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

Thank you, everyone, for joining us today. My name is Marlane Pereiro. I'm the high-yield cable media analyst here at Bank of America. We're very pleased to have with us today Mary Berner, CEO; and Francisco Lopez-Balboa, CFO of Cumulus Media. Thank you for joining us today.

Thanks, Marlane, and thank you all for being here. I'm going to kick off today with our investor presentation, which you should be able to access through the portal, and then we'll have a little bit of time at the end for Q&A. So assuming you're able to pull that up, let's just jump right in. Slide 2 contains the safe harbor statements. So what we should do is just go straight to Slide 3. So if you're on Slide 3, it's our hope from this presentation that you take away a couple of things. One is an 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. We hope you take away an appreciation for the upside inherent in our value creation model. Confidence in the management team is a group of consistently strong operators who will effectively optimize our value creation levers and, ultimately, clarity on why Cumulus Media is an attractive investment, particularly now. So if you move on to Slide 4, over the past several years, Cumulus has transformed from a one-dimensional radio-first model as in one product distributed one 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. And 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 that we generate from them, along with ancillary digital marketing products to tens of thousands of businesses. Slide 5. Now this slide highlights what we see as the key reasons to invest in our company, particularly now. We'll cover each in later slides, but the punchline is the Cumulus has a significant opportunity to build future shareholder value, much of which is not currently reflected in our stock price. As noted at the top of the page, our consensus stock price is nearly currently 2x above where our shares are trading today. 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 in 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. Slide 6. A core element of our audio-first strategy is our significant array of our assets and talent and brands, and you'll see a sampling of those on the right. We have a massive platform, including our local radio business, with 412 stations, #2 in the radio industry. Our Westwood One network was 7,300 affiliates, number one. Our robustly 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. And you can see throughout the slide that we have a strong and exclusive relationships with many marquee brands, both locally and nationally, like the NFL and the NCAA, for instance. Slide 7. Here is a financial snapshot, which illustrates how our execution under the multidimensional audio-first model transforms into financial performance. Our business has been recovering nicely from its COVID lows, which is reflected in our 2020 EBITDA guidance range of $175 million to $200 million. Our particular note are the continuing strong results of our digital businesses. which have collectively delivered 48% growth year-to-date through Q3, now representing 14% of total revenue. Last on the page, we've improved the financial strength and flexibility of our business despite the pandemic. We enacted over $70 million of permanent fixed cost reductions, which we will see in 2022 versus our 2019 baseline. And we continued our ongoing mission to derisk our balance sheet, and increase the optionality we have with respect to capital allocation. Since we emerged from bankruptcy, we've cut our net debt by nearly half, more than $600 million of reduction, which, on a 20 million share count, is about $30 per share of value creation. Next, I want to spend a few minutes describing our strategic transition over the past few years, which will continue going forward. So if you move to Slide 9, we depict the traditional radio model, a one-dimensional model, which relies on one type of content, radio shows created mostly using career radio DJs, distributed one way over the air and consumed through radio devices on a set schedule. For many years, this was our model. And 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 traditional -- in the traditional radio space 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, our talents and our brands across the vibrant and growing audio ecosystem to increase our audiences and our revenue. On Slide 10, to meaningfully participate in the larger audio ecosystem, we've been evolving our content creation process and expanding our distribution. In this audio-first model, we view our talent, and that includes 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. And this shift from a radio to an audio mindset has also broadened how we think about our potential talent pool. So as we look for people who've had success in connecting with audiences and 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 this 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. On to the next slide. So let's look at how this audio-first focus has worked for us to expand our audiences. Bert Weiss has hosted the bird show, a popular motor show for decades. The show was first expanded through syndication to quadruple its local broadcast reach. And then 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 into 20 different podcasts using short snippets of regular show features and daily highlights, generating 6 million downloads a month. And that's just a terrific example of how we leverage content in this new business model. In the second example, our expansion went in the 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 on Slide 12. So one of the great benefits of our historical model is that radio monetizes his audiences very efficiently, generating a lot of free cash flow in the process. We generate billions of impressions from our radio shows, which were and still are sold through about 800 sellers in local, national and network channels. However, in the traditional radio-first model, those sellers almost exclusively sold radio spots, with our revenue opportunity limited to the $14 billion total addressable broadcast radio market. On Slide 13. With the transition to our multidimensional audio-first model, we go to market with a much bigger set of products, including a greater 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. Slide 14. Here are a few examples of the clear additive nature of this audio-first model, and I won't touch on all of them, but I will point out a couple. Notably, a local financial services company who were sold on complementing their digital marketing services by with the radio campaign, doubled their year-over-year spend. And a national sports betting company, who hadn't advertised with us before, engaged with us for a multiproduct integrated audio marketing program with a substantial multimillion dollar commitment. And these are just a few illustrative examples, a few of the way 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. So next, 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. So moving to Slide 16, there's a lot of the slides, 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 the line of sight to hitting our 4x target sometimes 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 operating efficiency and continue to pay down debt to the tune of $300 million, even generating free cash flow from operations despite significant pandemic-related revenue declines. And I'll spend more time on the specific results of these efforts in the next section. But suffice it to say that we are confident that this work has positioned us well for the future. On Slide 17. On the revenue side, as I've said, the transition to an audio-first revenue strategy allows us to expand far beyond the radio advertising marketplace to a 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 412 stations. And it's priced to deliver a very high ROI compared to most other media. Our network business does the same for our 7,300 affiliates. In that case, we generally provide programming to our affiliates who pay us with spots so that we can sell national brands who's 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 listers, 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 on how to build and monetize personality-driven audio audiences. And our success of bringing new audio talent into the company through podcasts as well as using it to provide new audiences for our traditional radio stars is really 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 worked well together, lifting at ROI by an average of about 19%, but many of our clients also appreciate the ability to work with one seller who can meet most of their media needs. On Slide 18. On the expense side, we are aggressive about improving our operating leverage and financial efficiency. In the height of 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 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 leverage to below 4x as EBITDA quickly recovers. Slide 19. We've also been active in executing value-enhancing partnerships and M&A transactions that benefit from or improve our audio-first positioning. In aggregate, we've completed more than $500 million of accretive partnerships of acquisitions, swaps and divestitures to drive shareholder value. And moving to our recent performance on Slide 20, our strong Q3 results reflected our continued upward trajectory out of the pandemic as we posted revenue growth of more than 20%, led by our digital business, which grew close to 70%. On our balance sheet and cash flow, we generated $13 million in cash from operations, and we ended the quarter with $153 million of cash and $249 million of liquidity. We also received forgiveness on some PPP loans that we took out earlier in the year. Pro forma for this, our net leverage is now actually below 5x. So now let's look ahead on how we think about our value creation model. On Slide 22, this page is an 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, improve 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. On Slide 23. Today, as we continue to evolve from the -- into the audio-first model, trajectory of traditional radio remains a primary factor. As such, barring any significant setbacks from the new Omicron variant, 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 prepandemic levels. And we expect this listenership recovery to drive additional revenue recovery in our high-margin radio business. Another way to look at this is by radio industry category spending to date. While some categories are exceeding 2019, many categories remained substantially below 2019 because they're still experiencing the knock-on effects from the pandemic. As these factors correct, recapturing even a portion of what was lost represents a significant revenue opportunity. Additionally, we see significant new opportunities in categories like sports betting, where, in the last few months alone, we've added business with 8 new operators in 8 new markets. Second, on Slide 24, our adoption of an audio-first strategy and the addition of digital services drives 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 that they can produce. In the streaming market, we reach listeners to consume digitally through earbuds and headphones and increasingly through smart speakers, which have 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 we can use to satisfy client needs. Podcasting is a fast-growing digital format, which is in high demand by national advertisers. And 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 to around 5% to 10% a year. The third on Slide 25, it is in our DNA to be relentless cost cutters. While we've recently increased our fixed cost guidance -- 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, on Slide 26, M&A represents a key lever in which we can use to derive 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 and partnerships that fuel digital growth. And finally, on Slide 27. Our free cash flow profile and our balance sheet are huge assets for us. Although not seen on the page, our third quarter net leverage came in under 5x pro forma for the PPP loan forgiveness that we recently received. 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 we move to Q&A, I just want to take you back to our investment highlights on Slide 29. Just why Cumulus Media, especially the opportunity to invest now? We believe that our multidimensional audio-first model is strategically compelling, leveraging our strengths in an attractive and fast-growing audio market, not to mention the fact that radio is particularly well 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, an experienced and engaged board and a highly focused, aggressive, results-oriented leadership group to execute our plan. And finally, we believe the market has not yet given us credit for the value that we have and will continue to create. And thus, the entry point is very attractive. Thanks for joining us and taking the time to hear the story. And Marlane, we are happy to jump into Q&A now.

Great. Thank you very much, Mary, for that very comprehensive discussion. Just starting with podcast, obviously, it's very topical. It seems everybody has podcast content right now. So where do you see the industry going from here? And how do you differentiate your content and take share?

Yes, that's a great question. We're really excited about the podcasting space. As you saw in the investor presentation, the market backdrop is growing. So that's a great tailwind for us. And podcasting itself, as I said, is a natural match for us given our legacy radio expertise in how to build and monetize personality and particularly personality-driven audio audiences. Our podcasting business, in particular, for that, we leverage our sales execution and marketing capabilities, and our strong relationships with national advertisers and agencies to monetize and grow the podcast of both our content partners as well as the homegrown podcast that we've seeded throughout our owned and operated radio system. As for differentiation, we're also one of the only podcast businesses that can partner with talent to cross them into radio broadcast syndication. And we have 2 very successful and high-profile examples doing that in the news talk space. The first is Ben Shapiro, whom I mentioned, and most recently, Dan Bongino. And then Dan Bongino's show was the most successful new launch in radio syndication ever. So we think we have some strong differentiations, one on the sales execution and ability -- second, I have the ability to syndicate and cross over our talent into radio. So -- and I'd say, again, something I'd say that is a differentiator. We've grown it profitably to date, and we expect it will continue to grow going forward.

Great. And then moving on to ad trends. Can you discuss what you're seeing in the larger versus smaller market?

I will talk about that, Mary, if that's okay.

Okay.

So there are several ways to look at this, and I'll give you a couple of different views. So when you think about our network revenue, it's basically 100% national and our station group revenue is really mostly local. So when you blend it all together, -- and it moves around based on the seasonality, but a little bit more than half of our revenues are local, a little bit less than half our revenues are national. Now earlier on the pandemic, there's a big disparity in the performance between the larger denser markets and the smaller ones, and that's not a surprise to anyone. Bigger markets were more impacted by shutdowns, greater disruption to listenership and generally had a higher percentage of their business driven by agencies. And as you know, advertisers is more sensitive to the rating. So we often see more direct fluctuates in the ratings. Having said that, more recently, the performance has been pretty comparable between the larger and smaller markets as a result of different trends driving each segment. Now talking a little bit about the lagging categories, we've all talked about and you've heard lagging categories like auto retailing customers. That makes up a greater percentage of our revenue in the smaller markets, and they're feeling a decline in those categories more. On the other hand, we have categories Mary talked about like sports betting, which have been strong, and that's been great for the business. So ultimately, we've managed these differences in the way we go to market to optimize our opportunity, not at the larger or the smaller markets, but overall, it's something that we have the scale, and we manage around it.