relationships as we offer additional products and services that meet their needs.

In fact, we firmly believe that are demonstrated ability to constantly evolve our sales capabilities and digital products that will bear additional dividends in the future in the form of more clients stronger customer relationships and even higher attachment rates.

Also on the digital side, we are the fastest organically growing podcast network in the U.S. with nearly 70 million monthly downloads at approximately 85% revenue growth in the quarter.

This rapid growth puts us on track to deliver over 25 million in revenue this year and I would reiterate that our podcasting business has been nicely profitable from the beginning and continues to contribute to our positive EBITDA momentum.

From a podcasting content perspective, we have built a stronghold in the news talk vertical anchored by the bench Shapiro show, which consistently ranks in the top five each month among over 750000 podcast.

More recently, we also announced expansions and several other content areas, including sports, where we kicked off a podcast partnership with Pat Mcafee, former NFL pro bowler standup comedians and social media Star and also developed a weekday radio show with him up for syndication.

We've also launched an E sports podcast with Cavenaghi one of the most popular inexperienced color commentators in a rapidly growing E gaming space.

And then a life and entertainment category, we partner with limit the 11 out of network, an exciting new podcast content company co founded by the executive producer of pod save the people, which in September debuted its first podcast called last day right out of the gate competing against some of the biggest and well known podcast ranked in the top tenants.

Category.

As we sit here today, we view each of our Threed digital businesses as critical to the growth of both our top and bottom line with revenue divided among the three roughly a third a third third.

To give you a little additional color streaming is our highest margin digital business with contribution margins comparable to core broadcast radio podcast as our lowest margin digital business, but we still generate a healthy margin and half from the beginning and C suite contribution marker. This fall in between these two.

I think these digital initiatives remains a key element of our long term growth strategy.

Alongside these initiatives, we continue to make progress and enhancing our operating performance in the core business.

This quarter, we fully completed the traffic in inventory system Rollouts to our radio stations that started nearly two years ago.

Assistance change and organizational build out like this is always a significant undertaking but the payout has been great in Q3 alone. Thanks to our new cross platform pricing in the yield management capabilities, we generated over 6 million in incremental high margin revenue largely from opportunistic.

Bespoke National and network advertising vehicles that we developed to meet or sometimes generate advertiser demand.

To be clear without the benefit of our new systems and tools, we simply could not have delivered this incremental revenue.

It's also worth calling out some other meaningful contributions in the quarter from some of our standout stations and brands.

Our best performing markets for the quarter, where Chicago, Cincinnati, DC, Indianapolis and Baton Rouge.

And speaking of Indianapolis I would also note that we're continuing to benefit from the swap transactions that we completed in Q2.

The station, we flipped to rock format to fill the gap in the market is enjoying ratings increases of over 100% year over year with multiple consecutive months of impressive ratings growth and across the entire Indianapolis cluster on a same station basis, we grew EBITDA by double digits in the core.

In Allentown, the other market, we expanded to retreat a swap transaction, we mentioned last quarter that W. OTI FM posted a number one in the spring book and the ratings traction converted to revenue share gains in September for the market.

In a number of other markets. We've also made some significant programming moves under our new programming had Bryant Phillips a few examples.

In San Francisco, we've been working to cement the leading position of our heritage Sports brand can be are we signed a great Papa voice of the 40 Niners to a multiyear deal and then added FM distribution to the station by flipping K fog at them to a simulcasts of can be are.

In its first month on the FM band rating share for can be our sky rocketed up 73% year over year.

We also recently resigned our powerhouse morning show and Houston, the Roulette and Ryan show on K RB at them to a multiyear deal securing the stations leading position in the market, notably Kirby also received a Marconi award this year radios, most prestigious annual awards for Chr station at a year.

Sure in fact this year chemo stations received a record number of nominations with K I P. RFM power 92, jams and a little rock also winning for medium market station of the year.

It's also important to note the strong position up our news talk platform.

Our stations grew rating share every month this year and our powerhouse news talk network syndication roster, which includes Mark will then Michael Savage and bench apparel has also performed very well.

In particular, Ben Shapiro success, and the 18 to 49 demo has been impressive with listenership up more than 60% in the simultaneous simulcast broadcast of this podcasts and up over 40% is like show from the fall 2018 Spring 2019 book.

In aggregate our strength in news talk positions us, particularly well for what we expect to be a very robust political environment as we count down to the 2020 election.

These highlights and our continued strong performance are a testament to the great execution by everyone at Cumulus and indicative of the focus in energy the whole team applies to our strategic priorities.

And we believe that these priorities support our financial goals, which are singularly focused on driving value for shareholders.

Our top financial goes to maximize free cash flow, which largely comes from the EBITDA debt generated by the operating priorities and our second financial goal is to pay down debt and to reduce leverage before below four times.

And in pursuit of these goals this quarter, we completed an opportunistic term loan refinancing and with the bond deal. We compete slated in June we have fully refinanced our exit term loan facility.

Our capital structure now has a 2026 maturity profile with lower interest rates than we had an emergence and four and a half times net leverage down nearly a turn and half from last summer.

During the simple math, we paid down 275 million of debt, which with around 20 million shares outstanding translates into 13 75 per share of value from debt pay down since we emerge from bankruptcy.

So we think we're doing the right things and we're confident that our focus on these financial goals fueled by strong execution against our strategic priorities will drive value for our stakeholders in the long term.

Looking forward to the fourth quarter, we're seeing pacing down low single digits on a same station basis, excluding political.

Political is about a 300 basis point headwind at this point.

The quarter got off to a sluggish start where we saw declines in advertiser demand that we believe reflected the macroeconomic and political uncertainty that has dominated the news cycle.

That said when considering our performance in Q3 and outlook for Q4, we're confident that we will exceed consensus EBITDA estimates for the year and with that I'll turn the call over to John .

Great. Thank you Mary.

As with prior quarters for the sake of.

Comparability I'll speak to our financials on a same station basis adjusting last years numbers for all of the M&A transactions that we've completed.

I would note, though that our numbers are not adjusted for the announced sale of WBC to read Apple media, which we hope to close this quarter.

As Mary indicated.

You mentioned the way that we're now operating the business is one unified platform necessitated a reporting change to a single segment. This quarter. However, we do expect at the new presentation of the financials will be more valuable to you into helped your modeling I would point you to the last few pages of the press release to see a historical quarter by quarter.

Breakdown of the new revenue presentation of course, please feel to reach out please feel free to reach out to call on or me. If you have any questions.

Switching the old format to the new.

One other item to note.

And Paul I mentioned this.

The FCC as close for veterans day.

Our 10-Q will or wont be available today, but it should be available first thing tomorrow morning.

With that.

Move into the financials total revenue for the quarter, excluding political was up $10.5 million or 3.9% the quarter had similar characteristics as last quarter in at National spot led from a broadcast revenue standpoint up double digits network revenue was up nearly 5% in digit.

All which includes C suite streaming and podcasting was up 51%, which led the industry this quarter.

And as Mary mentioned revenue management initiatives directly contributed about 6 million of the national spot in network growth.

These positive drivers were partially offset by a continuation of market driven challenges in local spot revenue performance, including the impact of political total revenue was up 8.6 million or 3.2% from Q3 of 2018.

We were up against a political comparison of about 3.6 million last year, and we did about 1.7 million of political this year.

Moving down the piano total expenses were up in the quarter by $9.1 million were 4.3%. The biggest driver. This increase in the quarter was higher variable cost on digital revenue increases and other growing revenue streams.

Characterize the remaining expense increases is largely onetime in nature, including.

The increase in bad debt expense, resulting from higher write offs, particularly the FTD bankruptcy, which accounted for.

Almost half of our increase in bad debt.

The increase in amortization of new local commissions comparisons against credits in certain expense lines last year.

And external are largely uncontrollable expense increases like increases in health care costs.

EBITDA for the quarter on a same station basis, and excluding political was up 1.2 million or 2.2%.

Without normalizing for political EBITDA came in at 58.7 billion, a decline of $500000 or 0.8% year over year.

As a reminder, M&A activity from earlier this year will also impact comparability as we.

Look into fourth quarter, so to help your modeling M&A adjusted numbers for Q4 2018.

Including political or 298.6 million and 62.3 million for total revenue and EBITDA respectively.

In Q4 last year, we had 11.3 million of political revenue on a same station basis and as Mary mentioned.

That comp is providing about 300 basis points headwind to pacing currently.

Moving off the personnel in Q3. This year, we spent about 6.7 million on Capex and we expect to spend a little more than 25 million on capex for the full year.

Turning to the balance sheet.

Where we've continued to be very active we've now fully refinanced our exit term loan facility.

Late September we completed a 525 million dollar term loan refinancing, which was accompanied by a 29 billion dollar voluntary prepayment to fully retired the old term loan.

The new term loan bears interest at a rate of LIBOR plus 375.

Which of course is a reduction from our old rate of LIBOR plus 450.

And the new term loan has a maturity of March 31st 2026.

And we now have net leverage of 4.5 times and total debt of 1.025 billion, which is a reduction of $275 billion since emergence from bankruptcy or as Mary mentioned in the way, we like to look at it $13.75 per share of value from debt.

Hey down.

Looking ahead to additional opportunities for cash generation I wanted to provide you with an update on the DC land sale.

As we've discussed on previous calls the development plans of our buyer toll brothers have faced and continue to face opposition from community organizations appealing the approvals that toll has received to date.

Last quarter, we noted that there was a positive there was positive progress as one of those appeals was dismissed.

In early October the court heard final arguments on the other active appeal and we expect to get a ruling on that sometime later in Q4 or in Q1 next year.

And we remain optimistic that with a positive outcome from that ruling will be able to reach a firm commitment with toll brothers.

That's attractive to both parties as we've said before we continue to believe that Theres.

You to be unlocked in selling this property and we'll keep you updated on our progress as we have more to share.

Now I'd like to give you a brief update on the status of the petition for declaratory ruling that we filed with the FCC.

Our current equity share structure, which consists of class a and b shares in series, one and two warrants was crafted to comply with the rule that limits foreign ownership to 25%.

However to simplify this structure and accelerate conversions of warrants in to the class a shares that trade on NASDAQ We filed a petition for declaratory ruling on July in July 2018 to allow higher foreign ownership and our shop dead permitted under the rule.

Approval of our request involves not only to sign off by the FCC, but also a review the review of a group of Representatives from the executive branch named team Telecom.

FCC issued a public notice on our petition on May 20, Onest 2019, and the team Telecom review started shortly thereafter no party other than team Telecom is filed comments with respect to the petition and the period for filing Talbot's has closed.

Pretty far down the line in the process of responding to team telecoms data requests and questions and we hope to have revs resolution on the matter in the coming months barring any unforeseen outcomes to the team Telecom review.

So at this point of we'd like to open up the line for acuity operator, we're ready for the first question.

And at this time I'd like to inform everyone in order to ask a question.

Yes Star one on your telephone keypad to withdraw your question press, the pound or hash key.

Please stand by what we compiled acuity roster.

Your first question comes from the line of Marci Ryvicker from Wolfe Research.

Thank you very much.

I wanted to dig a little bit into digital 'cause. This was a very big positive surprise.

You gave us the margins can you talk about the percent of revenue from streaming podcasts and C suite that makes up the total digital number that's the first question and then second me.

You mentioned pacing down low singles, but then you also said you're going to hit consensus EBITDA. So that would imply that you are spending maybe less.

I don't know if that's what you meant to imply that can you talk a little bit about cost control into the fourth quarter.

Sure. Thanks, Marcy the percent of digital revenue it.

Bifurcate roughly a third of sort of third.

Training, podcasting, and yeah, and and C suite.

And with regard to pacing on the fourth quarter, largely we're seeing similar trends that we've seen in prior quarters.

With local the weakest at this stage.

And digital strike continuing nationals also up in the network business can you just to be lumpy I'll, let John take on the implication on consensus.

Yes, you about expenses.

Yeah, I don't know that Theres, a the total consensus I think for the year is right around 204 million and we're very confident and feel good about hitting that number I don't know if there was a specific.

Question, maybe I missed around expenses, well I think it's because married had said that even though there are pacing down you're still going to hit consensus EBITDA. So I wasn't sure if youre, implying that you had more cost controls in the fourth quarter.

So I didn't it wasn't a 100% sure what the reference the consensus EBITDA.

I think what's on capital all year, and when you take into account or third quarter performance and our outlook for the fourth quarter. We feel good about the full year I think is really really all we're saying.

And I just have one follow up on net political.

How is that 1.7 million.

In the third quarter compare is is there a comparison.

You mean delays had to lap till the last year, Sir Yes last year was 3.6 million no. The year before so like from and are you getting more political and this idling or anything on the Alaska off cycle year, Yes, I don't have that in front of me.

Circle back with you on it okay. Thank you.

Absolutely. Thank you.

Your next question comes from the line of sex over from B. Riley FBR.

Okay. Great. Thanks training question. The first one is just on the pacing lows down low single if you could.

Give us some more detail on what.

Well, you're seeing strength and where you're seeing weakness.

Categories and.

Then.

Maybe too early for 2020, but I guess more qualitatively, how you're feeling going into next year ex political.

Yeah, I mean, we don't we don't have visibility into the category performance until after the fact, it's a little early to call that right now and as I said were largely seeing for fourth quarter. This is similar trends that we've seen in prior quarters at this point a local continues to be the weakest at this stage.

Digital is pacing nicely up nationals up.

And again that work is is lumpy.

And with regard to how we feel about 2020, you know obviously the political year. So we we'd love political years, especially assessing what are anticipated to be frothy political years, we're seeing some early political at this stage and we do expect it to ramp up with.

Moving forward as some of that some does changes to certain states as they move forward in their primaries in 2020, So I guess the way I characterize 2020 and the way we're thinking about it now is at this stage nothing leaves us to believe that the trends that we've been seeing are likely to change materially into 2020.

We certainly hope that the weakness in local spot abates, but we plan for it to continue.

We think national spot network should have the potential to offset.

And most specifically for us we expect to benefit or continue to benefit from our pricing and inventory management initiatives you know.

Unlike prior years, it should allow us to manage pricing in inventory utilization in 2020, much better than in previous years at previous political years.

So we.

Expect to be able to minimize spillage and maximize rate across the platform and we think that's especially important given the fact that reduction because it's going to be a reduction in available impressions.

You're well aware you know Twitter no adds Facebook cutting back and.

Theres going to be high demand with put pressure on pricing so.

No I think that's it's a little too early to call, but we don't.

Nothing leads us to bleed the trends will change with exception of political of being politically or.

Got it and then I would add on.

Great.

Yes on the fourth quarter pacing is it I think we're seeing similar trends that you've probably heard from some other operators right where it was a.

We said it was a slow start to the quarter.

But you know looking better on the back into the quarter. So.

Got it and then Theres a very you made a comment in the prepared remarks about.

6 million of high margin incremental revenue coming from.

Traffic and inventory upgrades, what exactly was that it is that something that you think it's sustainable going forward.

Yeah, I mean, it's a capability at a platform so essentially.

We were able to participate in national deals.

With the visibility required.

Into pricing and placement to ensure that we actually were driving incremental revenue something we couldn't do before so so we were able to.

Create new channel opportunities. So we created custom networks. For example, so we can just because we have a bird's eye view of all of our inventory, we can scoop up and package that inventory to create or create demand in the marketplace or to fulfill demand and so it's been we certainly expect that to be.

A key driver of our lead you know if not overall performance certainly share.

Got it thank you very much.

Thank you for your last question comes from the line of Michael Kupinski from Noble capital markets.

Thank you and congratulations on your hard work first of all I just want to ask a little bit about ratings. They remain stable at this time, you're not seeing any dynamic changes, especially in some of your higher contributing markets. I know you mentioned, what it when we flipped a.

Format, and so forth, but I was just wondering.

Terms of ratings are they.

Pretty stable, though.

Yeah, I mean, I I would characterize it as saying that we gain back most of the share that we lost from 2012 to 15, and we're back up near those levels. So our challenge at this point as you point out his mouth, maintaining and picking our battles where the ratings had the highest impact as I mentioned earlier, we're seeing real.

Real strengthen our news talk platform currently.

Which we think positions us well going into the next year sports remains I've said this before on prior calls sports remains our biggest challenge right now in the local side.

And really that's given the alternative ways to consume smart sports context content.

However, sports was a big driver for US earlier this year at Westwood one.

Gotcha, and then obviously were earlier in the year you began repositioning your portfolio.

And I was just wondering since then of course, it's been a little quite is this a reflection of the fact that you kind of several then or your current portfolio or is there a lack of interest from other operators to swap or so can you just kind of give us a sense of what your thoughts are regarding your portfolio at this time, but with your plans are.

Yeah, I know that's it looked at remains.

An important component of our strategic and operating strategy is to optimize the portfolio and to the extent we.

We see opportunities to do that we'll continue to pursue those we are comfortable with the portfolio that we have we think it provides tremendous region.

A nice broad national footprint, but we'll continue to be opportunistic where there.

Situations and.

Accretive transactions present themselves, where we're able to put a transaction together that's accretive we will pursue those so.

WBC, we obviously announced a while ago that hasn't closed yet.

But.

I think it's just a reflection of.

As opportunities arise, how we're able to transact against those.

And I show.

Okay got you I've been encouraged about the digital I want to go back you know you talked about your Ses suite products.

That are really driving some of the growth. There of course are podcasts been turning to the C suite products, particularly.

Can you just talk little bit about that growth outlook that you're seeing there I know a lot of Europe appears of kind of being a little bit more aggressive in their digital businesses.

With more attribution type Bob did attribution type models and things like that that they're pursuing can you tell me a little bit about where where you are in the stage of development of your digital businesses. How fast do you think you can grow that going forward.

Whether or not you're actually utilizing data attribution tools at this point orders that another opportunity for you to cover later in further growth.

Going forward.

Yeah, I mean, I would I would take a step back and answer it more broadly is that when you think about attribution essentially it does two things that's it.

Its a.

Important to.

Proved that radio works and that's where advertisers are really looking for so we have some products that are truly unique to us which is the ultimate attribution, which is guaranteed results and that's the epic guarantee locally and the Westwood one ROI guarantee on the national side, I would say that from a data standpoint, we're already capturing.

A significant data on our digital users across a variety of both owned and third party platform that allow us to drive a higher cpms on audience on the audience I think where we are now is that it's we believe that I believe our peers do that it's critical that our industry speaks.

The same language about how we measure our effectiveness and how we prove that to advertisers.

And so.

You know the with the technology to actually exist today, we can deliver a similar data similar proof for performance and attribution metrics.

And we do like all of our competitors, we're all working with a number of third party.

Parties locally to provide those solutions. So I think it's a work in progress.

Gotcha, and then do you have any thoughts in terms or benchmarks, maybe what you would like to see the digital business contribute to total company revenues at some point.

No I mean, we certainly feel good about the growth.

Opportunity.

It had in digital and we've talked about what percent of our total revenue. It is and we feel good about being able to continue to grow that.

I think you asked about C suite in particular, one way, we think about that is.

Attachment rates and help how many sales that occur in the local market include.

The C suite products in those attachment rates are still fairly low and we see.

Great growth from just continuing to drive that.

Yeah, I mean, just to give you up and I did you do we reached 30 as I said in my prepared remarks, we reached 30000 local businesses and with just.

Approximately 10% of those attaching C suite product.

I'm pretty quickly there's there's a lot of upside there.

Gotcha. Thanks.

Appreciate it.

Yes. Thank you.

Now I'll turn the call back over to the presenters for closing comments.

Alright, thanks, everybody for joining us today as we look forward to speaking with you again soon thank you have a great day.

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