Q2 2019 Earnings Call

Good morning, welcome to Townsquare second quarter 2019 conference call.

As a reminder, today's call is being recorded and your participation implies consent to such recording.

At this time all participants are in listen only mode and a brief question 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.

With that I would like to introduce the first speaker for today's call Claire Yenicay Executive Vice President.

Ma'am you May proceed.

Thank you operator, and good morning to everyone. Thank you for joining us today for Townsquares second quarter financial update with me on the call today are Bill Wilson, our CEO and Stuart Rosenstein, our CFO and executive Vice President.

Please note that during this call we may make statements that provide information other than historical information, including statements relating to the company's future prospects. These statements are considered forward looking statements under the safe Harbor provision of this private Securities Litigation Reform Act of 90, 95 and are subject to risks and uncertainties that could cause actual results to differ materially from those projections.

These statements reflect the company's beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in the Companys annual report on Form 10-K filed with the SEC and we incorporate these by reference for this call. We may also discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted operating income and make certain pro forma adjustments.

Such non-GAAP financial measures should be used in conjunction with all the information contained in the quarterly and year end reports available on our web site.

At this time I would like to turn the call over to Bill Wilson.

Thank you Claire good morning, everyone and thank you for joining us.

Let me start by sharing with you that in the second quarter Townsquares net revenue increased a very strong plus 8.3% ex political over the prior year and plus 7.4%, including political our strong revenue growth is being driven by the consistent strength of our advertising and Townsquare interactive segments, just as impressive our second quarter adjusted EBITDA increased plus 19% over the prior year, representing an all time record high for Townsquare and a nonpolitical year. It is worth noting that our net revenue and adjusted EBITDA Q2 results exceeded our previously issued Q2 guidance.

Also worth noting we ended the second quarter with 4.9 times net leverage which is our lowest net leverage ever as we continue to make reducing our net debt a priority townsquare strong Q2, and first half of the year results. We believe demonstrate that our local first strategy combined with our talented teams execution is accelerating our transformation from being a leading traditional radio broadcaster to being a premier local media and entertainment company proudly focused on markets outside the top 50 cities in the United States.

As I have shared previously we are very confident that our marketing and advertising solutions are differentiated from our competition in our markets and our very effective and powerful to help local clients achieve their goals and as a result enable us to aspire to be not only the number one radio broadcaster, but also the number one local media company in the markets we choose to operate in.

I am proud of our talented townsquare team and the focus and passion in which they are executing our local first strategy.

As a result, 2019 is turning out to be a transformative year for townsquare as we continue to outperform our local competitors from a broadcast perspective, which I will share details on shortly while at the same time driving very strong digital solutions growth, enabling digital overall to be a much greater percentage of our companys revenue.

Revenue from our digital advertising and marketing solutions now contributes more than one third of our total company revenue putting us on track in 2019 to deliver the strongest EBITDA growth for a non political year in Townsquares history.

Given the strength of our performance through the first half of the year as well as our outlook for the second half of 2019 I am very pleased to share that we are raising our full year adjusted EBITDA guidance and narrowing our full year revenue guidance to the high end of the previous guidance range.

Stuart will provide further details on our guidance in a moment.

The headline is that we are raising our 2019 adjusted EBITDA range to be between 90 and $100 million from our previously issued range of $94.5 million to $98.5 million due to our Q2 outperformance and our current outlook for the full year.

I thought it would be helpful to provide a few tangible examples and data points that reinforce the transformation of town square in 2019, and our belief that we have a very differentiated portfolio of advertising and marketing solutions for local clients first in our markets that are measured by Miller Kaplan Townsquare second quarter local spot broadcast radio revenue increased plus 1.1% compared to the second quarter of 2018, while the overall industry was down negative 2.7%. According to Miller Kaplan demonstrating that we are outperforming the industry in local radio spots sales in these markets second our total revenue for the second quarter in markets measured by Miller Kaplan increased the plus 5.5% compared to the second quarter of 2018, while the industry grew plus 2.3% in these markets.

This is consistent with our results overall and all of our local markets as our second quarter advertising net revenue, which includes revenue from our broadcast and digital advertising products and solutions increase plus 7.1% ex political and increase plus 6%, including political our first party data initiative are alive and local on air talent and our strong ratings have been instrumental to improving our local broadcast performance.

It is also worth noting that our local broadcast revenue is being bolstered by our partnership with analytical which allows for broadcast measurement and quantitative attribution and has proven not only to be a valuable tool for advertisers, but also a great retention tool for town square.

As of the ended the second quarter nearly 1500 advertisers were connected to our Townsquare analytics platform and connected clients have an attrition rate approximately 50% below that of our other clients in the second quarter.

And these clients spend 20% more with us than our company wide client average over the past 12 months.

Great local on air talent with strong creative combined with valuable data and attribution tools clearly delivers results.

As I have outlined in detail previously on our earnings calls the primary revenue growth driver in our advertising segment is and we expect will continue to be our town square ignite digital solution, which remains the fastest growing local clients solution across our company.

We expect that Townsquare ignite, which as a reminder is our proprietary in house digital programmatic business will approach $50 million of revenue in 2019.

And 100 million of annual revenue within three to five years.

We are confident in this estimate because in our experience townsquare ignite is differentiated in our markets and thus we believe we have a distinct competitive advantage.

The competition that Townsquare ignite often faces in our markets as a salesforce that white labels, a third party product.

Which lessens the buying power and door margin of the provider and also we believe results in a subpar customer experience.

This is contrasted with our solution, where the entire AD tech and offering is in house, and we own and control the customer relationship from end to end from the activation and optimization of the client campaigns to the detailed in depth client reporting, which we believe leads to a better customer experience and higher client retention rates.

In addition to our advertising revenue in Q2 growing more than 7% ex political our advertising profit also increased very strongly in the second quarter by 11.3% overall and 8.5% on a pro forma basis with a strong profit margin of approximately 34%.

I believe it is worth noting that our portfolio of strong broadcast brands great local on air talent local live events and our in house digital solutions and platforms provide local businesses a trusted media partner, who provides world class customer service, while achieving their goals.

As a result of the ecosystem that we have created clients who in the past may have bought only broadcast from us or only digital from US now look to us for comprehensive solutions and thus the large majority of our clients partner with us for multiple integrated campaigns. This is one reason for our strong advertising segment results.

A significant contributor to our strong performance in 2019.

Is our subscription based digital marketing solutions Division Townsquare interactive.

I am pleased to share with you that Townsquare interactive added approximately 1100 net subscribers in the second quarter, which you will note is a significant increase in quarterly net adds ending the quarter with approximately 17300 subscribers.

This drove second quarter net revenue to increase approximately 31% and adjusted operating income to increase a very strong 46.8% over the prior year.

Townsquare interactive operated at a healthy 32.8% profit margin in the second quarter.

And we anticipate that these margins will remain relatively stable going forward at approximately 30% as we balance investment and growth.

In the first half of 2019 Townsquare Interactive has added nearly 2000 net subscribers and is well on track to surpass our initial goal of 3000 net adds in 2019.

We are confident that we will continue to deliver strong growth at Townsquare interactive due to our high quality product offering growing salesforce greater productivity per seller and our focus on client retention.

Based on our current subscriber base and monthly average revenue per subscriber of $300.

Townsquare interactive annual revenue run rate is $62 million as of the end of Q2, and we believe well on pace to achieve our projection of 100 million of annual revenue within three to five years.

We continue to have great success, selling townsquare interactive outside of our local market footprint with approximately half of our current subscribers not residing within our 67 radio markets.

At the same time, we believe that we are still under penetrated within our local market footprint as well as within our local markets of similar size and demographics.

To illustrate the runway we have in our local markets on average we estimate there are approximately 7500 smbs in each of our markets and thus across our 67 markets that totals over 500000, Smbs and yet we only have 17300, townsquare interactive subscribers today of which only about half or 8600 50 or in our markets.

Outside of our local markets, we estimate our market for Townsquare interactive, it's well over 5 million Smbs.

Therefore, we believe that our future runway for Townsquare interactive is significant in our local markets as well as in like sized markets across the United States.

Turning to our live events business as we discussed last quarter after carefully evaluating our asset portfolio. We determined that music festivals, we are not core to our local first strategy and we began a search for a buyer of those assets. We completed the sale of the festivals to a subsidiary of live nation. During the second quarter for $10 million and therefore the festival results are now shown as discontinued operations.

Our remaining live events business consist of our 200 annually recurring local live events, which are core part of our local first strategy and we believe often have a competitive advantage.

Although our live events net revenue declined approximately 14% in the second quarter. We will we were able to keep profit stable and improved profit margins for the remainder of the year, we expect to see similar revenue trends as we fine tune our portfolio to focus on live events that are core to our markets and meaningful to our communities and have a healthy margin.

Although we plan to reduce expenses, we expect live events profit will also decline before returning to modest growth in 2020.

Looking at our balance sheet, we ended the quarter with net leverage of 4.9 times, our lowest net leverage level in our company's history. This included a cash balance of approximately 63 million.

And undrawn revolver capacity of $50 million.

We remain focused on reducing our net leverage over the course of the next 12 to 24 months.

And we believe that we have ample liquidity on hand to balance net leverage reduction with investment in attractive growth opportunities that meet our investment criteria.

With that I will turn the call over to Sue.

Who is going to provide greater details on our financial results.

Thank you Bill and good morning, everyone.

As a reminder, over the past two years, we have completed several divestitures and discontinued certain portions of our live events business as we reoriented the business towards local media platform.

The results of these live events businesses have been reclassified to discontinued operations for the current and historical periods and these results can be found in our quarterly filings on Form 10-Q .

All of the financial results that we will discuss today are related to continuing operations.

Unless otherwise stated the second quarter and year to date results I will discuss today are pro forma for the acquisition of three radio stations in Princeton, New Jersey on July 2nd 2018, as if they occurred at the beginning of the reporting and comparison periods.

Please refer to the tables included in our earnings release, which provide GAAP results and pro forma results as well as our non-GAAP performance measures.

For the quarter ended June Thirtyth 2019, net revenue increased 5.3% to $113.1 million as compared to the second quarter of 2018.

As Bill noted earlier this exceeded our previously issued guidance range of 109.5 million.

To $111.5 million.

Excluding political revenue, which declined approximately $800000 as compared to the prior year total net revenue increased 6.2%.

For the six months ended June Thirtyth 2019.

Net revenue increased 5% and 5.7% excluding political revenue compared to the first six months of the prior year.

Townsquare interactive net revenue increased 30.8% in the second quarter.

Direct operating expenses increased 24.2% translating to an adjusted operating income increase of 46.8% compared to the second quarter of the prior year.

Townsquare interactive second quarter operating margins expanded to 32.8% as compared to 29.2% in the prior year.

Advertising net revenue increased 3.6% in the second quarter as compared to the second quarter of 2018.

Excluding political revenue advertising net revenue increased 4.6%.

In the year to date period advertising net revenue increased 2.8% or 3.6%, excluding political revenue as compared to the first six months of 2018.

The increase in advertising revenue was driven primarily by Townsquare ignite, which continues to be our fastest growing product advertising direct operating expenses increased 1.3% in the second quarter and 1.6% in the year to date period.

Due to continued investment in our product and sales team for Townsquare ignite to support our revenue growth.

Adjusted operating income for this segment increased 8.5% in the second quarter.

And 5.6% in the year to date period compared to the same periods of 2018.

Live events net revenue declined 14.9% in the second quarter and 12.4% in the first half of 2019 compared to the same periods of 2018.

As we continue to streamline that business and eliminate certain non core low and non margin events.

Live events expenses declined in line with revenue, which kept live events adjusted operating income stable on a year over year basis.

Corporate expenses were approximately flat in both the second quarter and the year to date periods.

Second quarter, adjusted EBITDA increased 15.6%.

To $30.1 million as compared to the second quarter of 2018.

This exceeded our previously issued guidance range of $27 million to $28 million.

As Bill mentioned earlier this growth rate represents an all time high at town square in a non political year.

In the year to date period, adjusted EBITDA increased 11.9%.

To $49.6 million as compared to the first six months of 2018.

For the second quarter.

On a GAAP basis net income from continuing operations increased $2 million to $10.6 million.

We'd like to remind you that the provision for income taxes included on the face of our income statement is for GAAP financial statement purposes only.

We maintained significant tax attributes, including $189 million of federal and it will carry forwards and other substantial tax shields related to the tax amortization of intangible assets. We continue to believe that we will not be material cash taxpayer until approximately 2026.

As of June Thirtyth, our total debt balance was $560.5 million.

Our total cash balance was $62.8 million and we had a revolver capacity undrawn $50 million.

Our net leverage as of June Thirtyth.

Was 4.9 times based upon a trailing 12 month pro forma adjusted EBITDA of $101.3 million.

As Bill stated earlier, our second quarter net leverage is the lowest in our company's history.

Yesterday, the board approved our seventh quarterly dividend distribution, which will be payable on November 15th 2019 to shareholders of record as of September 26.

The declared dividend is 7.5 cents per share.

Which equates to 30 cents per share on an annualized basis. This represents a dividend.

Over 5% at our current share price.

Looking forward to Q3, we expect net revenue to be between 109 and $111 million, representing an approximate 3% to 5% increase over the prior year on a pro forma basis.

Or 5% to 6% excluding political revenue.

We expect adjusted EBITDA to be between 27, and $28 million, which would be flat on the low end of the range and up 4% on the high end of the range compared to the third quarter of 2018.

Excluding political revenue this would represent growth in the mid to high single digits.

As a reminder, in Q3 of 2018, we recorded $2.3 million of political revenue.

In Q3 of this year, we're anticipating approximately 500000 of political revenue a decline of nearly $2 million.

For the full year, we are tightening our revenue range towards the upper half and expect net revenue to be between $424 million and $430 million, which represents pro forma net revenue growth of approximately 3% to 4% over the prior year.

Excluding political revenue, which we now anticipate will come in stronger than originally expected at around $3.5 million for the full year. This represents growth of approximately 5% to 6%.

We are raising our 2019 adjusted EBITDA range to be between 90 and $100 million from our previously issued range of $94.5 million to $98.5 million.

This is due to the strong Q2 performance and our current outlook. This represents pro forma growth of approximately 2% to 4% as compared to 2018, even with the loss of high margin political revenue in 2019.

We are not providing EPS information at this time as we continue to work through technical issues revolving around the accounting for our outstanding warrants with a newly appointed independent orders vivo.

We will provide this data when we file the company's quarterly report on Form 10-Q .

And with that I will now turn the call back over to Bill.

Thanks, Stu and thank you to everyone who dialed in this morning, we are very pleased with our performance through the first half of the year and our ability to raise guidance for the full year, we look forward to continuing to deliver strong results for the back half of the year and we are on track to deliver the strongest year over year adjusted EBITDA growth in a nonpolitical year in our company's history.

We hope that you agree that townsquare as not a traditional radio broadcaster, but has evolved to be a premier local media and digital marketing solutions company with a thriving digital business that has net revenue growth in excess of 20%. We are hyper focused on super serving our local communities and our local clients and helping their businesses grow through our local first strategy, while simultaneously delivering results for our stakeholders.

As always please do not hesitate to call us to discuss the business further or ask any questions I look forward to speaking with our investors at every opportunity and with that we're now happy to open the call for questions. Operator will you. Please open the lines.

Thank you.

We will now be conducting the question and answer session.

If you like to ask a question today. Please press star one on your telephone keypad and a confirmation don't indicate your line is in the question queue.

You May press Star two fewer later move your questions from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.

One moment. Please so we poll for questions.

Thank you.

Our first question is from the line of Michael Kupinski with Noble capital. Please proceed with your question.

Thank you and congratulations on a great quarter guys.

First of all I wanted to just ask I know that you are adding a number of salespeople and so forth in a night can you just tell me what the level of Ft East for the total company is at this point we were.

That was like maybe a year ago or maybe even for the first quarter. Just wanted to see how quickly you are adding employees at this point.

Sure. Thank you Michael It's Bill I think when you're asking about ft is you're asking specifically about sales personnel is that correct that's right.

Okay. So from a local a perspective, it's relatively flat year over year, So what and as you know Michael.

The local agencies are the primary driver of our ignite revenue and growth and bringing that to market. So thats really an apples to apples comparison year over year from a t. ESI perspective, we've added sellers and they're primarily driving Rts ice sales and that is roughly I would say.

12 people 12 to 15 people in terms of sales from a t. ASI perspective that have increased year over year.

Gotcha, and then on Townsquare interactive up a very strong 30%.

It looks like you indicated that the revenue run rate is like 62 million or so it looks like the revenue cadence will achieve $100 million in revenue much earlier than well, let's put it this way on the earlier side of your three to five year target.

Growth would have to slow to low double digits to be at the long end of your guidance range. I was just wondering is there any reason to be a little concerned that we would see that type of deceleration of revenue growth at this point.

Maybe you're just being a little conservative in terms of the.

Achieving your target.

Thanks, Michael I think as you know our confidence in that product and that's why we spent the time on this call to outline not only the differentiation that we have having everything in house, but also importantly.

The runway, we have with five to 6 million smbs that fit this profile and a couple of hundred in our local markets. When they are 7500. So there's tremendous amount of runway that's really what's driving close to 2000 net adds year to date.

We're being conservative in the three to five years I think we had originally said 100 million in three to five years on our Q3 call last year. So I think our next call, we'll update that projection, but we're on target and I think it's fair to say, it's probably on the earlier side of our projection initially that on the later as you've indicated here.

Great. Thank you and then number of radio companies indicated that the prospect of lifting ownership caps. We have slipped into next year can you give us your thought on the prospect of lifting radio shack radio ownership caps and the possibly give us an update on the current M&A environment for small mark small market radio stations.

Yes, so in terms of when we expect de rig and the announcement on that what we are hearing is in the first quarter next year was the most likely timeframe. It's right now open for review review as you know, Michael and others and we've spoken about it for quite some time, we are very pro lifting the caps. We've outlined why that is particularly in our size markets, where there is a lot less coverage of news and entertainment from print journalism in television Journal, we really feel like we're serving these local communities, particularly as others.

Our less so these days so we think de Reg will open up choice for these markets and provide a lot more coverage in terms of the M&A activity I'll ask Claire to touch on that so I think that there hasn't been a material change in M&A activity in the small midsize markets that we like to operate in.

I think we believe that a lot of the owners of radio stations in those markets are waiting to see what happens with keybanc before they.

Look at that their properties on the market.

Gotcha Thats all I have congratulations again.

Thank you Michael.

Our next question is coming from the line of Jim Goss with Barrington Research. Please proceed with your question.

Thanks, No Townsquare has from from the start wanted to differentiate itself from radio group operators with the the the added growth there was primarily live events and I'm sort of thinking that.

Pressure to make that happen.

Probably creative that your misstep with the name.

But now with the growth there with Ts I and ignite.

You seem to have Oh.

Better differentiated strategy and I'm wondering if it gives you an opportunity to reshape Uh huh.

Where live events might fit in and how big it might be or if it will just be an ancillary type business you know as as it's developed into at the moment.

Hey, Thanks, Jim as Bill.

I would probably reclassified what you stated because having joined the company and when it was founded in 2010. It was always focused on a great broadcast business and then adding the live events and digital growth. So digital is always been a key component of our growth strategy I think whats fares. What you alluded to is that our live events, we expanded outside our local market footprint with name and some other assets that we built or acquired through the years and going back a couple of years now as I've mentioned, we really focus back on our local markets and Thats. Our local first strategy and live events are still very important in those markets as I noted on the call. We have about 200 annually occurring local events in our local communities. They are differentiated they are providing great entertainment value and it's a nice business for us in a call. It mid teens profit margin currently.

Part of what Youre seeing in 2019 is we're fine tuning that portfolio to make sure. We're focused on events that means a lot to the community and also a great business for us so.

In some ways. We retired some events also in our local markets that may have had high revenue, but little to no profit and Thats why you are seeing in this quarter our live events revenue.

Decreased roughly 14%, but at the same time our profit you noted increased quite nicely in live events this quarter.

So live events will continue to grow I think in the future. This year is really a year of rebalancing. It and then we expect to modestly grow that in 2020 and I think we are the best provider of that in our local markets, but what you won't see is us expanding outside our local market footprint in live events anytime soon.

Okay.

Couple of other smaller things I think I'm wondering with the.

The I think we've talked in the past about.

The competition you might have with Townsquare interactive I'm wondering if you feel the.

A combination of going out and no media.

That was announced yesterday will somehow.

Impacts that competitive landscape.

I know you don't overlap that much but you can do both focused on smaller markets with that sort of activity.

So as you know we don't go to overlap that much and given what we've seen this year to date with almost 2000 net adds in one of our best quarters ever with 1100 net adds in growing our revenue over 30% and our profit margin over 40%, we couldn't be more bullish on T. ASI and again, that's why we took the extra time to sometimes when we're talking to investors. They don't understand how much runway, we actually have in this business with today, so a little over 17000 subscribers and in our view the core SMB call. It.

Annual revenue less than $5 million in markets of population less than a million.

We have about a $6 million that we target. So we have a huge runway so getting that new media others clearly they see what we see we have the benefit of performing quite well.

And I really believe we have a differentiated offering there not only from our sales force, but the products that we have so we welcome all new competitors, but currently we really are differentiated in the marketplace and and really building that business quite nicely. As you said earlier on your other question with TSA and ignite really being the core driver of our growth this year and in the future.

And your discussion with Mike you were just talking about the tremendous runway for 100 million.

For each of ignite and interactive is just a convenient starting point too.

To shape, some further growth from there I'm sure.

Exactly.

The political lift you mentioned I think three and half million full year political I was wondering if you start to get some early primary.

Political ads in the fourth quarter, especially in.

And then environment like the one we expect to be on top of mind for 2020.

Correct and that's currently in our three and a half million forecast that we would be getting some of that early primary and we see a very healthy political environment now and really excited as we go into 2020.

Okay. Thanks very much.

Thank you Jim appreciate it.

I don't think we have any other calls I just want to thank everybody for dialing in this morning were incredibly incredibly proud of our results I'm incredibly proud of our town square team across the country and we are quite confident in our outlook for the future. Please reach out with any questions or any feedback you have at any time and thank you again for dialing in this morning.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.