Earnings Call Transcript - EEX Q3 2024

Operator, Operator

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. This includes 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. For a discussion of these risks, uncertainties and other factors, please refer to the company's SEC filings, including its most recently filed periodic reports on Form 10-K and Form 10-Q as well as the company's earnings release, all of which can be found on the company's Investor Relations website. 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 measures can be found in the company's earnings release, which is available on the company's Investor Relations website. As a reminder, this conference is being recorded, and the replay of this call will be available on the Investors section of the company's website.

Hervé Sedky, CEO

Thank you, Eric, and good morning, everyone. This is Hervé Sedky. It's a pleasure to be with you to discuss our third quarter results. I will start with a quick overview of our performance and then outline our strategy. David Doft, our CFO, will provide further details on our financials. We frequently talk about portfolio optimization at Emerald, and today I want to share some more assertive steps we are taking to better position the company for growth and profitability in the future, which will have immediate effects on our expected results for 2024. While we are experiencing strong year-over-year growth heading into the first half of 2025, we do not anticipate our performance in the second half of 2024 to align with expectations. Therefore, we are adjusting our previously stated full year 2024 expectations downward. This update is mainly due to two factors: a proactive strategy to enhance our portfolio mix and certain macroeconomic and operational challenges affecting our Content business. Let me elaborate on these points. To optimize our long-term organic growth and margin trajectory, we conducted a comprehensive review of our event catalog earlier this year. As a result, we decided to accelerate certain portfolio optimization initiatives by cutting several smaller and unprofitable events. Over recent months, we have permanently discontinued 20 events that accounted for $20 million in historic revenue. This includes $17 million from events that were held in 2023 but will not take place in 2024, and $3 million from events that took place in 2024 but will not occur in 2025. Generally, these events were not growing and had negative EBITDA margins. Consequently, we expect these changes to have a positive effect on growth and margins in 2025. Additionally, we canceled one of our hosted buyer events in early October, which was scheduled to take place in Florida during Hurricane Milton. This cancellation resulted in a revenue loss of just under $1 million, but these events had high contribution margins. We are currently filing an insurance claim, as we believe that this cancellation is covered by our event cancellation insurance policy, similar to past situations involving weather-related disruptions. Going forward, our main focus is on business growth. Our actions align with our goal of portfolio optimization, which we believe will strengthen our foundation for expansion in the coming year and beyond. We anticipate strong growth and a return to margin improvement in 2025, supported by the elimination of these unprofitable assets. David will discuss the short-term impact on the business shortly. Despite the challenges, our current show portfolio remains robust. Just a few weeks ago, we completed the New York Edition of Advertising Week, which had an excellent turnout and introduced new tracks, including an Investor Summit featuring influential voices from major industry players like Meta, Google, Amazon, TikTok, and Netflix. We are now looking forward to our upcoming fourth-quarter events, such as BDNY, Healthcare Design Expo, and MJBizCon, and we feel confident about the strength of our portfolio as we move into the first half of 2025. In fact, our pacing for 2025 is stronger and more widespread than at this time last year, reinforcing our belief that growth will improve in the new year. We currently anticipate solid revenue growth in 2025 with a return to margin expansion, aided by a more favorable business mix resulting from our portfolio optimization efforts. On a separate note, our small content business continues to experience softness. This segment now makes up about 5% of our total revenue but has not been performing up to our expectations. Significant organizational changes over the last 18 months were implemented with the hope of boosting performance in the second half of the year. However, the advertising environment in several key markets has remained difficult, leading to modest near-term growth expectations. Despite its small size, we are facing a low-to-mid single-digit million-dollar shortfall in expected revenue for full year 2024, which had anticipated growth this year. Therefore, we now expect a year-over-year decline in Content revenue for 2024. Our Content portfolio is still a vital part of our operations because it enhances our event marketing and generates proprietary data assets. This business supports our strategy of personalization and improves lead generation for our event customers throughout the year. As growth continues in other larger areas of Emerald, Content is naturally becoming a smaller part of our overall revenue, suggesting that fluctuations in this segment will have limited effects on our future performance. Consequently, we are adjusting our full year revenue and adjusted EBITDA guidance to at least $400 million and $100 million, respectively. Our updated guidance still indicates year-over-year growth in both revenue and adjusted EBITDA, albeit at a lower level than we had previously expected. We believe that the changes in our portfolio and more aggressive efforts within our Content division will position us well for strength in 2025 and beyond. The value proposition of Emerald's large and diverse collection of events is strong, and our customers recognize the significant ROI that in-person events provide, as evidenced by the solid growth in our 2025 bookings. Traditionally, trade shows are among the leading sales and marketing events for our clients. According to a recent survey by The Boston Consulting Group, many CMOs find that traditional channels such as email campaigns and display ads are yielding diminishing returns due to ad blockers and algorithmic changes. Consequently, CMOs are reallocating budgets toward more effective channels, such as in-person events and experiential marketing. Almost 65% of CMOs, according to Deloitte, reported increasing their investments in in-person events to enhance brand loyalty and customer engagement. In-person events are increasingly viewed as crucial and immensely valuable components of a company's marketing strategy, with many executives perceiving under-investment in them as a competitive disadvantage. In summary, in-person events represent a genuine opportunity for long-term value creation through knowledge sharing, innovation, and relationship building, which are fundamental to any growing business. As we look ahead, we remain confident in the strength and value of our portfolio. We believe in the positive mid- to long-term trends for in-person events as we move further away from the volatility caused by the pandemic and recognize the significant value Emerald offers to the market. Ultimately, we are willing to make tough decisions based on data that improve our growth prospects. This quarter was consistent with that approach. We possess a profitable portfolio featuring some of the industry's most recognized events within their markets. We are dedicated to enhancing this portfolio through strategic acquisitions and new event launches. Recent industry transactions further reinforce the value of live events. I am enthusiastic about the path ahead and the continued potential of in-person events. Now, I will hand it over to David Doft. David?

David Doft, CFO

Thank you Hervé, and good morning. I will start with a financial overview of the most recent quarter and then discuss capital allocation as well as our guidance. For the third quarter, total revenue was $72.6 million compared to $72.5 million in the prior year quarter. This was primarily driven by $4.2 million in revenue from acquisitions as well as scheduling adjustments of $4.2 million. These gains were offset by $5 million in discontinued event revenue that was not contributing to profitability as part of our portfolio optimization strategy and organic decline of $3.3 million. Organic revenue, which takes into account the impact of acquisitions, scheduling adjustments, and discontinued events, declined 5.3% in the third quarter to $58.7 million as compared to $62 million in the prior year quarter. Besides the items Hervé reviewed, growth in the quarter was also impacted by construction at one of the venues, which has temporarily caused disruption for a small number of events in the short term. Year-to-date, organic revenue was up 4.8% as compared to the same period last year. Third quarter adjusted EBITDA, excluding insurance proceeds, grew 56.3% or $4.5 million to $12.5 million versus the prior quarter. This equates to an adjusted EBITDA margin of approximately 17.2%. As Hervé discussed, we conducted a thorough review of our entire event catalog as part of a proactive review of our nearly 150 show portfolio. As a result, we removed 20 unprofitable events this year. For the events that were discontinued, there was some positive contribution at the event level, which means we're in the process of reducing overhead related to those changes and we expect the full benefits should be seen in 2025. Turning to expenses, third quarter SG&A was $40.8 million versus $41.6 million in the prior year period, driven by continued management of overhead costs and lower stock-based compensation expense. This was partially offset by lower gains from the remeasurement of contingent consideration for prior acquisitions. In the third quarter, we generated $6.7 million of free cash flow, excluding event cancellation insurance proceeds as compared to $2.7 million in the prior year period. As many of you know, the Federal Reserve recently reduced their interest rate by 50 basis points, which delivers an immediate boost to our free cash flow as we have a floating interest rate on our debt. Specifically, we have $410 million of term loans, so every point reduction from the Federal Reserve leads to approximately $4 million of incremental cash flow for Emerald. This is good for our equity holders and provides added fuel for investing in value-added initiatives. Turning to the balance sheet, we had a healthy cash balance of $188.9 million as of September 30th versus $193.2 million as of June 30th. As a reminder, in early May, we completed the conversion of our convertible preferred stock, eliminating the preferred dividend and resulting in a simpler all common equity structure. I should also highlight that in the third quarter, S&P upgraded Emerald's debt from a B rating to B+, reinforcing the strength of our model and liquidity position. Our total liquidity is $298.9 million, including full availability on our $110 million credit facility. As of September 30th, we had net debt of $221.2 million, leading to a net leverage ratio as defined in our credit agreement of 2.11 times our trailing 12-month consolidated EBITDA based on the definition in our credit agreement of $105.0 million. Our balance sheet strength and cash flow generation support our ability to opportunistically invest in and grow our business. Going forward, we expect to continue to balance our capital allocation priorities between acquisitions to bolster our portfolio of events, investments in our own business, managing debt leverage to 3.0 times net debt to EBITDA or below, and returns of capital to shareholders, which includes dividends and opportunistic share buybacks. During the third quarter, we bought back 743,000 shares for $3.6 million or an average price of $4.85 per share under our existing buyback authorization, which had $19.6 million of capacity remaining. Our Board of Directors authorized an extension and expansion of that existing share repurchase program through December 31, 2025 for the repurchase of $25 million of Emerald's common stock, representing approximately 3% of the current equity market capitalization. Additionally, on October 29th, Emerald's Board of Directors declared a regular quarterly dividend of $0.015 per share for the quarter ending December 31, 2024, which would imply an annualized cash dividend amount of $12 million and reflecting a dividend yield of 1.3% based on yesterday's closing price. Turning to guidance, as Hervé noted, we now expect that our 2024 performance will be at least $400 million of revenue and at least $100 million of adjusted EBITDA. Our revised guidance reflects the impact of the discontinued events, the aforementioned content softness, and the cancellation of one hosted buyer event in October due to Hurricane Milton. As Hervé also noted, we believe this cancellation should fall under our event cancellation insurance policy and we expect to file an insurance claim for this event shortly. Our guidance implies an adjusted EBITDA margin of approximately 25%. Note that we continue to believe that we can achieve an adjusted EBITDA margin in the range of 35% in the coming years as we continue to leverage our existing cost base, realize the benefits of our investments, and reap the benefits from the pruning of our portfolio. Thank you very much for your time. And with that, we'll now open the line for questions.

Barton Crockett, Analyst

Okay, thanks for taking the question. I guess, a couple of things. One, I was wondering if you could explain a little bit more about why your outlook for EBITDA is reduced if so much of this is really tied to canceling unprofitable shows and I think you were kind of getting at it with the event level and other expenses but if you could kind of elaborate on that a little bit more, just would help me kind of understand the guidance?

Hervé Sedky, CEO

There are three main factors to consider. First, the cancellation of events has affected our financials. Many of these decisions were made later in the year, but we had already incurred a significant amount of SG&A expenses related to those events. Since we aren't generating revenue from these events, we won't have the funds to cover the SG&A costs we've already spent. We are currently adjusting SG&A, and we expect to see the full benefit reflected in our bottom line by 2025. This situation is mostly about the timing of when events were canceled and when we allocated funds. However, we anticipate this will ultimately be beneficial for us both in terms of dollar amounts and profit margins moving forward. The second factor is the downturn in our Content business. This sector has been more volatile in the last couple of years, particularly due to a challenging advertising market and short-term decision-making from advertisers, which has complicated our forecasting. We have adjusted our financial expectations for this business significantly downward, estimating a low-to-mid single-digit million dollar impact compared to our previous outlook. Lastly, there was a minor issue from a hurricane in Florida that caused a small event cancellation, which will cost us about $1 million. We believe we will recover this amount through insurance, although we are uncertain about the timing of that recovery, so we have excluded it from our expectations.

Barton Crockett, Analyst

Okay. And in terms of the Content, is that revenue largely come out of EBITDA, those low-to-mid single-digit millions?

Hervé Sedky, CEO

It does at this point. Digital media is a high contribution margin business. Again, given the timing, it's late in the year. And so it's a bit hard to get the cost basis adjusted in time to benefit this year. And so there is a high flow-through in the short-term of that shortfall versus what we thought.

Barton Crockett, Analyst

I'm curious about your thoughts on the positive outlook for 2025. Is there any new information or insights that might provide us with more confidence in your projections for 2025 compared to what you anticipated at the beginning of 2024? You mentioned that the pacings are looking better, but are there any factors related to forward reservations or event cancellations that could affect this outlook, or is this just how things tend to fluctuate?

Hervé Sedky, CEO

Pacing builds over time. When we consider the first half of 2025, we have good visibility because we have events that have been in the market for a while. In the second half, our visibility is less certain at this moment. As we progress in the coming months and provide our next update on year-end results, we expect to have greater clarity on the latter half of the year. Currently, we are not making any statements regarding that period. As a reminder, we have previously discussed the fluctuating performance of our business quarter-to-quarter. It is indeed true that our weaker performers tend to be concentrated in the second and third quarters, giving us some time before we can make predictions for the second half of next year. However, in the first half, the pace indicates strong performance, which not only shows higher growth compared to the same time last year, but also indicates a broader range of events achieving better pacing than they did last year. This is a positive sign, especially as we focus on optimizing our portfolio and the mix of events across various sectors. We are also working on removing underperforming events that lack potential for growth and profitability, allowing us to concentrate our resources on stronger brands to enhance our financial performance.

Barton Crockett, Analyst

Okay. And then switching gears a little bit. I was just wanting to make sure I understand, there's been some press releases around Blockchain Futurist where suggesting an acquisition, which I'm just not clear that that's exactly what's happened. So I was wondering if you could talk a little bit about what you're doing with that event, which is obviously popular in Canada and I think expanding to Miami, what is your engagement there?

David Doft, CFO

I'll start and then I'll turn it to Hervé. There's a nuance that I think is also important as we think about portfolio optimization is, we've talked a lot about investing in new launches in our Xcelerator unit. There's been a slight shift in thinking where if we can identify emerging assets that are a couple of years in and kind of do more of an acquihire type and bring them into the portfolio, we can accelerate launch activity in a way where it doesn't burn as much on the bottom line because we recognize that we've invested quite a bit in EBITDA losses the last couple of years in launches. And so if we can minimize launches and accelerate path to market by finding the right emerging brands, we would do that. And so we had a launch in the blockchain area. This supplements what we were already doing and accelerates it in a way where we expect to eliminate the burn of that launch and have it be a contributor faster with a more favorable growth trajectory.

Hervé Sedky, CEO

And the only thing I'll add is that the Xcelerator team is managing our initiatives, and we are continuing to invest in and encourage the team to grow. Furthermore, there will be a launch in Miami that has been announced. The Xcelerator team, which serves as our launch team, is actively investing in and pushing that launch. This aligns with our launch strategy and helps accelerate our overall launch efforts.

Derek Greenberg, Analyst

Hey guys, thanks for taking my questions. To start, could you just give a little bit more color in terms of the profile of the events that were discontinued and why you think they were underperforming?

Hervé Sedky, CEO

I'll address that. We won't go into detail about the discontinued launches since they were mostly related to existing brands. To clarify, many of the discontinued brands were either geographic extensions or variations of current brands. They didn't achieve the anticipated traction or meet customer needs as we initially expected, resulting in lower returns for both our customers and us. The notable exception is NBA Con, which is the largest in this group and doesn't fit the pattern I just described. Other than that, we won't provide details on the specific brands we discontinued. I hope this gives you the insight you were looking for.

Derek Greenberg, Analyst

Yes, that's definitely helpful, thank you. And then can you just comment on how the business is tracking relative to pre-pandemic and some of the steps that could make it get back to full performance there?

Hervé Sedky, CEO

Pre-pandemic seems like a long time ago, and our business has changed significantly since then. Therefore, many aspects of our portfolio are not really relevant to that timeframe, particularly as we adjust our focus. Regarding the discontinued events, there were some that were underperforming even before the pandemic, and they remain so afterward. While some stronger brands have recovered and many across our portfolio have surpassed pre-pandemic levels, this particular group is still struggling. There are a few that have yet to bounce back, and each industry hosting our events has unique challenges. We are continually working to generate growth from those assets.

Derek Greenberg, Analyst

Got it. And then in terms of getting international to return and driving that side of the business, I was just wondering, how you're progressing there?

Hervé Sedky, CEO

We are making progress on our international efforts. As previously mentioned, we have invested in an international sales team because we identified that Emerald's presence in global markets was lacking. Building this international network takes time, but we have successfully established it with over 50 sales agents globally. We are beginning to notice increasing activity from various countries. Although it will take some time to realize the full benefits of this investment, we anticipate seeing positive results in the next few years. Recently, our team returned from China, where we expect to face some challenges, which may be influenced by the upcoming election. We are keeping a close watch on this situation, as it holds significance for our international revenue, despite being a smaller portion of total Emerald revenues. Consequently, we are actively working to diversify our international revenue sources away from China.

Derek Greenberg, Analyst

Okay, got it. And then in terms of the hosted buyer event that was impacted by the hurricane, is that something you plan on still trying to host this year or is it just canceled until next year?

Hervé Sedky, CEO

No. We have canceled it. We've canceled the event altogether for this year.

Derek Greenberg, Analyst

Okay. Got it. And then my last question would just be how you're progressing with integrating and using AI across the business?

Hervé Sedky, CEO

That's a great question. It’s a work in progress. AI is an important topic for us and we are conducting various tests throughout the company, mainly for internal purposes. For example, our marketing teams are utilizing it for crafting email content, headlines, and landing page text. AI has the potential to significantly enhance our personalization efforts in marketing, enabling us to improve conversion rates more quickly and efficiently. We believe that leveraging AI internally will be beneficial for marketing, and we are experimenting with several initiatives. We plan to continue testing AI internally and will aim to scale its usage as we assess the outcomes of these tests.

Derek Greenberg, Analyst

Okay, great. Thanks for taking my questions.

Hervé Sedky, CEO

Thank you very much. Well, I wanted to thank you all for joining the call. Over the course of the last few years, we've talked a lot about our three pillars of growth, which are portfolio optimization, customer centricity, and 365-day engagement. And the reality is this quarter we've really focused more on portfolio optimization. And portfolio optimization in the last few years' discussion has really centered largely around M&A. Today, we've talked more about discontinuing events and we've made difficult decisions. But these difficult decisions were important to optimize the mix of our portfolio to really position us well for sustained growth for the foreseeable future. So while they were difficult decisions, they were important. And we look forward to updating you as we continue to make progress on our growth strategy in the upcoming quarters. So thank you again for joining the call, and I look forward to speaking to you next quarter.