Q2 2019 Earnings Call
I'll now turn it over to Mr., Collin Jones, Senior Vice President corporate development and strategy.
Sir you May proceed.
Thank you operator, welcome everyone to our second quarter 2019 earnings Conference call.
I'm joined today by our President and CEO , Mary Berner, and our CFO John Abbott 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 in forward looking statements. These statements are based on management's current assessments and assumptions and they're subject to a number of risks and uncertainties.
A full description of these risks as well as financial reconciliations to non-GAAP terms can be found in our SEC filings, including our press release and Form 10-Q , which were filed earlier this morning.
A recording of today's call will be available for about a month and details for how to access that replay and our SEC filings can be found on our website.
With that Mary I'll turn it over to you.
Thanks, Colin and good morning, everyone.
As you know we've been pretty active on the transaction front since we last spoke the cutting through all the M&A noise, we're pleased to be reporting another solid quarter.
On an ex political same station basis revenue in the quarter was up 1.8% and EBITDA was up 3.7% driven primarily by strength in digital national and network revenue channels.
On adjusted for political revenue was up 8.7% and EBITDA declined by about a point.
Our results reflected our focus on the financial goals and our strategic priorities, we established when we emerge from bankruptcy and which continue to drive us today.
These include reducing leverage to below four times.
Optimizing the portfolio to support de leveraging and enhance competitive positioning.
Executing a multi pronged profitable and high growth digital strategy.
And enhancing operating performance through nerve numerous initiatives, including yield management inventory optimization and cost reduction strategies.
Since our last earnings call, we've been very active in paying down debt with M&A priest proceeds and internally generated free cash flow.
In June and July alone, we prepaid 165 million of our term loan, bringing our total.
Debt prepayment in the first full year post bankruptcy to approximately $250 million, a nearly 20% reduction in our debt.
As of 630 net leverage has moved down to approximately 4.8 times, a full turn of decline in a year.
Also in the quarter, we responded to attractive opportunity in the capital markets to issue senior secured bonds, whose proceeds were used to repay some of our remaining term on.
The recent debt repayments prepayments were funded in large part through our M&A activity.
Since our last call we have closed all four previously announced portfolio optimization transactions.
Two of those were swaps with no change of cash however, the sale of six stations to educate educational media Foundation and the sale of K.L. of Wes in L.A. to Morello media together generated 146.5 billion in gross proceeds.
Also we recently announced an agreement with Red Apple media for it to acquire our New York station W.A.B.C.A.M. for 12.5 million and when that transaction closes we'll use the net cash proceeds to pay down debt as well.
Our swaps with Entercom and kind of store media were designed to meaningfully strengthen our positions in two key markets Indianapolis and Allentown.
In our first quarter of operating with the new stations, both markets grew EBITDA versus prior year with expense synergies and particular outpacing our expectations.
We've also seen good traction on the rating side for both clusters.
In India, we owned a station that was it was a direct format competitor to one of the stations that was acquired.
After consolidating the cluster we change formats about legacy station W. Y RG FM from Chr to rock to resolve this head to head battle and in the first month the station under its new format went from a 1.7 a share to a 4.8 share and our total Indianapolis cluster now claims a significant share of market.
And in Allentown, our newly acquired W. OTI FM just posted a number one spring book, which we expect will give us a nice trajectory into the back half of the year.
Moving to our topline results are multi prong digital strategy continues to meaningfully outperformed the industry and is helping to offset weakness in local spot revenue.
In Q2, our combined digital businesses grew 69% year over year, reflecting strong execution and new product innovation.
And just the last year the tremendous digital growth, we've experienced taken digital from below 5% of our total revenue in Q2 2018 to more than 7% of the total revenue this quarter.
And most importantly in each of the last four quarter, we've enjoyed solid profit margins.
To give you a little insight into what is fueling that digital performance.
First our highest margin digital business streaming grew 30% in the quarter.
That growth is coming in part through new distribution channels, we previously announced a deal with tuning and now where the home of the largest audio network of custom skills for Alexa and Google home with 365 stations in 17 nationally syndicated shows now accessible through voice activated technology.
Providing us with new monetization opportunities.
Recently for example, we were able to leverage this unique network to sell an exclusive sponsorship of all Alexa and Google home skills to the job search site indeed.
We've also made recent capital investments in both hardware and software across the streaming platform to enhance sound quality and to improve our ability to deliver content and spot loads in the stream, which differ from the over the air broadcast.
Our local digital marketing services platform, which we refer to as our C. Suite of products is our next highest margin digital product.
And C suite revenue was up 77% in the quarter.
A key driver of growth here is our focus on attachment rates, which are up over 30% in the last six months.
Nearly 10% or over a thousand local direct and agency accounts are now buying a C suite product on an average on average each month.
We've evolved our local sales force through training and new hires to better package digital with radio.
In support of that transition. We now have 60 digital sales managers managers up from just 17, two years ago and Weve armed them with innovative solutions like the epic guarantee which is the Industrys first integrated local radio and digital lead guarantee program.
And new data attribution capabilities back by partnerships with leads Rx and Veritone both leaders in that space.
And finally, our podcasting business up 139% in Q2 and is now a meaningful contributor to the company's top and bottom line.
Monthly downloads are up to 67 million nearly double what we had a year ago.
And as I mentioned on the last call, we hired John Wardak, who ran the Wall Street Journal podcast business to head up podcast content development and acquisition.
And under John we continue to build up our content offerings.
For example, we recently commenced a podcast partnership of global you tube and publishing sensation psychologists Jordan Pearson, who is sold 3 million books, and 50 languages and has amassed nearly 150 million Youtube views.
Downloads at his top ranking podcasts are up 30% quarter to quarter.
We also announced that we will be the exclusive sales partner for the female targeted soon to be launched Lemon Nada network. A podcast content company, who is co founder was the executive producer of pod saved the people and have entered into a partnership with E Sports and gaming platform sub nation, which includes a new podcast called the voice of sports and a syndicated broadcasts element as well.
So a lot of positive momentum and importantly, we've been able to build this business from scratch with a healthy profit margin that is actually in excess of that of some of our core business lines.
While investing in our digital initiatives remains key to our strategy. We've also been enhancing our operating performance in the core business.
In these areas improvements sometimes requires more transformative approach as to how we do business. For example, the massive systems changes and organizational development over the last two years that have resulted in a sea change in our ability to maximize the value of our inventory.
We are largely finished with the rollout of the pricing and inventory systems that have been highlighted on previous calls.
These systems people and process investments, we have made in revenue management has given us the critical ability to look at all of our inventory as one big pool, allowing us to match supply with the demand that delivers the most EBITDA to the company regardless of sales channel.
Now that we're finally able to track at scale, our pricing in sell out trends, we can manage the business in view of those trends and better project inventory needs and availability in advance.
Which is not only helped drive margin and sell out across the board, but has also allowed us to develop and sell new revenue opportunities.
For example in this quarter alone, we generated nearly $4 million of operation opportunistic revenue that we can track directly.
From the spokes National and network advertising vehicles that we created with a degree of precision we simply could not achieve before the new systems.
Many advertisers are looking for tailored solutions and overall market dynamics can shift relatively quickly. So the ability to view all of our inventory as one pool with granular knowledge of all elements of that pool is not only a huge new benefit for us it's a strategic imperative.
Along with the investments that we've made in our revenue management capabilities and in digital we continue to be relentlessly focused on cost management.
Our expense increases this quarter were entirely driven by variable cost increases associated with higher revenue in digital national and network.
Absent those increases active cost reductions essentially offset inflationary expense pressures otherwise baked into our cost profile.
While the low hanging fruit and cost savings has been realized at this stage. We continue to focus on cost reduction strategies daily, including through reengineering business practices, and leveraging technology, where possible to gain efficiencies.
For example, we're in the process of centralizing our traffic function to oversee all spot advertising trafficking consolidating a function function previously distributed across 90 different locations down to three hubs.
When completed in November this effort will decrease overall cost and is expected to improve the effectiveness of the traffic function.
Similarly, we started to work on we have already started to work on consolidating our network technical support operations from two facilities into one.
And have already consolidated our music content management system for multiple technology platforms to one consistent uniform platform.
We view these types of projects as critical to free up dollars for investment in high growth areas that better position the company long term.
Looking ahead pacing in the third quarter is slightly negative ex political political it's about a 50.
Basis point headwind at this stage local spot revenue continues to be a source of weakness and currently network revenue is also picking pacing down though that business tends to be lumpy from a pacing standpoint.
Digital revenue across all three strategies is pacing up nicely as his national spot.
As I mentioned at the onset our consistently strong performance as a result of execution against our strategic priorities and financial goals at the same time, we are deliberately transforming cumulus media from a traditional broadcast radio business to a true audio first media and entertainment company a platform that provides premium content content to consumers.
While providing advertisers with local impact and national reach not just on air but through digital mobile voice activated voice activated media solutions and integrated digital marketing services.
So with that I will turn the call over to John for additional financial update John .
Thank you Mary I'll give some more color on our financial results before covering a few additional items related to cash flow debt and M&A.
Also given the number of deals Weve closed.
M&A activity you had a significant impact on our as reported results this quarter so for the sake of comparability.
I will speak to our financials on a same station basis, adjusting last year's and this year's 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 Red Apple media, which we expect to close in the latter part of this year.
Additionally, as we've noted this quarter and in previous quarters the boundaries between our historically reported segments have become less and less relevant.
With the enhanced insight that we have in inventory availability and pricing.
We now move inventory among sales channels to optimize revenue more than ever we are managing the business as an integrated whole and we expect to see significant benefit in operating this way going forward.
With that in mind I will spend a few minutes on our financial results for the quarter on a consolidated basis same station basis.
Total revenue for the quarter, excluding political was up 4.8 million or 1.8%. We saw strength in network, which was up nearly 4% national spot, which was up double digits in the quarter and digital which was up 69% in the quarter as Mary previously mentioned.
Our strength in both National and network was supported by the revenue management initiatives that are continuing to gain traction while our digital performance was driven by strong execution on all three strategies.
These positive drivers were partially offset by a continuation of market driven challenges the pressing local spot revenue performance.
Including the impact of political total revenue was up 1.8 million or <unk>, 0.7% from Q2 of 2018.
We were up against a political comparison.
Of about $3.8 million.
In revenue last year, and we did about 800000 of political this year.
Moving down the Pinedale total expenses were up in the quarter by 2.4 million or 1.1%.
The net expense increased in the quarter was entirely driven by higher variable cost on digital revenue increases and the other growing revenue streams.
As you May remember in Q2 of 2018, we were hit by a onetime write off related to the shutdown of the United States traffic network. However, this quarter was impacted by several other onetime items that more than offset you STN impact from last year. So in total onetime items did not affect the quarter.
EBITDA for the quarter on a same station basis, and excluding political was up 2.2 million or 3.7%.
Without normalizing for political EBITDA came in at 61.5 million, a decline of 500000 or <unk>, 0.9% year over year.
We recognize that modeling for the rest of the year may get a little bit complicated because of our M&A activity so to help with that effort.
We wanted to share with you what that 2018 M&A adjusted revenue numbers for Q3 and Q4 are.
And for Q3.
The numbers 20 to 72.2 million Q4 to $98.6 million and those numbers reflect the same announced transactions for which we adjusted the Q2 numbers.
And then for EBITDA Q3 in Q4 2018, adjusted prior period numbers or 59.2 million and 62.3 million respectively.
Additionally, since political such a big factor.
In the next few quarters, we thought it would be helpful to note that in Q3 last year, we had $3.6 million of political revenue and in Q4 last year, we had $11.3 million of political revenue.
Moving off the PML in Q2.
This year, we spent about 5.6 million on Capex, and we expect to spend about $25 million.
Capex for the full year.
Turning to the balance sheet, we have been very active since we last spoke taking advantage of good market conditions to refinance a portion of the term loan and also making prepayments to reduce our total debt. Following the closing of our sale of six stations to educational media Foundation for gross proceeds of $103.5 million on May 30 Onest.
We completed a $115 million voluntary prepayment of the term loan using the net proceeds from that sale and cash on hand from operations.
In mid June we Opportunistically issued new senior secured first lien notes the offering was well received allowing us to upsize the deal with 500 million and price at 6.75%.
The new notes have a maturity of July Onest, 2026, which considerably de risks our balance sheet.
And we were also able to achieve more flexible terms on the bonds than we had.
In our exit term loan.
We used the net proceeds of 492.7 million from the notes.
To prepay nearly half of the remaining term loan at par.
Finally, we completed the sale of Camel has helped him to rule media on July 15th for gross proceeds of $43 million and we used the net proceeds from that sale plus cash on hand from operations to make a 50 million dollar voluntary prepayment on the term loan.
Collectively we have now reduced our debt by approximately $250 million in the year since we emerged from bankruptcy.
Net leverage as of 630 was 4.8 times and after July's $50 million prepayment net leverage was further reduced to approximately 4.6 times.
The last item to note on the M&A front is 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 approvals that toll has received to date.
There was some positive progress this quarter and that one of those appeals was dismissed which we believe has increased the likelihood of and potentially decrease the time to achieve a positive outcome for this transaction.
We continue to be in discussions with toll brothers and remain optimistic that we will be able to reach a new agreement that's attractive to both parties.
We still view this property is a valuable asset that can be sold to raise cash and pay down debt and we'll keep you updated on our progress as we have more to share.
Finally.
I'd like to give a brief update on the status of the petition for declaratory ruling that we filed with the FCC.
Our current equity structure of course consists of class a and B shares and series one into warrant which was crafted to comply with the rules.
Limit foreign ownership to 25%.
However to simplify the structure and accelerate conversions of warrants into class a shares to trade on Nasdaq.
We filed a petition for declaratory ruling about a year ago to allow higher foreign ownership and our stock than permitted under the rule.
Grant of our request involved not only the approval of the FCC, but also the review of a group of Representatives.
From the executive branch named team Telecom.
The FCC issued a public notice on this petition on May 20, Onest 2019, and the team Telecom review was commenced shortly thereafter.
No party other than team Telecom is filed comments with respect to the petition in the period for filing comments is closed we're now going through the process of responding to team telecoms data requests and questions. At this stage, we don't have an updated view on the timeline for a definitive response.
And what we've said historically, which is that a reasonable expectation is for a response to our request to be received by the end of 2019.
At this point, we'd like to open up the line for Queuing day, operator, we're ready for the first question.
With this I would like to remind everyone in order to ask a question over the phone Super far then the number one on your telephone keypad.
Sales.
Again, the do D. Star then the number one on your telephone keypad.
Your first question comes from the line of Marci.
Right here your line is open.
From Marci I had a quick question you guys mentioned that Q3 pacings are slightly negative is this on an as reported basis or same station and I was wondering if you guys could give some color on how your AD categories are trending.
Yes, sure that is on a same station basis. So that's that we're looking at that adjusted for the transactions as well.
Yeah, I can address that the categories are stronger categories.
This quarter were telecom and media financial and travel.
And the weaker weaker category weakest categories, where entertainment home products and automotive.
Got it and one one last one entercom are now instead, its acquiring two podcasts companies yesterday.
And I know, there's a lot of growth in this space, but it feels increasingly crowded.
Just wanted to.
Your thoughts on your strategy, there and how you guys plan on defray differentiating yourselves.
Yeah, I think the purchase speaks to the opportunity in the market.
And while we are always mindful and sensitive to new competition.
Weve as Weve said shown we've grown nicely organically and we still see a great deal of runway in that growth.
With regard to our success to date, we see that as driven by good execution.
And we do have some some we think some core strikes.
You know an experienced network sales organization with deep relationships and a track record of strong monetization.
We have the second largest promotional platform after I hurt with 250 million listeners.
Which we use and are using to promote podcasting.
And we have an internal content development arm with the which I mentioned in my prepared remarks, which were.
Built up.
And a proven ability.
To identify and partner with third party content creators.
So I think theres theres runway in our growth.
Got it.
And where do you guys expect glut net leverage to be at the end of the year.
Yes, I don't know that we have a.
Forecast for that I mean that.
A couple of things to keep in mind. One you know once we lap Q4 last year, which is the big political quarter.
The LTM, if you're looking at and leverage based on LTM EBITDA.
LTM EBITDA will drop down because of that.
But.
I mean it.
Ill add a particular number that we're putting out but I think factor that in.
And the fact that we'll continue to generate free cash flow.
Should close on the WBC deal in continue paying down debt. So.
Okay. Thank you.
Sure.
Your next question comes from the line of Michael Kupinski. Your line is open.
Q.
Just a couple of questions I was wondering if there was any particular regions that are seeing better or softer advertising result, then then that maybe that general corporate trends.
Yeah.
The you know, we operate and 87 markets. So.
The general corporate trend is the result of inputs from many many markets. You know many are up many are down yes.
So no particular regional trend.
No nothing Thats, just standing out that is particularly weak burst or are particularly strong.
Oh, no not recently.
Okay, and then can you just talk a little bit about ratings trends.
Our media.
Versus diaries, your your diary markets, how things are trending there.
Sure.
We have gained back most of the share that was lost from 2000 to 12 to 2015, and we're now back up near those levels. So.
I would say our challenge at this point is really about maintaining our share and picking our battles where our ratings have the biggest impact.
As we announced at the last earnings call, we have a new per head of programming I'm in the seat. He has been in for a couple of months. He was in the radio business for the earlier part of career.
His career, but he joined us from Viacom.
And you know he's digging in at this stage is what he's focused on is trying to accelerate the areas, where we are seeing good progress and to address our problem children and as again when you have over 400 stations, there's always pockets of strength and always problem children.
But speaking generally I'd say, we've seen some choppiness recently and some large market cases.
It seems to be caused by.
At least a contributing factor would be some issues with nielsen's measurement mechanism and methodology.
But in general our news talk platform news talk platform in aggregate is gaining momentum.
Which is a boost heading into election cycle next year.
I'd say sports.
Probably remains our biggest challenge right now on the local side.
However, sports has been trending nicely for us at on the network side at Westwood one.
So.
I think that that's pretty much it.
Gotcha, and then can you talk a little bit about your advertising guarantee that initiative and how they're going to get that programs ongoing at this point.
Oh, yeah yeah.
It's it's it's ongoing epic guarantee is a local attribution project product product and it guarantees qualified leads.
And they are in Westwood, one ROI guarantee is a network attribution product and it measures campaign impact.
We.
We rolled out epic in home services financial medical and legal and next in the queue, our events and auto and retail services and.
I would characterize it as many direct sales of the product and exponentially more I mean, hundreds and hundreds of sales attributed to using it as a door opener.
Gotcha, Yeah, we look at it sorry go ahead.
I was just going to ask if that if your start you are seeing.
Traction with advertisers if that is actually.
Hoping you really gain more advertisers I mean any color additional color you can give there.
Yeah, I mean, it's a unique go to market strategy and that it gives local sellers a very.
Simple and distinct advantage versus other local sell sellers radio broadcast radio and others.
Gotcha.
That's all I have thank you.
Great.
Bye.
Your next question comes from the line of Zack Silver Your line is open.
Okay, great. Thank you for taking the question just first on the network pacing down now you mentioned Lumpiness there and.
Yeah, I guess as it has been a mid single digit kind of grower for you and just to get a little more granularity around.
That trend so far quarter to date.
Whether you expect that this is sort of the new trend going forward or.
Yeah, we can still see mid single digit growth in network.
Yes, no totally fair question and Thats why we highlight that network is lumpy because we really have.
In the past seen that pacing bounce around it and pretty meaningful swings and so it's fairly early in the quarter I don't think we are.
Concerned at this stage that it's by any means a trend.
And we feel good about the the demand on the network side.
And so.
What we wanted to be transparent with with what we're seeing today.
Got it that's helpful and then.
I guess in terms of the portfolio optimization.
You talked some about what you've done but I guess, how is the pipeline looking for additional portfolio optimization transactions over the back half and into next year and what is the appetite for M&A either through.
Actual acquisitions and divestitures and also for swaps.
Sure I'll I'll try to speak to that obviously.
Difficult to speak to anything specifically, but so maybe what I would highlight is.
I would hope that you would all agree that.
One hallmark of everything Weve done so far in the portfolio optimization side is that we've been very very.
Rigorously analytical about it.
And that's the approach we're going to continue to take and be an opportunistic.
And so as we see opportunities whether its like in Allentown, and indeed have to build stronger clusters.
And we have an ability to pursue those will do that.
And we have opportunities where we have.
It's difficult for us to gain.
A strong competitive position, a leading competitive position in the market and we have an opportunity to monetize those assets in a very attractive accretive way, we'll pursue those so.
A lot of it depends on the opportunities that present themselves and so.
I think the couple of things that were most mindful of is putting ourselves in a position to be flexible to do that and pursue those and secondly to just be as I said rigorously analytical as we evaluate any opportunities.
Great. Thank you and then I guess, one more if I could add just in terms of your smaller markets versus larger markets. I can you give us a sense of how advertising trends have been.
Year to date.
Yeah between those two groups.
Yes and to add to that.
Interesting question that we shared a lot and surprisingly.
There is no real distinction that we can see and we had a good mix of large medium and smaller markets and right. We have some great performers across the board and as you said, we have problem children across the board.
Is it the market size surprisingly does not really drive sort of our bill our ability to deliver whether it's growth or more high margins, it's really more execution and market specific dynamics.
Got it okay. Thank you that's very helpful.
Yes.
Your next question comes from the line of Aaron Watts. Your line is open.
Hey, Thanks for having me on.
Couple of questions, one just broader on the advertising environment, a little bit of a deceleration from twoq to Threeq you.
Anything you would call out in terms of big advertisers that pulled back a little bit or general themes throughout that are causing that and any reason for optimism that it you can see a little bit of a bounce back as we reach the back end of the year.
I think it's pretty much the same story.
Quarter to quarter at this point in the quarter, which is that it.
We continue to see strength in national spot as John mentioned, there is still in that network demand.
Pacing aside.
And local spot continues to be very very weak.
Our focus.
Of course is offsetting that with our positive revenue streams and in our case, that's digital which is tracking very very nicely.
Yes, and obviously national International history.
Network as well so continue to.
Constraint there.
I mean, there's always individual advertisers that are that are sort of in and out I mean, there are some of the.
Horrific tragedies here recently have led to some.
Pullback by certain advertisers like Walmart for example, so.
But I don't think we're seeing any particular trends if you would call out.
On the broad.
Right.
Okay got it and then a quick one on podcasting because I know there is a lot of buzz on it now and I'm. Just curious have advertisers has the demand come in.
For podcasting in a big way, yet and and as that money comes in or are you finding it specific.
Request for a podcast buys or does it more cross sell for you as you sell some of your spot ads and offer that as an add on.
Yes, its specific demand for podcasting and I would say.
Where there is growing demand is for female targeted podcast.
Most the majority of podcasts are that the reach is currently against men and so which is why our partnership with Lemon auto which is specifically targeted to females is important.
What's happened is it's evolving very very quickly from.
Direct marketers.
Two brand advertising and we do see a considerable amount of demand. So so far it's been starting with podcasting, but there is also and ask for for add ons as well, it's really across the board.
Okay, and just somewhat attached that and I understand it's early days, but are the podcast by sort of incremental dollars from those advertisers that may be our existing.
Advertisers of yours or is it sort of taking away from one pad, that's coming into you and putting into the podcast spot.
We spent on the advertiser, but but I would say in general its incremental revenue.
Okay great.
One last one from me and again appreciate the time.
As I think about you pairing or optimizing your station portfolio.
Will that have any impact on your network business.
Yeah, I mean, I think it's a great question and we're we're very mindful of that I mean, I think we feel very good about the the broad reach that we enjoy right now and which is which is an important element of.
The network's position in the in the AD market place and.
You know certainly nothing none of the activity to date has had any kind of negative impact on that and.
No I guess I would just say, we're mindful of it in and.
That gets factored into any decision we would make on that on that front.
I would also like we did these when we did these we evaluate them quite carefully and the impact was pretty small.
You know I think I would want to make this note that ever after all the M&A.
We continue to have massive scale.
If we combine the station footprint 428 stations and 87 markets with the 8000 affiliates, we have through the network.
For 250 million people, we reach each month, but as we said before which is only slightly behind.
I heart.
So given that we think we're really well positioned to continue to compete both on a local level.
Both the national in the network marketplaces.
Okay, great. Thanks Mary.
At this time. This concludes our live questions I'll now turn it back over to the company.
Thank you all for joining us today, and we look forward to speaking with you again soon have a great day. Thank you.
Thank you again for joining US today. This concludes today's conference call you may now disconnect.