Emerald Holding, Inc. (NYSE:EEX) Q4 2023 Earnings Call Transcript
Emerald Holding, Inc. (NYSE:EEX) Q4 2023 Earnings Call Transcript March 1, 2024
Emerald Holding, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Emerald Holding, Inc. Fourth Quarter and Full Year 2023 Earnings Conference Call. Before we begin, let me remind everyone that this call will include certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. In particular, the company's statements about projected results for 2024 are forward-looking statements. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings.
The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, management will discuss non-GAAP measures, which it believes can be useful in evaluating the company's performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. The reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in the company's earnings release. As a reminder, this conference is being recorded, and a replay of the call will be available on the Investors section of the company's website through 11:59 p.m. Eastern Time on March 7. I'd now like to turn the conference over to Mr. Herve Sedky, President and Chief Executive Officer.
Sir, please go ahead.
Herve Sedky: Thank you, Julie, and good morning, everyone. It's great to be with all of you today to discuss our fourth quarter and four-year results. I'll start with a high-level overview of our accomplishments, review our 2023 performance, and then give an overview of our strategy. David Doft, our CFO, will then provide more detail on our financials and outlook for 2024. I joined Emerald three years ago, and I'm incredibly proud of the work our team has delivered to date. Remember where we were three years ago. I joined Emerald in January of 2021 in the middle of a global pandemic that brought our business to a screeching halt. I knew then that this was a marathon, not a sprint. We needed to manage through the storm one day at a time thoughtfully and strategically, and we did.
Since then, we've accomplished remarkable milestones, fostering moments of success that are paving the way for an exciting journey ahead. In 2023, we once again stayed true to our core, drove growth across the business, and remained committed to our strategic pillars of customer centricity, 365-day engagements, and portfolio optimization. Some of this past year's highlights include we saw the vast majority of our connections brands return to pre-pandemic levels of revenue performance and most importantly, higher levels of impact and growth in the communities we serve. In fact, just yesterday, I returned from KBIS, the kitchen and bath industry show where attendance has far surpassed any event in its history. Across our portfolio, our growth was meaningful, and we believe we are on a path for continued growth.
Our efforts span various fronts, from introducing onsite rebooking and launching our first time exhibitor program, to expanding into the B2C event landscape with initiatives like NBA Con and Outdoor Adventure X. We implemented important strategic initiatives and investments that are crucial for our ongoing success with expansion of our Emerald Resource Hub in Manila, investments in new tools and resources, and the addition of lodestone events to the Emerald family. We launched several new events, co-locations, and strategic partnerships while we expanded our international sales reach and welcomed meaningfully higher levels of exhibitors and attendees from outside of the United States. Our content business underwent significant incremental digital transformation since we made the decision to run it as a standalone business unit through resource investment in editorial, advertising, lead generation, and other media-related services.
As part of this effort, we launched our first pan-Emerald media property servicing small businesses called Small Business Exchange, which already has 400,000 newsletter subscribers. I urge you to check it out, actually, at www.smallbusinessexchange.com. Simultaneously, our commerce businesses' expansion into the kitchen and bath home market, adding brands like LG's, LG Builders, and Signature Kitchen Suite divisions, as well as Z-Line, provides a substantial new opportunity for growth, which we believe doubles our total addressable market opportunity for our B2B commerce software. Overall, the Elastic business sustained 20% plus growth in a subscription software revenue base with a net revenue retention of 110%. The progress made on the Emerald platform underscores our commitment to transformation.
We have also made progress in supporting our commitment to strengthen diversity, equity, and inclusion, DEI, at Emerald. This progress stems from the work of our dedicated DEI committee, as well as the efforts of our teams and brands supporting over 100 successful social programs, partnerships, and initiatives last year. Our commitment to sustainability and Emerald's net zero priorities continue to drive forward. We anticipate even greater transformation in 2024, propelling us closer to achieving our sustainability goals. We believe this effort is good for business, and many of our customers look to us here for our leadership. With all this, we've enjoyed strong double-digit growth in both revenue and adjusted EBITDA, and I'm confident in our ability to continue to deliver high levels of growth given our razor-sharp focus and investments in long-term growth initiatives, and these include, one, freeing up our sales force to hunt for new customers with the implementation of onsite rebooking across our events and enhancing our sales support and lead generation.
We're also excited to see the growth of our sales force and our innovation efforts through our Emerald resource hub. Second, expectation that each brand in their annual three-year brand operating plan will identify adjacencies and sub-expos, supporting by our accelerator team that was created to purely focus on launching new brands, thereby catalyzing growth in the exhibitor phase at our events. Third, driving matchmaking adoption, that we are now testing with elements of AI to drive even more relevant matches to our clients, directly benefiting their ROI from attending our events. And fourth, transforming how we market to further grow qualified attendance at our events, including enhanced focus on growing our databases and broadening our reach into industries via collaboration, being our connections and content teams.
We also created new centralized departments within the company that not only gives us tremendous operating leverage, but also ensures the implementation of best practices across the business. These include, one, an international sales group to drive growth by curating and expanding our overseas agent network and working with trade commissions, agencies, and governments to drive sales at Emerald's events. As part of this, we developed and executed a plan to set up country pavilions across our events to highlight these markets and sellers. In total, we believe we can double the percent of revenue from international exhibitors from 11% in 2023 to 20% over the next few years. Second, a pricing group and strategy to capture value we create for exhibitors and attendees.
We have standardized our pricing processes, implemented reporting with visibility into trending and forecasting, allowing for continuous improvement and improved yield through rate mix changes, removing dilutionary products, reducing discretionary discounting, rate tier reductions, the introduction of late rates, inventory controls, and location-based pricing. In total, this has allowed Emerald to improve the overall yield on its products and deliver increases well in excess of inflation. And third, we created a customer experience group, which includes the launch of exhibitor on-boarding and first-timer programs to help exhibitors leverage best practices to maximize their return on investment at our events. We believe that this program should directly translate into increased customer retention for Emerald and with it, higher growth.
Now let's turn to our results. Starting with live events in 2023, we saw another significant step forward in both revenue and profitability driven by increases in exhibitors, attendees, and pricing. Emerald continues to benefit from post-COVID tailwinds, including the removal of international travel restrictions, which persisted into early 2023 in some countries, as well as improvements in our customers' supply chains. Square footage at our trade shows grew 11% year-on-year, while exhibitor counts also grew 11% as compared to 2022. As I noted, we've implemented on-site rebooking at most of our trade shows, which means we are already selling exhibitor space for events up to 12 months out. Our sales pacing data gives us a great deal of confidence in our growth trajectory for 2024, with three-quarters of targeted booth revenue already under contract and where we project continued increases in our revenue above our industry's historical run rates.
The strength of our business comes from the unique and measurable value we bring to our customers, who are themselves business owners looking to maximize the value they get out of their marketing budgets. Trade shows provide a tangible ROI to exhibitors in the form of new customers and purchase orders. For nearly half of the small businesses in the U.S. that participate in at least one trade show per year, trade shows are their number one selling event of the year. A big part of our ongoing effort has been to clarify the value proposition and make the ROI more transparent by developing value-added tools and metrics, which we believe will deliver an even better trade show experience to both exhibitors and attendees. The result is that our customers view our shows as an investment rather than a cost.
They know we understand them, continuously adapt to their ever-changing needs, and that our objective is to help them achieve and even surpass the goals they have set for themselves. This is what our brand teams focus on each and every day. While our lab events business remains strong, the performance of our content business was somewhat muted in 2023. As I noted last quarter, our content business is more broadly exposed to the technology sector, where we saw a pullback in ad spend last year. This ultimately put downward pressure on our media business in the fall year. However, our strategic growth initiatives, combined with a recovery in the broader economy and with the tech sector approaching the end of its cost-cutting cycle, we expect that the media business to return to growth in 2024.
In terms of our broader strategy in 2023, we continue to execute on the three pillars of value creation, customer centricity, 365-day engagement, and portfolio optimization. In customer centricity, we're focused on delivering greater value to customers in the form of ad-on services, actionable data and insight, and a clearer picture of the return on investment customers receive from the marketing dollars they put to work across Emerald's platform. This improves our stickiness with customers, incentivizes them to deploy more marketing dollars with Emerald, and ultimately, we expect will help drive higher revenue per customer. Our second pillar, 365-day engagement, is about providing multiple entry points to the customer engagement cycle through trade shows, conferences, webinars, media content, and our e-commerce platforms that gives buyers and sellers a digital platform for year-round transactions.
Our third pillar is portfolio optimization, which includes both acquisitions and new event launches. Over time, we expect that new launches through Emerald's accelerator unit to contribute one to two percentage points of annual revenue growth. On the acquisition side, we continue to evaluate a large pool of potential acquisitions with the ability to bring Emerald's scale and operational efficiencies to shows within our highly fragmented industry. This includes some smaller near-term opportunities in the active pipeline that we're working hard to get over the finish line. We took a patient approach to M&A in 2023, walking away from some acquisition opportunities that did not meet our criteria. In January 2024, we expanded our hosted buyer event offering by acquiring Hotel Interactive and its series of buy-tech and help-tech events.
Combined with our existing CPMG unit, we now have 29 hosted buyer events on our annual calendar. While smaller in size than the traditional trade show, we like the hosted buyer events given the high-quality new business leads it provides our customers. Looking ahead, we continue to expand our opportunity set, building a proprietary pipeline of potential deals, which we expect to pay off with future potential acquisitions to scale and diversify our portfolio. Between organic growth, acquisitions, and new show launches, we believe we've positioned the company as an engine for double-digit long-term growth. With the benefits of operating leverage, we expect to be at 35% EBITDA margins in the coming years with strong continued growth prospects ahead of us.
To conclude, although 2023 came in slightly below our original revenue expectations, it remained a year of powerful growth as we grew revenue more than 17% and adjusted EBITDA by 67%. We're especially excited as we look ahead to 2024 and beyond, where we expect to continue to demonstrate our free cash flow generation and compounding abilities as we look to grow attendance and revenues, expand margins, and continue to realize the benefits of our recent investments into our technology and data systems that deliver greater and greater value to our customers every year that they return to our shows. And with that, let me turn the call over to David.
David Doft: Thank you, Herve, and good morning. Starting this quarter, we have realigned our reporting segments to better reflect how our business is organized and managed. Our connections segment includes all of our live events, while the all-other grouping includes our media content assets as well as our software e-commerce assets. This follows the completion of a reorganization executed during the year where we focused leadership around the products and services we provide as opposed to the industries we serve. We expect this will allow us to better share best practices and increase the speed of innovation within Emerald. This has also had the added benefit of enabling us to streamline our executive team to become less top-heavy.
For 2023, our connections segment accounted for 89% of total revenue and 97% of adjusted EBITDA pre-corporate expenses. A full breakout of segment performance is available in our earnings release, and our investor presentation posted this morning to our website provides some historical trending data for your models. Turning to our results, for the fourth quarter, total revenue was $101.5 million compared to $93.6 million in the prior year quarter. The increase was driven primarily by organic revenue growth and less so from revenue from acquisitions. For the full year 2023, total revenue was $382.8 million compared to $325.9 million in 2022, representing an increase of 17%. Organic revenue for the connections segment, which takes into account the impact of acquisitions and scheduling adjustments, was $87.5 million for the fourth quarter 2023, an increase of $5.7 million or 7% versus the fourth quarter of 2022.
For the full year 2023, organic revenue for connections was $327.5 million, an increase of $47.7 million or 17% versus the full year 2022. Given the decline in our content business, organic growth in total was an increase of 14.5% for the year. During the full year 2023, we recorded $2.8 million of other income, which hit in Q3, reflecting the remaining insurance proceeds paid to us under our event cancellation insurance as a result of the disruptions during COVID. Recall that in 2022, we recorded $182.8 million of other income, representing a large portion of those insurance proceeds. At this point, we have no remaining COVID-related event cancellation claims outstanding. Fourth quarter adjusted EBITDA increased 43% to $35.8 million compared to $25.0 million for the same quarter last year.
Full year 2023 adjusted EBITDA, excluding insurance proceeds, was $95.0 million compared to $56.8 million in the full year 2022, an increase of 67%. This also equated to an over 700 basis point improvement in adjusted EBITDA margin, excluding insurance proceeds, as our recovering revenue base leveraged our overhead as planned. One important item to note is the level of investment we have been making in the business, which we believe should pay off with higher, more profitable growth in the future. These include launching new events and building out our scaled e-commerce software solution. While these initiatives contribute revenue to the company, in aggregate, they dragged reported adjusted EBITDA margin by four percentage points in 2023. Fourth quarter free cash flow was $13.5 million compared to an outflow of $1.4 million in the prior year quarter, excluding the impact of the $25 million in taxes paid in 2022 related to last year's insurance settlement recovery.
Full year 2023 free cash flow, excluding insurance, was $26 million compared to $6.9 million for 2022, as our increase in adjusted EBITDA was somewhat offset by higher interest expense and timing of payables. Turning to expenses, on a reported basis, fourth quarter SG&A was $36.1 million versus $17.4 million in the prior year quarter. The year-over-year increase is due largely to 4Q 2022's $24 million benefit from a reduction in estimated deferred acquisition consideration from historical acquisitions, which flowed through the P&L as a credit to SG&A, as well as other one-time items as described in Schedule 3 of our earnings release. For the full year 2023, SG&A was $168.3 million compared to $145.0 million for 2022, largely due to the same dynamic.
Turning to the balance sheet, we had $204.2 million in cash as of December 31, 2023 versus $200.3 million as of September 30, after funding the $8.6 million dividend on our convertible preferred stock. Our total liquidity is $314.2 million, including full availability on our $110 million credit facility. We believe our balance sheet strength and cash flow generation support our ability to opportunistically invest in and grow our business, as well as optimize per share value of our stock. We expect to continue to balance capital allocation between acquisitions, investments in our own business, managing debt leverage, and opportunistic share buybacks. While we did not repurchase any common shares in the fourth quarter, for the full year 2023, we repurchased a total of 5.1 million shares at an average price of $3.34 per share.
At year-end, we had $25 million remaining on our existing buyback authorization, which was reloaded by our board in November. In lieu of buybacks of common stock, we did fund the quarterly dividend on our convertible preferred stock in cash as opposed to in-kind now that we have the option to do so. We spent approximately $17.2 million on this in the second half of the year, thereby avoiding the issuance of incremental convertible preferred stock that could have converted into 4.9 million common shares at issuance, given the $3.52 conversion price. As of December 31, we had net debt of $209.1 million, leading to a net leverage ratio as defined in our credit agreement of 2.13 times our trailing 12-month consolidated EBITDA based on the definition in our credit agreement of $98.3 million.
The terms of the convertible preferred stock also allow us to force mandatory conversion of all preferred shares if the price of Emerald's common stock closes at $6.17 or higher for 20 consecutive trading days. If we achieve the closing price requirement, we intend to immediately effect the conversion of the preferred shares, and our independent directors have already approved this. Yesterday's close represented the 14th straight day our stock has closed above the threshold. Should we close at $6.17 or higher for each of the six upcoming trading days through March 7, we would be able to execute the mandatory conversion, turn off the 7% dividend paid to the convertible preferred stockholders, and save over $34 million per year. We believe that the conversion of the preferred shares would substantially simplify our capital structure and moderately improve our trading liquidity, making Emerald more attractive to potential investors.
Additionally, as some data providers have been treating the convertible preferred stock as debt in their market cap calculations, the conversion into common shares will make it easier for investors to calculate our market cap, which at current prices is approximately $1.3 billion on an as-converted basis. An overview of our capital structure and the effects of the potential conversion of the preferred shares can be found on slide 12 of our earnings presentation deck. Factoring in 62.9 million of common shares outstanding at December 31, and an additional 139.9 million common shares represented by the convertible preferred shares as of December 31, our total share count on an as-converted basis would be 202.8 million. As just noted, based on yesterday's closing price, this equates to a market cap of $1.3 billion on an as-converted basis.
Adding in our net debt, estimated contingent consideration of $7 million on our balance sheet for prior acquisitions, and a deferred tax asset worth approximately $70 million, this leads to an enterprise value of approximately $1.5 billion. Turning to guidance, we are initiating full year guidance for 2024 in the range of $415 million to $425 million of revenue, and $110 million to $115 million of adjusted EBITDA. This guidance implies an adjusted EBITDA margin of approximately 27% and includes an over 300 basis point drag from continued investment in the growth initiatives I noted previously. We believe as our business continues to scale, and we leverage the investments we have made that we have runway to improve this number as we work our way back over time to the margins we saw prior to COVID.
Thank you very much for your time. And with that, we will now open the line for questions.
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