Townsquare Media Inc (TSQ) 2014 Q2 法說會逐字稿

Greetings and welcome to the Townsquare Media's second-quarter 2014 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alex Berkett, Executive Vice President. Thank you, Sir. You may begin.

Thank you, operator, and good morning to everyone. Thank you for joining us today for Townsquare Media's second-quarter 2014 financial update.

With me on the call today are Steven Price, our Chairman and CEO; and Stuart Rosenstein, our CFO and Executive Vice President. Today, Steven is going to provide an overview of our Company, and we're going to update you on our second-quarter financial results.

Please note that during this call, we may make statements that provide information other than historical information, including statements related to the Company's future prospects. These statements are considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, 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 Company's S-1 filed with the SEC. And we incorporate these by reference for this call. We may also discuss certain non-GAAP financial measures, including direct profit and adjusted EBITDA, 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 website.

At this time, I would like to turn the call over to Steven Price.

Thank you, Alex. Good morning to everyone. We really appreciate you joining us today.

Before I get started, I would like to take a moment to thank everyone that helped us through our recent IPO process. Our employees, customers and advisors were all essential in this effort. In addition, I would like to thank the new investors who spent time to learn about our Company, and who had the opportunity to see what we believe is a tremendous opportunity in Townsquare Media, as we execute on our goal of being a diversified media and entertainment company focused on small and midsize markets, and creating long-term shareholder value along the way.

Since this is our first earnings call as a public company, I thought I would take the opportunity to briefly introduce you to Townsquare Media for the benefit of our new equity investors, and for others we may not have met on the road show.

Townsquare Media is a diversified media entertainment and digital marketing services company focused on small to midsize markets across the United States. We owned 311 radio stations and over 325 local companion websites in 66 small to midsize markets; a leading national portfolio of music and entertainment, digital properties, reaching over 75 million US unique visitors monthly, and approximately 500 live events.

These are all great assets and businesses onto themselves, but what we believe makes Townsquare Media unique is our integrated media and entertainment platform, or what we call Townsquare Everywhere, our go-to-market strategy. We are focused on being relevant to the consumer and being everywhere the customer is, whether they are online, on air, or on site.

We focus on the small and midsize markets where other large-scale operators don't. And I believe this is a key differentiator to our diversified revenue strategy. This strategy enables us to dominate the local media landscape with our radio, digital and live events assets with limited competition from larger players.

Radio is the foundation of our business. Why radio? Because it's a stable and solid media platform. Radio reached approximately 92% of American consumers weekly in 2013. And this listenership has been essentially the same since the 1970's. We believe the statistics for radio continue to demonstrate its power and resiliency. Despite the evolving competitive landscape where new entrants, such as satellite radio, personal MP3 players and streaming services, have become complements to rather than category-killers for radio.

Radio may have at times a perception problem, but it does not have a listenership problem nor an engagement problem. Our radio business is at scale. We are the third-largest radio company in the United States in terms of number of stations owned. We have the number one or number two revenue market share in 65 out of 66 markets. We reach 11.6 million people on air, which represents approximately 70% of the addressable audience in our markets.

For us at Townsquare, radio is the platform on which we grow our complementary, multiproduct local media business. Our customers listen to our radio stations, go to our stations' companion websites, and participate in our live events. At Townsquare, we are live and local. We focus on live and local personalities who are stars in their towns. And we believe that life and local content drives multichannel audience engagement.

It allows us, we feel, to be relevant to our local audience. We write and talk about what's relevant to the listener.

We have a substantial live events business, with over 500 music and non-music live events per year. Our life events are primarily smaller family-oriented events. They are generally recurring in nature and are often syndicatable, meaning we can roll out a single idea across our markets, increasing the revenue potential of a single event. One of the most salient benefits of our live event offerings is that much of our live end revenue comes from our listeners, not our advertisers.

With that context, I'd like to shift to our financial results. We are very pleased with our results for the second quarter. Pro forma for all material M&A activity completed as of June 30, we delivered a 7.8% increase in net revenue over the prior-year period. Pro forma adjusted EBITDA, excluding a nonrecurring reversal of legal expense in 2013, grew 4.6% as compared to the prior-year period. We believe our results continue to demonstrate the strength of our diversified revenue strategy as the strong performance across our digital marketing services, national digital, and live event offerings more than offset flat revenue results in our local advertising segment.

Our local advertising revenue was negatively affected by two factors in the second quarter. First, while we are confident in the prospects of the 14 Cumulus assets that we acquired in November 2013, four of the markets we acquired significantly underperformed. We have changed in-market leadership in three of those four markets, and expect performance to improve materially going forward, now that we are able to bring our Townsquare Everywhere strategy to bear.

Second, certain of our Northeastern markets were adversely impacted by the hangover from extremely harsh winter weather, together with a wet spring. In particular, two of our larger markets in the region experienced meaningful advertising softness in the quarter. Excluding these six markets, our local advertising revenue grew 2.9% in the quarter, and our total net revenue grew 11.6% in the quarter. Further, excluding those same markets, adjusted EBITDA, excluding a nonrecurring reversal of legal expense, increased 10.2%.

Overall, we are happy with our performance in what has been a somewhat challenging market environment, and are continuing to execute on our differentiated growth strategy.

With that, I will now turn the call over to Stu for further details on our financial results.

Thank you Steven, and good morning, everyone. As a reminder, the results that Steven referred to earlier are not GAAP financial statements. Instead, the results reported reflect pro forma same-store sales for all material M&A activity completed by June 30 as if they had occurred at the beginning of the reporting in the comparison periods.

Please refer to tables that we have provided in our earnings release, which provide GAAP results with a bridge to our pro forma results and non-GAAP performance measures. Since we have made several material acquisitions in the past year, we feel it's important to report our comparative results in a more meaningful way. Unless otherwise stated, all of the financial results discussed will be pro forma for these completed acquisitions.

For the quarter ended June 30, 2014, net revenue was $106.3 million, up $7.7 million, an increase of 7.8% from the same period last year. Local advertising revenue was effectively flat at $78 million, a decrease of approximately $200,000. Local advertising was adversely impacted by underperformance in a few of our newly acquired markets, as well as the harsh winter weather and wet spring, particularly in the Northeast. This, combined with overall softness in the economy in Q1, led advertisers to pull back on advertising spend in Q2.

Other media and entertainment revenue increased 39.3% or $8 million to $28.2 million, reflecting strength across our digital marketing services, national digital, and live events businesses. Total direct operating expenses increased 11.2% or $7.2 million as compared to the same period last year, of which local advertising accounted for $600,000 of the increase, which was primarily the result of increased investment in the markets we acquired from Cumulus and Peak at the end of last year.

Other media and entertainment expenses increased $6.6 million. This resulted in second-quarter total direct profit increasing $0.5 million or 1.5% over the prior-year period to $34.8 million. This increase was primarily driven by an increase in the direct profit of our other media and entertainment segment.

Corporate expenses increased $1.3 million or 27.9%. This was driven by the reversal of an accrual in Q2 of 2013. As a result of the April 18, 2013 dismissal of a lawsuit, we reversed $2.1 million of the remaining liability as a credit to legal fees and corporate expense on a consolidated statement of operations for the three months ended June 30, 2013.

Adjusted EBITDA for the quarter was $28.6 million, down slightly from the prior-year quarter. Excluding the reversal of Q2 2013 legal expense, adjusted EBITDA for the second quarter would have increased approximately 4.6% over 2013 adjusted EBITDA. On an as-reported basis, depreciation and amortization expense increased $900,000, approximately 27%, primarily attributable to assets we acquired in the Peak and Cumulus 2 transactions.

Also on an as-reported basis, interest expense increased $4.6 million, or 62.2%, driven primarily by additional interest expense related to the term loan and PIK notes used to finance the Peak and Cumulus 2 transaction in November of 2013. We reported $12.1 million of net income for the second quarter in our 10-Q on a historical basis as an LLC. As an LLC, taxes are minimal, as we are treated as a pass-through entity for tax purposes.

We also reported pro forma Q2 net income of $7.5 million, as if we had converted to a C-Corp. and paid tax at a 38.9% statutory rate. Had we further pro forma'ed net income, as we did in our S-1 to include items related to our IPO on July 24, such as reduced interest expense resulting from the use of our IPO proceeds to pay down debt, net income for the quarter would've been $8.2 million for the three months ended June 30, 2014.

The as-reported earnings per share presented in our 10-Q calculated basic and fully diluted number of shares outstanding in connection with GAAP as if we had converted to a C-Corp. as of the periods presented. The 7.9 million basic shares and the 17.4 million diluted shares did not give effect to the shares sold in connection with our IPO nor the common stock equivalent issued thereof.

Giving effect to the issuance of the 8.3 million shares sold in the IPO, plus all dilutive common stock equivalents, basic shares outstanding were 16.7 million shares, and fully diluted shares outstanding were 26.2 million shares, resulting in pro forma fully diluted EPS of $0.31 per share and $0.33 per share for the three and six months ended June 30, 2014, respectively. The income taxes presented in the 10-Q are on a pro forma basis, and are in accordance with GAAP for financial statement purposes.

On a cash basis, we are not a current taxpayer, as we have significant tax attributes, including $53 million of NOL carryforwards and substantial tax shields related to the amortization of our intangibles. We ended the quarter with a cash balance of $47.7 million and an undrawn revolver of $10 million. On July 24, 2014, we successfully completed our IPO and raised net proceeds of approximately $82.2 million. We used the net proceeds, together with approximately $37 million of cash on-hand, to repay our 10% senior PIK notes due in 2019 and to repay $90 million of the outstanding term loans under the senior secured credit facility.

Giving effect to the IPO and the subsequent debt paydown, we would have had approximately $523 million of total debt and $10.7 million of cash on-hand as of June 30, 2014. In July, we also increased the size of our revolving credit facility from $10 million to $25 million. We feel confident that with the cash on-hand and the $25 million undrawn revolver, we have sufficient liquidity available to us.

Pro forma for the IPO and the subsequent debt paydown, our total and net leverage as of June 30, 2014 was 5.6 times and 5.5 times, respectively. We would also like to outline our guidance policy. We intend to provide a range of pro forma total net revenue and adjusted EBITDA growth for the subsequent quarter, and a range of capital expenditures for the upcoming quarter and the full year. We do not intend to provide more granular guidance by segment, guidance or disclosure on products within segments, or guidance on items other than pro forma total net revenue, adjusted EBITDA, and capital expenditures.

Turning now to our outlook for the third quarter, we expect pro forma net revenue growth in the mid to high-single digits, and pro forma adjusted EBITDA, excluding duplicative corporate expenses, to grow in the low-single digits. For the third quarter, we expect capital expenditures to be between $6 million and $7 million. The third quarter will be our largest quarter in regards to capital expenditures. And we remain on track for a total year capital expenditures of $12 million to $14 million.

And with that, I now turn the call back over to Steven.

Thanks, Stu. Again, we are pleased with our second-quarter results, and I believe we're off to a good start as a public company. Over the past four years, we have worked extremely hard to evolve traditional media assets into an exciting, diversified media and entertainment company focused on small to midsize markets across America.

We believe that we have the right strategy, the right vision, the only scaled platform, a terrific team and great products. We believe that we are well-positioned as a cross-platform, multiproduct company with a significant market opportunity. And we believe our strong second-quarter results demonstrate the strength of this diversified strategy.

We are excited about our future and we hope you agree. As a sign of our commitment and belief in the long-term benefits of our Townsquare Everywhere strategy, you may have seen the recent SEC filings, which indicate the open market purchases of stock by both Oaktree and me. We are believers in the Townsquare story, and are fully aligned with shareholders as we look to grow shareholder value in the future.

Thanks again for taking the time to learn more about our story. And with that, we are now happy to open the call for questions.

Operator, will you please open up the lines?

(Operator Instructions). Bryan Goldberg, Bank of America Merrill Lynch.

Got a couple. First, on local advertising. Could you give us a little bit of color on the categories, ad categories, their strength or weakness in the second quarter? And I guess what are current pacings looking or feeling like right now in the third quarter? And then I've got a couple follow-ups.

Okay, sure. Thanks, Bryan. The categories that were strongest in the second quarter were real estate, vehicles and equipment, travel, IT services, and then a variety of miscellaneous. And some of the weaker categories were retail, entertainment, auto in some sectors in some parts of the country, food and beverage, and services.

And as -- I mean, what does the current pacing feel like in the third quarter? I mean, have things changed much sequentially or --?

So, in terms of pacing, our guidance policy is going to be to give a range. And we expect, as Stu said, net revenue to grow in the mid to high-single digits in the third quarter. That's as a company. And I would say we haven't seen anything in our pacings that would make us feel differently from that guidance.

Okay, fair enough. And then with respect to the four recently acquired markets that you identified as underperforming where you've changed management, I'm just curious -- had you already attempted to integrate or implement the Townsquare strategy in these markets? And was it being executed satisfactorily? Or was this more of a function of just completing the initial integration process from the deal, meaning you'd really yet to deploy your strategy in the markets?

Just kind of curious what's going on there. And then are there any other markets from the recent acquisitions where you may have more work to do from an integration standpoint?

So, I wouldn't call it integration. Because we relatively quickly put new markets on our -- we've done this a number of times -- put new markets on our platforms and on our systems. To some extent, it's getting -- you know, seeing if you have the right local talent. As you know, we are pretty decentralized company, and we rely heavily on our local in-market talent. And when that local talent either isn't used to doing what we want them to do or isn't up to speed, or in some cases, incapable, that's when you want to make a change.

So it's not like they didn't have sort of the -- I guess the playbook; although it's not actually a playbook -- sort of the training from all of our folks. It's that they just -- that that local team couldn't do it. So we've changed out management.

And I think in a number -- and in one of those cases, it wasn't the manager; it was that it had slipped through with some poor ratings over the past couple years, and it caught up with it. So, in that case, in that one case, it wasn't that the local manager, we don't think, could do the job; it was just some things going on in the market.

You know, as you know, in our Company, it's sort of 66 different stories. Each market is a little different. But in the three, we feel very good about the people that we brought on. In some cases, we have known them for a while. And in those particular markets, those three in particular, we are seeing much better results in July and in August.

As of now, we don't foresee other situations with the new markets where we have a problem with the local team that we have to do a wholesale change. But we constantly monitor that.

And this is not -- and the other thing I would say is, Bryan, this is somewhat typical. In a sense, unfortunately, a couple of these markets are some of the larger markets in this acquisition. But in every acquisition, there are some markets that take longer, and in our view, get it, and some that are shorter. But in all the cases, we think that we will see significant improvement by the end of the year.

Okay, thanks. And then my final one, my final question is on media and entertainment, or other media and entertainment. It seems like live was the largest driver of growth this quarter. Can you just give a little more color on the components of the growth in live? Just really, was it more weighted towards adding new events or improved yield per event?

And then just kind of following up on another comment you made earlier about syndicatable live events, can you help us think about roughly what portion of your events today you believe are syndicatable? And then how far along are you in actually syndicating them, so we can kind of think about the opportunity there?

Yes. We think many of -- as we've talked about, when we talked to folks during the road show, we think many of the concepts -- obviously, not all, but many of them are syndicatable. And many of those are syndicatable everywhere. Obviously, if you do on pond hockey tournaments, you're not going to do that in the South. But that's sort of for our local producers and promoters to figure out what makes sense in those markets.

We did increase the number of events in the second quarter of 2013 -- we did 120 live events; in the second quarter of 2014, we did 157 live events. So, it gives you a little bit of sense of how sort of the additions. And that's what we -- consistently what we have said, which is, one of the growth strategies is to grow the number of events. Obviously, the other is to grow the revenues within the existing events. And we will continue to do that, and did that in the second quarter as well.

So, live events had quite a strong quarter. Second-quarter does tend to be a little bigger for live events, because, you know, the ability to do outdoor things and the like. But I would say that the other segments of media and entertainment had strong quarters as well.

Okay. Well, thank you very much for your time.

Okay. Thanks, Bryan.

David Bank, RBC Capital Markets.

Congratulations, and -- on being a new public company. And Alex, you put some nice feeling into that Safe Harbor. So, you've clearly got the hang of it.

Thank you, David.

So I just have kind of two follow-up questions. The first is, in the markets where you said you saw the hangover of the weather, can you -- in 2Q, can you talk about the sequential acceleration that you are seeing -- hopefully, on a delayed basis -- in those markets into 3Q?

And I'll give you the second question, which is -- as you're looking at the political dollars, starting to pace or whatever your view of the political dollars is today, how do you benefit versus other players in the kind of broader radio industry right now, given the digital platforms that you are able to complement traditional radio spots with?

Like, if you look at how the political dollars are being spent, are you -- how are they being distributed? Is there anything surprising about it? Does the platform offer something that's really enabling you to capture more share of political dollars because of that cross-platform sale in local markets? Thank you very much.

So -- thanks, David. I'll answer your second one first on political. Political, as you know, is not a huge driver for us. So we do expect sort of a 1% of revenue kind of number. So it's not something that we, unfortunately, get a lot of feedback from the campaigns and the like, although we try.

Historically, I think broadcasters -- our company among them -- was pretty reactive. You get an order in on Monday, you've got to run it Thursday. So, as the Cumulus folks said on their call I think yesterday, someone said that it books late, which we totally agree with. It does book late, so it's hard to know exactly what it's going to look like in the third quarter.

Clearly, we are trying to move all of our advertisers, including political advertisers, not only to broadcast but to digital. And I say candidly, we've taken baby steps toward that, and we'll get a little, but it's clearly something that we would like to focus on a little bit more. And we do actually have an internal team that started up about three months ago to focus on this issue. Now, obviously, that's not going to help us this year, but it will in 2015 and 2016.

Generally on local advertising, I'll make one general comment and then I'll answer specifically. No one in media and entertainment was immune from the difficult advertising market in the second quarter. And it did affect a number of our markets -- although not all of our markets. But in general, we believe that our diversified revenue strategy, our emerging growth businesses, and our focus on smaller, less competitive markets, allowed us to significantly outperform in the second quarter. And we expect we will continue to do so in the future.

Now as to the hangover in a couple of markets that we had, I think it's two-fold. Candidly, it's -- some of it is the local leadership in the market. And my view is great local leadership, in some cases, can significantly mitigate what's going on, either economically or weather-wise, not all of it. So I think we've done something there. But we have seen, I would say, things get better in the markets -- in the couple of Northeastern legacy markets where we saw some real softness. I would not say it's great, but getting better in the third quarter.

Okay, thank you.

Okay. Thank you.

(Operator Instructions). Amy Yong, Macquarie.

One for Steven and one for Stu. So, Steven, can you just talk a little bit about some of the longer-term digital mobile initiatives? Anything particularly that's resonating loud, either from a sales perspective or different brands that you're seeing in the marketplace?

And then, Stu, can you just prioritize use of the free cash flow at this point, I guess, deleveraging? And also any particular investments that you would highlight? And, I guess, what are your plans for the credit facility? Any thoughts on that? Thanks.

Sure. Thanks, Amy. I would say that our bucketing our digital products is the local digital businesses that are within local advertising, and then our digital marketing services and our national digital business. And I would say they are all growing nicely and on track. Just like we had talked about during the road show and in our S-1, we don't see, in any case, any of those either doing significantly better or significantly worse than our plan.

So I think we are executing -- we have a diversified revenue strategy, our Townsquare Everywhere go-to-market strategy, and we are executing along that plan. And that's to have a wide variety of products for different advertiser sets. And we don't see anything different than that.

Stu, do you want to talk about the cash flow?

Sure. Thanks, Amy. So, uses of our excess cash flow, first, we're going to look for accretive acquisitions. And absent any accretive acquisitions, we will look to pay down our bank debt. That said, Alex is very good at finding real good accretive acquisitions. So my first -- my estimate is that we are going to basically make good accretive acquisitions, both in the event space and someplace else.

Our credit facility -- as you know, we just increased our revolver. We have no immediate plans to use our revolver. We also have coming due in April, the end of our no-call period is up in April of 2015. So we're going to hopefully look to refinance our entire debt facility, bonds and bank, and we will balance it. That will give us the ability to actually save between $10 million and $14 million or $15 million of interest expense, should the markets stay the same -- on an annual basis.

Great. That's helpful.

Mr. Price, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Great. Thank you so much. Thanks to everyone for joining us on our first quarterly conference call. If people have thoughts or suggestions, please let us know; things you'd like to hear or like us to do on subsequent calls, because these calls are really for you. And if you have any questions, you don't need to wait 90 days until you hear from us again. Feel free to give us a call.

And that with that, I appreciate your time this morning and we'll talk to you soon.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.