Q3 2022 Audacy Inc Earnings Call
Greetings welcome to Odyssey, Inc. Third quarter 2022 earnings call at this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Richard Schmeling, Chief Financial Officer. Thank you you may begin.
Thank you operator, and welcome to our third quarter call.
As mentioned this call's being recorded a replay will be available shortly after the conclusion of today's call. The replay link or number noted in our release.
During this call the company May make forward looking statements, which are based upon the company's current expectations and involve risks and uncertainties.
<unk> actual results could differ materially from those projected forward looking statements.
Additional information concerning factors that could cause actual results to differ materially are described in the risk factors section of the company's annual report on Form 10-K, as such risks and uncertainties may be updated from time to time in the company's SEC filings, we assume no obligation to update any forward.
Looking statements, except as may be required by law.
During this call we may make.
Efforts to certain non-GAAP financial measures, we refer you to the investors page of our website.
Or do you see Inc. Dot com for reconciliations of such measures and other pro forma financial information.
With that I'll turn it over to David field.
Thanks, Rich and good morning, everybody.
Needless to say this is a challenging time for our company as we navigate through the macroeconomic pressures and advertising headwinds.
After a very strong start to the year, which had us on an accelerated path towards pre pandemic numbers, we haven't seen a substantial deterioration in market conditions and this has obviously taken a toll on our EBITDA and leverage and has raised concerns.
As we present, our third quarter earnings results and an update on the business I wanted to address a few key questions that weigh on investors minds.
But a lot of to successfully navigate the economic turbulence.
How well positioned is odyssey competitively and what is the earnings capacity and value proposition of Odyssey once business conditions normalize.
Notwithstanding a difficult third quarter as we look forward, we believe that Odyssey has been fundamentally enhanced and he's today, a much stronger company with substantially elevated products and capabilities to serve listeners and customers than the one that generated $341 million in EBITDA in 2019 at that time, we were one of the industry's too.
Strongest radio broadcasting groups with a terrific scale local station lineup across the country's largest markets and an unrivaled leadership position in news and sports.
But we had no podcast business essentially no AD tech a skeletal streaming platform and no meaningful national business development that capacity.
Since then we have transformed into a leading multi platform audio content and entertainment company that now also includes premium podcast publishing emerging AD tech capabilities are re imagined innovative competitive screening platform and a strong national enterprise sales team driving elevated partnerships with key national agencies and clients.
And in a world in which there are multiple quality providers abuse, including ourselves.
In the news <unk> sports leader in most of the country's largest markets coupled with our deep roster of exclusive compelling local personalities and National Award winning podcast makes us we believe the number one creator of original premium audio content.
Timing of the current marketplace challenges has been poor and it hit us at a time when we are in transition building significant new capabilities and products to drive revenue and EBITDA growth and bearing the investment and operating expenses of our transformation, but not yet reaping a large portion of the revenue benefits.
There are a number of positive developments across your various businesses the point to stronger performance ahead.
A few of which I will touch on momentarily. Furthermore, we have made good progress in executing our action plan to generate additional financial cushion to navigate forward successfully.
Before providing additional color in those areas, let's turn to our third quarter results.
Q3 was a challenging quarter with market conditions worse than our expectations impacted performance across our various channels.
Excuse me.
Revenues were down three 8%.
Radio revenues were down 6%, including network with network revenue was up 1% and total spot down 7% with local outperforming national.
Looking at the three components of our digital business, we had solid double digit growth across screening up 14% and digital marketing solutions also up 14%. However, our podcast business had a rough quarter and was down 23%.
Podcast some results were impacted by the departure of Crooked media, which moves off of our platform in may and the timing of licensing revenue last year.
Extra content and licensing our podcast revenues were down 2%.
Fourth quarter podcast and pacings have improved significantly.
I would add that our podcast listenership continues to grow with third quarter downloads up 29% during.
During the quarter, we launched a number of new shows including no mercy with Steven a Smith.
Project Unicorn in partnership with Apple TV, plus and the Sunshine place, which hit number one on the Apple chart.
And then finally on podcast and we are seeing strong growth in listenership on our 2400 sports podcast and studios with 15, new shows launched in the past four months and downloads up over five times since Q2.
Some additional color on Q3 results.
Our radio revenues were highly impacted by our marketing mix, our smaller markets defined as markets 50, and smaller grew 8% faster than the largest markets, 1% to 25. According to Miller Kaplan and to be clear I'm speaking of total market revenues not just odyssey's results.
Given that our company is significantly more concentrated in the largest markets relative to our peers that caused a big relative performance challenge.
We don't believe that the market growth differential is permanent although the gap has persisted for a while.
Turning to categories. We are encouraged by an uptick in auto our largest category, which was up 6% in the third quarter, albeit still down 39% under 2019, a wall Street Journal story last week noted that the number of cars and trucks on lots or in the stores at the end of September was up 46, 9% versus.
The same month, a year ago per awards intelligence rich will share some additional thoughts on our business categories.
On our last call I noted that we are deeply focused on executing our action plan to navigate the storm and emerge healthy and strong with compelling profitability and shareholder returns I'm pleased to report that since then we've executed $56 million of nonstrategic real estate asset sales to provide additional liquidity, we have a number of other real estate.
The assets that we plan to monetize and will continue to pursue other tools at our disposal to weather the storm.
As a reminder, we have no maturities until 2024 and all of our junior debt isn't due until 2027 and 2029 and.
In addition, we have made substantial fixed cost cuts across the business to reduce expenses as a result third quarter expenses were flat versus plus 8% in Q1 and plus 6% in Q2.
Turning to fourth quarter AD market headwinds continue.
But there has been some small sequential improvement across the business.
Fourth quarter revenues are currently pacing flat and we expect to finish flat to down low single digits versus prior year.
Local national and digital businesses have improved slightly and podcast and more so while network is a bit worse.
On our last earnings call. We noted our primary strategic focus areas, which we see as the key drivers of significant additional revenues and profitability and they are at Jack digital National Enterprise business development auto another disrupted category recovery.
Sensors and the launch of our re imagined streaming platform, we continue to make progress in each of these fronts.
<unk> has been an area of weakness for us historically as we have been entirely relying on third parties limiting both our participation in important pools of demand like the programmatic guarantee market and our AD product capabilities with our acquisition of ample wave a year ago, we have established our own AD tech capacity and are actively pursuing our product roadmap.
We remain on track to roll out new AD tech to unlock these pools during 2023, enabling us to increase our sell through rates and improved yields and developed new AD products to tap into our 200 million person audience.
We launched the next generation of our Odyssey direct to consumer streaming platform in late July featuring a completely rebuilt backend as well as an improved user experience with innovative features such as enhancements to our patented <unk> technology now, including chapter descriptions for each segment of live radio shows so listeners can opt to listen.
To the specific content that interest them.
New features and capabilities will continue to rollout over the next few months.
To bolster the content offerings on the platform, including a new partnership with Disney to expand our listener choices in.
In addition, we continue to add additional new Odyssey created content, including new specialty shows an exclusive Odyssey artist check ins with artists like Ed Sheeran use litho, Billy Idol and more.
Since launch we have seen a 25% increase in our digital listeners and a 15% increase in registrations.
And our National Enterprise business development team is making solid progress in reintroducing the transformed Odyssey brand and our enhanced products and capabilities to key national agencies and customers are National agency and client engagement has accelerated significantly and based on what we are seeing we believe we are well positioned for a greater share of national ads.
Spending in 2023 and beyond.
Before I turn it over to rich a couple of additional thoughts in these turbulent times, we recognize it is difficult for many to look beyond the current challenges.
But we don't want to lose sight of the broader perspective on oddities competitive position.
And our opportunity set.
The macroeconomic disruptions at a time of transformational change across our company has certainly made a great impact on our EBITDA.
That should not op escape the underlying fact that Odyssey has emerged as a fundamentally enhanced scaled multi platform leader positioned to compete for significant growth in the dynamic audio market.
And we see significant revenue headroom as we capitalize on our enhancements and the holistic value of our platforms.
Putting all the pieces together takes time and we have work ahead of us, but we continue to make solid progress and are truly excited about our prospects going forward.
We remain intensely focused on executing our plan to successfully navigate this storm and emerge healthy and strong and believe that in a normalized economy. The earnings potential of today's enhanced Odyssey should exceed where we were in 2019 and with that I'll turn it over to rich.
Thanks, David and good morning, our total net revenues for the third quarter came in at $3 17.
Million down three 8% year over year.
Our spot revenues were down 7% national spot was weaker than local and political revenues came at $7 million for the quarter, which was $2 million in the prior year looking.
Looking at our top spot aperture.
Advertising categories auto dealers, our largest category was up 7% year over year in the third quarter in auto in total including dealer associations was up 6%.
This is a significant improvement from earlier this year auto in total was down mid single digits in <unk> and was about flat into Q.
Our second largest category hospitals and clinics was up 22% in the third quarter, and our 12 get out and go categories, including concerts sporting events and movie theaters were up 18%.
And then ending the third quarter.
And mortgage lenders, our third largest category was down close to 40% year over year.
Yeah.
We continue to believe that spot radio has significant headroom for further recovery. After this economic slowdown is behind us and any remaining supply chain issues are fully resolved.
Our digital revenues in the third quarter were up 2% led by double digit growth in streaming and in our digital marketing solutions product line.
As Steve stated our podcast revenues were down for the quarter.
Turning to the fourth quarter, we projected our net revenues will come in about flat to down low single digits year over year.
Political is tracking to come in around $12 million in the fourth quarter were about consistent with where it came in during the last midterm election cycle in four acute 18.
For the full year, we expect that political advertising revenues will be about $25 million were up around 16% versus 2018.
Moving to our expense performance, our cash operating expenses for the third quarter came in at 285 million and were about flat year over year.
The company is continuing to work to further reduce its operating expenses and we are making good progress.
But we still have more work to do.
We will provide guidance on the outlook for 2023 expenses during our fourth quarter earnings call.
In the fourth quarter, we expect our operating expenses will be up low to mid single digits, driven primarily by cost associated with the return of some holiday events and other variable selling expenses.
And we expect our EBITDA margin in the fourth quarter to improve sequentially to about mid teens.
Turning to our financial position, our compliance basis first lien net leverage was three eight at the end of the third quarter compared to our maintenance covenants covenant of four times.
And our liquidity was $115 million down from $206 million at the end of last year.
We used cash during the first nine months of this year, primarily as a result of the unexpected and fairly rapid deterioration in advertising demand and due to an increase in our Capex investment elevated working capital then the impact of rising interest rates.
We expect we expect to see improvement in our free cash flow performance in the fourth quarter, and we expect that our liquidity will improve slightly by year end.
After deducting the maturity of $22 7 million of our revolver in November .
There are no other debt maturities until 2024, and we believe it is important to note that our upcoming 2024 maturities are all first lien.
And that's a companys second lien bonds don't begin to mature until 2027.
Yeah.
Digging deeper into the key drivers of our financial position. It took us some time to realign our operating expenses given the rapid drop off in advertising to demand and as noted our expenses got to about flat in the third quarter.
And we have mortgages.
Our capital expenditures.
Expenditures totaled 27, sorry done $72 5 million September year to date versus $39 million for the same period last year.
This planned increase was driven by the investment to build our new innovative streaming platform, which was released earlier in the third quarter.
You will see a significant drop off in our capex in the fourth quarter to about seven and a half million versus an average of $24 million per quarter September year to date.
We will provide guidance on the outlook for 2023 capital expenditures during our fourth quarter earnings call.
Our capex in 2023 will be significantly less than it was in 2022.
In addition to working to significantly reduce our capex and our operating expenses. The company is working as discussed by David to bolster its liquidity through the sale of a number of non strategic assets.
Over the last 90 days, we have sold two real estate properties for total proceeds of $56 million and we are working on a pipeline of additional sales.
We expected to provide more specificity about the expected added proceeds from these sales during our fourth quarter earnings call.
As a result of the actions we have already taken and the actions we plan to take we continue to believe assuming that the severity and duration of any recession encountered in 2023, it's more akin to the 2001 recession and not like the great recession.
That we should be able to maintain compliance with the requirements of our credit agreements and avoid we re pricing our floating rate debt to market in the near term.
We also believe that our projected liquidity RTP sufficient to weather slowdown in advertising demand.
And we are working to position position ourselves to refinance our 2024 maturities well in advance of their due dates.
With that we'll go to your questions operator.
Thank you if he would like to ask a question. Please press star one on your telephone keypad.
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And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment as we poll for questions.
Our first question is from Dan <unk> with B Riley. Please proceed.
Yeah morning, guys. Appreciate you taking my questions I've got one and then a follow up.
Over the last couple of years, we've talked a lot about.
This large versus small market issue a lot of it was the large city has taken a lot longer to reopen in the smaller markets I mean, it feels like at this point, we're kind of a 100% open everywhere in the large markets are still lagging behind the smaller markets as far as the recovery in radio ads.
Maybe just if you could talk a little bit more about why you think that is and why at this point.
We are confident that these large markets, where we will get back to where we were pre COVID-19.
Well I think there is still a difference right between recovery in large markets and in small to medium sized markets in terms of people returning to offices and so forth. There is still some differential there.
And you know as we as we continue to talk to advertisers in these markets and continue to work forward.
We don't see any sort of discernible pattern that would lead us to believe that there's anything fundamental fundamentally different.
That said, we do scratch our heads right then because it is something which is.
Something that we don't.
Necessarily fully understand.
We don't see any substantive reason why it should be a long term point of differentiation when you when you analyze it.
And that's really that's really our best answer at this time.
Got it thanks, David and then John just yet.
And just to be sorry, Dan and just to be clear. The data, we're referring to is not outperformance in large markets versus small to medium sized markets. It's been market wide data. So this incorporates all of the other competitors in the market as well I just want to make sure folks understand thats the data worker.
The religion.
I think we lost Dan operator, so we'll get down back in the queue, maybe we should move to the next question. Yes. Our next question is from Steven.
With Wells Fargo. Please proceed.
Yeah, Thanks, and a few for me maybe first just rich you talked about the 2024 maturities and you're working to potentially finance those could you give us some more color on how those talks are going is there an opportunity to bring leverage down.
Can you push out those maturities and what's the willingness of the Counterparties to reextend those into something that's a little less of like a the wall that you're currently face in 2024.
So we've had.
A number of conversations.
Yes.
While groups, representing our first lien lenders and the crude representing.
Our second lien lenders I'd say those conversations are in early stages and are and they've been quite constructive so.
There is there are ongoing conversations there as well.
Outlines of.
The role that should fade accomplish while extending our maturities and perhaps.
While their benefits.
But it's early stages yet.
And I do think those conversations will continue for a number of months until we finally get to a point, where we have all agreed.
Solution to refinance our 2024 maturities and perhaps other benefits so.
I think the great Wolf is is that.
The lenders are well organized and well represented.
We've had very constructive conversations.
And it's going to take some time I think for those conversations that come to fruition.
Great and then.
I was wondering if you could give a little more color around podcasting being down in the quarter is that just the timing of the studio business and it can be a little bit lumpy quarter to quarter or was there anything related to pricing. There that you saw in the market would love that.
Yeah.
As I noted.
It was largely the absence of cricket media, which was the largest component of our podcasting business and the Lumpiness as you noted of of licensing fees coming out of our Pineapple Street Studios.
For the period.
And that we did take some cancellations during the quarter.
But as I noted the underlying health of the business is strong the downloads were great.
Our fourth quarter looks substantially better so it looks to us more like a hiccup in the third quarter than anything sustainable beyond the obvious point that the head the macro headwinds did impact podcast in the podcast the marketplace in the third quarter to some extent.
Great and then maybe lastly, just when we think about digital margins versus broadcast radio margins I know you've invested a lot in digital over the last few years, you've redone the digital experience a few times and because you may face disposition, you know where you're really looking at liquidity.
Hard as evidenced by some of the asset sales that are maybe going on at the moment do you have the capacity to if need be sort of slow down or temporarily pull back on some of the digital opex that would provide a boost to EBITDA because I'm guessing those those broadcast radio margins are a lot higher than the reported margins.
Maybe you could just kind of give us a sense of how those two different parts interact at the EBITDA line. Thank you.
Yes. So we are working to further reduce our operating expenses and slow.
Number of investments.
It's important to know that.
Our streaming quotes.
That's been constrained over the last several years five of growth.
In our supply.
And our new platform, Paul already seeing some benefits in terms of accelerated audience growth.
We do think that.
We hope and believe that's going to lead to accelerated growth over time as we roll out new innovative features.
That are targeted to launch over the next.
Four to six months.
And so we believe what longer term that that platform is going to be a very important driver.
Our growth and I think it's really important to note that.
I think youre, well aware that our marginal spot radio dollar.
Flows through just about 90 cents on the dollar it's a very attractive flow through rate.
The flow through rate for it.
Digital audio advertising dollar a streaming dollar is less but it's upper seventies.
And Odyssey, maybe in a somewhat different position than others given that.
40% of our revenue is tied to our own proprietary content news talk and sports. So we see.
Accelerated streaming grows as a very with a very attractive source.
<unk> accretion to the overall operating margin of Odyssey overtime, but we also believe that we've taken our podcast business has been rough because we had a.
A number of large clients that we acquired as part of his cadence 13 that had exited over the years, because we will we could meet their expectations for added revenue share and we suffered the loss of those revenues, but I think unfortunately, the pruning has positioned us for a healthier future.
And so it's all happening, Steve and I think that you will see us.
Pare back our operating expenses.
Chopped a lot of wood the over the last 90 days there is more to go and we'll talk about that more fully on our fourth quarter call.
Great. Thank you.
Our next question is from Avi Steiner with Jpmorgan. Please proceed.
Hi, good morning, Thanks for taking the questions that I've got a couple here.
One I think you mentioned you're at three eight times versus a four times tests on the maintenance covenant.
I'm curious rich where do you expect that to be at year end are you in discussions on amending that and did I hear you say in a moderate recession do you expect to remain in compliance and then I have a couple more thank you.
So yes, we.
We expect our first lien covenant.
End of year to be about three got a three nine.
And.
We expect to remain compliant.
With our first lien covenant.
Yes.
Out over at least the next 12 month period of time.
So when we look at what we're doing.
All as permitted by our credit agreement to manage.
And sustain our compliance with our first lien covenant.
I'll need feel reasonably confident that we won't be able to sustain that compliance out over time.
Sure.
And that's what we're working hard to do.
Okay.
And then maybe beyond the real estate sales people right now.
First reports on potentially monetizing some other non core assets I'm curious.
How we should think about that particularly in the podcasting space and in many maybe any progress on this front.
Yes, so as you might expect we're not going to speculate on market rumors with regards to M&A.
What I can tell you is that we are very committed to the growth of our podcasting business going forward. We believe that is an integral portion of our.
Listener and customer value proposition and if you look at what we've done with the business over time.
Starting with cadence <unk> and Pineapple Street studios, giving us we think perhaps the best.
Studio in the business.
We've launched 2400 sports, which is our own in house.
A separate studio focusing just in the sports space, we've ramped up our local our local podcast business and then of course popcorn the acquisition of the <unk>.
Podcast native marketplace with well in excess of 60000.
Sort of medium to long tail podcast yours on there. So we feel very good about the.
All in podcast business and as our AD Tech continues to improve we see greater monetization opportunities on that going forward.
Yes, I think we can say out loud that our while our podcast audience growth has been.
Really strong.
We've we've not kept pace fully monetizing that audience for a number of reasons that <unk> been.
Near the top of that list.
I appreciate that and then very last question if I can and thank you for the time, if I think about your big picture.
As you kind of think through the evolution of the business model over the next couple of years, and where you want to take the platform and I think you guys made comments and began to call that.
Platform stronger as you see it than where it was in 2019.
Do you think the company will need more cash and liquidity to invest in the business I guess to get through this near term to get to where you want to go.
And is that one of the benefits, perhaps you might be looking for in your conversations with bondholders I appreciate the time and thank you.
Yeah, So so theres no doubt.
That yeah.
We are focused on bolstering our liquidity.
And yes.
And we believe that.
<unk>.
Severity and duration of any recession that we count on next year is not as severe.
But we're going to be just fine.
And.
Look I think I think that.
The largest chunk of the investment with regard to building our new.
Personalized interactive streaming platform.
It's behind Us there.
There is absolutely more work to be done on our development roadmap, but we've really made a very significant investment.
Over the last 24 months that we believe.
Positions us for accelerated growth in the rapidly growing digital audio advertising market.
And so look I think I think when we get to them.
Better economic conditions that we're going to see the sustained.
Sustained recovery than spot radio.
Believe will position.
Participate more fully in the digital audio advertising marketplace, and that's going to show up in revenue growth, that's going to show up in our.
Our expanding EBITDA margin and improved free cash flow. So look its own with lot of uncertainty right now for sure.
But.
Based on the parameters that we outlined.
Based on those assumptions.
We think that we have a good shot of making it through and emerging stronger.
And ready to more fully participate in what we see as great secular tailwind in the audio advertising space.
I appreciate the time thank you.
Our next question is from Craig.
Huber Research partners. Please proceed.
Great. Thank you I joined late so apologize if you covered this.
Rich when you think about your spot advertising for the fourth quarter.
How the pacings look right now the bookings look right now versus a year ago. What are you sort of thinking youre spot AD revenue will do versus a year ago.
The fourth week.
Yes, we didn't provide that detail correct, what we provided was.
Well, we did say that we expect our total revenues for the third the fourth quarter to be flat to down low single digits. We did say currently we're pacing about flat and we could give further specific specificity Craig.
The outlook for political which we see at about 12.
<unk> million dollars in the fourth quarter or about consistent with <unk> 2018.
We didn't provide any any other further detail.
Okay and then.
I did hear a comment in there about they're small markets versus large markets large markets performing worse, maybe you can just go a little bit more in depth. Why you think that is what's your perspective on that.
Okay, I'm going to respectfully, we did touch on that at length in a prior question, so rather than torture, everybody I'm going to just ask you to refer to the transcript I think we covered that extensively so thank you.
Okay. My other question if I could ask you real estate sales I think you said 56 million.
If you're going to do any other real estate sales or they can be anywhere near that sort of magnitude just can you sort of size it for us what's left.
So look the characters.
It was a pretty good pipeline of additional sales.
And I don't want to speculate at this point about the ultimate proceeds for those sales, but at time, we talk to you in 90 days from now I think we are going to be in a position.
To give you.
<unk> guidance about one hopefully.
Perhaps one or two sales they've been completed and the outlook for what's left to do.
So at this point in time.
We're not going to speculate but.
More to come.
Tom.
Okay. Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.
Great well look we appreciate everybody being with US here. This morning, and we look forward to reporting back to you after our fourth quarter. Thanks, so much.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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