Townsquare Media, Inc. (TSQ) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Townsquare Media Year End Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Claire Yenicay, Executive Vice President, Investor Relations and Corporate Communications. Thank you. You may now begin.

Thank you, operator and good morning to everyone. Thank you for joining us today for Townsquare’s year end 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 those 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, Claire. Good morning, everyone and thank you for joining us today. 2015 was a very good year for our company. Among other things we will discuss we further diversified our business with the acquisition of NAME, North America’s largest mobile amusement company. Today, we generate approximately half of our revenues from sources other than radio broadcast sales. We refinanced our capital structure, capturing approximately $11 million of annual interest expense savings and locked in a long-term covenant light debt package with a weighted average interest rate of 5.4%. We strengthened our local management teams and bolstered our corporate team with the addition of key individuals. Our two startup businesses, Townsquare Interactive and our national digital business Townsquare Media, were both profitable, Townsquare Media reaching profitability for the first time this year. And we continue to grow our local advertising business despite some political and national headwinds in 2015. On top of all that, we had strong financial results, meeting the guidance that we had laid out at the start of last year. In 2015, we grew net revenue by 18%, driven by the acquisition of NAME and pro forma for material acquisitions, we grew net revenue by 5.4%. Excluding political, our pro forma revenue increased 6.6%. Excluding the NAME acquisition, 2015 net revenue grew to $412.5 million and exceeded our guidance of $407 million to $411 million. This was driven by growth across each of our operating segments and we feel that we are well-positioned me across our market footprint going into 2016. Our Live Events segment grew significantly over 135% due to the strategic acquisition of NAME. With this acquisition, we extended our reach across Middle America and now reach nearly 18 million people per year through our Live Events. On an organic basis, our Live Events business demonstrated very strong revenue growth. Excluding NAME, Live Events net revenue grew approximately 35% over the prior year. Our organic growth was driven in part by the success and continued rollout of our craft beer festival series and our obstacle race series across and beyond our markets as well as revenue and attendance increases at our music festivals. As we have noted in the past, 2015 was the year of investment in our Live Events business. We made this strategic decision to strengthen our position as a leading operator of music festivals by investing in talent and production and to launch a handful of new festivals. We also continue to invest in some of our newer initiatives, including the Insane Inflatable 5K obstacle race. And we expect these investments to generate meaningful returns going forward. For example, we are launching an inflatable fun run for children called Krazy Kids Inflatable Fun Run, further demonstrating our ability to provide family-friendly affordable entertainment to our communities. As we stated at the time of the NAME acquisition, we do not expect to see the impact of meaningful NAME revenue synergies until 2017 as we are using this year to test certain concepts to ensure success. However, we very pleased that we recently won the contract for the Tulsa State Fair, the 14th largest fair in North America from an incumbent who held the contract for over 20 years. We believe that our ability to offer incremental services to the fair boards may have influenced this decision to reward the contract to us and we are hopeful that in the future, we maybe able to continue to win business. Other Media and Entertainment continued to experience rapid growth with pro forma net revenue growing 36.3% over prior year. And as I mentioned earlier, both our digital marketing services business and our national digital business were profitable for the year, a significant milestone. We continue to operate one of the leading digital advertising platforms focused on music and entertainment concepts reaching more than $70 million unique visitors in December. Last year, we focused on growing a video business by creating compelling content on both our local and national websites. By year end 2015, we had achieved over $300 million lifetime views with over 600 million minutes consumed across our YouTube channels. Townsquare Interactive continues rapid subscriber growth ending the year with nearly 8,000 subscribers, up over 60% from 2014. Shifting now to our cash flow for the year, adjusted EBITDA increased 2.6% over 2014. Excluding NAME, adjusted EBITDA was $93.7 million meeting our guidance. Looking forward, we feel that we are well-positioned to grow both revenue and EBITDA in 2016, due in part to investments we made last year. 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 December 31, 2015, net revenue equaled $113 million, up $19.3 million for an increase of 20.6% from the same period last year. For the year ended December 31, 2015, net revenue increased 18% or $67.3 million over the prior year. 2015 pro forma net revenue grew 5.4% to $502 million. Local advertising revenue declined approximately $400,000 from the prior year’s fourth quarter to $80 million. The decline was primarily due to a $3 million year-over-year reduction in political revenue as 2015 was not an election year. Excluding political, local advertising revenue increased 3.5% or approximately $2.7 million in the fourth quarter. For 2015, local advertising revenue was approximately flat year-over-year with an increase of $500,000. Excluding political which declined $5.3 million from 2014, local advertising increased $5.7 million and 1.9% for 2015. Live Events revenue increased dramatically in both the fourth quarter and the year due to the NAME acquisition. Fourth quarter net revenue growth was approximately 300% and full year net revenue growth was approximately 140%. Other Media and Entertainment revenue equaled $11.5 million for the fourth quarter. This was an increase of $3.5 million or 44.1% over the quarter ended December 31, 2014. In 2015, Other Media and Entertainment revenue increased $10.1 million or 33.4% over the prior year. This increase is primarily reflective of the strength across our national digital assets and our digital marketing services offerings. Total direct operating expenses increased 36% in the fourth quarter of 2015 and 25.4% for the entire year. This was largely driven by an increase in Live Events operating expenses. This was due to the acquisition of NAME as well as Live Events investments that Steven mentioned earlier. Other media and entertainment expenses also significantly increased year-over-year and were commensurate with revenue growth. Corporate expense was up approximately $400,000 for the year, representing a slight growth of 1.7% as compared to the prior year. This increase was primarily driven by increased costs in professional services as it relates to being a public company, as well as increased costs in headcount related expenses. Adjusted EBITDA for the fourth quarter of 2015 was $21.1 million, down approximately $2.9 million from the prior year period. For the year ended December 31, 2015, adjusted EBITDA was $98 million, up approximately $2.5 million or 2.6% from the prior year. This increase was due to growth in our legacy business and the addition of NAME for the last four months of 2015, partially offset by the reduction of political, our investment in Live Events and the loss of tower income. Depreciation and amortization expense for the year increased $700,000 or approximately 4%, primarily relating to the depreciation on property equipment acquired through the acquisition of NAME and WE Fest this year. For the year ended December 31, 2015, interest expense decreased $10.5 million or approximately 23% due to our new lower interest rates as a result of the new lease financing. For the year, we reported net income of $10.2 million compared to a net loss of $17 million in 2014. This resulted in basic net income of $0.58 per share and diluted net income of $0.37 per share. As a reminder, 2015’s net income was not negatively impacted by a $30 million charge related to the early extinguishment of our step bonds in connection with our refinancing in the second quarter. This was partially offset by a $12 million gain on the sale of our towers. Excluding these one-time charges, 2015 net income would have been $28.2 million, which would have resulted in basic net income of $1.53 per share and diluted net income of $1.03 per share. We would again like to emphasize that the provision for income taxes including on the face of our income statement is for GAAP financial statement purposes only. We maintain significant tax attributes, including $96.9 million of NOL carry-forwards and other substantial tax yields related to the tax amortization of our intangibles. We continue to believe that we will not be a material cash taxpayer for the next 4 years. We ended the year with the cash balance of $33.3 million and had 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 of December 31, 2015, our total and net leverage was 5.8x to 5.5x respectively, based on our 2015 pro forma EBITDA of $102.6 million. Additionally, it’s important to note that due to the fact that we made a voluntary $20 million debt repayment in 2015, there will be no excess free cash flow payment required in 2016 nor will we be required to make scheduled mandatory amortization prepayments for the reigning life of our term loan. Finally, as of today, the company has approximately 27.4 million shares outstanding, inclusive of warrants. Turning now to our 2016 outlook, for the full year 2016, we expect net revenue of $525 million to $535 million and adjusted EBITDA of $108 million to $112 million. This represents pro forma net revenue and adjusted EBITDA growth in the mid, high single-digits over 2015. For the first quarter of 2016, we expect net revenue to grow to $90 million to $92 million and adjusted EBITDA to decline to $10.5 million to $11 million. The EBITDA year-over-year decline is largely due to the timing of the NAME fair which we will discuss in more detail shortly. To give unity of NAME’s impact, our EBITDA guidance would be for positive mid single-digit growth, excluding NAME. 2016 will be the first full year that NAME will be under TSQ’s ownership. As such, given the seasonality of the business, we will provide more granular detail today than we would normally typically offer in future guidance discussions. NAME’s season really starts in mid-March and would last through November. Due its seasonality, NAME has negative cash flow in the first and second quarter, makes more than 100% of its annual cash flow in the third quarter and is approximately breakeven in the fourth quarter. Last year, NAME was $2.7 million in the first quarter. This year, that loss will increase due to the timing of one of NAME’s fairs, which due to a latest start date, will have more days fall in the second quarter than the previous year. This translates to approximately $1 million of EBITDA that will shift from Q1 to Q2 of this year, therefore the increase in Q1 loss for our Live Events business. And with that, I will now turn the call back over to Steven.

Thanks Stu and thank you to everyone who dialed in this morning. In summary, we are pleased with our performance in 2015 and our ability to meet the guidance that we had provided. As always, we will focus on balancing the proper mix of investment in growth for our business in order to build shareholder value. Today, we also released our annual shareholder letter, which I encourage you all to read. Please do not hesitate to call as with any questions, comments or just to check in. And with that, we are now happy to open the call for questions. Operator, will you please open up the lines?

Thank you. At this time we will be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Amy Yong with Macquarie. Please go ahead with your question.

Thank you and good morning. Couple of quick questions. First on the – thank you for the ‘16 guidance. I was wondering if you could actually talk about ’17 and I guess particularly as you start integrating some of these assets, what are some of the top line synergies we can expect and perhaps some of the costs that you are going to take out. And then secondly, can you just comment a little bit more on what you are seeing on the local ad side, how is visibility, how are some of the ad categories holding up? Thank you.

Sure. Thanks Amy. On the first one, on NAME, what we said when we made the acquisition was that there were very little – we didn’t expect many cost synergies. And on the revenue synergies, we expected $5 million to $10 million in revenue synergies by year three. So this – as you know, because you have known our company for a while, we sort of jump into things, we test things. So 2016, as we said when we did the NAME acquisition and we are actually in the middle of doing, it is the year where we are testing a number of different strategies with NAME. And then we will begin to actively ramp them up in ‘17 and beyond. So that’s everywhere from doing additional things with fair boards to bringing some of our other assets to bear, to join marketing, some of which we actually will be doing in 2016, probably a little more than we had thought to sponsorship to additional affairs and with all those kind of things we are – I would say, things that we thought about on the blackboard when we made the acquisition and we are actively either working on or working with our events teams on. So we still feel good, probably a little bit better about that in ‘17 and beyond and even when we did the acquisition. In terms of the local ad market, I would say we felt and I think we mentioned this in our prior calls that the local ad markets got sequentially better over 2015. And we feel to some extent that, that continues. So we feel that the local ad market feels fine today and certainly better than it did for much of last year. In terms of categories, it’s – the normal categories for us entertainment, food and health have been, I would say stronger than they had been in the past. And then there are some which are a little less strong. And then there are plenty in auto and retail and the like that are doing fine sort of as expected. So, I would say no real radical shifts among the categories. And in general, we feel that the local ad market felt sort of better during last year and into this year.

Great, thank you.

Sure, thanks.

Our next question is from the line of Kyle Evans with Stephens. Please go ahead with your question.

Hi, thanks for taking my questions. Can we dive down a little bit more into the Tulsa fair? When we look at NAME here, we can look at three levers for ‘16, ‘17 and beyond, that’s extending the shoulders of the season, better utilization within the season and then maybe longer term better terms with fair boards. Tulsa looks like it checks the first two of those, how significant is that kind of win to top line for NAME?

So listen, we don’t disclose individual fairs and individual fair financials. But I would actually say it checks the fourth box, Kyle, which is the ability to win new business, which was actually not something that we had put out there when we did the NAME acquisition. But Tulsa State Fair is a terrific fair. It’s the 14th largest fair in North America. It’s a Q4 event. So, it goes basically early October. Over 1 million people a year visit the fair. It’s – NAME had not been on the fair before. And the NAME – the folks who operate NAME and our team, I think did a really nice job in working with the Tulsa State Fair folks. So, we are real excited about that.

Is there joint marketing there or some other events that you are bringing to bear that helps you win that or was that just a straight up competitive win?

There is no joint marketing, because we don’t have assets right in the Tulsa area. So, it wasn’t necessarily joint marketing, but I would rather not go into too much detail as to how we won that, because I just think it was a good competitive offer.

Okay. You gave a number on Live Events growth ex-NAME of 35% earlier in the call. Is that a – is that an organic number, I know you guys have done acquisitions there. I am just trying to get a sense for whether or not that’s – some of that 35% is acquired?

No, it isn’t. It’s all organic.

Okay, thank you.

Okay, thanks.

Our next question comes from the line of Michael Kupinski with Noble Financial. Please go ahead with your questions.

Thank you so much and good morning. Just following up on that, I just wanted to clarify. How many Live Events did you have in the fourth quarter year-over-year, excluding acquisitions like what would be the number of events?

I don’t – Mike, I can get you I don’t have the exact number of events. We have sort of – I would say in some way moved away in the last year or two from thinking about the specific number and more the types of events we are doing focusing on I would say larger events. And if we can calling some of the smaller events, which take time and generate less money. So, it was over 100, I don’t know somewhere between 100 and 150, I think that was true a year ago in the fourth quarter. That was true in the fourth quarter, but whether it was up or down slightly or what the number, I don’t know exactly I have that with us, but I can get it for you.

Okay, thanks. And congratulations on your Tulsa win, but I was wondering, what is the capacity for NAME to add events before you would have to make investments there?

So, there is some not unlimited capacity, because the mobile units are busy in the season. There is some capacity. And then there is also some capacity to upgrade events, so to do bigger events and to maybe give up some smaller events if the opportunity arose. So, I think there is not unlimited flexibility, but flexibility if there were good attractive things. And we were going to – Tulsa was an attractive opportunity. We were going to make it – where it turned out it fit, but we were going to make it work.

And in terms of the acquisition environment right now, obviously, there is a number of companies out there that are struggling might be selling some assets. What is the current acquisition environment like? Are you seeing any properties come available? Can you just kind of give us some color there?

Yes, I would say on the bracket side, the M&A market seems pretty quiet. There is not sort of a lot out there that we are seeing and either from the larger companies or sort of across the board. It may be that the sellers are looking at the financial markets and particularly the debt markets and it’s not an attractive time and maybe that – their business is pretty good and pretty good last year and it will be pretty good this year. So, if they were going to sell, they want a pretty high multiple which people might not hit. So, I don’t know what the dynamics are, but I would say it’s pretty quiet.

Okay, thank you. That’s all I have. Thanks.

Okay. Thanks Mike.

Thank you. Our next question is from the line of Michael Morris with Guggenheim Securities. Please go ahead with your question.

Thank you. Good morning, guys.

Hey, Mike.

Two topics. Hey, how is it going? Can we dive a little more – can you share anymore on digital business, you said both reached profitability this year? Any insight you can give us on how much of that is top line growth and the trajectory there and how much is cost control at this point? And then second on Live Events, outside of the NAME business, can you talk a bit more about the franchises? I mean, I know that you have things like Insane Inflatables which you have expended and now it seems like you have a bit of an adjacency there with kids. What are properties that you see as further franchise opportunities and maybe what are some that you would dial back on? Thanks.

Okay. On digital, I would say we feel these were in our Other Media and Entertainment part of our business. We have two digital businesses, national digital content business and a digital marketing solutions company. And both were basically startups early on and we invested and grow those businesses. And we are very pleased with them. They are doing really nicely growing quite quickly on the revenue side. So, I would say it’s not driven by cost-cutting because these were startups that are turning to profitably. But as the revenues continue to ramp and I think revenues grew 35% or something last year, for OM&E, the direct profit was off the chart, because it was such a de minimis amount. I think it was 600% to 700%, some ridiculous number, but it’s not a cost saving that we are actually going to start to see margins. And then when we see margins, we will see margin expansion in those businesses as revenues continue to grow in the digital businesses. So, we are still excited about those. In terms of the Live Events, I mean, it has been our – you are right that has been our strategy is to what we call an Events in a Box, find a concept, test it in a few markets and then try to scale it across as many of our markets make sense and in some cases, beyond our – beyond the markets where we have local advertising businesses. So, Insane Inflatables is one. America on Tap is another one. The derivative of Insane Inflatables, which is the kids festival. We have a whole series of other events. We have 17 or 18 different concepts that we – everything from haunted houses to bridal shows and home shows to food and wine festivals, a whole series of different franchises as you would call them that we are in the process of doing in selective markets scaling out and the like. So, I just think that’s going to continue to grow. And part of the investment we made in our Live Events business is to go test some of those concepts and some work and some don’t work. But as they do it, we will continue to scale those out. So, the two that have scaled the most are Insane Inflatables and America on Tap, but there are others that we are working on.

If we look at the growth in that side of the business, how much at this point is sort of organic growth from continuing to drive more participation in the events and how much of it is rolling out successful products into additional markets?

One-third, two-thirds directionally. So, each time we do an event and we do one of these franchises in a particular place, you try to do it bigger, you try to get sponsorships, you try to charge more, you charge less, you do those kind of things, you figure out ways to take some cost. So, that’s part of it, but rolling it out into additional cities is a big part, additional places or multiple days is a big part of the strategy and then the new concepts and sort of the third part of the strategy.

Thanks, Steven. It’s very helpful.

Okay. Thanks Mike.

Our next question is from the line of Leo Kulp with RBC Capital Markets. Please go ahead with your question.

Good morning guys. Two quick ones, if I could. First, from a high level, can you just review your listen – how your listening trends are doing on the stations versus digital. And also about – can you talk about how your monetization efforts are progressing for your digital streams. And then the second question is do you have any thoughts on how Trump nomination could impact the overall political spending in the 2016 election?

Sure. Our listening and we have said this since we started the business, it’s been I would say quite stable and that continues on the tune side and TSL is actually time spent listening are actually in a less books, we are up a little bit. So listenership now is fine, stable and pretty good. And we feel like we have the right programming team, doing – balancing all the different factors. A lot of that is because we are live and local. A lot of that’s because we are in small to mid-size markets. I think we could be doing better. And we actually had our programming folks in for two days this week talking about other ways that we could up – continue to grow our listenership and obviously that sort of in some parts that fuels, that drives that local advertising business. In terms of Donald Trump, I would say if you step I guess I am not sure what I want to say about that. But if you step back, a lot of our – if you say in the fall election where is a lot of money is going to be spent Ohio, Pennsylvania, Florida, Virginia, that was the case for the last number of presidential cycles and the current one. And we are in and of those states. So in terms of a fall presidential election, if we were in Ohio or Florida or pick another state, Pennsylvania, that’s where there is typically a ton of advertising spending and we have never participated in that. Our political – while we do get some political money from the presidential, particularly in the primary, the vast majority of our political revenues are state races, governors races, Senate races, house races, state judge races, issues, much more local things like that as opposed to Democratic or Republican presidential nominee. So I don’t know how if Donald Trump is the Republican candidate how that will affect spending both at the top of the ticket and as you go down the ticket, whether people will want to spend more or less on either – in either party based on that. Those aren’t variables that, I mean I could argue both sides, I don’t know. It doesn’t materially affect us. What it does is, if there is a competitive senate race in Louisiana or a governor’s race in Maine or South Dakota, those are much more impact-full to our business.

Got it. Thank you very much for the color.

Okay. Thanks Leo.

[Operator Instructions] Our next question is from the line of Jim Goss with Barrington Research. Please go ahead with your question.

Thanks. A couple more on the Live Events business, I am wondering as you take these franchises, your events in a box and you grow them, are there leverage impacts – do you have impacts on the costs by doing that, especially if it is coming from server replacing, the existing smaller events that you are telling with these proven entities?

So I am not sure I – so if you are asking if as we continue to roll these out and do the shift, will it help margins?

That’s right.

It should. Yes, it should, that’s the plan. And that’s what we have seen before.

And the one-third, two-third you mentioned before. You have found that as you have come through the next year with same sort of events, you are building expectations and growing the events and people are looking forward to them and that is – that’s hindering, I know they are fairly early on, but...?

Yes. I would say absolutely. That’s on the music festival side, on the inflatable side, on the beer festival – on most of our events, we have seen that.

And with the talents and productions, you mentioned the launching of the festivals, could you talk a little more about that, because aside from a couple of really big ones, it seem like music has not been as big as you might expect for a company sort of had a genesis in radio, but this seems to go back – going back to the roots, so that – I would be interested in knowing about that a little bit more?

Yes. I mean music is obviously a big part of our company. And the music festivals are a nice piece of our Live Events business. I think we are one of the – if not number one, one of the top players in the music festival space. And so that’s important to us. And those tend to be, while they are smaller in number than 100 Insane Inflatables, they are certainly bigger in terms of revenue per event. So they are important to us. We do spend time and effort and trying to figure out where we should strengthen events, where we should build new events, as we did in some cases in 2015. So I would say that’s an important part of our Live Events business as are some of the others.

Okay. And I think lastly and just the Q4 tax rate, was it a bit higher, it looked like that gap was a bit higher – bigger than it had been and what was the reason for that?

Hi Jim, this is Stu. Our effective tax rate went up from about 41.7% to 43.1% and that’s basically due to the fact that our new business NAME has some operations in Canada and they have a loss in Canada each year, which is intentional because U.S. charges Canada fees on a tantalizing agreement and rate in Canada is less than the U.S. It’s 25% versus I don’t know 33%. So, the benefit that you get from that in comparison to prior years, the benefit was less because the tax rate was less and it was a loss. So our effective tax rate went up.

Any guidance, should have for this year’s tax rate assumption?

I think it’s going to stay the same, kind of going forward. But remember, we are not a taxpayer, right. The taxes that you see of the financials are GAAP provisions for income taxes. We don’t actually pay tax – cash taxes. We have about $96.7 million of NOL carry-forwards going forward and we won’t be a taxpayer until way into the third or fourth quarter of 2020, so I mean we don’t buy anything else. We get to take huge amortization tax deductions for our SEC licenses.

Thanks Jim.

Okay, that’s it. Thanks.

Thank you. [Operator Instructions] Thank you. At this time, I will turn the floor back to Mr. Steven Price for closing remarks.

Great. Thank you very much, operator. Thank you everyone for listening to the call, for paying attention and investing with us. And as I said earlier, if you have any questions, comments, suggestions, please don’t hesitate to give one of us a call. Thanks and have a great day.

This concludes today’s conference. Thank you for your participation. And you may now disconnect your lines at this time.