Cumulus Media Inc Q3 FY2023 Earnings Call

Good morning. Welcome to the Cumulus Media Quarterly Earnings Conference Call. I will now turn it over to Collin Jones, Executive Vice President of Strategy and development. Sir, you may proceed.

Thank you, operator. Welcome, everyone to our third quarter 2023 earnings conference call. I'm joined today by our President and CEO, Mary Berner; and our CFO, Frank Lopez-Balboa. 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 as discussed in our filings with the SEC. In addition, we will also use certain non-GAAP financial measures. We believe the supplementary information is useful to investors, although it should not be considered superior to the measures presented in accordance with GAAP. A full description of these risks as well as financial reconciliations to non-GAAP terms are in our press release and SEC filings. The press release can be found in the Investor Relations portion of our website and our Form 10-Q was also filed with the SEC shortly before this call. A recording of today's call will be available for about a month via link in the Investor portion of our website. With that, I will now turn it over to our President and CEO, Mary Berner. Mary?

Thanks, Collin, and good morning, everyone. In the third quarter, revenue and EBITDA met expectations, which reflect the ongoing dichotomy between local and national performances. While the softness in national advertising persisted, causing an overall revenue decline, we mitigated that impact through our ongoing focus on areas that we can control, investing in our digital businesses, reducing costs, and improving our balance sheet through non-core asset sales and debt reduction. More specifically, during the quarter, we increased digital revenue by 7%, with streaming, podcasting, and digital marketing services each growing during the period. We executed an additional $5 million of annualized fixed cost reductions, bringing the total to $110 million since 2019. And we continued to maintain our best among peers liquidity position and balance sheet, completing a highly accretive $10 million non-core asset sale and retiring over $5 million face value of debt at a discount. These actions further improve the company's revenue growth profile, operating leverage, financial flexibility, and strategic optionality, collectively positioning us to rebound strongly when the advertising environment improves. That said, national advertising continued to be weak in Q3, with clients citing ongoing uncertainty in the macro environment as the main reason for lower spending. Our national businesses account for approximately 45% of our total revenue, and we saw top-line impact in both network and national broadcast, particularly in the professional services, financial, and insurance categories. However, there were and are some green shoots worth noting, particularly in home products and consumer packaged goods, which continue to show improvement year-over-year. Notably, P&G ramped up spending since the start of their new fiscal year on July 1, citing their commitment to high ROI ad spend and increasing their bookings first in Q3 and continuing into Q4. In that same vein, national advertisers who continue to appreciate the value of radio scale, reach, and ROI are indicating a desire to return to more normal levels of spending as they set their 2024 budgets. Another key category worth mentioning is retail. Heading into the fourth-quarter holiday season, the category is currently pacing down in aggregate, but several big box retailers have notably started spending again after being out of network radio for several quarters. National podcast advertising was down in the first half of this year but returned to growth, up 8% in Q3, supported by continued strong audience growth trends. September downloads, for example, were up 17%. While considerable uncertainty remains in Q4, these positive trends and improving sentiment give us cautious optimism that we will see a better national advertising environment in 2024. Continuing the theme of the last two quarters, our local businesses have been more insulated from macro ad pressures. Total local revenue, which includes local spot and our local digital revenue streams, was down 5% for Q3. Local spot broadcast revenue was down about 7% in Q3, which is in line with our commentary from the last call. As for Q2, while spending in most advertising categories declined, auto continued to show growth, up 10% despite the recent strikes. Thus far, the strikes have mostly negatively impacted markets where factories have been shut down, affecting both dealers and where other local SMBs in the same markets have also pulled back spending. While we are paying close attention to any knock-on effects from the strikes, we believe this category represents a high-margin recovery opportunity long term, considering that Q3 spending is still only at 60% of 2019 levels. Turning to our local digital marketing services business, we expect this to be a significant growth opportunity for us, as we make further inroads into the $15-plus billion market this business serves. Digital Marketing Services grew mid-single digits in the quarter, driven by subscriber growth in Cumulus Boost, the suite of digital presence products that we launched in the middle of last year. We are building this business by leveraging our sales process and growing sales organization. To that point, since our last earnings call, we've tripled our digital sales force, and we expect to add additional resources in this area to drive further growth for 2024 and beyond. Overall, we remain very optimistic about the growth trajectory of our digital marketing services business, particularly as we continue to ramp up investment in this sector. Meanwhile, as we've been doing in recent quarters to mitigate the revenue pressures from the depressed national ad market and to free up resources for digital investments, we continue to meaningfully reduce costs. During the third quarter, we executed an additional $5 million of annualized fixed cost reductions, bringing the total reductions this year to $20 million and $110 million since 2019. These actions again reflect our aggressive but thoughtful approach to reducing costs to improve the company's operating leverage without impacting revenue growth. We remain focused on maintaining our best among peers balance sheet and liquidity position through disciplined capital allocation. In the third quarter, we completed the highly accretive $10 million sale of WDRQ-FM in Detroit, a station with minimal EBITDA. We also completed a discounted prepayment of our term loan, retiring $5.2 million face value of debt at 83.5% of par. Since the beginning of last year, we have retired over $130 million in face value of debt, bringing total debt down to $676 million, the lowest it's been in over a decade, and net debt to $593 million. Additionally, we believe reducing debt is the best way to maximize financial flexibility and strategic optionality headed into what we hope will be a recovery year. Looking ahead into Q4, the market remains choppy, with revenue pacing down low double digits, impacted by both the continuing weakness in national advertising and a tough political comparison. While we are cautiously optimistic that the environment will improve in 2024, we are prepared for what comes. Since the pandemic, our management team has driven best among peers performance on cost takeouts, EBITDA margin recovery, free cash flow conversion, and net leverage reduction, and we are committed to maintaining that track record regardless of the environment. With that, Frank, I'll turn it over to you.

Thank you, Mary. Third quarter revenue was down 11%, in line with the pacing commentary that we gave you in our last earnings call, and down 9.8% excluding political revenue, while EBITDA came in at approximately $27 million. Of note, from a revenue standpoint, our local businesses continue to outperform our national businesses on a relative basis, and each of our digital businesses grew during the quarter, including podcasting where revenue had declined during the first half of the year. We were also impacted by a tough political comparison in the quarter, booking $800,000 of political revenue in Q3 of this year compared to $4.5 million in Q3 of last year. That comparison will worsen in Q4, as we benefited from $8.3 million of political revenue in the last quarter of 2022. This political differential is a contributing factor to our pacing down in the low double digits. From a category perspective, home products and consumer packaged goods were our top-performing national categories, while our weaker categories included professional services, financial, and insurance. General services and auto were top-performing major local spot categories, while professional services, financial, and sports betting were some of our weakest. Turning to expenses, total expenses in the quarter decreased by over $6 million year-over-year, driven by fixed cost reductions and lower variable costs from lower revenue. As Mary mentioned, the impact of the fixed cost reductions that we executed in the quarter is approximately $5 million on an annualized basis, bringing the total reductions implemented this year to $20 million and $110 million since 2019. Moving to the balance sheet, cash from operations during the quarter was negative $7 million, largely driven by the seasonal impact of working capital, while cash from operations through the first nine months of the year was positive $28 million. In Q3, we continued to reduce debt through a $5.2 million discounted prepayment of our term loan, bringing total debt down to $676 million with net debt of $593 million. The cash utilized in this discounted prepayment will work to offset any excess cash flow sweep that we might otherwise need to repay at par. Overall, since the beginning of last year, we have reduced our debt by over $130 million. This reduction in net debt, plus interest income earned on our cash balances, has largely offset the approximately 525 basis point increase in short-term rates since last year. Also, our Board of Directors authorized a new $25 million share repurchase program to replace our existing plan, which was set to expire shortly. However, we expect to focus our near-term capital allocation efforts on debt reduction. Additionally, in the quarter, we completed the previously announced highly accretive sale of WDRQ-FM for $10 million, on top of the $7 million we received for the sale of WFAS-FM in Q1. Foreign exchange impact was $7.1 million in the quarter, and $21 million year-to-date, which will be in the range of $25 million for the year, consistent with the guidance we laid out earlier in the year. Looking ahead, macroeconomic factors continue to impact Q4 results, but we are starting to see some green shoots in the national advertising market, which could lead to a recovery next year. In the meantime, we continue to take actions that will position us strongly for a rebound by investing in our digital businesses, improving our operating leverage, and maximizing financial and strategic flexibility. With that, we can now open the line for questions.

The first question comes from Michael Kupinski with Noble Capital Markets. Your line is now open.

Thank you for taking my questions. I appreciate it, and good morning. Can you discuss how it's surprising to me that radio operates with such a thin staff? I was wondering if you could elaborate on where you're reducing costs and provide a bit more detail on that.

I'll take that, Michael. Good morning. Well, first, I'll start off by saying that the areas where we're reducing costs are not impacting revenue, and we're actually increasing our sales force, which is a key focus for us. The areas that we continue to get efficiencies in include real estate, and we are examining our footprint around the country. We are also being very judicious with our use of external contractors and renegotiating contracts at better rates whenever possible.

Got you. And Frank, could you just talk a little bit about what the opportunities might be, especially as we go into Q4, which sounds like it continues to be a little softer? Are there further cost-cutting opportunities in Q4? Or do you think you’ve cut as much as you would like? Or can you give us some color on what the cost outlook might be as you go into Q4?

We'll provide an update on Q4 next year. We're currently going through our budgeting process now. Our mantra is to look at all costs from the ground up. We took out $20 million more this year as we discussed in our script on top of the $90 million beforehand. The magnitude of these cost cuts, as you can imagine, will be diminishing given what we've taken out thus far. These are fixed cost reductions, equating to approximately 20% of our fixed cost base compared to 2019.

Got you. And digital rebounded in the quarter. I was just wondering if you can kind of give us some thoughts on— I know that you've been hiring sales staff and so forth there. Can you just provide some thoughts if you have a sense that the digital marketplace in itself is rebounding in general and just kind of your thoughts on how digital should perform, especially as we go into 2024?

Yes. I can take that. Good morning, Mike.

Good morning.

Our digital marketing services businesses, as we noted in the prepared remarks, is very vibrant and continues to grow. We've seen consistent growth, with it growing 16% in 2022, over 20% in the first half of this year, and continuing at a nice pace this quarter. So we're very bullish. As we said in the prepared remarks, we are investing in this business. We have tripled our sales force since the last call. Half of our new digital customers are now also buying something else from us, such as broadcast radio. So we're reaching more customers with more sellers, which is our overall strategy. So in terms of the business, we're very optimistic and believe that there’s a nice growth trajectory for 2024 and beyond.

All right. That’s all I have for now. Thank you.

Thank you.

Thank you. The next question comes from the line of James Goss with Barrington Research. Your line is now open.

Okay. Thanks, and good morning. One question I have is, if you look at the digital businesses, traditionally, they tended to be roughly one-third, one-third, one-third between digital ad sales, digital marketing services, and podcasting. I'm thinking over time, that mix may change as certain segments grow more rapidly. I initially thought it might be podcasting, but it might be digital marketing services where you have the greater relative advantage. How are you thinking in terms of how that mix would change?

Hi, Jim, I'll take that. You're correct that the podcasting business is growing, and we’re pleased to see that in the third quarter, it returned to growth after some decline in the first half of the year. We're still very focused on that business, and it will continue to grow. But currently, the digital marketing services business is the fastest-growing segment among our digital business lines. While there's still roughly one-third, one-third, one-third distribution between the three buckets, as we execute our sales strategy and grow the digital marketing services, that will likely become the largest part of our digital business lines.

Okay. Have the digital marketing services been impacted at all by the economy to the extent that some of the clients in that space might face challenges that would make them less likely to engage with you? Or is that not really a challenge at this point given the large space?

It really hasn't been affected significantly because we're largely serving small and medium-sized businesses that operate locally. The dynamics of those businesses vary depending on the market and category, and there's always growth as new businesses emerge. Our digital marketing services model is subscription-based, which creates a recurring revenue stream for us. Once we sign clients up, our strategy allows us to sell them additional relevant products. Frank, do you have anything to add?

No, I agree. Even though some businesses may be impacted by the economic environment, we're starting from a base where there’s an enormous opportunity. We're not concerned about marginal new business as we're still in an expansive market.

You raise an interesting point that this isn't a one-size-fits-all customer base. You can also have advantages by increasing your penetration within existing customers with additional services, which I think some may not appreciate as much?

Exactly.

Also, with podcasting, as it's grown, traditionally, new categories will grow substantially more rapidly than some of the current comparisons. Are we getting any walls within podcasting, do you think, or is there a significant room for growth from your perspective?

Our focus is on advertising and monetization. We generally represent other people's content. Our success depends on who we feature and our own developments. We've concentrated on news talk and personality-driven content, which has proven effective in that space. As audience numbers grow, monetization opportunities increase. We've expanded to have multiple podcasts in the top 100, and this positions us well for future growth, especially as we explore non-conservative content. We're quite optimistic about this trajectory despite initial pressures on national advertisers, which now appear to be easing.

Okay. One last question. Is there any significant difference in the tone of national advertising between Westwood One and the station's group national advertising? Would that be more of a national ad versus a national spot?

Not really, there's no substantial difference. It's all considered national.

All right. Thank you very much. I appreciate it.

Thank you.

Thank you. The final question comes from the line at Dan Day with B. Riley Securities. Your line is now open.

Yes. Good morning, guys. I appreciate you taking the question. I have a two-part question on the one and the network segment. First, can you discuss whether there's been a materially different performance this year between your live sports content on Westwood One and the other nationally syndicated content? I've been reading good things about live sports ratings on the radio, and I'm curious about any discrepancies and whether that impacts your decision to invest more in live sports rights moving forward with Westwood One?

Regarding your first question on sports, as we look at our pacing in the fourth quarter, especially with the NFL, which began in the third quarter and is expected to be significant in Q4, our performance is pacing close to flat compared to last year. This indicates high demand from advertisers for live sports. The national weakness we're observing is primarily due to a general market slowdown away from sports. Going forward, we will analyze the economics of any contracts, but currently, we are pleased with our sports portfolio, given that Westwood One holds NFL rights, including digital.

Thanks. On Westwood One, if we put the macro aside, do you feel there are specific investments you need to make to regain growth?

The network business is indeed challenged by the national advertising market. We're continuously exploring ways to enhance revenue-generating opportunities, whether it involves programmatic sales or improved targeting options. This area has evolved significantly over the past several years compared to the local market due to technology, and maximizing our revenue opportunity remains a constant focus.

It’s been a while since we've revisited the profitability of that revenue. Can you provide any updates on margins within the podcasting segment, and what you've done recently to improve podcast revenue profitability?

The margin profile hasn't changed significantly since we're primarily on a revenue share model with podcasters. We don't carry the risk of running a studio business, which can be costly. Additionally, we've noticed some declines this year related to national advertisers, especially direct response clients. However, with national advertisers returning and onboarding new podcast talent, we are also appealing to a wider range of advertisers. Our podcast margins are in the low twenties, but we're comfortable with this lower-risk model.

Lastly, can you discuss the rationale behind the recent focus on repaying the term loan versus the notes? Is it purely a yield decision?

It's not purely based on yield. As mentioned in my prepared remarks, the term loan includes a mechanism that would require any excess cash flow at the end of the year to be repaid at par if leverage exceeds a certain level. Therefore, being able to repay at $0.835 rather than par is compelling. As for our capital allocation, we opted not to buy equity in Q3 and have prioritized debt reduction. Nonetheless, we are also focused on maintaining financial and strategic flexibility, identifying opportunities as they arise. Our plan is dynamic, and we take pride in reducing our debt consistently over the past several years, benefiting both debt and equity holders.

All right. Thanks for your time.

Thank you.

Thank you. There are no additional questions waiting at this time. I would now like to pass the conference back over to the management team for any additional or closing remarks.

Thanks, everybody. We greatly appreciate your time, and we look forward to talking to you next quarter. Thanks.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.