Townsquare Media Inc (TSQ) 2014 Q3 法說會逐字稿

Greetings and welcome to the Townsquare Media third-quarter 2014 results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Alex Berkett, Executive Vice President for Townsquare Media. Thank you, sir; you may begin.

Thank you, operator, and good morning to everybody. Thank you for joining us today on Townsquare Media's third-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 we're going to provide an update on our third-quarter financial results. 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 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.

Thanks, Alex. Good morning, everyone, and thank you for joining us today. We are very pleased with our results for the third quarter.

Pro forma for all material M&A activity completed as of September 30, we delivered a 7.1% increase in net revenue over the prior-year period. Pro forma adjusted EBITDA grew 2.7% as compared to the prior-year period. These third-quarter results are in line with the guidance we had provided last quarter.

In the year-to-date period, our net revenue and adjusted EBITDA increased 8.0% and 2.1%, respectively, versus the same period in 2013. Overall, we are happy with our performance in what has been a less than optimal general advertising environment. We continued to execute on our revenue diversification strategy, and we believe the resulting differentiated revenue growth validates our strategy.

In the third quarter, we saw strengthen both our Local Advertising segment and our Other Media and Entertainment segment. Our Local Advertising revenue increased 1.9% in the quarter. Other Media and Entertainment revenue grew 43.2% in the third quarter, driven by strong performance across our digital marketing services, national digital, and live event offerings.

Last quarter we mentioned certain markets that negatively affected our second-quarter performance. The first set of markets were four of the markets that we acquired from Cumulus in November 2013.

We are pleased to report that the leadership and other changes we made in the market have had an impact and they are on a good trajectory. In the third quarter, these markets' revenue growth rate improved more than 1,400 basis points; and collectively these markets have positive year-over-year third-quarter revenue growth.

The second group of markets we mentioned were two of our Northeastern markets. In the second quarter these markets were adversely impacted by the harsh weather in the first half of the year and demonstrated general underperformance.

In this third quarter, these markets improved, but are not yet performing to our expectations. We have changed in-market leadership in one of these key markets and expect performance to continue to improve going forward.

From a strategic perspective, we made two acquisitions since our second-quarter earnings call. Earlier this week, we announced the exciting acquisition of WE Fest, the largest country music and camping festival in the world. This festival is a great fit with our country music footprint, including more than 46 country music radio stations and companion websites, 10 large-scale country music events, and two leading national digital destinations, TasteofCountry.com and TheBoot.com.

In the third quarter, we acquired an iconic hiphop brand, XXL, together with King and Antenna, which collectively reached 1.3 million US unique visitors in August, according to comScore. While small the acquisition of these properties will complement the portfolio of our national digital assets, enhancing our reach, relevance in the music and entertainment space.

We believe what 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 relative to the consumer and being everywhere the consumers are, whether they are online, on air, or on site.

The financial implication of this strategy is revenue diversification, which we believe allows Townsquare to realize differentiated revenue growth. Acquisitions like WE Fest and XXL directly support this strategy, and we will continue to pursue these types of strategic, accretive tuck-in acquisitions.

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 our historical GAAP financials. They are pro forma for all material M&A activity completed by September 30, as if they had occurred at the beginning of the reporting and comparison period. Please refer to the tables that we have provided in our earnings release, which provide GAAP results with a bridge to our pro forma results as well as our non-GAAP performance measures.

Since we had made several material acquisitions in the reporting period, we feel it is 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 September 30, 2014, net revenue equaled $94.7 million, up $6.3 million or an increase of 7.1% from the same period last year. Local Advertising revenue equaled $79 million, or an increase of approximately $1.5 million, or a 1.9% increase for the quarter.

This increase included approximately $1 million of political advertising revenue. Excluding political, Local Advertising revenue increased 0.6% or approximately $500,000.

Other Media and Entertainment revenue equaled $15.8 million, which was an increase of $4.8 million or 43.2% over the quarter ended September 30, 2013. This increase is reflective of the strength across our digital marketing services, national digital, and live event businesses.

Total direct operating expenses increased 7.5% or $4.3 million as compared to the same period last year. Of the total $4.3 million increase, Local Advertising expense only accounted for $300,000 of this increase. Other Media and Entertainment expenses increased $4 million, commensurate with the revenue growth.

This resulted in third-quarter total direct profit of $33.1 million, an increase of $2 million or 6.3% over the prior-year period. This increase was primarily driven by a $1.2 million increase in the direct profit of our Local Advertising segment.

Corporate expense for the quarter increased $1.3 million or approximately 24%. This increase was driven primarily by increases in salaries and benefits as a result of our investment in additional headcount to support the growth of our business.

Adjusted EBITDA, excluding stock-based compensation for the quarter, was $26.7 million, up approximately $700,000 or 2.7% from the prior-year period. On an as-reported basis, depreciation and amortization expense increased $600,000 or approximately 16%, primarily attributable to the depreciation on the assets acquired in the Peak and Cumulus II transactions.

During the third quarter, the Company recognized a one-time, nonrecurring noncash stock-based compensation charge of $37.6 million. This noncash charge was a direct result of the conversion of the Company's old management LLC carry plan into restricted shares and stock options granted at the IPO on July 24 of 2014.

Additionally, upon conversion to a C Corporation, the Company ceased being treated as a partnership for income tax purposes. Related to this change, as of September 30, 2014, we have recorded approximately $29.1 million of deferred tax assets and $35.4 million of deferred tax liabilities on our balance sheet. We also recognized a $6.3 million deferred tax provision expense on the income statement as of September 30, 2014.

Importantly, we would like to emphasize that the provision for income taxes included on the face of the income statement is for GAAP financial statement purposes only. The Company maintains significant tax attributes, including over $53 million of NOL carryforwards and other substantial tax shields related to the tax amortization of our intangibles. Given these tax attributes, we do not expect to be a cash taxpayer until sometime in 2019.

Also, on a reported basis interest expense increased $4.3 million or 57.3%, driven primarily by additional interest expense related to the term loans and PIK notes used to finance the Peak and Cumulus II transactions in November of last year. These PIK notes, along with $90 million of our term loans, were repaid with proceeds from the IPO on July 29, 2014.

For the third quarter of 2014, we recorded a loss of $33.6 million compared to net income of $4.4 million in the third quarter of last year. If you exclude the noncash one-time stock-based compensation charge of $37.6 million related to the Company's conversion to a C Corporation, pretax income equaled $10.4 million for the quarter ended September 30, 2014, versus only $4.5 million of pretax income for the same quarter last year.

Net income for the quarter, after providing for income taxes at the statutory tax rate of 38.9%, would have been $6.3 million for the quarter ended September 2014 versus $2.7 million in the quarter ended last year. The $3.6 million increase in net income is primarily due to the addition of the Cumulus and Peak markets that we acquired in November of 2013.

We ended the quarter with a cash balance of $29.9 million and an undrawn revolver of $25 million. As of September 30 our total and net leverage was 5.5 times and 5.2 times, respectively, down from 5.6 and 5.5 times as of June 30, and pro forma for the IPO.

On November 3, as Steven mentioned earlier, we announced the acquisition of WE Fest, the largest country music and camping festival in the world. This event attracts approximately 45,000 attendees each day during the annual 3-day event.

To fund that acquisition we used approximately $21.5 million in cash, net of adjustment, and 100,000 shares of Townsquare Media Class A common stock. Cash consideration was satisfied from cash on hand, a $10 million drawdown on Townsquare Media's revolving credit facility, and a working capital adjustment of approximately $3.7 million.

Pro forma for the acquisition of WE Fest, our total and net leverage as of September 30 was 5.5 times and 5.3 times, respectively. We feel confident that we have sufficient liquidity available to us with our cash on hand and the undrawn capacity of $15 million under our revolving credit facility to operate our business and service our debt in the ordinary course.

Turning now to our outlook for the fourth quarter, we expect pro forma net revenue growth in the high single digits. We also expect pro forma adjusted EBITDA, excluding duplicative corporate expenses, to also grow in the high single digits.

For the fourth quarter we expect capital expenditures to be between $1.5 million and $2.5 million. This is consistent with the full-year CapEx guidance we provided on our last quarter's earnings call.

Finally, as of today the Company had 26.9 million shares outstanding, inclusive of warrants to purchase shares. With that I will now turn the call back over to Steven.

Thanks, Stu. Again, we are pleased with our third-quarter results and that we met the guidance we provided last quarter. I believe we will continue to deliver on our Townsquare Everywhere revenue diversification strategy.

Since going public, we've met with a number of existing and potential investors, and we want to thank those of you who have been willing to learn more about our Company. We intend to remain active in shareholder outreach as we look to grow shareholder value in the future. Please don't hesitate to call us with any questions you may have or just to check in.

We continue to believe that we are well positioned as a cross-platform multiproduct company with a significant market opportunity. We are excited about our future, and we hope you agree.

Thanks again for taking time to dial in this morning. With that we are now happy to open the call up for questions. Operator, will you please open up the lines?

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

Hi, thanks. I've got one on Local Advertising, and then two on Other Media and Entertainment.

First, on Local Advertising, last night CBS talked about their radio group pacing up mid single digits this quarter; and I recognize they've got a different asset mix and strategy. But is it reasonable to assume things have ticked up for your Local Advertising business in the fourth quarter?

I guess, what can you tell us about how political came in, now that the elections are over? And more broadly speaking, how would you characterize the current advertising climate in your Local businesses?

Thanks, Bryan. As you know, we are not giving guidance by segment. Our guidance was high single digits for the fourth quarter, which probably gives you some sense that we feel that the environment is at least a little bit better than it was in the second quarter and into the third quarter. But we don't break out guidance separately segment by segment.

As to political, I've seen -- I guess the story will be written, because I have seen lots written by you and others about how political came in, in general. For us, I would say it was in line with what we thought.

Then on the current advertising climate, are there any categories you would call out as being notably strong or weak?

Yes, I would say in the quarter some of the better-performing categories were entertainment, food/beverage, services, principally financial services, real estate. I think some of the other -- travel, vehicles, auto, health, education -- was a little weaker than we had expected.

Okay, thanks. Then on the Media and Entertainment side, the WE Fest acquisition, it's a good-sized deal. How should we think about accretion from this in 2015? Anything you could tell us about the margin characteristics of this type of business that you have acquired?

Seasonality, as we should think about folding it into the P&L next year, and then any kind of preliminary thoughts on synergies as it fits into the Townsquare Group would be very helpful. Thanks.

No problem. Thanks, Bryan. From a seasonality perspective, the event happens in August, so that is where the financial impact will be.

The festival -- we are pleased with this festival. It is founded in 1983. It is in an area that fits very well with our geography.

We have 24 stations in Minnesota, 13 in the Dakotas, and 14 in Iowa. We are -- we think it's a very strategic acquisition for us.

We are pleased with the price that we paid. The festival did about $10 million -- area of $10 million of revenue.

And in terms of synergies, next year in 2015 we will have a limited ability to impact the festival, principally because the acts have been booked and the tickets have been priced and are on sale. But what we can do with the festival in 2016 and beyond we are quite excited about.

Bryan, this is Steven. I agree with everything Alex said. It adds to our overall festival business.

We have -- I don't know, the number is something like 10 or so nice-sized country music festivals. And having an anchor like WE Fest helps with national sponsors, local sponsors. It just overall boosts our footprint in country music.

As you know, we have two of the three largest natural digital destinations, TasteofCountry.com and TheBoot.com. Actually I think last night was our biggest traffic night ever because of the CMAs, on both sites. So it just overall helps our country music footprint, which as you know is important to our Company.

Okay. Then just one minor housekeeping item. I think in your press release you said pro forma net revenue for this segment, Other Media and Entertainment, increased about $5 million. So it is the vast majority of your pro forma revenue growth.

Amongst the drivers of this segment -- live events, digital marketing and national digital -- can you just -- was one a big -- which one was the biggest driver of growth in the segment? Was it live, or was it digital?

Yes, all components of OM&E increased significantly in the third quarter and year-to-date. On a dollar basis, live events increased the most; and on a percentage basis our marketing services increased the most.

Okay, great. Thank you very much.

The subscriber business. Great, thanks, Bryan.

David Bank, RBC Capital Markets.

Hey, thanks. That was a pretty exhaustive list before me, so most of them were taken care of; but I have a couple. The first, on your perspective from the events business and what you saw in the third quarter versus what you are seeing in the fourth quarter.

Is there anything about consumer behavior and spend in the context of the events business that sequentially is different, from what you can see? Or is it more or less the same? I know overall, revenues are growing; but your gut feeling about consumer behavior.

The second question is your markets are -- they are pretty unique in that they tend to be smaller, but they are anchored by some form of economic strength from various institutions, or there is something about them that tends to keep them less volatile. Do you think you are seeing things that are different right now in your markets versus the general markets for Local Advertising? And for events, for that matter. Thanks very much.

Yes, sure. Thanks, David. I would say on the first one, we haven't seen any sort of change in consumer behavior, writ large, Q2 versus Q3 on the event side. I think it has more to do with where the event is, the mix.

We tend to do a little bit more music in the second quarter than in the third quarter, and in the third quarter than in the fourth quarter, where there tends to be more family-based or local-based kind of events. That probably has more to do with it. But on a same-store basis if you looked at the same kind of events, we really haven't seen shift in spending patterns.

My personal view is that is because in our markets, sort of Main Street versus Wall Street, the economy seems okay. Not great; wages are not great, wage growth. But it's not -- it doesn't seem as bad as it had been.

When we started Townsquare for the first couple years it seemed, I don't know, it's sluggish or slow growth or stable. And that really -- we really haven't seen that markedly change.

It obviously looks a little better now than it did, let's say, in the second quarter. Maybe some of that was weather, etc.

Your second question was -- are our markets different?

Yes.

I would say our whole thesis is that small to midsize markets are less volatile and have a better local environment and a local competitive environment than in the bigger market. So I think that would drive you to a conclusion more than the South is good, the North is bad; the North is good, the South -- that kind of a thing, anything geographically.

When we look at our markets across our footprint, the star market -- if I picked in my head the handful of better-performing markets that are crushing it this year, it is not like they are all in X state or in X region. They are pretty scattered.

And the same thing with the ones are not performing as well. We called out two of our bigger ones that are in the Northeast that aren't performing well. The next three that are not performing well are not in the Northeast.

So again much more has to do with size of market for us and our strategy than it does with a particular geography.

Okay, terrific. Thank you very much, guys.

Amy Yong, Macquarie.

Thanks and good morning. Two for Steven, two for Stu.

Just following up on the advertising market, Steve, can you talk about visibility from where we stand? It's November already. Just heading into the retail season, has it improved coming out of the summer months and into the fall?

Then my second question is can you just -- is there any way to quantify some of the drag as you improve the Cumulus markets and your Northeast markets, what that impact is going to be heading into 4Q and 1Q?

And then just two for Stu. Can you talk about the working capital needs, and how we think about the 2015 number, and the impact of WE Fest? Then just what is the reasonable cash on hand that we should be thinking about for your Company going forward? Thanks.

Okay. Hey, thanks, Amy. I would say on your first point, there is always a pickup as you -- I mean, it's a self-evident comment. When you talk about advertising there is a pickup as you go into the holidays, as you go into the holiday season. That is the same year-over-year, so that is not going to help a year-over-year comp.

We haven't seen anything noticeable, maybe because in October political tends to crowd out some advertising, so it's a little hard to get a sense of where your other advertisers are, dependent upon the state etc.

As I said, retail was not one of our better -- in fact it was one of our lower-performing or worst-performing categories in the third quarter. So we are a little bit optimistic that that will improve.

How much? Hard to say right now. I think we factored that all in when Stu gave you our guidance for high single digits in the fourth quarter.

As to the drag of a couple of the markets that underperformed, we feel to some extent there are always going to be markets that underperform. It just depends how much they underperform and how big they are.

It turns out that this year a couple of the newer markets that you identified, plus a number of our Northeastern markets were some of our more important markets and performed pretty badly for us. As you can see, because we improved at least some of those markets 1,400 basis points, as we said, quarter-over-quarter.

We think, as I mentioned in my remarks, a lot of those issues in those markets are either fixed or on the road to fixed. A bunch of it was new leadership; some of it was some other things. Our strategies have kicked in; there were some other kinds of issues that I think we have sorted through.

So I guess to some extent -- and we factored this in when we think about guidance -- I think those politics markets will do great next year because they will have easy comps. We obviously factor that when we do the GM budgets. But there will be a handful of other markets that are on the watchlist.

So I don't think that the drag of those markets is really going to affect us going forward. I think I feel actually pretty good about the markets that we had issues with this year. Stu, did you want to answer Amy's question?

Sure, hi, Amy. WE Fest won't have a great impact on working capital. Our working capital in 2015 will be slightly -- need to be increased, but practically the same as 2014 this year.

As far as cash on hand, we always try to keep somewheres between $5 million and $10 million cash on hand. Any excess we will look to pay down debt or make acquisition.

Great. That's helpful.

(Operator Instructions) David Hebert, Wells Fargo Securities.

Good morning, everyone. Thanks for taking the questions. I just wanted to ask a question about the live entertainment festival M&A environment.

Can you share with us what kind of multiples these businesses attract? And how competitive are these situations? Because we hear Live Nation being fairly acquisitive as well in the space, and there are obviously a lot of other smaller players. So just curious if you just talk about the M&A environment in general about that industry. Thank you.

Sure. Thanks for the question, David. I would say -- a stupid answer: it depends. A lot of the things that we do are really small that have fit in. Put WE Fest a little separate from this, but in general the things we've done have been very small. More add-on to what we are doing tuck-ins. Some of these, $100,000 is expensive kind of thing, okay?

So on those we are really in a lot of cases the only buyer. Not only the best buyer, but probably the only buyer for some small things that are in our market that we think fit with what we are doing, and we obviously already heavy footprint in our markets. That has probably been most of what we have done.

WE Fest was a little different because it was bigger, and people value them differently. We looked at it as: how does it fit in with our overall footprint? Minnesota and the Midwest are good markets for us.

If this were a festival in California or Southern Florida, I don't think you would have seen us as a buyer. I guess I will never say never; if it was somebody handed it to us dirt cheap, maybe.

But in general, we have been looking at things where we have a major strategic -- places where we have a major strategic advantage. So when we bought some festivals over a year ago in Colorado, we have a nice footprint in Colorado. Same thing in upstate New York; same thing in Montana; and now the same thing here.

So our strategy is to try to find things where we have a differentiated strategic reason to be there and marketing power and the like. And we are thinking about this acquisition, as Alex said, as what it could do for us for our overall business and for long term.

It's obviously going to be tough to influence materially 2015's numbers since, as Al said, the ticket pricing is set; a bunch of tickets are already sold; and the talent's booked. But as we think about 2016 and 2017 and adding other festivals and doing other kinds of things, we think it is a really strong acquisition for us. (multiple speakers)

Okay, that's really helpful. Thank you.

Tripp Handke, Tricadia Capital.

Good morning, guys; it's David Walker with Tricadia, actually. Thanks for all the color. I had a couple of questions in addition.

The first one is on margins. Your guidance for the fourth quarter suggests that obviously EBITDA and revenue growth will be in the same zone. Is that something we should anticipate for the most part from this point forward? Or will we see perhaps some variability in margins in the next several quarters?

Secondly I apologize; I had to click off the call for a bit. Have you provided color on the EBITDA that the WE Festival is anticipated to do, or maybe what it did in 2013?

Hey, David; it's Alex speaking. In terms of cash flow for the WE Fest festival, I will take that one first. Then I will turn it over to Stu to answer your question on margins. The financials that we observe -- the festival recorded in 2015 are area of $10 million of revenue and area of $2.5 million of cash flow.

And as far as future guidance -- hi, David.

Sorry, David. I missed that.

Sorry; I was just going to ask, cash flow, is that comparable to EBITDA, or is that (multiple speakers) cash?

No, that's EBITDA.

Okay, great. Sorry I cut you off, Stu.

No problem. Guidance for fourth-quarter revenue, we said high single digits. And we are not -- we don't give guidance for future years or future quarters until the earnings release when we give the next quarter. So what we are really guiding to is high single digits revenue and high single digits EBITDA for the fourth quarter at this point.

Okay, great. Thank you.

(Operator Instructions) Mr. Price, there are no further questions at this time. I would like to turn the floor back to you for any closing and final remarks.

Great, thank you, operator. Thank you, everybody, for joining us on our call today. Hope you are as pleased with our results as we are.

As you think about things and look at the numbers, if you have any follow-ups, please don't hesitate to give us a call. We look forward to talking or seeing you soon. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.