Townsquare Media, Inc. (TSQ) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to Townsquare Media’s Second Quarter 2015 conference call. As a reminder, today’s call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] With that, I’d like to introduce the first speaker for today’s call, Ms. Claire Yenicay, Executive Vice President. Ma'am you may proceed.

Thank you, operator, and good morning to everybody. Thank you for joining us today for Townsquare Media’s second quarter 2015 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 are going to provide an update on our second quarter and year-to-date, as well as to provide a brief update on some recent developments at our Company. 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 the 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 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 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 Web site. At this time, I’d like to turn the call over to Steven Price.

Thank you, Claire. Good morning everyone and thank you for joining us today. We are pleased to report the Company’s second quarter results, which are inline or exceed our previously issued guidance. The Company’s second quarter net revenue grew 10.6% year-over-year, exceeding our guidance of high single-digit revenue growth. And pro-forma adjusted EBITDA increased 2.5% inline with our guidance of low single-digit EBITDA growth. In the second quarter, local advertising revenues increased by 0.6% and local advertising revenues excluding political increased 1.5%. Our second quarter results were impacted by soft results in our New York and New Jersey market. Excluding these markets, local advertising revenue would have increased 1.8% and local advertising revenue excluding political would have increased 2.4%. We have been working to solidify our leadership in these markets. In some cases it requires redirecting management’s focus, and in other it requires finding the right person for the market. A number of positive developments have occurred for the radio industry in recent weeks. First, it was announced that AT&T has agreed to activate the FM receiver chip in their 2016 android smartphones at no cost, allowing the further proliferation of the next radio app. This deal follows the 2013 deal with Sprint that has resulted in 25 million next radio enabled phone in the marketplace today. I want to personally salute Jeff Smulyan and others in the industry who have worked tirelessly for this important step for the radio industry. Second, Nielsen report released earlier just this week, stated that radio has reached an all-time high, reaching approximately 245 million Americans aged 12 or older. This follows the first quarter announcement that radio surpassed TV for the first time as the nation’s top reach medium. Related to this data, a recent MoffetNathanson analysis suggested that although broadcast television ratings have declined by double-digit percentages, radio ratings have remained stable over the past year. We continue to believe that radio’s biggest problem is perception. And hopefully these data points as well as many others will help combat this issue. Turning to Live Events, our Live Events had a strong second quarter, as net revenue grew 50.4% or approximately $10 million over the prior year period. Revenue growth was enhanced due to the addition of three new music festivals which contributed a total of $2.1 million of incremental revenue in the second quarter. Excluding these festivals, revenue still grew at a healthy pace of 39.9% over the prior year or approximately $8 million in the second quarter. Our second quarter Live Events activity was driven primarily by our music events, particularly our multi-day music festivals. Regarding our three new music festivals, it’s important to note as we have in the past the new festivals organically growing generally require significant upfront investment. As you may recall, we approach Live Events as a principal risk taking and brand building business. Therefore, while the new festivals typically drive revenue growth in their inaugural year, we do not expect to see cash flow growth until years two or three, as we build the brands of these festivals. In fact, these three festivals negatively impacted our results of operations in the second quarter slightly more than we’ve planned. Other media and entertainment net revenue grew 9.5% in the second quarter of 2015. Second quarter growth within our other media and entertainment business was driven by our marketing -- digital marketing services offerings. This morning we announced the sale of 43 of our towers to Vertical Bridge for approximately $22.8 million. This deal makes a lot of sense for our company. Not only that this transaction unlock capital that was previously unavailable to us, but it also grants us a 35-year essentially rent free term for our existing broadcast equipment. We expect this deal to close in the third quarter. We plan to use the proceeds towards either accretive acquisitions, investment opportunities, or debt repayment and are currently evaluating these alternatives. And finally, we recently announced changes to our senior management team, including the addition of Chris Kitchen, a partner from Kirkland & Ellis, who has worked with the company for five years as Executive Vice President and General Counsel. Chris knows our company well and is a great addition to our team, and we’re looking forward to his August 10 start date. Altogether, we believe the changes to our management team have put us in a great position as we enter the back half of 2015 and beyond. With that, I’ll now turn the call over to Stu for further details on our financial results.

Thank you, Steven, and good morning, everyone. As a reminder, our second quarter and year-to-date results discussed today are on a pro forma basis. Meaning they are pro forma for all material M&A activity completed by June 30, as if they had occurred at the beginning of the reporting and comparison periods. Importantly, there are no revenue adjustments necessary in these reporting periods. So pro forma revenue results are the same as they would be on a historical GAAP basis. Our pro forma direct profit and adjusted EBITDA metrics are adjusted to reflect the expenses that were incurred in connection with the WE Fest music festival in the first half of 2014 in order to provide a meaningful comparison. As a reminder, we acquired WE Fest in the fourth quarter of 2014. 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. Unless otherwise stated, all of the financial results discussed will be pro forma for these completed acquisitions. For the quarter ended June 30, 2015, net revenue equaled $117.5 million, up $11.2 million for an increase of 10.6% from the same period last year. For the six months ended June 30, 2015 net revenue increased 7.1% or $13.2 million over the prior year period. Local advertising revenue for the quarter equaled $78.5 million for an increase of approximately $500,000 or 0.6% from the prior year’s quarter. This included approximately $400,000 of political advertising revenue in this quarter whereas $1.1 million of political advertising in the second quarter of last year. Excluding political, local advertising revenue increased 1.5% or approximately $1.2 million in the quarter. For the year-to-date period, local advertising revenue increased $300,000 or 0.2% over the prior year period. And excluding political, it increased $1.3 million or 0.9%. Live Events saw a revenue increase for the quarter of $10 million or 50.4% to $29.7 million over the same period last year. Excluding the new, first time festivals; this represents an increase of 39.9% or $7.9 million over the prior year period. This increase is reflective of increases in the number of attendees at each event and the revenue per attendee. For the year-to-date period, Live Events revenue increased 37.7% or $10.4 million. The first six months of 2014 included a non-recurring festivals from the first quarter of 2014 that we discussed on last quarter’s conference call. Excluding these results, Live Events revenue increased 52.4% in the year-to-date period. If you have to exclude the 2014 non-recurring festivals as well as the three first time 2015 festivals Steven mentioned earlier, Live Events revenue increased 44% in the year-to-date period. Other media and entertainment revenue equaled $9.3 million for the quarter, which was an increase of $800,000 or [audio break]. In the year-to-date period other media and entertainment revenue increased $2.6 million or 17.7% over the prior year period. This increase is primarily reflective of the strength across our digital marketing services business. Total direct operating expenses increased 14% in the second quarter or $10.1 million as compared to the same period last year. It was entirely related to an increase in Live Events operating expenses. Our Live Events operating expenses increased as a result of investment in the three new music festivals, as well as an investment in talent and production at our music events in general. We believe these investments will drive both revenue and cash flow growth in future periods. This resulted in second quarter direct profit of $35.2 million, an increase of $1.2 million or 3.4% over the same period in the prior year. Direct profit for the year-to-date period of $55 million represented an $800,000 increase or an increase of 1.4% over the prior year period. Corporate expense increased approximately $400,000 in the quarter and $900,000 in the year-to-date period. This increase was driven primarily by us being new public company and the cost associated with that. Pro forma adjusted EBITDA for the quarter was $28.6 million, up approximately $700,000 or 2.5% for the quarter. For the year-to-date period, pro forma adjusted EBITDA was $43.2 million, slightly below the prior year-to-date period of $43.3 million. On a reported basis, depreciation and amortization expense for the quarter decreased $700,000 or approximately 17%, primarily attributable to a decrease in the amortization on software development costs. Also, on an as reported basis, for the three months ended June 30, 2015, interest expense decreased $3.9 million or approximately 32% due to an overall lower level of outstanding indebtedness as a result of the debt pay down associated with last July’s IPO and an overall lower average interest rate as a result of our April 1 refinancing. As a reminder, we previously reported the successful refinancing of our capital structure. On April 1 of this year, we issued $300 million of 6.5% senior notes due 2023 and $275 million senior secured term loan facility due 2022 and L+325 basis points with a 1% LIBOR. We also entered into a new five-year $50 million revolving credit facility at L+250 basis points. Net proceeds from the refinancing together with cash on hand, we used to repay all amounts outstanding under our previous notes [ph] and credit facility. For the second quarter of 2015, we reported a net loss of $8.7 million, compared to net income of $12.1 million in the second quarter of 2014, resulting in a net loss per share of $0.50 per share for the second quarter of 2015. The net loss in the second quarter of 2015 was driven by a $30 million net loss on debt extinguishment in connection with the April 1 refinancing. Excluding this one-time charge for the loss on our debt extinguishment, net income would have been $9.1 million, which would have resulted in basic net income per share of $0.52 per share and diluted net income per share of $0.27 per share for the second quarter. Importantly, we’d like to emphasize 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 over $60 million of NOL carry-forwards and other substantial tax yields related to the tax amortization of our intangibles. We expect to use some of these tax assets to offset any taxes that will be due as a result of the tower sale. We’ve evaluated the impact of the tower transaction on our future expected cash tax payments and continue to believe that we will not be material tax payer for the next two years. We ended the quarter with a cash balance of $30.4 million and had revolver capacity of $50 million. We feel confident that we’ve sufficient liquidity available to us to operate the business in the next 12 months and service our debt in the ordinary course. As of June 30, 2015, our total and net leverage was 5.9x and 5.6x respectively. As a result of the tower sale that Steven mentioned earlier, we expect cash proceeds of approximately $22.8 million, subject to closing adjustments in the third quarter. Going forward, the tower sale is expected to result in reduction to our revenue and cash flow of approximately $1.5 million and $1.3 million respectively. This revenue and cash flows related to third-party tenants that currently rent space for their broadcasting equipment on our towers. We intend to use the proceeds from our tower sale for either accretive acquisitions, or investment opportunities, or repayment of debt. Finally, as of today, the Company has approximately 26.9 million shares outstanding inclusive of warrants. Turning now to our outlook for the third quarter of 2015, we expect pro forma net revenue to grow in the mid high single-digit as a percentage over the third quarter of 2014. We expect pro forma adjusted EBITDA, excluding political to be flat to low single-digit percentage increase over the prior year, depending on the timing of certain investments. For the full year, we reaffirm our formal guidance of pro forma net revenue year-over-year growth in the mid to high single-digits and pro forma adjusted EBITDA to grow year-over-year in the low single-digits, excluding the impact of political. And with that, I’ll now turn the call back over to Steven.

Thanks, Stu. In summary, we’re pleased that we produced yet another strong quarter and believe that it underscores the success of our Townsquare Everywhere diversification strategy. We feel we are well positioned to take advantage of future operating and strategic opportunities that may arise due to the investments that we have made and will continue to make this year. We believe in making investment decisions as you know based on both near and long-term results, and are confident that we’re working hard to build shareholder value. Thanks again for taking the time to dial in this morning. And with that, we’re now happy to open the call for questions. Operator, will you please open up the lines.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Amy Yong of Macquarie Capital. Please go ahead.

Thanks and congrats on the great quarter. Steven, can you talk a little bit about some of the actions that you’re seeing perhaps visibility and I know choppiness in some of the oil producing states is one of the issues in the first half of the year. Has that kind of improved as we’ve trended toward to summer? And how much of -- and I guess, if you could talk a little bit about your guidance from mid to high single digit growth. I mean what kind of advertising visibility, is that baked in? Thank you.

Sure. Thanks, Amy. On the one, oil producing, we do have a number of markets in oil producing regions particularly Texas and Louisiana. I would say we did see a little bit, we did see some issues in the beginning of the year and I would say that has moderated, and that’s not longer I would say a significant factor. Overall, our view is that the [indiscernible] market at least as we see it has improved on a sequential basis. I wouldn’t say we feel like it’s a boom market, but it’s definitely improved and we feel better about it. On the local side we are seeing and this sort of does answer your question about visibility. We had seen for probably the last year, clients booking later and later. So it does make pacings a little bit more difficult to gauge in this environment than it did a number of quarters ago. And as always for us, local is local, so local factors often overwhelm the bigger economic trends. So sometimes it’s a particular issue in a city. Sometimes candidly if it’s a great management team that’s aggressive they can outrun that, in some cases they can't. So, its -- since some much of our business is local, it’s a little hard to sort of parse out a general advertising environment because there were so many issues if there’s a particular base moving around or closing or new hospital, something in a community, that tends to be as or more relevant. On the national side we do see some softness -- some softness and continuing to see that. But stepping back overall we think that our diversification strategy gives up the ability to deliver the kind of revenue growth that we saw and that we think we’ll continue to see despite these factors given the balance of different products that we have. In terms of forward guidance, we really don’t break that down by segments. So overall we gave sort of the mid high single digit revenue growth and we think it will be sort of a combination.

Perfect. Thank you.

Okay. Thank you.

Thank you. The next question is from David Bank of RBC Capital Markets. Please go ahead.

Okay, thanks. Good morning. I guess as you kind of look back, think about where you were a year ago telling the story in the IPO. A big part of the story is the kind of mode I think that Townsquare has in the local market place on any platform, be it radio or online, because of the nature of having feet on the street and strong franchises in markets where big national digital players just didn’t have any scale. And I’m kind of wondering if you look back a year later now, do you think the big national players are making any progress in trying to penetrate your mode, do you think -- are they even trying? It doesn’t make sense for them and, do you see that in the market place at all? Thanks very much.

Yes, sure. Thanks David. We don’t, and again I don’t think that’s because of anything other than in a sense smart business by them even if I had markets in New York and Chicago, in LA and Boston I would not spend a lot of resources in Twin Falls [ph], or Tuscaloosa or Utica were some other markets that we operate in, it just wouldn’t make sense. You can add a couple of people to New York and move their needle much more than they can trying to figure out how to go staff all that I believe. So that’s in our thesis and since we started the company, it was our thesis when we did the IPO and its still our thesis and from what we see, that continues to hold. And in fact if you continue to be live and local and have an active local sales force and active management, we think we’ll have them both. One recent example is, the June rankings which just came out yesterday on streaming. Townsquare stations had more engagement than any other radio group, and our listeners stay tuned into those streams for an average of 1 hour and 27 minutes. That’s not only bigger than radio group in our market, that’s twice Pandora and Spotify. So, we do think that, if we say live and local, we do have a connection to our community. We’re going to keep our listeners, our viewers and our attendees and therefore advertising will follow.

Okay. Thank you very much.

Thanks David.

Thank you. The next question is from Michael Kupinski of Noble Financial. Please go ahead.

Thank you and congratulations on your quarter.

Thanks Mike.

In terms of the tower deal which was pretty incredible. I was just wondering if you can just talk about the special situation nature of that deal because it seems like if you’re offered that deal you would just, you may have wanted to do additional markets. And I was just wondering if you could just chat a little bit about that?

Sure. We thought for a while about what to do with our towers because its, it’s an asset that to some extent was a hit in our stock asset and our company. And we decided a couple of things. We had not candidly been as aggressively in actively managing and finding new tenants, finding tenants on our towers as we put the company together candidly as we might have been able to. So there are many of our towers which either don’t have outside tenants, have very small number of outside tenants or in some cases candidly just are in places or our structure show that they’re probably not going to have many outside tenants. So we spent a lot of time with Vertical Bridge and put together this package 43 towers. We kept some 250 or so of our towers which as part of this, they’re going to market those towers on our behalf with a revenue share that works on a percentage basis in our favor. And importantly we wanted to sell these towers without increasing our costs. So we’re able to structure something with Vertical Bridge that worked with us. They see opportunity in the towers that they bought, as well as we hold [ph] in the towers that we kept to market those.

Okay. And as you’re in the third quarter, I was just wondering if you can, you’ve gone through a significant number of Live Events increases over the years but that seems to have stabilized at least a little bit. So in the third quarter, can you tell me, are there additional live event venues in this quarter that you didn’t have last year or if so how many? So I’m just looking on the apples-to-apples basis.

Yes, I’d have to get you that Mike and we can. There are some -- and there were some that we moved. Whenever you have 500 to so Live Events, you’re always thinking through what the right portfolio is, how to move things, so there are some. This happens to be a big weekend for us. I hope anybody who had some spare time will get on a plane and fly up to Detroit Lake because it’s WE Fest this weekend which is a big one for us, which is our first year running it. So there’s opportunity but also risk because while we’ve seen it and we never actually managed it ourselves so we’ll see, so far the weather looks good other than Thursday, where it looks like they’re going to get an inch of rain or so. So I don’t exactly have the specific number. There’s always movements in the portfolio.

Okay. And then, in terms of -- there seems to be some radio companies out there struggling with managing even more debt than you are. What are your thoughts on additional acquisitions at this point? How are you going to manage it with other?

Yes, so I appreciate it. So we look for active issues, we’d like to continue to make acquisitions. We said a couple of things on that front and we have been pretty consistent on this. One is that, our mid to near-term objective is to get our leverage down below five turns, so that’s -- and over the more mid and long-term into the four range, so we’re conscious of that. And the other thing is, if there are accretive acquisitions we think that we could make, we’ll go do that. We don’t think we have to go buy more things or particularly more radio stations, but we’d like to. And if we can, and if it meets their criteria that makes sense for us which we have defined as the right price, the right cluster which is a dominant cluster, and the right market in the right geography that fits with us. And if we could find things that fit in that box we’ll be pretty aggressive doing that. And if they don’t meet those three criteria, we’re not just going to go buy things just to go buy things.

Great. Thank you.

Okay. Thanks Mike.

Thank you. [Operator Instructions] The next question is from Jim Goss of Barrington Research. Please go ahead.

Thanks. A question or two on the Live Events. What’s way past for this weekend, is it one weekend or two weekends this year? I know there was a plan to ultimately expanded, that wasn’t clear on that.

One weekend.

One weekend.

When we made the acquisition, we said that over time which wouldn’t be this year and might not be next year. We are looking at -- we do have the land, it’s an attractive area. If we think we can start a festival, if that makes sense, we’ll go do that. But we wouldn’t have had time, booking would have been early done for second weekend, so its just one weekend this year.

Okay. And you mentioned …

Well, I would say it’s exciting because it’s the first time that Blake and Miranda are together since their announced divorce.

Okay. That’s pretty interesting. The three new music festivals, could you give any scale on those, I mean WE Fest was sort of outsized relative to the rest of the Live Events category. What sort of description would you have for the other [indiscernible]?

Are you saying on a revenue side or on a …

Well, revenue or the nature of the festival or, I mean WE Fest is sort of a different thing where you’re out in the middle of a large area with a big draw. Are these -- these aren’t anything like those, I assume.

No, nothing newly that big. It was an incremental a little over $2 million in revenues and we took a loss. We expected a loss in the $1 million, maybe a little bit more of EBITDA hit. It ended up being about that a little more than that, what we thought. What we expected -- the biggest one was a rock festival we did out in Colorado where we wanted to build to your point on WE Fest to do a second weekend. We do a country music festival out in Colorado, called Country Jam. We added a second weekend this year which was a rock festival. It, I would say broadly met what we thought. I think we’ll continue to do it. Are you ever happy to loose I’ll call it a $1 million bucks or whatever that number is, I don’t have the exact number for that festival. You’re not thrilled about it but you know it. We planned on it, we’ve only said when you do festivals you’ll loose money in the first -- we sort of laid that out, we laid it at the beginning, we laid it out in the IPO and when we talk to investors. So if you’re going to build something that’s going to be a franchise and build a brand, you invest in it. That’s why we didn’t start 10 music festivals this year, we started a few. That was the biggest one. We did a couple of other ones, started a couple of other ones in both country and rock, also in the mid-west. And as expected, we think those are good investments. Do they hurt? Cash flow if you just look into cash flow this year, they do. I think the right thing to do for the company and will there by an ROI on those? We think so. That’s why we do. So we -- as we -- so, that’s sort of how we thought about those festivals. And we’re still excited about those.

You also had talked about Beer Fest and other portable type concepts. Where do you stand on some of those ideas?

We are still rolling those out. I mean, you saw we had a -- even without the music festivals, we have booked a 40% growth in our Live Events business. So putting up new festivals aside, we’re doing lots of different things, credit to Dhruv Prasad and his team who run a Live Events business, who’ve been able to manage not only the music business, but our portfolio of non-music events that we’re excited about and that we’re growing. Beer festivals as you mentioned are doing well for us. I think we hare the only national tour of craft beer festivals called America on Tap. I’d ask people to go to the Web site and go check out one of the events, and lots of other non-talent based events.

Okay. And lastly, following up on the question Mike had asked about M&A. Is there -- do you have any sense of potential acquisition multiples in the types of markets you would be looking at where that sort of stands right now?

You know I don’t, and I still don’t want to give it away to sellers. We’re looking at some stuff now; I’d say some things on the smaller scale. So I think we may have a better -- I don’t know if they’ll happen. We may have a better sense. I don’t think -- I wouldn’t say -- I don’t think multiples have changed in the past six to nine months of where sellers are, where buyers are, and where things may transact. And again, it’s to some extend its specific. It fits right into what makes total sense for us, and we think there is a lot of geographic and other synergies, probably worth a little more. If not, it’s probably worth a little less.

All right. Thanks very much.

Okay. Thank you, Jim.

Thank you. We have no further questions at this time. I’d like to turn the conference back over to Mr. Price for any closing remarks.

Great. Thank you so much, operator. Thank you all for participating for getting up this morning, listening and for supporting us as shareholders, debt holders, and bond holders. To the extend you have further questions, please don’t hesitate to call any of us. Thanks so much.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.