Townsquare Media, Inc. (TSQ) Q1 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to Townsquare’s First Quarter 2018 Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Claire Yenicay, Executive Vice President. Please go ahead.

Thank you, operator and good morning to everyone. Thank you for joining us today for Townsquare’s first quarter financial update. With me on the call today are Dhruv Prasad and Bill Wilson, our Co-Chief Executive Officers 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, 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 adjusted segment operating income, adjusted EBITDA and adjusted net loss 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 Dhruv Prasad.

Thank you, Claire. Good morning, everyone and thank you for joining us today. We are pleased to report a strong start to 2018. Total net revenue in the first quarter grew 6.6% from the prior year period and adjusted EBITDA grew 12.7%. These results both exceeded our expectations. Our growth in this quarter was broad-based with revenue gains in each of our broadcast digital and live event products and services. We also announced two strategic acquisitions, radio stations in Trenton, New Jersey and Utica, New York in the first quarter. These acquisitions will strengthen our existing footprint in these markets and enable us to drive incremental earnings by rolling out our digital and live events offerings to new advertisers and new audiences. From a balance sheet standpoint, we repaid $9.5 million of our term loans ending the first quarter with net leverage of 5.2 times. And finally, we initiated a quarterly dividend of $0.075 per share following through on a promise we made to begin to return capital to shareholders in 2018. It was a busy buy successful first quarter. During our last call, we described to you our four point agenda for 2018, which started with a sharp refocus on local execution, which we have termed local first. Bill will discuss in more detail the progress we’ve made in our local marketing solution segment since we last spoke with you, but the take away is that our steady growth in our core business continues. For first quarter 2018, we delivered our 17th quarter in a row of positive organic revenue growth in the local marketing solution segment. Our second focus was to reduce the complexity and volatility in our business. As a result of the strategic review of our entertainment segment, we made difficult decisions to reset our local live events and national digital businesses. We are pleased to report that both of these businesses had outstanding orders, beating our revenue and profit expectations and we believe this demonstrates the steps we took were the right ones. The exception to this is our fairs business North American Midway Entertainment or NAME. This business did not meet our expectations in Q1 and continues to be beset by many of the same issues we have discussed on previous calls. We’ll provide some more commentary on NAME in a moment. Third priority was to drive Townsquare Interactive and Townsquare Ignite, our fast-growing digital businesses that Bill described in detail on our last call. Our revenue and profit growth momentum is continued in the businesses, which is fueling our overall revenue and EBITDA growth. Finally, we continue to focus on product innovation in two areas, analytics and data. Later in the year we’ll provide more granular detail about these initiatives, but our early indications are very strong and we feel positive about the commercial potential. When I turn the call over to Bill, I wanted to circle back to NAME, where performance continues to be a drag on the rest of our company. First, from a timing standpoint, we want to make sure you know that the dates for the Miami-Dade County Fair names largest event of the year straddles the first consecutive order. This year, more fair days fell in Q1 than in the prior year period and as such we experienced revenue growth in the quarter for NAME that was almost entirely associated with that timing change. This timing shift was reflected in our Q1 guidance and will reverse in Q2, which will affect our comps relative to the prior year period. More important than the timing difference however, is the fact that NAME again producing disappointing financial results. As we previously discussed, our strategic review of our entertainment segment concluded that this business was not core to our strategy going forward and we continue to explore strategic alternatives to address this asset. With that, I’ll turn the call over to Bill who will provide more color on our local marketing solutions performance in Q1.

Thanks Dhruv. As Dhruv noted, we are pleased to report that the first quarter of 2018 marked the 17th consecutive quarter of positive organic growth in our local marketing solutions segment. First quarter local marketing solutions net revenue grew by an impressive 5.9% over the prior year period and 5.6% excluding political revenue. We saw strength and growth in both our broadcast and our digital products and solutions in the first quarter. National revenue, which has experienced a fairly significant headwind over the past several years was approximately flat in the first quarter and our local revenue once again drove the growth in this segment. On our last call, we reported that our fall 2017 ratings period was one of our strongest in years. We are pleased to report that the winter 2018 ratings period has also yielded strong results for our local brands, even though the smaller sample set has only a handful of our markets that are measured during the winter ratings period. In two of our larger markets Grand Rapids and Albany, we had very encouraging results. In Grand Rapids, one of our stations we claimed the number one spot in the market, and in Albany, we now have two of the top three stations following share gains of more than 30% from the previous year. We believe these positive rating trends are a result of investments we made in new content managers and content quality across our local radio brands and their numerous media platforms. Our digital products and solutions continue to deliver great results for clients and strong financial results for Townsquare. Townsquare Interactive added 400 net subscribers in the quarter and 1600 net subscribers in the trailing 12 month period increasing its paid subscriber base to 12,800 at the end of the first quarter. Townsquare Ignite, our digital programmatic advertising platform continues to ramp at an exceptional case. As we reported in March, we now have more than 1600 Ignite campaigns running per month up from less than 1000 per month in 2017. In the first quarter, we expanded our sales force and service teams for both Townsquare Interactive and Townsquare Ignite in order to support continued growth in these businesses and we plan to continue to do so throughout the year. In addition, we continue to invest in commercialization of our data initiative and our broadcast measurement and attribution service so that we can offer our local advertisers the best and most relevant products and services available in the marketplace. In summary, we feel great about our first quarter results in our local marketing solutions business. With that, I will now turn the call over to Stuart for further details on our financial results.

Thank you Bill, and good morning everyone. As a reminder, our results discussed today are presented on a continuing basis and exclude discontinued operations. In 2017, we elected to discontinue the operations of certain portions of our live events business, including our holiday event series, “THE GLOW” that was sold in the first quarter of 2018. The operations and related expenses of these live event operations are presented as net loss from discontinued operations in our financial statement. We had a net loss from discontinued operations of $98,000 in the first quarter of 2017, and there was no financial activity related to discontinued operations in the first quarter of this year. All of the financial results, we will discuss today are related to continuing operations, unless otherwise noted. For the first quarter ended March 31, 2018, net revenue increased 6.6% or $5.8 million to $94.2 million as compared to the first quarter of 2017. This exceeded our previously issued guidance of $90 million to $92 million. Our first-quarter revenue growth included growth in both our local marketing solution segment and our entertainment segment. Local marketing solutions net revenue increased 5.9% or $4.5 million in the first quarter. Political was a positive factor in this quarter, increasing from approximately $450,000 in the first quarter of 2017 to approximately $700,000 in the first quarter of 2018. However, our results excluding political were still very strong. Net revenue increased 6.3% and local marketing solutions net revenue increased 5.6% excluding political revenue. First quarter entertainment net revenue increased $1.3 million or approximately 11% to $13.7 million, due largely to the timing of one of NAMES fairs, which had more days following the first quarter of 2018 than last year. First quarter entertainment net revenue also exceeded our previously issued guidance of $11 million to $12 million. Total direct operating expenses increased 5.8% in the first quarter, driven by increases in both local marketing solutions and entertainment operating expenses. The expense growth in the local marketing solution segment outpaced its revenue growth in the first quarter, primarily as a result of the investments we have been making in our digital products and sales teams, largely related to Townsquare Interactive and Townsquare Ignite. The expense growth in the entertainment segment was entirely driven by NAME, due to both the timing of the NAME fair and a higher overall expense base for the business. Adjusted EBITDA for the first quarter of 2018 was $11.5 million exceeding our first quarter EBITDA guidance of $10 million to $11 million. This represented an increase of $1.3 million or 12.7% from the prior year. Depreciation and amortization expense for the quarter decreased 0.7% or $43,000 primarily related to the amortization of capitalized software development costs. Net interest expense for the first quarter of 2018 increased $173,000 or approximately 2.1% as a result of the increase in LIBOR rates, which impacted the applicable interest rate on our term loans. Following our entertainment segment strategic review and in conjunction with our current outlook on the NAME business, we recognized that impairment charge that carrying values of long-lived assets of approximately $38 million in the first quarter. This impairment charge is a non-cash charge and was entirely related to NAME. For the quarter ended March 31, 2018, we reported income tax benefit of approximately $14.7 million. We would like to remind you that the provision for income taxes included on the face of our income statement is for GAAP financial statement purposes only. We maintain significant tax attributes including $137 million of NOL carry-forwards as well as other substantial tax shields related to the tax amortization of our intangible assets. We continue to believe that we will not be a material cash tax payer until the year approximately 2024. For the first quarter of 2018 we reported a net loss of $26.6 million or $1.44 per diluted share as compared to a net loss per diluted share of $0.16 in the prior year period. Our first quarter net loss was largely driven by the non-cash NAME impairment charge. Adjusted net loss which excludes one-time items such as impairment charges and is detailed in the schedules to our earnings release was $2.3 million or $0.12 per diluted share for the three-month ended March 31, 2018. In the first quarter we made in excess free cash flows sweep repayment of $9.5 million reducing our term loan balance to $282.3 million. As of March 31, our total debt balance was $562.4 million. Our total cash balance was $49.1 million and we had revolver capacity of $50 million. Our net leverage as of March 31 was 5.2 times based on a trailing 12 month adjusted EBITDA of $98.5 million. We expect our net leverage to increase slightly over the quarter consistent with the trend in prior years before reducing in the second half of this year. During the first quarter our board approved the initiation of a quarterly dividend with the first payment commencing on May 15. Yesterday, the board approved our next dividend distribution which will be payable on August 15, 2018 to shareholders of record as of June 20. The declared dividend is $0.075 per share which would equates to a $0.30 per share on an annual basis. We are confident that with our existing cash balance anticipated cash flow generation and undrawn revolver capacity, we will have sufficient liquidity available to us for the next 12 months to operate our business and service our dividend and debt obligations in the ordinary course. Turning now to our second quarter outlook. We expect local marketing solutions net revenue to be between $93 million and $95 million representing growth of approximately 3% to 5%. We expect entertainment net revenue to decrease to between $37 million and $39 million. This equates to total net revenue of $130 million to $134 million. We expect second quarter adjusted EBITDA to be between $21 million and $23 million. As a reminder the year-over-year comparison of our second quarter results will be impacted by the restructuring of our Entertainment segment, which resulted in fewer events this year, as well as reduced revenue from the National Digital business and the timing of NAME'S Miami fair which shifted more days into the first quarter of 2018. For the full year 2018, we reaffirm total net revenue guidance of $510 million to $520 million. Compose of Local Marketing Solutions' that revenue of $364 million to $372 million and entertainment net revenue of $140 million to $148 million. We also reaffirm our full-year adjusted EBITDA guidance of $99 million to $101 million. And with that, I will now turn the call back over the Dhruv.

Thanks, Stuart and thank you to everyone who dialed in this morning. In summary, Q1 was a strong start to the year for our company. We are in the midst of executing the plan that we describe to you in detail in our shareholder letter and in our previous calls and so far its driving the results we expected. As always, please don't hesitate to call us with any questions or just to check in. And with that, we're now happy to open the call for questions. Operator, would you please open up the lines.

We will now begin the question and answer session. [Operator Instructions] We have a question from Mr. Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you, and congratulations on a good quarter. I was just wondering in terms of the book value for NAME after the write-down, what is the book value at this point?

Hey, Mike. It's Dhruv. How are you?

Hi.

We won't disclose the specific carrying value of an asset like that, but we've written it down to what we think is fair market value.

Got you. And in terms you guys did you provide the revenue impact in the quarter from the ship in the additional days from the Miami-Dade fair?

We have not provided that at this point.

Okay.

On the revenue basis it was several million dollars and less so on a cash flow basis.

Got you. Okay. And in terms of in general the 400 net subscribers you added in the quarter, how does that compared to the fourth quarter? I just don't have that number in front me. How is that number? Also, is there any seasonality into how the subscribers are added in general?

Hi, Michael, it's Bill Wilson. Q1 was also roughly 400, and as we said on the call trailing 12 month with average 400 a quarter, so 1600 over the last 12 months. So it's pretty consistent. We don't see seasonality as relates to subscribers coming on.

Got you. Okay. Really don't have any other questions. That looks pretty decent and good luck with your strategic review of NAME.

Thanks a lot Mike. Appreciate it.

[Operator Instructions] Our next question comes from Jim Goss with Barrington Research. Please go ahead.

Thanks. Couple of more things on NAME, I'm wondering; are the options primarily private equity or something of that nature? And what sort of timeframe do you have? And if at some point you determined that you will separate that business, can you treat it as disc ops and maybe clean up the financial statements a little bit in that order?

Hey, Jim, it's Dhruv. So, we're considering all options as it relates to name. It’s a very unique business. So, the buyer group is not -- the buyer group is not massive for that business, but we are considering all options. As it relates to accounting treatment and disc ops, our intention as of right now is as we said on the call is having determined NAME is non-core. We're thinking about strategic alternatives if those strategic alternatives should not come to pass then we will look at ways to simplify our financial statements for the effective name. But we haven't made any decision regarding that.

Okay. But even if you did not have a buyer or did not exactly know how it would disposed but knew it wouldn't that no longer be part of the company, I don't know Stuart what are the financial rules on this. Is it potential to separate it out as a non-continuing operation?

Jim, it's not big enough to be its own segment and if we decide that we're not going to close it down and if we decided that we're not going to start a process and officially hire somebody to sell it then we will just continue to account for the way it is as part of the entertainment segment.

Okay. And the other thing as Mike said it, it did look a good quarter in the core radio business and I'm wondering if you think with iHeart and Cumulus both sort of coming to the end of the terms that some stage over the next year at least of some of the bankruptcy, if you feel there will be some environmental shift or change that will affect you positively, negatively from an industry standpoint. Or are there markets to separate, I think even Cumulus tend to be a larger markets than it once was. So, maybe there would less impact than I think, but I am curious of your thoughts?

Jim, Dhruv again. So I think that – I'll take the second part of the question first which is asset sales from iHeart and Cumulus. As we said on previous calls we're very open to the idea of transactions with either of those companies as they get through their processes. And it seems like Cumulus has made some good progress in that regard in the last week or so. So, we're hopeful that there will be transactions. There are very attractive markets in the – in their mid-market and small-market portfolio, there are markets that are very attractive to us. And so we expect if a transaction happens to be in the mix either or both of those situations. As relates to them getting out of their Chapter 11 and bankruptcy processes, we think that can only be a positive for the industry. The industry has been operating now for the last several months with the overhang of number one and number two in restructuring. That affects advertisers. That affects capital going into the industry. So, clearing the decks as it relates to those two processes can only help. And it seems like both of those companies particularly Cumulus, since there's been news on them in the last few days are making positive steps in that regard and moving forward.

All right. Thanks. Appreciate it.

Ladies and gentlemen, we have reached the end of our conference call. I'd like to turn the call back to Dhruv for any closing remarks.

Thanks everyone for joining us this morning. We know it’s a busy day and a busy week for lot of you. Appreciate the attention and as always reach out to us with any questions. Thanks.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.