Townsquare Media Inc (TSQ) 2017 Q2 法說會逐字稿

Good morning, and welcome to Townsquare's Second Quarter 2017 Conference Call. As a reminder, today's call is being recorded, and your participation implies consent to such recording. (Operator Instructions)

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 Townsquare's second quarter financial update. With me on the call today are Steven Price, our Chairman and 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 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 that are subject to certain risks and uncertainties that are detailed in the company's 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 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, Claire. Good morning, everyone, and thank you for joining us today. The results that we will report today were in line with our expectations and the guidance we provided last quarter. We are particularly pleased with our Local Marketing Solutions segment, where we marked our 14th consecutive quarter of positive organic revenue growth.

Second quarter Local Marketing Solutions revenue increased 4.3% over the prior year and nearly 5%, excluding political revenue. This is a testament to the strength of our Local Advertising solutions as well as the strength of our local teams. I'm pleased to report that as expected, our energy markets have stabilized and as a group, posted positive revenue growth for the first time since the first quarter of 2016.

National, however, continues to be a drag on our results. On the local digital side, we continue to see strong customer adoption of our product offerings with more than half of our advertiser base, purchasing our digital products. At Townsquare Interactive, we continue to see strong steady growth with our subscriber base increasing to 11,750 clients at the end of the second quarter. We also continue to see strong audience adoption of our digital products.

In the first half of 2017, our local digital websites attracted a monthly audience of 14 million unique visitors and on average, our listeners spent more than an hour per week listening to our stations online among the industries best online listening statistics.

Entertainment net revenue was flat in the second quarter. As anticipated, our second quarter music festivals rebounded from last year, and we saw growth in revenue, direct profit and attendees at nearly all of our second quarter major music festivals. We also experienced growth in NAMEs revenue and direct profit in the second quarter, but our second quarter Entertainment results were hurt by revenue declines in our National Digital business.

As a reminder, last quarter, we discussed our decision to focus on EBITDA growth at the expense of revenue growth in our National Digital business. Our results were also impacted by the decline in revenue and profitability from our Insane Inflatable 5K or fun run property. When we launched this property in 2014, we anticipated that there would be a life cycle to this event unlike many of our other events, which are perennial in nature.

After reaching its peak revenue in 2016, we have now entered the tail end of II5K's useful life. The events, themselves, are still well attended and profitable however, are down from prior years. We expect this trend to continue to impact our results throughout the rest of 2017. Excluding the results of Insane Inflatable events on our National Digital business, Entertainment revenue would have increased 6.6% over the prior year period.

In June, we announced the acquisition of a cluster of 6 radio stations and 2 FM translators in and around Pittsfield, Massachusetts for $3.5 million. Although a small transaction, we're excited about adding this cluster to our footprint, which fits nicely with our other Northeast markets. The local brands are very strong, and their local team has done a fantastic job building a great set of market leading assets. We plan to introduce Townsquare's digital capabilities to the market and supplement their existing live event business with additional offerings.

While we don't expect this to have a material impact on our operations as a whole, we're excited to expand our footprint and bring our resources to the market. We expect this transaction to close within the next 2 months.

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. For the quarter ended June 30, 2017, net revenue was $140.7 million versus $137.2 million in the second quarter of 2016. This was within our previously issued guidance. This represented growth of 2.6% year-over-year and 2.9%, excluding political revenue.

Local Marketing Solutions net revenue increased by 4.3% or $3.8 million. Political revenue declined $400,000 year-over-year from $1 million in the second quarter of 2016 to $600,000 in the second quarter of 2017. Excluding political revenue, Local Marketing Solutions net revenue increased 4.8% or $4.1 million.

Second quarter Entertainment net revenue was approximately flat year-over-year with a slight decrease of $200,000 or 0.5%. As a reminder, our results were slightly impacted by the sale of certain live events in the second quarter of last year.

Total direct operating expenses increased 3% in the second quarter. The increase in expense was driven by increases in Local Marketing Solutions expenses, partially offset by decreases in Entertainment expenses. Our Local Marketing Solutions expenses included approximately $500,000 of nonrecurring expenses related to the ongoing company-wide conversion to a new traffic system. These costs will continue through the fourth quarter when the conversion is scheduled to be completed.

Adjusted EBITDA for the quarter ended June 30, 2017 was $25.3 million, falling within our guidance. This represented a slight increase from the prior year period. Excluding the traffic system conversion, adjusted EBITDA would have increased 2.1% over the prior year period.

Depreciation and amortization expense for the quarter increased $800,000 or 13.9% primarily related to the amortization of capitalized software development costs. Net interest expense for the second quarter of 2017 decreased $900,000 or approximately 10%, primarily due to repayment of debt as well as the repricing of our term loans in the first quarter.

For the second quarter of 2017, we reported diluted net income of $0.20 per share or net income of $5.6 million, approximately flat for the second quarter of 2016. We'd like to remind you that the provision for income taxes, included on the face of the income statement, is for GAAP financial statement purposes only.

We maintained significant tax attributes including $111.3 million of NOL carryforwards and other substantial tax shields related to the tax amortization of our intangible assets. We continue to believe that we'll not be a material cash taxpayer until approximately the year 2021.

We ended the quarter with a cash balance of $31.1 million and had a revolver capacity of an additional $50 million. We believe we have sufficient liquidity available to us to operate our business over the next 12 months and service our debt in the ordinary course.

As a reminder, in the first quarter, we made an excess free cash flow sweep payment of $6.7 million reducing our term loan balance to $291.9 million. As of June 30, our total debt balance was $571.9 million, and our total and net leverage was 5.5 and 5.2x, respectively. This is based on a trailing 12-month adjusted EBITDA as of June 30, 2017 of $104.9 million. And as of today, the company has approximately 27.5 million shares outstanding inclusive of warrants.

Turning now to our third quarter outlook. We expect net revenue to be between $165 million and $170 million. We expect adjusted EBITDA to be between $41 million and $45 million.

For the full year 2017, we're revising our net revenue guidance to $520 million to $530 million, and we reaffirm our adjusted EBITDA guidance of $105 million to $109 million with a bias towards the low end of the range. There are 2 primary reasons for this slight adjustment to our guidance. The first is the continued revenue decline of our National Digital business, which we discussed on our last earnings call and Steven discussed earlier.

Early this year, we made a strategic decision to shift our focus to maintaining EBITDA in this business at the expense of revenue growth. The other reason is the decline of our Insane Inflatable 5K property. After reaching its peak revenue in 2016, we expect to see a continued decline in the business this year. Together, we expect these factors to account for approximately $10 million of revenue decline for 2017.

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

Thanks, Stu, and thank you to everyone who dialed in this morning. With that, we're now happy to open the line for questions.

Operator, will you please open up the line?

(Operator Instructions) Our first question is from Kyle Evans from Stephens.

It sounds like -- I guess my first question is how long should we expect the Insane Inflatable's to drag on the top line if it started in '14 and peaked in '16 and we're just now starting the decline. Are we looking at a multiyear kind of tail off on that? And I've got several follow-ups.

No, it's -- I mean, we don't really give 2018 guidance, but I think generally speaking, the balance of this year and the beginning of next year.

Great. And could you give us -- this is the year...

And I should say I just -- I'd love to make one comment on the II5K, our fun run series. It's hurting us in terms of the public financial now, but if you'll -- and we knew there would be an arc to it. It's probably the, arguably, the only thing we do in our Live Event business that isn't perennial content. It's -- we knew it would have an arc. We still, from a shareholder perspective, it was a phenomenal return on investment. We made more than 3x our money, so it was a very good deal. We just knew there would be an arc, and then we're seeing the tail end of the arc. But it wouldn't -- based on the numbers, it's not going to last past the beginning of next year.

Okay. Could you give us an update on NAME? This was the year that you were going to try to extend the shoulders of the season and maybe get better utilization of the assets. Could you just provide us with kind of your latest thinking there?

Yes. I mean, we're right in the middle of the heart of the NAME season, so it's a little hard to -- you never really know. But from what we've seen, we feel good about NAME. It's up nicely. It's doing quite well, and we feel I guess the same way we did when we bought the business. They had a lot of the things we wanted to put implement, whether it's the new Arkansas fair that we won this year, Tulsa last year. Some of the things that we're implementing, we feel good about it. And last year, we had some weather issues as we talked about. We still feel good. Let's hope something doesn't turn in the next 3 weeks or a torrential downpour across the country. But from where we are now, we're -- I would say it's on plan from what we thought.

Okay. And lastly, I want to make sure I understand the National Ad commentary. I understand, National, the digital decline because you talked about it last quarter. Is National Ad as a component of your time sales in radio, is that also weak? I'm not sure I got that straight.

Yes. Yes. It's not a huge percentage of our revenues, but it is. The National radio advertising that we get through the, principally through our rep firm, that business has been down and we've said that. Our local business and our regional business has been doing better than our national business, and we've seen that as a trend and that continued in the quarter. We've seen that as a trend for, I don't know, maybe 2 years and that continued. We continued to work with our rep firm and pound them and figure out different strategies. And as I said, it's not a huge piece of our business. It's less than 10% of it, so it's not huge, but we notice it.

Could you maybe some specific commentary on auto advertising x National? Just what are you seeing on the ground in your small- to mid-sized markets from the auto dealerships?

Yes. It was flat in the quarter. So as you know, it's less than 20% of the business, so it's -- that's important, but it's not a huge piece. But it's been relatively flat, and in this quarter, it was flat.

Our next question is from Curry Baker from Guggenheim.

On Townsquare Interactive, I think you guys said that you had -- or were up to 11,750 subs, which is about 5% growth year-over-year. I think it's actually about a 25 -- 20 basis point acceleration in growth from what you saw in 1Q, quarter-to-quarter. Longer term, what inning do you guys think you're in regarding that business? And is mid-single-digit subscriber growth sustainable over the near future?

Are you saying quarter-over-quarter, it's 5%, or year-over-year?

Yes, quarter-over-quarter from the 11,200.

Yes. I mean, I would say we're probably in the top of the second in that business. I mean, just in our markets and part of our strategy is to edge out of our markets with Townsquare Interactive. But there are something like 700,000 or 800,000 SMBs that in my view, all of them need digital presence, and we have about 12,000.

Our next question is from Amy Yong from Macquarie.

Maybe 2 questions. I guess first for Stu. Can you quantify the run rate, the annual run rate for expenses once this new traffic conversion is complete? And maybe how we should think about '18 and '19? And then maybe a bigger picture question with, you mentioned the Inflatable 5K being one of the few things in your portfolio that has kind of a tail end to it, but maybe if you could just talk larger, bigger picture on how you're actually managing the portfolio. Anything else that we should be aware of that has a very similar I guess profile to something like the 5K?

Okay. Let me take the first question, Amy. So the conversion over the course of this year is going to cost us about $1.6 million, and will be completed, of additional costs. Because we're still paying our old traffic system through the end of this year when the contract expires and we have a lot of license costs and up front conversion and training costs this year. And as we convert over systems, markets throughout this year, we have to additionally pay for those so that will end at the end of this year.

And Amy, in terms of the II5K, there's nothing else in our portfolio that has the arc that -- fad is a bad word, but arc is, I think, a nicer word, that the fun run did. And we debated this when we started the fun run series, but we thought there was such a huge opportunity to go grab share and money that we decided it was worth it, and we're seeing as a public company the sort of the negative consequence of that. But if you run the business for the long term, for the benefit of the shareholders, it was clearly the right thing to do. And we would do it again. Maybe what we would do next time, lesson learned, is to explain publicly a little bit better what we're doing and what the arc is. We had talked about the 5K run. We didn't talk about the arc and maybe we should have. But in any event, it wasn't material, and we didn't sort of know exactly what the timing would be. But there's -- as we look at, going forward, the things that we're testing and the things that we're launching or the things that we may buy, we have a huge bias and Dhruv and his team have done a great job on this towards perennial content. That's what music festivals are, that's what carnivals are, that's what all the local events are, perennial year-after-year kind of events that would stand the test of time. And that has sort of been our strategy. So that's -- there's nothing that we view as similar to this in the portfolio.

Our next question is from Barry Lucas from Gabelli & Company.

A couple of questions. So the traffic system, it's, I guess in total, a couple of million dollar investment. What are the benefits you really get from new traffic system?

Well, I think the main benefit is right now, we operate our business and we have 66 different local databases in each market. So the most important benefit that we're going to get, besides the day-to-day functionality and efficiencies, are that the new traffic systems run on one database, essentially held in one database. So we can do a lot more polling, get a lot better data out of it, get a lot more real-time. And it will really help us sell digital as integrated into the regular bill. I mean under our old system, we had 2 different systems, spot sales and digital sales bill. It will give us a lot better analytics and reporting, this system. We're really confident that it's going to help us.

Okay. That's helpful, Stu. And just coming back to the National Digital business. One thing is, when do you lap the effort, let's say, the focus on EBITDA versus revenue growth?

This year. So we implemented the strategy at the beginning of the year so the comps next year will sort of have factored in what -- the strategy from this year.

And just coming back at the strategy, was that a function -- you talked about driving EBITDA, but has the competitive nature of that National Digital business made it more expensive to go after revenues? And if so, where is that increased pressure coming from?

It has, right. I mean, what this business is, it's a really nice business, but it's competitive. We're actually very successful. Like we own some of the biggest music communities on the web, right, XXL, Taste of Country.com, PopCrush, Loudwire. I'd mean I urge people to check them out, the content and the videos and the short and long form content is terrific. So if you're a hard rock enthusiast, you're going to Loudwire, I would suspect most days. If you like, hip-hop, you're going to XXL. If you like country, you're going to Taste of Country. It's bigger than CMT, it's the biggest site on the web. So it's a good business, but in order to really ramp it -- if we were a VC-backed company, we would be investing like crazy in new forms of content, new forms of video, new -- all the kind of things that you would do to really ramp it up. Given the context that we're in as a public company, where this is not a huge component, we're trying to balance where we invest and you can't invest everywhere. To invest here may not have as much of a return as investing in some other places in our business. It might for somebody else if -- and we don't have lots of other digital portfolios. We have a music digital portfolio. So our strategy is to maintain the excellent quality that we have, and we can see that both in the number of uniques, we're the biggest music focus ad network in the entire Internet, and in the engagement. And that's measured in terms of social engagement, YouTube subscribers, pages per view, lots of different minutes on per page, et cetera. And that has stayed pretty stable. So we're trying to maintain that without sort of going, spending so much money to really invest to ramp it, which would really hurt EBITDA, so we're trying to manage that. And it's the business we're competing with lots of players so we're -- if that means that we give up some revenues because we're not hiring as many salespeople, those kinds of things, that's a trade we decided to make that we foreshadowed, I think, about a year ago, and we're in the middle of that now.

Okay. One more, Steve, if I may. You made a small acquisition up in or signed a deal and to buy the stations up in Massachusetts. I'm just wondering what your appetite is for additional properties and what the M&A pipeline looks like. And do you think sellers are kind of deterred or at least not active because we haven't had a firm change in tax policy yet?

I don't know about the latter although I suspect with the family-owned operators, that's probably true on the tax issue. But I mean do we have an appetite for deals like Pitt's deal? I would say all day long. We just haven't found a lot of them. It's a good cluster, the dominant cluster with really good management, where we could help roll out a digital event strategy. A good team fits right inside our clusters in Massachusetts and New York, Albany, Dutchess County, New Bedford, et cetera. It'll be close to seamless. And if we could find situations like that, it would be great. There's, I would say, there's a little bit more of a pipeline of smaller things than in the last 2 years, but not as robust as we'd like. And as you know, because we haven't done anything for 2 years before this, we've been pretty disciplined on price. So if we said, "Hey, we'll go pay 10x." I think there'll be a huge pipeline. We're not -- last time I checked, we haven't done that, and I don't think you would expect us to go do that. So on a pipeline of things that fit with us at reasonable prices, we think there's a little bit more of a pipeline than there has been, but it's still not huge. It's a couple of things.

Our next question is from Jim Goss with Barrington Research.

I recognize you have been very disciplined in your approach to M&A and that has put some hold on activity. I was curious though, a couple of things. One, how big a gap are you perceiving between buyer and seller expectations? And also, given that the Entercom-CBS RADIO merger, probably won't shake loose a lot of properties that would be in your types of markets, but maybe there are, maybe -- I'd be curious about that. And to the extent that iHeart has properties in pretty much every segment and there are some financial issues there, are there properties you might make a bid on in that context that might be -- that you might have an opportunity with?

The answer is I don't know. Yes, I don't see the CBS and Entercom combination creating opportunities for us to grow our business. I believe the things either that are being spun off or in bigger markets, which is we've said has not historically been our strategy nor have they given any indication that they are willing to entertain selling off some of the smaller markets that might fit with us. In terms of iHeart, I don't -- we're not going to go make a particular bid. I think people, lots of people know that at the right price we're interested in, small to mid-sized markets and that we're a willing buyer for the kind of things we want to buy at the prices we're interested in. So I guess if anybody was thinking of selling or doing something with those kind of markets, my guess is we'd be one of the top, if not the top, call. So whether or not something shakes out from either iHeart or elsewhere, I don't know. I don't know, but I hope so.

Okay. And one other thing, I know you just mentioned again you're not making 2018 projections, but I wonder if there are any early political expectations and that it could be a good midterm election with the political hostility around and I'm wondering if your markets seem to overlap well with the potential heightened political interest.

It's funny, I sat down yesterday with a gentleman in our company that oversees political to talk about this exact issue. It's early. I mean, if you look at the -- and it's easier to tell what are going to be Senate competitive races and what potentially are governor potentially competitive races as opposed to what are the House potentially competitive races. And there are some that are right in our sweet spot in -- but ultimately, it's going to be as you get in, whether or not there are going to be on both sides, primaries, and whether or not a lot of the house races are going to be competitive or not. So I'm, right now, pretty optimistic that it's going to be a good political year just given lots of dynamics, but it's way too early to tell.

(Operator Instructions) Our next question is a follow-up from Kyle Evans.

I wonder if you could dig a little bit more into that up 4% on core radio and maybe call out some areas, maybe regionally or advertising verticals that drove that strength. And then also kind of what you're seeing on 3Q pacing so far in the quarter.

Right, so our LMS segment has been growing 14 straight quarters organically. As you said, I'll confirm it, it was a good quarter. Retail, Entertainment and -- were good categories for us, I would say in the quarter. And then in terms of regionally, our energy markets, as we said, have turned the corner. We noted -- I was going to say complain, but that's -- I don't mean that because we love the people down there, and they worked really hard and it was a tough time in some of the energy markets, not just for our clients, but for lots of people, and as the price of oil goes back up and there's potential offshore drilling and the like coming back, it does seem to be that -- and as we said in our remarks, the energy markets have stabilized, and in fact, are now showing growth that they didn't have last year. So Texas, Louisiana, the Dakotas, some of those kinds of places are doing a little bit better than they were. And then generally, we're a company of 60-something different stories. So there are a handful of our markets that are performing pretty well and obviously, there are -- because we're self-critical all the time, there are plenty of places that we should be doing better. So other than that, I don't think there's any particular region that's materially above or any other region that's really falling behind. It's more episodic things in specific markets that just add up to the total.

And then 3Q pacing?

I would say we don't see an advertising market that's different than it has been for the past handful of quarters. Again, it's a little bit, 60 different stories in some places, there's a plant closing and some places, there's a new employer moving in, you know there is always kind of things, but sort of in an aggregated basis, we don't see either a massive slowdown or a massive uptick or something along those lines. It seems sort of about where it's been for the past couple of quarters for us.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Steven Price for closing remarks.

Great. Thanks. In middle of August, there are people dialing early and spending time with us. I hope people have a great rest of the summer and nice Labor Day. And if anybody has questions or thoughts, don't hesitate to give us a call. Thanks for joining.

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