Townsquare Media, Inc. (NYSE:TSQ) Q3 2023 Earnings Call Transcript
Townsquare Media, Inc. (NYSE:TSQ) Q3 2023 Earnings Call Transcript November 9, 2023
Townsquare Media, Inc. misses on earnings expectations. Reported EPS is $-2.27 EPS, expectations were $0.3.
Operator: Good morning, and welcome to Townsquare Media's third-quarter 2023 conference call. As a reminder, today's call is being recorded, and your participation implies consent to such recording. [Operator Instructions]. With that, I would like to introduce the first speaker for today's call, Claire Yenicay, Executive Vice President.
Claire Yenicay: Thank you, operator, and good morning to everyone. Thank you for joining us today for Townsquare's third-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 expectations, plans, and 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 these statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties, including those that are detailed in the company's annual report on Form 10-K filed with the SEC.
We may also discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted operating income, which we may refer to as profit in our remarks. Such non-GAAP financial measures should be used in conjunction with all the information contained in the quarterly, year-end, and current reports available on our website. I would also encourage all participants to go to our corporate website and download our investor presentation, as Bill will reference some of those slides during our discussion this morning. At this time, I would like to turn the call over to Bill Wilson.
Bill Wilson: Thank you, Claire, and thank you all for joining us this morning. It's great to reconnect with everyone today. We're very pleased to share with you that our third-quarter results met our previously issued revenue and profit guidance despite the challenging macro environment. After July's promising start to the third quarter, as you are aware, the US advertising industry experienced a slowdown. According to Standard Media Index's US Ad Tracker, the US ad market rose plus 6.3% in July. However, in August, that growth slowed to plus 1.2% and in September was up only plus 0.1%. In essence, flat in September. Our performance through the first nine months of this year has helped to demonstrate the efficacy of our digital-first local media strategy and validated our focus on local markets outside of the top 50 US cities.
Of particular note is how our business model allowed for industry-leading digital advertising revenue and profit growth for the first nine months of the year, while also generating consistent meaningful cash flow. Townsquare's digital platform sets us apart from others and local media. As highlighted on slide 11, 52% of our total revenue was digital revenue in the first nine months of 2023, more than two times the industry average. Even more impressive is that 57% of our total profit was digital profit in the same period, which represents a healthy 30% profit margin. As anticipated, third-quarter revenue for Townsquare Interactive, our subscription digital marketing solutions offering outlined on slide 13, declined negative 13% year over year.
As I previously shared with you, 2023 is a reset year at Townsquare Interactive. Townsquare Interactive's target clients, generally the smallest of the SMBs with less than 20 employees and less than $5 million in annual revenue, continue to struggle with inflationary and wage pressures, labor shortages, and higher interest rates. All of these factors have contributed to elevated churn rates among our clients' subscriber base and moderately slower sales velocity. And while there are no -- there is no clear end in sight for these hurdles, we are confident that Townsquare Interactive will return to growth in 2024. We have already begun to see churn begin to moderate from its peak in Q2. And that's why you will note less subscribers lost in Q3 versus Q2, which we expect will translate to improved revenue and subscriber metrics in 2024.
At Townsquare, we always look for the silver lining when faced with challenges in our quest to achieve our internal company motto, how high is high. 2023 represents the first growth challenge we have encountered at Townsquare Interactive. And as such, it presented us with an opportunity to step back and truly examine our operations, attack ourselves, and evaluate all of our processes and procedures. As we mentioned on our last call, we made a number of important changes to optimize and improve our customer service platform, including moving from a one-to-one customer service model to a pooled model and implementing an interactive voice response system as the initial point of contact on customer inbound calls. These changes led to a meaningful increase in call answer rates, enhanced visibility to customer requests and concerns, and improved response times.
Those changes as well as other improvements we have made recently resulted in Townsquare Interactive's Google business review ranking increasing to over four stars. We believe we have positioned Townsquare Interactive to efficiently scale in 2024 and beyond. And we remain incredibly excited about the growth potential for this business. With an addressable market of nearly 9 million target customers, as outlined on slide 14, a superior product offering, a customer service team and model built for future growth, and a significant market opportunity, I am very confident that Townsquare Interactive is geared for long-term profitable growth and success. Although revenue at Townsquare Interactive, as expected, declined negative 13% in the third quarter, and we expect a similar rate of decline in the fourth quarter.
Through careful expense management and thoughtful investment, we are very pleased to share that we were able to maintain a very strong 28% profit margin in Q3, in line with Q2's profit margin as well as Q3 2022's profit margins. Our digital advertising solution segment, Ignite, is outlined on slide 12 and has been a key driver of growth. In the third quarter, digital advertising revenue increased approximately plus 5.5% year over year. And through the first nine months of the year, revenue increased plus 10%. Our growth in this segment has been due to our differentiated digital solutions, which are often the best and most sophisticated digital advertising products and solutions available in our size markets as well as our focus on local advertisers.
Although year-over-year growth rates have slowed from the start of the year, we believe our performance in this segment has held up better than many of our peers because of our limited reliance on national advertising, which has been particularly weak during the advertising slowdown. Third-quarter digital advertising profit growth increased in line with revenue growth of plus 6% year over year with third quarter profit margins in line with prior year margins at approximately 30%. As radio share of ad spending in United States continues to decline, along with that of other traditional media, such as TV and print, as noted by S&P Global Research, that highlights our need to maximize our broadcast share while simultaneously driving digital advertising growth through both share gain and share shift.
And that's exactly what we're doing. Through the first nine months of the year, our Broadcast revenue declined negative 5% year over year, excluding political. Yet according to Miller Kaplan, our total broadcast share in the markets in which we are measured by Miller Kaplan, increased by 50 basis points over the same period, driven by gains in our local broadcast share. Our local broadcast revenue once again meaningfully outperformed our national broadcast revenue in the third quarter as national broadcast radio advertising was down an anticipated negative 19% year over year. Due to our focus on local, with only 8% of our total company revenue comprised of national advertising, and therefore, the national advertising steep decline has had less of an impact on our total results.
At the same time that we are gaining broadcast share, we are also experiencing market share gains in our digital business. Of course, what truly matters is gaining total market share from our local media competition, including television and cable. And we are keenly focused on that. In fact, one of the largest areas of growth in the digital advertising industry today is streaming or connected TV, which also happens to be a strong growth driver of our digital programmatic revenue stream. What is perhaps most encouraging is that we still have a long way to go. According to Burrell Associates. although Townsquare is steadily increasing our digital market share each year, we are still only capturing roughly 14% of the total obtainable digital revenue in our local markets, signifying meaningful upside that we are very confident we can capture.
Although in the back half of 2023, advertising overall in the US has slowed down compared to the start of the year, while early, it does appear that advertisers are gearing up for a stronger and better 2024. Our annual customer appreciation sale, which we hold in October and which largely involves placing advertising buys for the year ahead, set an all-time record with orders increasing by plus 10% over 2022 sale. That combined with our confidence that Townsquare Interactive will return to growth in 2024 and the current outlook on strong political spending solidifies our belief that the pressure to our top and bottom line will be temporary and short-term in nature. One very important characteristic of our business model that we'd like to highlight as often as possible is our significant cash flow generation.
Although we have experienced revenue and adjusted EBITDA declines in the first nine months of 2023, we have generated $39 million of cash flow from operations, up an impressive plus 21% year over year. We ended the third quarter with $38 million of cash on hand, having utilized our cash in the third quarter to repurchase and retire $14 million of bonds at a price below par, repurchase an additional 94,000 shares, as well as make an $18 million interest payment and pay $3 million of dividends to our shareholders. I'm glad to share that our Board of Directors approved our next dividend of $0.1875 cents per share payable on February 1, which equates to $0.75 per share on an annual basis, which today would be approximately an 8% yield. We remain very confident with our current capitalization and the strength of our balance sheet with $38 million of cash on hand at quarter end, a fixed interest rate of 6.875%, no maturities until 2026, and net leverage of 4.5 times at the end of the third quarter.
And we are pleased that we can deliver attractive current cash returns for our equity shareholders. And now I'd like to turn the call over to Stu, who will go over our results in even more detail as well as provide you our fourth-quarter guidance. Stu, take it away.
Stuart Rosenstein: Thank you, Bill, and good morning, everyone. It's great to speak to you today. We are pleased to report that our third-quarter results met our revenue and profit guidance, supported by the continued growth in our digital advertising revenues. We're also very pleased that we continue to effectively deploy capital in the third quarter by repurchasing shares and debt in the open market and announcing our next dividend payments. Third-quarter net revenue declined 4.6% year over year to $115.1 million, which was within our guidance range of $115 million to $117 million. Excluding political, third-quarter net revenue declined 3.8%. Third-quarter adjusted EBITDA declined 12.1% year over year to $27.2 million, which was within our guidance range of $27 million to $28 million.
Third-quarter broadcast advertising net revenue decreased in line with expectations with the decline of 8.6% year over year and 7.2% excluding political. Third-quarter broadcast profit margins sequentially improved to 31% as compared to 27% in the second quarter. As Bill shared, 2023 is a reset year for -- and we expect topline and bottom-line growth to return in 2024. In the third quarter, net revenue decreased 12.6% as compared to the prior year, and profit decreased 10.6% year over year. Margins were strong at approximately 28% in the third quarter and in line with the third-quarter 2022 margin. As we have shared previously, we expect margins at Townsquare Interactive to be suppressed in the second half of 2023 as we continue to invest for future growth, given our confidence in our long-term growth prospects and while we ramp the newly opened Phoenix location.
Townsquare Ignite, our digital advertising segment, was again a growth driver for the company with net revenue increasing 5.5% year over year in the third quarter and digital advertising profit increasing 6.3% year over year. The segment's profit margin was approximately 30% in the third quarter. Our other category, which is comprised of live events activity, generated $1.7 million of revenue in the third quarter, an increase of 42.4% year over year and had a small loss of approximately $400,000, a decrease of approximately $150,000 year over year. As a reminder, live events activity should not be viewed as a growth driver or revenue center for Townsquare, but rather a marketing arm for the company. In the third quarter of 2023, we had noncash impairment charges of $31 million, of which $23.6 million were related to our FCC licenses.
As I covered on previous calls, given the way that these non-cash impairment charges are mathematically calculated, we expect the value of our FCC licenses to continue to be written down regularly over time. The third-quarter impairment charge was caused by rising interest rates, which caused the discount rate in our calculations to increase by approximately 60 basis points from Q2 as well as decreases in the third-party broadcast revenue forecasts and higher initial capital costs due to rising prices, all of which are inputs in these valuations. These write-downs of the decade-old purchase price calculations have no bearing on our company's cash position, our operating revenue, our operating expenses, our profitability, or the company's future prospects.
They are nothing more than non-cash accounting charges affecting only the historically recorded purchase price allocations made when we bought our radio station assets roughly 10 years ago. Our third-quarter net income declined from $2.8 million in 2022 to a net loss of $36.5 million or $2.27 per share. The decline was largely due to the non-cash impairment charges and a meaningful increase in the income tax provision related to the noncash impairment charges and the impact on the valuation of our deferred tax assets as well as our calculated effective tax rate. Third-quarter adjusted net income, which adds back certain items, including the noncash impairments and adjust for normalized tax rate was approximately flat year over year. We'd like to remind you that any benefit or 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 more than $100 million of federal NOL 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 Bill highlighted and I would again like to emphasize, we consistently have strong cash flow generation. We generated $39 million of cash flow from operations in the first nine months of 2023. That's up 21% year over year or $7 million, and we ended the quarter with $38 million of cash. At the end of the third quarter, our net leverage was 4.5 times down slightly year over year. We repurchased $14.2 million of bonds below par during the third quarter at an average price of , bringing our year-to-date total bond repurchases to $27.1 million.
In addition, we repurchased approximately 94,000 shares in the open market during the third quarter, bringing our year-to-date total share repurchases to 1.7 million shares or $16.6 million at an average price of $9.88 per share. As always, our number one priority is to invest in our local businesses through organic, internal investments that support our revenue and profit growth, particularly in our digital growth engine. We plan to continue to invest in our digital product technology, sales, content, and support teams, specifically in our Townsquare Interactive and Townsquare Ignite businesses in order to maintain our strong competitive advantage in markets outside the top 50 cities. In addition, we are focused on our balance sheet as we begin to prepare for a likely refinancing in late 2024 or early 2025.
As Bill mentioned earlier, our Board has approved the dividend payable on February 1 to shareholders of record as of January 2 with dividend of $0.1875 per share, which equates to $0.75 per share on an annualized basis, implies an annual payment of approximately $12 million based on our current share count and a dividend yield of approximately 8% based on our current share price. We believe our strong cash flow characteristics will allow us to continue to invest in our businesses, supporting the dividend, and give us flexibility to opportunistically pursue debt and share repurchases in the open market. Turning to our fourth-quarter outlook, we expect fourth quarter net revenue to be between $110.6 million and $112.6 million. We expect fourth-quarter adjusted EBITDA to be between $24.8 million and $25.8 million.
This implies that Townsquare's 2023 full-year revenues will be between $450 million and $452 million. And our adjusted EBITDA will be between $100 million $101 million dollars, both within our original guidance ranges we issued in the beginning of the year. And with that, I will now turn the call back over to Bill.
Bill Wilson: Thank you, Stu, and thank you to everyone who joined us this morning. We greatly appreciate it. I want to close today's call by highlighting what our business model has delivered this year, despite a challenging backdrop of rising interest rates and inflation and extreme and persistent national advertising weakness. I am proud that despite these challenges, our differentiated digital advertising platform delivered double-digit revenue and profit growth through the first nine months of 2023. Our mature cash cow broadcast advertising platform has and continues to generate a solid profit contributing to our strong cash generation. Our net leverage remains below prior year levels and we have efficiently repurchased both debt and equity this year while maintaining a high yielding dividend, delivering attractive current returns to our shareholders.
Our performance this year has reinforced our confidence in our digital-first local media strategy and our deliberate focus on markets outside the top 50 cities in the United States and the long-term profitable growth potential of our digital platforms. And again, thanks to each of you for taking the time to be updated on Townsquare's Q3 results this morning. We greatly appreciate it. Operator, at this time, please open the line for any and all questions.
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