Cumulus Media Inc. (CMLS) Earnings Call Transcript & Summary

Good morning. Welcome back to the Deutsche Bank Leveraged Finance Conference. I'm Aaron Watts. I cover the media, tech and business services sectors here at DB on the credit side. Pleased to have Cumulus kick us off today. From the company, we have CEO, Mary Berner; and CFO, Frank Lopez-Balboa. I wish we were all doing this in person, but I appreciate you both taking the time to participate virtually. Mary is going to begin with a new presentation, and then we'll jump into some Q&A with the time remaining. Mary?

Great. Thanks. Hi, everyone, and thanks for having us, Aaron. We are pleased to have this opportunity to present our new investor presentation. I do first want to note the safe harbor statement, which is also posted in the PDF of this presentation on our website. So our hope is that from this presentation, you take away and understanding of our strategic shift from a one-dimensional radio-first model to a multidimensional audio-first media company and why that positions us for growth? Appreciation for the upside inherent in our value creation model, confidence in the management team as a group of consistently strong operators who will effectively and -- effectively optimize our value creation levers and ultimately, clarity on why Cumulus Media is an attractive investment, particularly now. Over the past several years, Cumulus has transformed from a one-dimensional radio-first, as in 1 product distributed 1 way, consumed on radio devices and on a set schedule, to the multidimensional, multiproduct, multichannel, on-demand, audio-first media company that we are today. We create value by linking our 2 main constituencies, our listeners and our advertisers. And today, we develop and distribute audio content in a variety of ways, reaching nearly 250 million people every month across every community in the U.S. Our sellers are tasked with monetizing those audiences by selling the billions of monthly impressions we generate from them, along with ancillary digital marketing products to tens of thousands of businesses. For investors, the main question is why invest in Cumulus Media now? And here are the highlights of our answer. We're going to cover each in later slides, but the punchline is that Cumulus has a significant opportunity to build future shareholder value, much of which is not currently reflected in our stock price. In short, we believe that our multidimensional audio-first positioning is strategically compelling. Our business model is well balanced with excellent free cash flow characteristics and multiple digital growth vectors. Our strong balance sheet and liquidity position give us substantial flexibility in how we allocate capital to build shareholder value. And we have the right Board and management team to execute on the opportunity in front of us, which in combination make Cumulus Media an attractive investment. A core element of our audio-first strategy is our significant array of our assets and talent and brands, and you see a sampling of those on the right. We have a massive platform, including our local radio business with 413 stations, #2 in the radio industry. Our Westwood One network with 7,300 affiliates, #1. Our robust growing podcast network, which generated over 1.2 billion downloads last year. A streaming network delivering over 5 billion impressions a year and a substantial portfolio of digital marketing services currently serving more than 3,000 clients. Here's a financial snapshot, which illustrates how our execution under the multidimensional, audio-first model translates into financial performance. Our business has been recovering nicely from its COVID lows, which is reflected in our recently issued 2022 EBITDA guidance range of $175 million to $200 million. Of particular note are the continuing strong results of our digital businesses, which collectively delivered more than 50% growth in Q2, now representing 14% of total revenue. Also, we've improved the strength and flexibility of our balance sheet despite the pandemic, continuing our ongoing mission to derisk our balance sheet and increase the optionality that we have with respect to capital allocation. So as I said over the last few years, we made an important shift from operating as a one-dimensional radio-first company to a multidimensional audio-first media company which substantially leverages the ability of our talent and sales force to drive value. And I want to spend a few minutes describing the difference between the 2 because it is transformational. So shown here is the -- our old and traditional radio model, a one-dimensional model, which relies on 1 type of content radio shows created usually -- using mostly career radio DJs distributed 1 way over the air and consumed through radio devices on a set schedule. For many years, that was our model. To be clear, radio today continues to deliver massive listening audiences, reaching 93% of the country's adults every month, and Cumulus itself generates nearly 250 billion sellable impressions in a traditional radio annually. However, with the advent of the digital era and the explosive growth and massive expansion, of both audio product and ways in which people can listen to that product, we saw a clear and compelling opportunity to redeploy our assets, talent and brands across the vibrant and growing audio ecosystem to increase our audiences and our revenue. So to meaningfully participate in the larger audio ecosystem, we've been evolving our content creation process and expanding our distribution. In our audio-first model, we view our talent, including our current DJs, as multidimensional audio content creators who think expansively about the amount and type of audio content they can and should generate. And that includes new as well as repackaged content, including radio, to reach listeners across the larger audio ecosystem. Our talent now has far more opportunities beyond radio, ranging from podcast to digital audio to live events to deepen their engagement with their current audiences and to attract new ones. This shift from radio to an audio mindset has broadened how we think about our potential talent pool, as we look for people who've had success in connecting with audiences in all sorts of non-radio arenas, from podcasters to social media influencers to authors to athletes. And this approach gives us a deeper pool of talent to draw from and a very powerful ability to expand the output and reach of any given talent, including our traditional radio talent, as I'll show you in a minute. Another key dimension of our audio-first model is that we now deliver, and our listeners consume, our content much more broadly and flexibly than before, including on-demand, allowing us to expand our touch points with existing listeners while also attracting new audiences. But let's look at how this audio-first focus has worked for us to expand our audiences. Bert Weiss has hosted The Bert Show, a popular morning show for decades. The show was first expanded through syndication to quadruple its local broadcast reach. And then in our first digital move, we began to stream the show, doubling its reach to more than 1 million people a month. Bert then extended into podcasting, using repurposed content by converting his radio show each day, every day, into 20 different podcasts using short snippets of regular show features and daily highlights, generating 6 million downloads a month, which is a terrific example of how we leverage content in our new business model. And the second example, our expansion went in a reverse order from digital to radio. We helped Ben Shapiro, the country's leading voice for young conservative millennials, grow his news/talk podcast into one of the top podcasts in the country, generating 25 million downloads a month. And then launched them in radio with a combination of repurposed and live content in over 375 radio stations. Turning to monetization. One of the great benefits of our historical model is that radio monetizes its audiences very efficiently, generating a lot of cash flow in the process. We generate billions of impressions from our radio shows, which were and still are sold through about our 800 sellers in local, national and network channels. However, in traditional radio-first model, those sellers almost exclusively sold radio spots with our revenue opportunity limited to the $14 billion total addressable radio broadcast market. With the transition to the multidimensional audio-first model, we go to market with a much bigger set of products. including a greatly expanded array of audio content products like podcasts and streaming and a complementary suite of digital marketing services. Our sales force uses this entire portfolio to upsell existing and attract new clients. And we have supplemented their effort with programmatic monetization. Having these new capabilities and offerings enormously broadens our revenue opportunity. No longer confined to the $14 billion legacy radio ad market, our total addressable market today is $30 billion and growing. So let me show you a few examples of the clear additive nature of this audio-first model by showing you how this expanded product offering has allowed us to grow and increase our revenue and share of media spend with current clients and attract new ones, a clear illustration of the additive nature of the model. Examples include a national auto aftermarket podcast client who added radio to their campaign, increased their total spend by nearly 60% over last year. A local financial services company who were sold on complementing their digital marketing services by with a radio campaign doubled their year-over-year spend. A long-time national insurance radio company -- client who added podcast to their buy increased their spending year-over-year by 45%. And finally, a national sports betting company who hadn't advertised with us before, but compelled by our ability to deliver a multiproduct and integrated audio marketing program, made a substantial multimillion dollar commitment. And these are just a few of the, too many to count, examples which demonstrate how our bigger portfolio of products and services improves the ability of our sales force to generate sustainable, incremental revenue. But I'd like to walk you quickly through our recent history to give you a better understanding of what we've done over the last few years to reposition ourselves as a multidimensional audio-first media company. There's a lot on this slide, so I'm just going to give you the highlights. When I joined Cumulus in 2015, it was a company in free fall. The new management team, both stopped the bleeding and focused on developing sustainable revenue growth, maximizing operational efficiency and optimizing our asset portfolio to put the company on a track that would build shareholder value on a sustainable basis. After the restructuring phase, we concentrated on developing a growth-oriented strategy, which resulted in our moving to our multidimensional audio-first model. Our efforts paid off and significantly improved financial results as well as the successful launch of our new digital business lines. We also made excellent progress on reducing our leverage with a line of sight to hitting our 4x target sometime in 2020, had the pandemic not hit. But of course, it did. And while our priority moved to guiding the company through the pandemic, we retained our focus on opportunities for growth acceleration and improved our operating efficiency and continued to pay down debt to the tune of $300 million, even generating free cash flow from operations despite significant pandemic-related revenue declines. I'll spend more time on the specific results of these efforts in the next session, but suffice to say that we are confident that this work has positioned us well for the future. On the revenue side, as I've said, the transition to an audio-first revenue model allows us to expand far beyond the radio advertising marketplace into the much larger and growing audio universe. Touching on the key characteristics of each, in broadcast, spot radio connects local and national advertisers to the very engaged fans of our 413 stations. And it's priced to deliver a very high ROI compared to most other media. Our network radio business does the same for our 7,300 affiliates. In that case, we generally provide programming to our affiliates who pay us with spots that we can then sell to national brands who are seeking national radio exposure. On the digital side, we currently participate in 3 primary areas, streaming, which is the digital simulcast and on-demand distribution of our broadcast shows, podcasting and digital marketing services. Inherent in our audio-first strategy is the synergistic interplay of these digital additions with our traditional radio businesses. Streaming not only brings in new listeners, but it also helps our talent serve existing audiences more fully, giving them the opportunity to listen on demand. Podcasting is a natural match for us given our legacy radio expertise in how to build and monetize personality-driven audio audiences. And our success of bringing new audio talent into the company through podcast as well as using it to provide new audiences for our traditional radio stars is exciting. And finally, digital marketing services has been a very logical expansion of our relationship with our local customers. Not only do radio and digital ads work very well together, lifting ROI by 19%, but many of our clients also appreciate the ability to work with 1 seller who can meet most of their media needs. On the expense side, we are aggressive about improving our operating leverage and financial efficiency. In the height of the pandemic alone, we significantly reduced our fixed expenses, having already expanded EBITDA margins before that. We apply the same discipline to debt reduction. Since emerging from bankruptcy, we have reduced net debt by approximately 45% or $600 billion (sic) [ million ] from free cash flow generation and highly accretive asset divestitures. And with our expected strong cash flow from operations, we are on track to reduce our net debt to below 4x as EBITDA recovers. We've also been active in executing value-enhancing partnerships and M&A transactions that benefit from or improve our audio-first positioning. Two recently announced partnerships are with WynnBET and Dan Bongino. The WynnBET partnership takes full advantage of our audio-first positioning in a multiyear, multiplatform advertising and content relationship where a portion of the payment to us is in WynnBET equity. The Dan Bongino partnership, which has gotten off to a record start, is another example of how audio-first allows us to leverage our talent. Additionally, we continue to opportunistically pursue M&A consistent with our general portfolio optimization principle of growing in markets where there's a path to sustainable profitability. And we have also been highly focused on monetizing the company's nonessential assets. Between 2018 and 2021, we divested land, towers and certain noncore stations, generating nearly $480 million of gross proceeds for the company. Moving to our recent performance. Our strong Q2 results reflected our continued upward trajectory out of the pandemic as we posted revenue growth of more than 50%. We also announced guidance on additional fixed cost reductions, another noncore asset sale of land in Nashville and the 2 new partnerships, which I just mentioned. And importantly, as I said, we also gave 2022 EBITDA guidance at the range of $175 million to $200 million. Our 2022 outlook is a good segue to the way we think about our value creation model on a forward-looking basis. This page isn't exhaustive, of course, but it does summarize the key drivers of shareholder value creation. First, additional recovery of the radio industry. Second, robust digital growth. Third, improved operating leverage; fourth, execution of strategically important and accretive M&A and investments. And finally, anticipated continuing strong free cash flow generation and deleveraging of the balance sheet. Today, as we continue to evolve into the audio-first model, the trajectory of traditional radio remains a primary factor. As such, part of what drives our expected recovery is the continued post-pandemic rebound in the radio industry. As companies return to work, we expect to see a greater return of historical driving patterns and a corresponding lift in listenership closer to pre-pandemic levels. We expect this listenership recovery to drive additional revenue recovery in our high-margin radio business. Another way to look at this by radio industry -- is by radio industry category spending to date. While some categories are exceeding 2019, many categories remain substantially below 2019 because they're still experiencing the knock-on effects from the pandemic. Auto, for instance, has suffered from the chip shortages, retail and restaurants from labor shortages. As these factors correct, recapturing even a portion of what was lost represents a significant revenue opportunity. Second, our adoption of an audio-first strategy and the addition of digital services drive growth in 2 ways. First, we will benefit from the robust upward trajectories of these digital markets; and second, we are leveraging our talent and our content creation capabilities and our sales force, expanding the value they can produce. In an expanding streaming market, we reach listeners who consume digitally through earbuds and headphones and increasingly through smart speakers, which will become the new in-home radio. We sell both our own stream content, 30% of which is consumed through smart speakers as well as third-party streaming impressions, which then we can use to satisfy client needs. Podcasting is a fast-growing digital format, which is in high demand by national advertisers. We are well positioned to continue to prosper in this growing market, given our stable of talent, profitable operations and excellent sales execution. And then we have our digital marketing services, which are a nice supplement to the other digital products we sell and sought after by a large segment of SMBs. This segment, generally, SMBs with fewer than 50 employees constitute a market estimated to be around $15 billion and growing around 5% to 10% every year. Third, it is in our DNA to be relentless cost cutters. And while we've recently increased our fixed cost reduction guidance from $50 million to $70 million, we're continuously focusing on new ways to reduce expenses. And of course, additional fixed cost reductions will inure to the benefit of our operating leverage. Fourth, M&A represents a key lever, which we can use to drive better and faster results from our strategy. You can see here that we've done a lot of M&A historically, and that's created significant value. As we look ahead, we envision executing additional M&A deals that optimize the radio station portfolio as well as other transactions that fuel digital growth. And finally, our free cash flow profile and our balance sheet are huge assets for us. We expect to further delever to below 4x net debt to EBITDA in 2022, which will continue to improve our flexibility to allocate capital to drive shareholder returns. So before I move into Q&A, I just want to take you back to that first slide. Why is Cumulus Media a great investment now. We believe that our multidimensional audio-first model is strategically compelling, leveraging our strength in an attractive and fast-growing audio market, not to mention the fact that radio is particularly well benefited -- positioned to benefit from the continued recovery. Our balanced business model supports top line growth while retaining attractive free cash flow characteristics and the ability to invest to drive shareholder value. Importantly, we have the right team and experienced and engaged board and highly focused, aggressive and results-oriented leadership group to execute our plan. And finally, we believe the market has not yet given credit to us for the value that we have and will create, and thus, the entry point is very attractive. So with that, I'll turn it back over to you, Aaron, for Q&A. Thank you.

Great. Thanks, Mary. You covered a lot of ground. So I'll just hit a few questions with the time that we have left. Now starting bigger picture, you've been cheerleaders and advocates for the industry. And a few years back, Nielsen gave you some strong ammunition with a report about the substantial ROI radio delivers for clients relative to other mediums. More recently, just a couple of weeks ago, there was a research report from WARC showing that audio captures 31% of media consumption, but just 9% of ad spend. I'm curious whether you think that these data points showing the value and continue to reach and usage of radio and audio resonates with advertising clients on Madison Avenue. And will the wallet share follow the data and the listeners?

The short answer is that we believe it will. As I said in my prepared remarks, audio listing is at an all-time high. And we participate in the parts of that audio ecosystem that provide a really unique combination of massive reach and efficiency as well as deep engagement, and that does resonate on Madison Avenue. So whether you're looking for the companionship of listening to your favorite DJ or somebody you really relate to through broadcast or streaming or on demand through podcasting, the common currency of this segment of audio listening is that the kind of content we do drives a deep level of listener engagement and connection. It's the kind you don't get with straight playlists or pure digital ads. I know the industry has talked a lot about the P&G example, but it's important because they initially -- when the dawn of digital initially pulled back on radio, pulled out of radio. And then using their world-class market and data and analytics capabilities, they determined over time that the efficacy of radio, in particular, was unparalleled. And so they pretty much shifted their dollars out of digital back to radio. And so now with streaming and podcasting and other content that draw big audiences, advertisers are rediscovering the value of audio more broadly and radio more specifically. And we saw that in some of the examples that I gave which is -- we're seeing all across our business. The way we look at it is, ultimately, our job as an audio media company is to get our content to listeners wherever, whenever they want it, and then create solutions for advertisers that give them the impressions that they want with the efficiency and effectiveness and deep connection engagement that our content has always delivered. So that's a very long way of saying, yes, it resonates, and we believe that, that gap will narrow.

Okay. Great. One concern that I often hear is whether digital growth comes at the expense of your legacy radio stations. Now you did say in the presentation that ROI -- that you see an ROI increase of around 19% when bundling digital and broadcast radio buys, how often is that happening?

It's happened more and more as a lot of sellers, in particular, work to -- they're trained and they're working to leverage all of their products for the benefit of their clients. And then as those clients see the benefits from the increased ROI, they want to replicate the results. So in a sense, it is self-reinforcing. As our sales force gets better and better at packaging these products, they have more to sell and more ways to create value for the same client. And that's an important element of our strategy. When you think about the opportunity to push more products through the same sales force, we can walk product into the door. We're really creating some nice operating leverage there. And to your point about, is it expensive broadcast? We really do this to be complementary. And the data we look at internally suggest that it is. And we're seeing more and more clients come in through digital only and then they buy radio, generally at a higher price point as time goes on. But it's -- when we add clients, we're generally drawing about equally from our existing client base and our new customers. So the addition of the digital products is really just opening up our total addressable market. I would say there's going to be some cannibalization around the edges. But to reiterate, we focused a lot on the sales [ side ] and the compensation strategies that allow us to minimize that. And we have our new products so that our new products are incremental, and it's a key focus of ours, both to increase the attachments rates of digital to existing clients, but also to seek out new clients. So it is complementary.

Okay. Great. And looking at the financial trends that you highlighted, while you posted healthy gains over pandemic impacted 2020, the top line is still down a fair amount versus 2019. I believe first quarter was down around 25%. Second quarter was down around 20%. And you said on your last call that 3Q is pacing down high teens, that would likely end up a bit better than that in the end. What will it take for you to recover to prepandemic levels of revenue? Particularly in broadcast, assuming you think you do recover fully, and any goalpost you can put around the timing of turning that corner?

Yes. I mean, fortunately, we have a number of drivers that can help us get back to those levels. First, there is the recovery of auto and entertainment and restaurants. As I mentioned, they're large categories for our radio businesses that are still experiencing substantial business disruption from both the direct and the indirect effect of COVID, and we believe those will inevitably go away, it is taking lot longer than they or -- we would have liked. Second, our core radio listenership, particularly the aggregate drive time audience is still somewhat impacted by the pandemic. That's given the delay in corporate return-to-work schedules that delta has caused on top of the shortage of childcare and the all-over-the-place school schedules that have kept some parents at home. We're seeing that with our employees. And as those issues get resolved, we expect some additional recovery in our commuter listenership beyond what we've already seen, which, as I said, should, of course, give us more audience to sell. Third, I think we're really excited about the expansion of our audio footprint via podcasting and streaming. It's helping us find new talent and new audiences who come through -- in through non-radio doors and Dan Bongino, great example, as well as it gives us ways to expand the audiences for our radio talent, who are no longer limited to fixed schedules, the distribution of vehicles of radio. So the bigger ecosystem that we're operating in gives us upside. And then I'd say fourth and obviously, is our digital marketing services business, which we initially developed to meet the growing demand for digital campaign and presence solutions from our existing SMB local clients has a lot of room to run. So I think those are the 4 top. There are other levers as well. But when we put it all together, the opportunity for continued revenue growth and recovery is there. But I'd be premature and I'd be pretending to have too much of a crystal ball to put a more discrete or a specific time frame on it. I will say that our guidance into 2022 alongside the fixed cost reduction guidance implies a revenue range of about $1 billion to $1.025 billion.

Right. So if I combine that kind of revenue and cost framework, it puts you on track to generate EBITDA next year of $175 million to $200 million, which you put out there. That's essentially pre-pandemic levels. Do you see upside from there?

I think that's -- it's a range. It's a range. I'd say it's certainly our focus. Even at those levels we are baking in an expectation of full recovery of the underlying factors that have been holding us back. So -- and we're obviously focused heavily on the controllable parts of our strategy that drives growth sustainable going forward. So that's our focus.

Okay. Frank, maybe I'll get you into the mix here with my next question. Last year, you closed the tower sale leaseback transaction and the D.C. land sale for over $280 million of gross proceeds and just recently sold your Nashville real estate for $34 million. Correct me if I'm wrong, but proceeds have largely gone to debt reduction. And are there any more noncore divestitures to come?

Thanks, Aaron. You're correct. The proceeds from those sales have gone to debt reduction. We paid down $175 million of debt in the second quarter, which satisfies the obligations under our debt agreements. With regard to other asset sales, you're correct, we did close on the Nashville sale early in the third quarter. Those proceeds are now reflected -- are not reflected in our second quarter cash balances. So you'll see that impact in the third quarter. And with regard to other assets, we do -- at this point, we've divested our largest noncore assets. There are always things we can look around on the edges to either sell or buy. But the Nashville is really our last large noncore asset sale.

Okay. All right. Now Frank, you -- as the slides highlighted, you've reduced your debt by around $600 million since your emergence back in 2018 and over $300 million since the start of 2020. Does debt repayment continue to remain a priority relative to other opportunities for your capital generally, and you're at 6.6x net leverage now. When do you get to that 4x leverage target?

Got it. Well, first of, you note -- as you noted, we're really pleased with the progress through the pandemic and the fact that we were able to reduce debt by $300 million last year. And that gives us confidence, given the cash flow characteristics of the company that we'll be able to hit that 4x leverage level very quickly. And certainly, based on our guidance, we expect that to be sometime next year. And as we talked about -- as Mary talked about in the presentation, debt paydown does remain a key priority for us. And the faster we get to that target, the more financial flexibility we'll have and optionality we'll have in terms of capital allocation in general.