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Edited Transcript of CMLS earnings conference call or presentation 9-May-19 8:30pm GMT

Q1 2019 Cumulus Media Inc Earnings Call

ATLANTA May 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Cumulus Media Inc earnings conference call or presentation Thursday, May 9, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Collin Jones

* John F. Abbot

Cumulus Media Inc. - Executive VP, Treasurer & CFO

* Mary G. Berner

Cumulus Media Inc. - President, CEO & Director

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Conference Call Participants

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* Marci Lynn Ryvicker

Wolfe Research, LLC - MD of Equity Research

* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst

* Zachary Alan Silver

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Hello and welcome to the Cumulus Media Quarterly Earnings Conference Call. (Operator Instructions) I'll now turn it over to Collin Jones, Senior Vice President of Corporate Development and Strategy. Sir, you may proceed.

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Collin Jones, [2]

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Thank you, operator. Welcome, everyone to our First Quarter 2019 Earnings Conference Call. I'm joined today by our President and CEO, Mary Berner; and our CFO, John Abbot. Before we start, please note that certain statements in today's press release and discussed on this call may constitute forward-looking statements under federal securities laws. Actual results may differ materially from the results expressed or implied in forward-looking statements. These statements are based on management's current assessments and assumptions, and they are subject to a number of risks and uncertainties. A full description of these risks, as well as financial reconciliations to non-GAAP terms can be found in our SEC filings, including our press release and Form 10-Q, both of which were filed earlier this afternoon. A recording of today's call will be available for about a month, and details for how to access that replay and our SEC filings can be found on our website.

With that, Mary, I will turn it over to you.

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Mary G. Berner, Cumulus Media Inc. - President, CEO & Director [3]

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Thanks, Collin. Good afternoon, everyone. It has been a busy 7 weeks since we last spoke, and we're pleased to be reporting another strong quarter today. Starting with our financial results, revenue increased 1.4% in the quarter, driven by strength in our national businesses, both at Westwood One and in national spot at the Station Group as well as tremendous growth in digital, which maintained the acceleration of growth we experienced throughout 2018. That revenue growth, combined with continued rigorous expense management, resulted in EBITDA growth of 3.8% in the quarter. We did have a small headwind from political in the quarter though not as much as we will face later in the year. Excluding political, revenue was up 1.6%, and EBITDA was up 4.7% for the quarter.

Overall, these results reflect solid execution against the 3 strategic priorities we described for you previously. First, enhancing operating performance, that is our ability to maximize EBITDA by improving our efficiency on the revenue side, primarily through pricing and inventory management and improvements in sales execution, and by aggressively, but thoughtfully reducing our cost profile. Second, growing our high potential digital businesses. And third, optimizing our asset portfolio by buying or swapping for assets that can help us obtain or expand market leadership positions or divesting assets that are noncore or in markets where attaining a leadership position may be challenging. The execution of those priorities is critical to helping us achieve our 3 key financial goals; generating as much as $100 million of free cash flow per year, reducing net leverage to below 4x as quickly as possible, and reinvesting in new opportunities with meaningful growth or valuation potential. We'll focus today on some of the efforts within these strategies that drove this quarter's results and will continue to help us going forward. First, our pricing and inventory initiatives continued to pay dividends in the quarter. We now have nearly 90% of our revenue on the new traffic and billing system and this deployment, combined with the business analytics tools and revenue management organization we developed, have dramatically increased the insights we have into our pricing and sellout patterns and our ability to take action to improve the yield on our inventory. While we are still in the early innings of what these capabilities can deliver over longer term, in the quarter, we were also able to identify several opportunities that contributed incrementally to the top line, including the creation of custom networks and other products tailored to specific client demand.

On the expense side, of course, we always face upward pressure from inflation, contractual escalators, required investments and higher variable costs on digital revenue. This requires us to be relentless in our efforts to offset those increases, including through contract renegotiations, process improvements and technology enhancements. In that vein, we were able to offset much of the built-in cost pressure, holding cost escalation in the quarter to approximately $2 million or 1%. This result was produced through the aggregation of many, many small cost initiatives executed across all our businesses. By necessity, we're continuing our institutional effort to develop and implement more of these, and also technology and business process focused cost reduction strategies. Prudent cost management doesn't mean that we aren't focused on making smart investments in areas we think will strengthen the company's capabilities and potential. To that end, we continue to invest in our digital capabilities and infrastructure, especially around streaming and podcasting. Talent is another one of those areas. We recently announced the hiring of 2 terrific executives whom we believe have the experience and skills to make significant contributions to our top and bottom line performance. On Monday, we announced that Brian Philips is joining us as Executive Vice President of content and audience, responsible for programming. Brian brings more than 30 years of leadership and programming experience across a range of different media. He was recently at Viacom, serving as President of CMT, where he led its successful launch of long-form script series, tentpole award shows, concert specials, feature films and CMT's national radio network. Under his stewardship, CMT grew from 36 million to a peak of 90 million homes and set the record for the longest documented ratings growth streak among ad-supported cable networks. Prior to his work in television and film production, Brian worked for more than 15 years leading radio programming in a number of major market stations including several stations that we still own in Atlanta and Dallas.

Earlier in the quarter, we also made another important content and programming hire, John Murdoch, whom we brought on as executive editor of our podcasting business. A multi-award-winning journalist, John comes to us with a wealth of experience in this space, having run the Wall Street Journal and marketwatch.com radio networks as well as the Wall Street Journal podcasting business. During his tenure at the journal, he launched several very successful podcasts, including the chart-topping and award-winning The Future of Everything. And he grew Wall Street Journal's monthly podcast audience by over 2000%.

So far in 2019, we continue to see the same strong growth in the podcast that we've enjoyed since we started the business. As the exclusive partner for over 40 podcasts, we generated nearly 52 million downloads in March 2019, more than double the 23 million generated in March 2018, and that doesn't include our growing local podcast businesses.

By our estimation, this would put us in the top 5 largest podcast companies measured by pod track in March. What is particularly notable about this growth is that we have been able to achieve it while maintaining profitability. From -- on the topic of digital, we are continuing to generate exceptional growth across all of our platforms, with total digital revenue for the quarter growing 79% from the first quarter last year. Our streaming audience is growing steadily, driven by both organic listenership and increased distribution on the TuneIn platform, and we're monetizing this high-margin digital inventory better and more broadly through all of our channels: local, national, network, programmatic exchanges and remnant networks as well. Our local digital marketing services platform, which we call C-Suite, is also maintaining its very steep revenue growth trajectory to the tune of over 100% year-over-year revenue growth in Q1.

I should also point out that our revenue management function, which we've tended to talk about in relation to broadcast revenues has also provided a meaningful boost to our digital performance. For example, we now have the ability to accurately track our attachment rate, providing us greater visibility into opportunities to upsell a digital component into a traditional radio broadcast order. Since from a revenue perspective, we believe there are significant digital revenue upside from continuing to grow the attachment rates of our current advertiser base, having this new level of insight is a high impact element of our sales execution strategy.

On the last call, we spent a little time on the EPiC Guarantee, the industry's first integrated, local, radio and digital lead guarantee program. A few months in, we're beginning to see results from this program, and not just from the direct generation of sales, which amount to hundreds of thousands of dollars at this point, but also because our willingness to guarantee results upfront is differentiating us from other local competitors and helping our sellers bring clients back to radio or increase their willingness to boost their digital spend. We launched the EPiC Guarantee last November in a subset of home and professional services categories and our performance since that launch has encouraged us to expand EPiC to new advertiser categories. Since our last call, we've launched it in financial services, which includes CPAs, tax accountants, mortgage lenders, financial planners and insurance agencies, with more to come.

The last area I want to highlight for today's call is portfolio optimization. John will give some more details on the activity that we've announced since the year began, but I'll hit the high points here. Previously, we announced 2 strategic divestitures generating over $120 million in net proceeds, which we expect to receive in the next several months. Collectively, the stations involved contributed less than $11 million of annual EBITDA, so the sales transactions are highly accretive to the company. Additionally, we executed 2 swaps, one with Entercom, and one with Connoisseur Media to meaningfully enhance our positions in Indianapolis and in the Allentown and Lehigh Valley area. We believe that bolstering our presence in both these markets sets us up well for long-term success and with synergies, the transactions are nicely accretive in the short term. We would expect to execute more of these types of portfolio optimization transactions as time goes on, continuing to employ a disciplined and strategic approach to any opportunity that we develop or that comes our way. Also and notably, in this quarter, we've continued to make progress on net leverage reduction. Our trailing net leverage as of 3/31/19, pro forma for the announced acquisitions, is down to 4.8x. As a reminder, in emergence from bankruptcy less than a year ago, we had a net average of 5.8x. So we're very pleased with the progress that has been made to aggressively reduce leverage.

Finally, as we look ahead into Q2, as of today, pacing is slightly negative, but essentially flat on an ex-political basis. It's a bit noisy this quarter for us given all of our M&A activity, but this pacing number is essential on a same station basis, reflecting the operations that we will have going forward. Therefore, it removes the impact of the stations that have been sold to EMF, and also KLOS-FM, as well as Nash FM in New York and Springfield, which are going to Entercom, and Bridgeport which is going to Connoisseur. On the flip side, it includes the pacing for the Indianapolis and Allentown stations from Entercom and Connoisseur. Our Q2 reported numbers will obviously be presented on a slightly different basis, but we'll give the comparable same-station numbers at that time.

So with that, I'll now turn the call over to John for a deeper financial review after which we will open up the line for questions. John?

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John F. Abbot, Cumulus Media Inc. - Executive VP, Treasurer & CFO [4]

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Great. Thank you, Mary. I will give a bit more color on our financial results before covering a few additional items related to cash flow, debt and M&A. One overarching point to make first is that all the numbers I'll talk about are on an as reported basis, meaning they are not adjusted in any way, including for the sales of -- or swap transactions that we've announced, unless I specifically call out any adjustments.

As Mary noted, total revenue in the first quarter was $267.5 million, an increase of $3.8 million or 1.4% from Q1 2018. As you know, 2019 is an off-cycle year for political revenue and Q1 is not a big quarter for political revenue, but excluding political, we were up $4.2 million or 1.6% from Q1 2018. Total expenses increased $2.3 million or 1% from Q1, primarily driven by variable revenue-related costs in our digital businesses and at Westwood One, partially offset by cost savings across both the content and SG&A expense lines. As a result, consolidated EBITDA for the quarter increased $1.5 million or 3.8% from Q1 last year. Adjusting for political, consolidated EBITDA grew by $1.8 million or 4.7% in the quarter. Looking at the numbers by business unit and starting with the Cumulus Radio Station Group, we continued to experience a tough local spot market environment, partially offset by strength in digital and national revenue. Total revenue for the Cumulus Radio Station Group declined $1.7 million or 1% to $166.5 million from first quarter last year, and excluding political, Station Group revenue was down $1.3 million or 0.8%. I would note, however, that the impact of political will grow in Q2 when we will compare against nearly $4 million of political revenue in Q2 last year, whereas in the first quarter, we were only comping against $1.2 million of political revenue last year.

Moving to expenses. Station Group expenses were essentially flat with higher costs associated with higher digital revenue offset by continued cost savings realized against contracts that were renegotiated or terminated over the last year and lower personnel related expenses. We also experienced some cost pressure from rent increases associated with the new lease accounting standard and fresh start accounting from our bankruptcy last year. The combined impact of the revenue and expense changes yielded a Station Group EBITDA decrease of $1.8 million or 5% in the quarter, and a decrease of $1.5 million or 4.3%, excluding political.

Turning to Westwood One. The network business produced another solid quarter with revenue growth -- revenue growing $5.6 million or 5.9% from first quarter last year. This increase was driven mostly by growth in the core ad sales business and podcasting, partially offset by the negative comparison to last year when we had revenue from the Olympics.

On the expense side, operating expenses increased at Westwood One by $2.3 million or 2.8% with the largest increases coming from variable content cost related to increased revenue, partially offset by the favorable comparison on the expense side associated with the Olympics and a reduction in bad debt cost. Combined, the solid revenue growth and relatively modest expense increases produced another quarter of very strong EBITDA growth at Westwood One, up $3.3 million or 26% year-over-year.

Moving off the P&L. In Q1 2019, we spent about $5.1 million on CapEx, and we continue to think we'll spend $20 million to $25 million in CapEx for the full year. In February, we completed $25 million discount at a discounted prepayment, which was executed at 1.5% discount. That reduced our debt to $1.215 billion at quarter-end, and our net debt was almost exactly $1.2 billion. Our net leverage was 5.1x at the end of the quarter, down from 5.2x at the end of 2018. We have been and will be generating strong free cash flow from our operations, and our priority for that cash will continue to be paying down debt.

At this point, I'm going to turn it over to Collin to cover a few of the other items. Thanks.

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Collin Jones, [5]

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Thanks, John. Since the beginning of the year, we have announced 2 divestitures, whose net proceeds will be used to pay down debt further. The first divestiture, Educational Media Foundation, is for gross proceeds of $103.5 million and an expected net proceeds of $80 million to $90 million. We have said previously that the 6 stations involved in the sale contributed $25 million to $27 million in revenue and $5 million to $7 million in EBITDA on an annual basis. The second divestiture announced in mid-April is the sale of KLOS-FM to Meruelo Media for $43 million in gross proceeds. We expect net proceeds to be in the mid- to high $30 millions. This station contributed $17 million to $19 million of revenue annually and had nearly $5 million of attributable EBITDA annually. We intend to use the net proceeds from both these sales to pay down debt as soon as they close, which would result in an LTM 331 net leverage ratio of about 4.8x, pro forma for that, additional debt reduction and the EBITDA that goes away.

Additionally, as Mary noted, we announced 2 strategic swaps in the quarter, one with Entercom, where we traded 3 stations in 2 markets for their Indianapolis cluster, and one with Connoisseur, where we traded our Bridgeport cluster for their Allentown cluster. From a financial standpoint, these were both essentially equivalent cash flow swaps, so there isn't any immediate impact from those. However, in both swaps, we are now the clear leader in the 2 markets where we gained stations, which positions us well for long-term success in those markets. And there are, of course, some expense synergies from the swaps, which will benefit both markets as well.

The last item to note on the M&A front is the D.C. land sale. As we've discussed on previous calls, the development plans of our buyer, Toll Brothers, continue to face opposition with community organizations regularly appealing any approvals Toll has received to date. That delay has forced us to explore all of the potential options to monetize this property efficiently and for the best value possible. We continue to be in discussions with Toll Brothers and are optimistic that we will be able to reach to a new agreement that is attractive to both parties. We still view this property as a valuable asset that can be sold to raise cash and pay down debt, and we'll keep you updated on our progress as we have more to share.

Finally, just to touch on the status of the petition for declaratory ruling that we filed with the FCC. Our current equity share structure, which consists of Class A shares, Class B shares, Series 1 warrants and Series 2 warrants, was crafted to comply with the rule that limits foreign ownership to 25%. However, to allow higher foreign ownership in our stock than permitted under the rule, we filed the petition for declaratory ruling on July 19 of last year. Grant for our request involves not only the approval of the FCC, but also the review of an ad hoc committee, consisting of representatives of various departments and other offices within the executive branch. We believe the process is progressing but do not have an updated view on timeline for a definitive response, beyond what we said historically, which is that a reasonable expectation is to hear a response to our request by the end of 2019.

At this point, we'd like to open up the line for Q&A. Operator, we're ready for our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line Zack Silver.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [2]

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On the 2Q pacings outlook, just wondering if you can help break down the components of that between local and national? And then I don't know if it is even possible, but maybe how that compares to sort of the industry average in your markets? That would be very helpful.

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Mary G. Berner, Cumulus Media Inc. - President, CEO & Director [3]

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Sure. Yes, this is Mary. Total pacing normalizing for the transactions is, as we said, is approximately flat, slightly down. Westwood One continues to perform relatively better than the Station Group. The Station Group's pacing continues to be pressured by local, but national and digital are somewhat offsetting. Most of our other revenue data comes in arrear, so there's not much more color that we can give.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [4]

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Got it. And then on, I mean, Westwood One, the growth there was particularly impressive given that you were comping at the Olympics last year. And I don't know that you kind of gave a breakdown between sort of the broadcast and the podcast side, but what was -- if you could provide some more detail on what was driving that growth? And whether you think that is maybe sustainable over the balance of the year?

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Mary G. Berner, Cumulus Media Inc. - President, CEO & Director [5]

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Yes. We don't break out the podcast business from the network business, but I would say that in the network channels, as others have noted, P&G spending has been meaningful, and so the network marketplace continues to be lifted by the entrance of P&G into that space. We're also seeing more small advertisers buying the network than we have previously seen, in the first quarter the total number of advertisers was up 18%, number of advertisers. So we're seeing a very robust network marketplace. I think one of the things that's been encouraging is that, P&G is an industry leader. So we're watching to see if their very outspoken support of the medium attracts other CPG advertisers to this space and the fact that we've gotten more advertisers in the quarter speaks to that. We were hoping that's what that trend is showing.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [6]

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That's very helpful. And then one more if I could just on the portfolio optimization. We may see some meaningful deregulation from the FCC at the end of this year, early next year. And I think, the DOJ is kind of talking through their -- the way that they look at media markets, and I'm just curious if you have a view on -- if there is an opportunity for you to either swap into new markets or to either acquire or divest stations? Do you have a view on whether you'd prefer small markets, large markets? And assuming that you can delever, whether you'd be a buyer or a seller of stations at this point?

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Mary G. Berner, Cumulus Media Inc. - President, CEO & Director [7]

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It's kind of 2 parts. I mean, the DOJ had their hearing -- as you know, a hearing last week, and we're glad that they're exploring their position because we believe that as it stands, it's outdated. But with regard to the FCC loosening the ownership rules, for starter, we certainly hope that they do take action necessary to loosen the ownership rules. We think it would be good for the industry, and we think it would be good for Cumulus. So in terms of how we react to it, we just think that it would open up possibilities for us to execute our portfolio optimization strategy to a greater magnitude. Right now, it's tough to find swaps today that line up cash flow and where the trade on each side makes sense. And we've been -- we think we've been very fortunate to find 2 of those so far and we hope to find more. So ultimately, our goal is to achieve market-leading positions, #1 or #2 where we can and if it makes sense to us to exist where we can't. So there isn't a certain -- there's not a stated goal one way or another as to whether we are more of a buyer or a seller of stations, it's really -- or even whether we're focused on smaller or larger markets, which is why we refer to the strategy as a portfolio optimization strategy, so really no point of view -- or stated strategy, large, small, buyer, seller.

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Operator [8]

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Your next question is from the line of Marci Ryvicker.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD of Equity Research [9]

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I just want to be clear on the second quarter pace that's down, I guess flat, excluding political. Is both the radio stations and Westwood One down or flat?

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Collin Jones, [10]

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Marci, we just gave the -- this is Collin, we just gave the consolidated pacing. It's down slightly and flat ex-political. Westwood One is performing relatively better, so given it's flat, they're up. And then the Station Group, and really driven by the local side, national and digital stronger are offsetting that.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD of Equity Research [11]

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Can you remind us how much local is as a percent of total revenue?

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Collin Jones, [12]

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No. We haven't broken that out for some time, and that's shifted as time has gone on. It is the majority of the Station Group, but we haven't broken that out more specifically recently.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD of Equity Research [13]

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Okay. And I may ask you another question where you don't have it. But for 2018, do you have a pro forma revenue and EBITDA number, based on all the transactions that you have done?

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John F. Abbot, Cumulus Media Inc. - Executive VP, Treasurer & CFO [14]

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This is John. The numbers that we provided as sort of the full year impact of the sales are, I think, pretty good numbers too -- that you can use.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD of Equity Research [15]

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Okay. So we just add all them up? Okay.

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John F. Abbot, Cumulus Media Inc. - Executive VP, Treasurer & CFO [16]

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Yes. Because -- the swaps, you can think of as cash flow even swaps, which we said so.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD of Equity Research [17]

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Okay. And then Mary, you talked about high margin, digital and there was some nice margin expansion I think year-over-year in this quarter. How should we think about margins going forward? I know it's a tougher when revenue is not up to see margin expansion. But as digital becomes a bigger percent of revenue, should we see margin expansion over the long term?

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Mary G. Berner, Cumulus Media Inc. - President, CEO & Director [18]

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I think it depends. We don't break out the different -- the three different buckets of our digital strategy, which includes -- and they all have varied -- various margin profiles. Streaming tends to mirror slightly -- slightly less margin than broadcast radio, even if only slightly. And then podcasting is profitable as I said. We haven't shared the margin on that, but less than broadcast, and ditto for C-Suite.

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John F. Abbot, Cumulus Media Inc. - Executive VP, Treasurer & CFO [19]

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So I mean -- and this is John. As we are growing, those are our areas of growth, to the extent those margins are lower than broadcast revenue growth, right, that does pressure margin. And so we're -- hence the part of our strategy that's very focused on expense controls and being really rigorous about -- on the expense side, because we're -- we're obviously focused on the bottom line, not just the top line.

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Operator [20]

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Next question is from the line of Michael Kupinski.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [21]

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In terms of your Capex guidance for the year, the $25 million, how much of that is maintenance Capex? And how much is related to maybe some of your digital technology investments?

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John F. Abbot, Cumulus Media Inc. - Executive VP, Treasurer & CFO [22]

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Yes. Very little of it is related to digital technology type investments. Most of those investments on the digital side are OpEx. So the vast majority of CapEx for -- I think for the radio business in general is -- tends to be maintenance capital. And certainly is for us, given some of the catch-up we've been undertaking the past number of years.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [23]

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Got you. And then I was wondering if you can talk a little bit about your aggregate ratings for the stations. Can you give us some color on how the rating performances of the stations have been doing?

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Mary G. Berner, Cumulus Media Inc. - President, CEO & Director [24]

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Yes. We've gained back most of the share that was lost from 2012 to 2015 time frame, and now we're back up near to those levels. I would say we experienced fluctuations quarter-to-quarter and also between PPM and diary markets, as you would expect. But in general, we're continuing to see rating share performance where it matters most. In our PPM markets, we focused our efforts where the ratings have the highest impact, so our largest music stations, which have a much higher percentage of their business that's rating dependent than in the case of spoken word, and those stations of the group have been gaining rating share over the last several quarters. In the diary markets, we had a good fall book with growth as well.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [25]

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And Mary, in terms of the advertising pace-ons for the second quarter and relative to the rating, are you seeing better performances in some of your larger markets versus smaller markets, your PPM markets versus diary markets? Or if anything in terms of possibly geographic performance? Any of that?

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John F. Abbot, Cumulus Media Inc. - Executive VP, Treasurer & CFO [26]

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This is John. We don't break out on that basis, but I would also say that there are no noteworthy trends that we've identified that we would highlight for you.

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Operator [27]

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There are no further questions at this time. Please continue.

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Mary G. Berner, Cumulus Media Inc. - President, CEO & Director [28]

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Okay. Thanks. Thank you, everyone for joining today, and we look forward to speaking with you again soon. Have a great evening.

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Operator [29]

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This concludes the conference call. Have a good day.