Townsquare Media, Inc. (TSQ) Q1 2019 Earnings Report, Transcript and Summary

Good morning and welcome to Townsquare's First Quarter 2019 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] And with that, I would like to introduce the first speaker for today's call, Claire Yenicay, Executive Vice President. Thank you. 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 Bill Wilson, our 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 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 EBITDA and adjusted operating income 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 Bill Wilson.

Thank you, Claire. Good morning, everyone, and thank you for joining us. Today I'll discuss Townsquare's strong financial performance to start 2019. As I shared on our last call, 2018 was a transformative year for Townsquare, as we had a renewed focus on our local markets and corresponding investments, which drove strong local revenue growth, particularly within our digital businesses. As I trust O&O at this point, we proudly focused on markets outside of the top 50 cities in the U.S. where we are confident that our marketing and advertising solutions are differentiated and enable us to aspire to be not only the number one radio broadcaster but also the number one local media company in the markets we choose to operate in. To that end, we kicked off the year continuing with the positive momentum we built throughout last year and as a result 2019 is off to an excellent start with our teams across the company executing our Local First strategy with renewed passion and excitement. For the first quarter, Townsquare's net revenue increased 6.5% over the prior year and our first quarter adjusted EBITDA increased 8.3% despite our strategic decision to reduce our live events revenue, which declined approximately 9%. I am pleased to share that these strong results place our revenue at the very high end of our previously provided Q1 guidance, while exceeding our EBITDA guidance quite nicely. Given the strength of our profit performance in Q1, coupled with our strong outlook for Q2 and the second half of 2019, you'll hear from Stu later on our call that we are raising our full year adjusted EBITDA guidance. In addition to raising our EBITDA guidance, it is worth noting that in Q1 our digital revenue was over 1/3 or over 33% of our total net revenue, a new milestone for Townsquare. As I shared it on our previous call, I believe this statistic more than any other emphasizes the point we are not your average radio company. We would emphasize that although radio remains a core part of our offering is our DNA and is still the largest part of our business today; it's just the starting point for Townsquare, as we continue to evolve and grow across all platforms. As one example, our portfolio of local and national websites and their corresponding social and video platforms go hand in hand with our local broadcast brands and continue to deliver original and influential content that drives deep multi-platform audience engagement and creates compelling advertising and marketing solutions for our clients. In fact, we have just as many people coming to our local website platforms as listen to our radio brands over the air. We believe this is because of the strong connection our local on-air talent has with their local audiences, which drives these audience to consume our content across all of our platforms on air, on site and on our websites as well as across our social and video platforms. As we like to point out, radio disc jockeys were and truly are the original social influencers. Therefore, today in 2019, Townsquare is best described as a premier local media and digital marketing solutions company with a thriving digital business that has net revenue growth in excess of 20%. In fact, 70% of our broadcast clients buy more than just our broadcast product. This data point speaks to the fact that although we have a wide breadth of advertising solutions across broadcast digital and live events, they all intersect and operate in the same local market ecosystem, which allows us to focus on super serving our local clients and helping their business grow. Since the beginning of this year, I've been spending a large majority of my time with our teams in our local markets and meeting with current and potential investors. As it relates to feedback from investors, I've continually heard how impressed they are with our strategy and execution, yet at the same time craving more details on our digital profit performance. As a result of those discussions for the first time we are now providing segment-level detail including revenue and expenses for Townsquare Interactive, advertising, and live events. One of our goals in doing so is to unlock or provide greater visibility into the incredibly valuable subscription business we have with Townsquare Interactive I detailed on our last call. I am incredibly proud of the team at Townsquare Interactive, not only for their continued strong financial performance, but also importantly the culture of winning and the world-class team they have built. I am pleased to share with you that Townsquare Interactive's net revenue in Q1 grew a very strong 32% and their adjusted operating income, which I refer to as profit on this call, grew 35% compared to Q1 2018. Townsquare Interactive operated at a 31% profit margin in the first quarter of 2019 and we anticipate that these margins will remain relatively stable going forward, approximately 30% as we balance investment and growth. Townsquare Interactive continued its strong pace of subscriber additions adding approximately 850 net subscribers in the first quarter of 2019, marking the fourth consecutive quarter with 850 net subscriber ads. This compares very favorably to the first quarter of 2018 when we had added 400 net subscribers and was propelled by our product offering, larger salesforce, greater productivity per seller, and our focus on client retention. We continue to have great success selling and servicing this product outside our local markets as well as within our 67 local media market footprint with approximately half of our subscribers outside of our footprint today. In total, we ended the first quarter with approximately 16,200 subscribers. As we discussed on last quarter's earnings call, we expect that Townsquare Interactive will add over 3,000 net subscribers this year and can grow to over $100 million of revenue within three to five years. As you can see from our financials, Townsquare Interactive ended Q1 on a $58 million annualized revenue run rate. Advertising net revenue, which included revenue from our broadcast and digital advertising products and solutions increased 3.9% in the first quarter plus 4.5% ex-political compared to the first quarter of 2018. Advertising profit also increased in the first quarter by 2.8% with stable margins. We continue to see stability in local broadcast net revenue. As we detailed on our last call our partnership with AnalyticOwl coupled with our first-party data and strong on-air and online ratings are helping to drive these broadcast results. And very strong growth from Townsquare Ignite, our in-house proprietary digital programmatic, advertising, and technology platform which has been and will continue to be the primary growth driver in our advertising segment as it is also the fastest growing solution for clients and our company. Over the past five years, we have organically built our programmatic digital platform, Townsquare Ignite, which includes our own in-house buying team and demand side platform or DSP which is integrated with more than 1,000 exchanges with access to more than 250 billion impressions in total per day as well as a full customer service function. We activate client campaigns, continually optimize those campaigns, and then provide detailed in-depth reporting essentially only when controlling the entire customer relationship from end-to-end. In our markets, the competition that Townsquare Ignite often faces is a salesforce that white labels a third-party product which lessens the buying power and lower margin and also we believe results in a subpar customer experience. It is our experience that Townsquare Ignite is differentiated in our markets and thus we believe we have a competitive advantage. As we discussed on our last quarter earnings call, we expect that Townsquare Ignite will approach $50 million of annual revenue in 2019 and will reach $100 million of annual revenue within the next three to five years. I am very proud of the results our 67 local markets are delivering for their local clients and as a result for our company. As we have discussed frequently over the past year, our local first strategy has been working very well for the company and we have continued to look for ways to narrow our focus to areas where we are truly differentiated and must have a competitive advantage in our broadcast, digital, and live events products and solutions. To that end, we have made a strategic decision to commence a search for our buyer of our music festival portfolio which includes our four multi-day music events. We made this decision given that these strategies are not a part of our local markets, requires significant time and resources, and are more volatile than our core business. Although our music festival portfolio is composed of market-leading events with iconic brands and had a record year in 2018, we believe that going forward, our time and resources are better applied towards our local first strategy where we believe we have a clear, competitive advantage. Since our inception, we have sought to provide family-friendly and affordable entertainment to communities in our local markets solidifying our position as a Townsquare in these markets. Our live events segment moving forward primarily consist of our 200 annually recurring heritage local, live events which are core part of our local first strategy and we believe often have a competitive advantage. Live events net revenue had a decline of approximately 9% or approximately $500,000 in the first quarter as compared to the prior year. This was driven by the continued fine-tuning of our live event footprint as we elected to not continue handful events in the first quarter that were not considered core to our local first strategy. Even though our Q1 profit margin for the Live Events segment is a very healthy 24%, our goal is to maintain margin for the rest of the year in live events on what we expect will be a lower revenue base so that we can focus on local events that are very meaningful to the cities and communities we operate in, while also providing us healthy operating margins. In 2020, I expect our Live Events segment will grow revenue and profits. As I noted on our last call a focus on priority is to reduce our net leverage over the course of the next 12 to 24 months. Turning briefly to our balance sheet. We ended the quarter with net leverage of 5.1 times which included a cash balance of approximately $61 million and undrawn revolver capacity of $50 million. We believe that we have ample liquidity on hand to balance investment and attractive growth opportunities that meet our investment criteria and we continue with our intend to continue to reduce our net leverage. With that, I'll turn the call over to Stu, who is going to discuss our strong financial results in much greater detail.

Thank you, Bill and good morning everyone. As a reminder, over the past 18 months we've completed several divestitures and discontinued certain portions of our Live Events business, as we reoriented the business to our local media platform. The results of these Live Events businesses have been reclassified to discontinued operations for the current and historical periods and these results could be found in our quarterly filings on Form 10-Q. In the first quarter of 2019, discontinued operations also includes the results of our music festival portfolio which was an asset held for sale as of the end of the first quarter. All of the financial results we will discuss today are related to continuing operations. Unless otherwise stated the first quarter results I will also discuss today are pro forma for the acquisition of three radio stations in Princeton, New Jersey as if they have occurred at the beginning of the reporting and comparison periods. Please refer to the tables included in our earnings release which provide GAAP results and pro forma results, as well as our non-GAAP performance measures. For the quarter ended March 31, 2019, net revenue increased 4.7% to $93.7 million as compared to the first quarter of 2018. This was at the high-end of our previously issued guidance range of $92 million to $94 million. Excluding political revenue, which declined approximately $400,000 as compared to the prior year, total net revenue increased 5.1%. Beginning this quarter, we've segmented our business into three segments: Townsquare Interactive, Advertising and Live Events. Townsquare Interactive net revenue increased 31.6% in the first quarter to $14.2 million compared to that of the first quarter of 2018. Direct operating expenses for Townsquare Interactive increased 30.2% in the first quarter due to our continued investment in our product and sales teams to support our revenue growth. Townsquare Interactive's adjusted operating income increased 34.8% in the first quarter compared to the first quarter of last year to $4.4 million, representing a margin of approximately 31%. Advertising net revenue, which includes our broadcast and digital advertising products and solutions, increased 1.7% in the first quarter to $74.3 million compared to the first quarter of 2018. Excluding political revenue, advertising net revenue increased 2.3%. The increase in advertising revenue was driven primarily by Townsquare Ignite which continues to be our fastest-growing product. Advertising direct operating expenses increased 1.9% in the first quarter due to the continued investment in our product and sales team for Townsquare Ignite to support our revenue growth. Adjusted operating income for this segment increased 1.4% to $19.4 million compared to the first quarter of last year. Live Events net revenue declined 9.2% to $5.2 million, as we continue to streamline that business and eliminate certain non-core first quarter events. Other expenses decreased 6.8%, which resulted in a decline in adjusted operating income of 16% to $1.2 million. Corporate expenses were approximately flat in the first quarter compared to the same period of 2018. Adjusted EBITDA for the first quarter of 2019 increased 6.7% to $19.5 million compared to the first quarter of 2018. This exceeded our previously issued guidance range of $17.5 million to $18.5 million, in large part due to the strong performance and in smaller part due to the reclassification of certain expenses associated with the Live Events to discontinued operations. Net interest expense for the first quarter increased 2% compared to the prior year as a result of the increase in LIBOR rates, partially offset by the repayment of $9.5 million of term loans in the first quarter of 2018 and an increase in interest income. For the first quarter, on a GAAP basis, net income from continuing operations decreased $1.1 million to $2.4 million or $0.09 per diluted share as compared to net income per diluted share of $0.13 in the first quarter of 2018. The decline was driven by the increase in certain non-cash expenses, including depreciation and amortization expense and stock-based compensation expense. We'd like to remind you that the provision for income taxes is included on the face of the income statement is for GAAP financial statement purposes only. We maintained significant tax attributes including $189 million of federal annual carryforwards and 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 taxpayer until approximately 2026. As of March 31, our total debt balance was $560.5 million. Total cash balance was $60.8 million and we had revolver capacity of $50 million. Our net leverage as of March 31 was 5.1 times based on a trailing 12-month pro forma adjusted EBITDA of $97.3 million. In late April, we amended our revolving credit facility to extend the maturity date by two years. It's now coterminous with our term-loan facility with a maturity date of April 2022 with a springing maturity to six months inside the term loan maturity date. This was merely good corporate governance as we have not previously and do not have current plans to draw-down on our revolver. Yesterday, the Board approved the six quarterly dividend distribution, which will be payable on August 15 2019 to shareholders of record as of June 28. The declared dividend is $0.075 per share, which would equate to $0.30 per share on an annualized basis. This represents a dividend yield of over 5.5% at our current share price. Turning now to our 2019 outlook. As Bill mentioned, we're off to a great start. In the second quarter of 2019, we expect net revenue to be between $109.5 million and $111.5 million representing an approximate 2% to 4% increase over the prior year on a pro forma basis with 3% to 5% excluding political revenue. We expect the adjusted EBITDA to increase to be between $27 million to $28 million, representing an increase of approximately 4% to 7% on a pro forma basis as compared to the prior year. As music festivals are now part of discontinued operations, this guidance excludes the revenue and profit. Please refer to the tables in our earnings release to get the prior year numbers for comparison. For the full year 2019, we're also revising our guidance to account for the discontinuance of music festivals, which in 2018 generated $22.3 million of net revenue and $1.5 million of adjusted EBITDA resulting in a profit margin of 7%. We now expect 2019 net revenue to be between $420 million and $430 million, which represents a pro forma net revenue growth of approximately 2% to 4% percent over the prior year. Excluding political revenue, which we anticipate to decline approximately $7 million this represents growth of approximately 4% to 6%. Because of a strong first quarter performance and current outlook, we're raising our 2019 adjusted EBITDA range to be between $94.5 million and $98.5 million despite the loss of the EBITDA from the music festivals. At the midpoint of the range, this represents a slight year-over-year increase even at the loss of high margin political revenue in 2019. If you were to exclude impact of political revenue adjusted EBITDA would increase even more significantly year-over-year. And with that, I will now turn the call back over to Bill.

Thanks, Stu, and thank you, everyone, who dialed in this morning. Townsquare has outstanding dedicated employees all over this great country and it is an honor to work with them each and every day. Their hard work is not only gratifying, but critical for us to accomplish our lofty goals. Our teams across the country are transforming what began as a portfolio of strong brands of traditional radio stations into a multi-platform premier local media and marketing solutions company. Their effort, passion and commitment is directly driving our strong growth. I could not be more proud of their work each and every day. We believe our performance in 2018 and Q1 2019 continues to validate that our decision in the fall of 2017 to rearrange the company to a Local First strategy was the right move. In summary, we are extremely pleased with our great start to the year as well as our Q2 pacings and our current outlook for the full year 2019 which in turn gives us the confidence to raise our adjusted EBITDA guidance for the full year. I look forward to continuing to connect with our investors as the year progresses, addressing any questions that you may have and sharing our impressive story with all who are interested. As always, please do not hesitate to call us to further discuss the business or ask us any questions. And with that we're now happy to open the call for questions. Operator will you please open the lines.

Thank you. [Operator Instructions] Our first question comes from the line of Michael Kupinski with Noble Financial. Please proceed with your question.

Yes. First of all, congratulations on a great quarter. How many are -- if we just kind of backed out Ignite out of the ad business, I was wondering if you can just give us a sense of what core radio is doing outside of the program -- programmatic side of that business? And if you can just kind of give us some thoughts on how the categories are might be -- the biggest categories might be performing especially as we heading -- are heading to the second quarter?

Good morning, Michael. Thank you and thanks for your kind words. In terms of broadcast overall as we noted on the call in Q1, it was overall stable. So our advertising growth was not only driven by our Ignite business as you mentioned the programmatic solutions, but also our digital O&O solutions as well. In terms of categories, in Q1 we saw strength and entertainment food and beverage health services real estate. We saw a slight decline in retail, education, financial services, particularly in mortgage. That would be how the categories look but going back to your first question broadcast stable and really strong growth in all of our digital solutions.

Got you. And then in terms of the FTEs in your Interactive business at this point where was that a year earlier and where is it today? And can you indicate what you're hiring plans for Interactive might be this year to drive the growth in that business?

Yeah. So our FTEs over the past 12 months have grown over 100 net ads in Townsquare Interactive and we expect that grow to continue over the next 12 months. And as we noted on the call, we obviously had 30% revenue growth we also had 30% profit growth and our operating margin for TSI is also 30%. So as you and I've discussed in the past one of the things moving to the segment was to show the strong profit growth over subscription business. So we expect our margins to continue to be about 30% but we'll continue to add about 100 people over the next year.

And just going back quickly on the Ignite business obviously that -- you indicated that -- at one point that you thought that that business could grow significantly to $100 million in revenues over the next three to five years as well. Is there an opportunity you can be breaking that out? Or do you think that that's just so integral to the radio business that you're going to continue to keep that liberty of business.

We think in an essence as an advertising solutions, as we look at it and as one ecosystem for advertising clients. Something -- anything could happen in the future but as we evaluate and look at the business today that's how we do it. So to your point on the call we noted that this year we expect Ignite to approach $50 million in annual revenue and over the next three to five years to be $100 million just like TSI.

Got you. And then just a housekeeping -- quick question on housekeeping what was political on a pro forma basis? Last year heard it about $700,000 in the first quarter of last year is that the right number?

Yeah, Michael. The $700,000 in the first quarter of last year. It's about -- quarter this year.

Got you. Okay. That's all I have. Thank you.

Thank you, Michael.

Thank you. Our next question comes from the line of Jim Goss with Barrington Research. Please proceed with your question.

Thanks. Starting off the intended sale of proceed -- use of the sale proceeds, originally it'll be to de-leverage but do you have any other goals or financial elements in line with that Stu?

Yes Jim. Thanks. Yeah, first use of cash is to pay our dividends then to invest in our digital operations as Bill had mentioned. We're going our staff for both Ignite and TI by 100 people this year. And then third pay down debt.

Okay. And if you do have $100 million each from TSI and that Ignite that's about 40% and $0.5 billion revenue base you'd have. What is a sustainable growth rate of those subcomponents, because it would seem like that would obviously bias upward the gross potential?

Yeah. I think as we noted today we're over 20% growth over third of our revenues digital at this point and we expect strong double-digit growth for a long time period. That's how we get to not only the $100 million, but we see that growth continuing past that five-year trend based on the competitive dynamics we see in our local markets.

And maybe lastly, Ignite revenues involve mostly I assume your internal operations, but possibly somewhat other non-related parties, and if so what share of revenues are -- do those represent? And would those be broken out as a separate item?

In essence Ignite is our digital programmatic. It's all in-house in terms of our buying and optimizing of inventory. So we have not only the personnel but a technology stack. So not exactly sure, I understand your question in terms of third-parties.

Okay. I was thinking you might have also use that platform to outsource some others in other markets but I guess you're not doing that at the moment.

Yeah. It's a great -- it's actually a great point Jim. That's one of the clear differentiators for us is the majority of our competitors that we do see be it in the newspaper space or other broadcasters or even small agencies are white labeling a third-party where our real differentiation is this is all in-house for us and gives us great control not only of the campaigns, but also the reporting and the customer service.

Okay. Thanks very much. Appreciate it.

Thank you, Jim.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Wilson for any final comments.

Thank you operator and thanks everybody for dialing in. I hope our call today helped reinforce why we believe Townsquare is best described as a premier local media and digital marketing solutions company today. We're proud of our strong Q1 results and even more importantly confident for the full year. And thank you for dialing in. If you have any questions please reach out. Have a great day.

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