iHeartMedia, Inc. (IHRT) Earnings Call Transcript & Summary

All right. Good afternoon. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. We're excited to welcome back to the conference, iHeartMedia. I think it's been a couple of years, but we've got Richard Bressler, who is the President, COO and CFO, back with us. Rich, thanks for being here.

Thanks, Ben, especially -- really appreciate being here.

Given the wild and Willy Week, thank you for making the trip.

I want to talk to you about all the exciting things happening at iHeart and where you're focused, but let's just maybe start with the topic of the day, which is around coronavirus and volatility in the markets, et cetera, et cetera. How, if at all, might this impact or is impacting iHeartMedia?

Well, first of all, thanks, and thanks, everybody, for that hung in there and see with everything going on. In terms of -- from an iHeart standpoint, no comment overall on what it does to the market. But from our standpoint, in advertising -- and just as a reminder, all of our advertising, a little over $3.8 billion of advertising revenue is U.S.-based. So we don't -- really don't have any direct exposure outside the U.S. And as -- and again, not to sound -- I don't want to sound pollyannish or anything, but as we stand here, we sit here as of right now, we've really seen that -- really we've seen no effect overall on our business. No effect from an advertiser standpoint. Clearly, there are certain little pieces of our business, whether they're in hotels or cruise lines, but that's an insignificant piece of our overall business. And the good news from iHeart's standpoint is there's no advertiser, just to make the point, that's more than 2% of our overall revenues. There are no categories that is significantly bigger than others. So we're pretty evenly distributed, whether you take telecommunications, whether you take autos, whether you take quick-service restaurants, whether you take consumer product companies. So we got a great diversity of revenue base. And on the -- from a positive standpoint, we do, do a significant number of PSAs, public service announcements. And this is where I think we're uniquely qualified, and have been, to get the message out in terms of health. And that's typically what we've done during periods which is very important to us, which is why I mentioned it, during periods of times of any natural disasters and what we're dealing with right now with the virus.

Great. You reported last week you guys had a nice 2019, public company, 4% top line growth ex political. What's -- give us the sort of steady-state for the radio industry and the audio industry and why you guys are growing and taking share.

So well, one is happy to have that team behind us, quite frankly. It was an interesting year being in restructuring from part of the years and now as a stand-alone public company, just able to look forward and not looking in rearview mirror. It's interesting. If you look at audio today, and I said this in a couple of small meetings that we had day earlier, and the term I always use is that we have -- if you went back 3 or 6 months ago, we kind of had a breeze behind our back. And now I'd say that breeze is picking up a little bit and developing, I think, a little bit more into a tailwind behind our back. And if you just take a step back for a second, from a consumer standpoint, the medium is never lost. It's relevant. So if you go back whether it's the early 1970s or any decade since then, if you come to today and the 275 million people we reach on a monthly basis, on average, people listen to us 31 minutes a day. That compares, to put that in context, to Google, which is 24, 25 minutes a day; Facebook, which is 17 minutes a day; the networks, I don't even know what they're at right now, let's say, 9, 10, 11 minutes a day, but that relevancy has been there, which started to manifest itself in the numbers that you talked about, as we left '19 and even as we're looking forward to 2020 and we also gave guidance for 2020, is really what's happening from an advertiser -- the advertising world standpoint. And even with the success that we've had, there are really 3 reasons in my mind that we've become top of mind again for advertisers, one that I'm sure we'll talk a lot about today, which is podcasting. We have 60,000 advertisers. Whether you're one of my biggest advertisers or the local pizza shop or car dealer, everybody wants to talk about podcasting. Everybody wants a podcasting. And we'll talk about why we're #1 in podcasting. The second thing is smart speakers. Think about smart speakers. Smart speakers has really brought AM/FM radio back into the home and whether it's a clock radio in the kitchen, in the bathroom, in the living room, back into the home. And the third piece is really the changing landscape and the decline in linear television, which happened because of the streaming services with the current ones that are on the marketplace and, quite frankly, obviously with the new ones coming onboard. And it's not just the absolute number. The audiences that's left on the streaming services are dramatically less desirable to advertisers. So I think it's really the 3 of those pieces that have raised the audio conversation, quite frankly, to the top of the house. And then you look at iHeart specifically within that context, and one is just our capabilities are just so much dramatically advanced than if I was sitting here a year ago -- as Ben said, it's been a couple of years -- not couldn't -- not only would we not be able to talk about podcasting, we have things like SmartAudio now where you have one to an informed many data set. We have the ability -- we bought a company, you may remember, during our restructuring period called Jelli, which makes our broadcast inventory look like digital inventory so advertisers can do triggers, weather triggers, automated buying and selling, automated reporting out there. And so again, we've got this multi-platform approach that really -- I don't care what platform you come in on. You can come in on a digital platform or a podcasting platform, a broadcast platform, a network platform. However you want to come in, we now have the capabilities not just to take market share from the traditional players, as Ben said, which we continue to do in the audio space. I think we outperformed other traditional broadcast advertisers by over 300 basis points in 2020 and over 200 basis points per year in the last 10 years. And we continue to outperform and, quite frankly, I continue to significantly outperform. But now we can start going after or start go after the $100 billion digital budget that's out there. And everything we're seeing, by the way, on podcasting is that the listening is coming from video. It's not coming from the audio side. All the evidence points to the fact that it's coming from video. So I think all these proof points, Ben, as recognition about following the consumer, our listening's at an all-time high and the effectiveness of the medium has led to the results you saw in '19 and, quite frankly, the projections or our guidance for 2020, which builds on that from '19.

That's helpful, Rich. I want to talk about all those things you just laid out in more detail. One of the things you guys talked about on your call last week, which was new information for all of us on the Street, was your plan to sort of modernize iHeart. And you talked about the fact that you were in restructuring, and it's nice to have that behind you. But you're spending, I think, about $100 million. What are you planning to get out of that? And how should we think about sort of the strategic drivers behind this modernization? What does it mean?

Well, it's interesting. And again, this hoping -- just looking forward with one objective. And we have said that we have 3 objectives, which is to drive the stock price, drive the stock price, drive the stock price, quite frankly, and create shareholder value. And one of those responsibilities is to take a look at the company and say, okay, if you've built iHeart today -- I mean, simply, this is the way Bob and I started the conversation a few months ago -- if you build it today, all the investments we've made over the last years, hundreds of millions of dollars in technology, in the systems in the company, things like artificial intelligence, how would you improve not just the back office operations, but how do you bring a better listener experience to your consumers, how do you bring a more efficient process to your advertisers? And really, that's what the modernization that we talked about on the call. And by the way, just to frame the numbers standpoint, we said that we would invest approximately $100 million this year, which will be substantially all the investments in the modernization efforts. We talked about that by the middle of 2021, we reach $100 million a year of run rate savings. We expect to capture about $50 million in this year. And by the way, the only reason it has a little bit of a longer tail is because when I go through maybe one example, you understand is -- because part of this is like shrinking our real estate footprint overall in addition to what you'd expect on severance costs. And sometimes it just takes some time to work through the leases. But I give you maybe example that all of you could probably picture and visualize in your mind. If you walked into a radio station today that was built in the last 6 months, 8 months or reconfigured during that period of time and if you walked to -- into a control room, we'd be maybe even like half the size of this stage. People that have a couple of laptops out there, the engineers, the programming engineers, the information is now stored up in the cloud. So you've got somebody sitting in front of you with like 2 MacBooks or 2 ThinkPads. The talent is around the rest of the table, and that's the radio station. And everything else is stored in the cloud. If you go back 3 or 4 years -- and by the way, still many of our radio stations have today -- because it's going to take a number of years to bring everybody up to date. But if you go into a radio station that was done 3 or 4 years ago or 2.5 years ago, you'd walk into room maybe twice the size of this stage. There'd be wires all over the place, racks all over the place, communications equipment in the walls. That was building out a radio station back then, and that's how quickly things have changed. And quite frankly -- so that's kind of structure side. And again, you get the benefit of shrinking your overall real estate footprint. And then you really -- you look at the next step and it's things like how do you take advantage of artificial intelligence. I think many view this, we would probably be pleasantly surprised about the ability now to predict or watch what consumers are doing, when do they tune in to when people are talking about. So whether it's Ryan Seacrest or Bobby Bones or Elvis, you have the ability to now see when are they tuning in, when are they tuning out. This is all done based on artificial intelligence technology. How many times should you spin a record, play a record? Depending on where it is. How well -- should you be spinning it more? Should you be spinning it less? And doing all those song configurations is so -- aided by technology. So what that then leads to is the program directors and people on the ground, they can spend so much more time on the magic because remember, all this is math and magic, and there's still a magic part to this. So as opposed to like writing down and logging things in and doing everything manually, so much now could be computer-generated. And by the way, it gives you the ability to have a better product for your listeners. It gives the program directors that are the stars of our company the ability to leverage them because then they can program more than one station. But at the same point in time, from a listener standpoint, and I'll give you one more example and we can move on, it sounds like the product is right there. It sounds like the product is local. Most people don't -- or many of you may or may not realize this, Ryan Seacrest, whose ratings have never been higher, he's never been hotter, all the research, the absolute rates and the research point to that, he does the bulk of his radio shows when he finishes the TV show in New York City. His ensemble cast happens to be in L.A. So if you walk into Ryan's studio in New York or the ensemble cast in L.A., 2 people are with him, it is -- you feel like you're in the same place with the video screens and the conversation. It's funny. I recently had Jack Brennan (sic) [ Jake Brennan ], who's a podcast of some note, does Disgraceland, who was going on Ryan's show in the morning in KIIS LA, and walked into the LA studio and he'd been listening to today -- he didn't realize that Ryan was in New York. And he said as a guest sitting there, you don't realize it. And think about it, it's no different than years ago, for anywhere in this room that's old enough, that it mattered about making a long distance telephone call, like distance mattered. It costs more, so what's the difference? Today, it doesn't matter where you make that long distance telephone call from. It's the same. So again, this is the responsibility Bob and I had as stewards of everybody's capital is to challenge ourselves. And we mentioned this and we talked about the numbers and the savings and the in-year savings and the benefits and the efficiency, but that's our job is everyday to think about this company, okay, how do you allocate capital as if this company was started today.

And it sounds like you think you can keep sort of that local and companionship element of radio that you and Bob talk about all the time while centralizing and capturing these efficiencies.

Yes. Yes, absolutely. That -- at our core, as -- at our core, when people ask me to define iHeart in one word, is we're companionship. We're your best friend sitting next to you in the car, and that does not change. Actually, quite frankly, it gets enhanced in terms of the quality of the product we bring to the listener. And I talked about from an engineering standpoint, but quite frankly, also from our talent standpoint, it gets in. We get to take our best talent, our best local talent and get to bring them to more and different communities that are out there. And also, our local program directors, because of all the technology I talked about, they could spend more time really focused on what's unique to their market. So they can bring -- like spend more time on local news, what's happening in the market and make the product more local and beneficial on a local basis to the local listeners and more part of the community than they could before. That's absolutely critical.

Okay. Why don't we talk about your digital business? And obviously, that includes podcast. I think you guys put up 30-ish-percent-plus, good growth in the fourth quarter. And even though you've lapped the Stuff acquisition, it's still growing 20-plus. So it's a great story. We talked about podcast today with Spotify, Monday with SiriusXM and we had your friend Greg Maffei up here talking podcasts earlier this afternoon. What's the iHeart strategy around podcasting? And how do you see the growth playing out over the course of the next couple of years for you?

Sure. So just a couple of things, but first of all, and Ben, it was great complementary on our growth in digital. Just so we had over 30% revenue growth every public quarter last year, so it wasn't just the fourth quarter, for the 3 quarters that we reported. And we gave guidance...

Wasn't trying to shortchange you. I promise.

We gave guidance. I just want to prove I was listening. In 2020, that'll be 20% revenue growth. And also just to set the context, I always find it interesting when other companies talk about aspirationally becoming profitable in the podcasting space. Again, we are significantly popular in podcasting and have been for some period of time. When you look at the total revenue number and of -- over $3.8 billion of revenue and well over $1 billion of EBITDA that we've talked about, it's not significant in the absolute sense. But it is growing more significant, and the growth rates are very, very significant on both the podcasting revenue and the podcasting profitability side. And look, I think just a couple of things as background, which leads to why it's no mistake of -- about the importance of podcasting to us and our growth, maybe the first question is why did we get into podcasting, which I think it really starts. We got into podcasting because that's where our listeners were. We're in the business of following our consumers, follow our listeners and are very big believers, Bob and myself, that if you follow the listener, if you get enough audience out there, you get enough engagement, the money will follow. And I think we've seen that in many of our lines of business, and we're seeing that in podcasting. We didn't get into it to reduce our overall cost of goods sold and we didn't get into it for any other reason. Interesting about the podcasting space and the other companies you mentioned, when we bought StuffWorks almost a couple of years ago now, 1.5 years ago, and this is all on public -- out there in the public, we paid $55 million for StuffWorks. And I think the important thing about that -- and we made 2 acquisitions. Jelli was the other one that I referred to earlier. But the important thing about that is we had asset base that made the rest of the asset base more valuable. And what we really focused on in that point, as we follow our consumers, we understood that the most important thing is creating awareness for podcast. And that's why we've had this unique position. We're, by far, the #1 podcaster -- commercially available podcast in the world. NPR -- we're probably 4x bigger than anybody else. NPR is the other big podcaster out there and -- on the nonprofit side. And if you see the 2 things we both have in common is that you could have the greatest podcast in the world, but if you don't have the platform to promote it, the platform to drive people to it, the platform to create the conversation because, honestly, what makes a great podcast? In all due respect to Morgan Stanley or to Ben or to me, it's not because one of our companies say it's a great podcast. It's because all of us are talking about it. It's about the conversation. So we have that ability to kind of create the conversation around podcasting. And look, I think the proof point is, I think, Spotify has spent over $600 million on all the podcasting apps that they've made in the last period of time. And if you look at Podtrac, which, for those of you not familiar with Podtrac, is the Nielsen measurement for podcasting, they're not even in the 15 -- top 15 in terms of Podtrac out there. And for us, we probably took over $100 million of our broadcast inventory last year and allocate it to promote the podcast, to promote the awareness of those podcasts. We had this -- what I referred to earlier, Jake Brennan. StuffWorks had a podcast. They had one before we got there called Disgraceland that was doing about 200,000 downloads a month. Then they come on the iHeart platform, same podcast, same kind of content, same focus and they did 2 million downloads a month. And then the last thing I'll say about -- one last thing about podcasting from a value standpoint and we put it in -- and again, I know our digital revenue line, which frustrates people that we don't break it out and we've heard that, we keep trying to give metrics to just think about how the value of our podcasting business. I think Spotify, as they've talked about acquisitions, has talked about $6 to $6-plus per download on acquisitions out there. If you think about in terms of what they're working on or what they paid, we had 177 million downloads last month, 1 month long, over 20 million unique visitors. So if you take any kind of math on 177 million downloads times 6 in terms of the value that we're creating for our stakeholders in podcasting, I think we're on the right track.

Yes. They extended The Ron Burgundy Podcast iHeartMedia.

Yes. Well, Ron Burgundy -- well, it's interesting. You bring a very interesting point. Will Ferrell, who does Ron Burgundy with us which was one of the top 2 or 3 podcasts last year in the United States, we just signed a deal with Will actually to do a comedy channel with us. And I think from a talent standpoint, because I do get the question often about talent costs or rising talent costs, think about the number of people like Will Ferrell, like Shonda Rhimes -- and for those of you who don't know Shonda Rhimes, well, she's probably the most prolific television producer in the last 20 years. She signed with Netflix recently.

I think -- I hope everybody here knows who she is. [indiscernible] have been wrong.

Yes. I hope -- so everybody do the preamble. But the only place for an advertiser to get her now is on iHeart since she went behind the paywall for Netflix. But I think that's an important point just to make is if you look at everybody that turned down, going behind a paywall with substantial minimum guarantees to come on iHeart, to ensure the highest probability of success and to share some of them on advertising revenue side, I think that says a lot about our medium and the creative community's belief in our medium.

Yes. Just sticking on podcast, though, Rich, I mean, if we go from Sirius on Monday and Greg and Spotify and yourself, I don't know, is it debate on the popularity of podcast and the engagement? There is a debate on monetization.

Right.

So how would you describe the state of monetization on your podcasts? Are you monetizing them fully in your view? And what are you doing to try to make sure you capture all the revenue opportunity tied to all this engagement?

So we're clearly not ad monetizing them fully. Just a second of background, podcasting used to be pretty much a DR business, a direct response advertising business. We're kind of, quite frankly, defining the market now, making it much more of a mainstream advertising business. What Ben just talked about, I'll give you Ron Burgundy. We have Procter & Gamble, who will be our -- was our largest advertiser last year. They came in with Charmin commercials with Ron Burgundy. We just did a big top podcast with T-Mobile in terms of talking about 5G and why consumers should be happy about 5G coming to the market. So our monetization strategy, there's a couple of different prongs to it and why I said we're not even close to being fully where we need be on monetization. One is just the straight-up podcast. We go to advertisers. We sell them podcast, whether they are existing advertisers as part of our multi-platform strategy or, quite frankly, new advertisers that podcasting is bringing to the audio medium. And when we talk about people like Pandora and Spotify, it's great that they talk about podcasting, talk about audio. I love the attentions it bring overall to the audio medium. But on the monetization question, we have one is just the straight-up piece of the advertising revenues I've talked about. And two is we do something that no one else could do called podcast-to-broadcast. So we can take the best of a podcast, take 15 seconds, 30 seconds, 45 seconds and make it a branded radio spot. And then you create podcast at scale because then you distribute it over all of our broadcast radio assets. And when you think about and model out the revenue opportunities, think about them twofold. Just look at the overall podcasting industry, which people are talking about going from $400 million or $500 million of North American ad revenue in 2019 to $800 million to $1 billion next year, $2 billion for the year after that, whatever numbers are, it's big. So we're going to participate in that. And the other -- the second way we get to take a bite out of the apple is if you look historically, we get 20-plus percent of broadcast revenue, broadcast radio revenue. We are nowhere near getting our fair share. So we're making up for it as more mainstream advertisers come in, but we'll continue to get a fair share of podcasting advertising revenue. So that's why we're so optimistic from a value creation standpoint. And by the way, last piece I would say, it is accretive to our overall margins, just to make sure everybody is clear. So if you look at the overall margins of the company and we gave guidance of 28% to 29% in 2020, podcasting is accretive.

Great. I want to turn now to another topic. And then if there are any questions in the audience, please raise your hand and wait for a microphone so the webcast can pick you up. Obviously, yesterday was Super Tuesday. It's a political year. What are you guys doing to make sure you maximize the opportunity in 2020?

Well, a couple of things about political. First, just to remind everybody, and it is baked into our guidance, political is not instead of. It's kind of the same inventory. Some things on the fringe, it's additive. But what it does for the most part, it just tightens up the advertising market. As you all know, it tightens up our inventory, which just creates more value for all our inventory and the rest of that inventory. One of the things that we've done going into this political year and one of the capabilities, more importantly, that we have this year that we didn't have in prior years and prior years' campaigns is SmartAudio. And as a reminder, again, that is our ability to target one to an informed many as opposed to what we had before, which we didn't have that capability in prior election years. So the ability to compete with the big digital players on one to an informed many is absolutely critical. And so we're looking to capture that dollars working with the campaign. And everything that I'm seeing this year -- in the previous years, in the off-year election 2018, in the presidential election in 2016, we did a little over $100 million in revenue in each of those years. Everything -- even as of today and the changing landscape, I think it's going to be a very good political year. And also, we benefit, as a reminder, on the line that we call media and audio services, that contains Cats. And just a reminder for the audience, Cats is where we represent the entire radio industry and actually Spotify for national ad sales, but we also have a television component to that in the web business. So that's why you sometimes get some spikes in those numbers. And again, so we benefit from everything we're talking about, also on Cats. And then I think finally, there's just been what we opened this with, the recognition that audio plays in people's habits. And it plays it across every single demographic and all the campaigns. I mean everybody's been talking the last couple of days about the African-American community, and we've got the biggest loudspeaker out in the African-American community. And we have Charlamagne and The Breakfast Club, which is a must-stop for all the Democratic candidates. They're the biggest African-American audio show in the country. And then we've got a number like Big Boy in the West Coast, too.

And does politicals always been very much a local TV buy? I mean, given the viewership trends in television, do you think it's moving money over to radio?

Yes. No, I do. I do. Look, I think it's still primarily TV, just to be clear. TV is the primary beneficiary of political, and that won't change. But again, with our financial characteristics and numbers, a lot doesn't have to move over for us to get a big benefit out there.

Okay. I've got a couple more questions, but why don't we see if there's any in the audience for Rich. Maybe, Rich, just to wrap up, the last topic I want to ask you on free cash flow and the balance sheet. So you guys have talked about getting your leverage down to the mid-4s by the end of this year. Why is that the right level of leverage? And sort of where do you guys go from there? Because the company is obviously highly cash-generative.

Yes. So thank you for that. We've talked about driving the company of about 4x leverage as our overall target. As Ben said, we talked about getting well into the 4s by the end of this year and to getting -- to achieving our target by the second half of 2021. We're still very comfortable with that. Really, the target, it's really listening a lot to, quite frankly, all of you and a big part of our equity investors, our current equity investors and talking to potential equity investors and people's comfort level with what the right capital structure looks like and what the right debt-to-equity leverage is out there. Again, we generate significant amount of free cash flow as we talked about. And so it's not a question of having enough money on hand, but it's getting to that right overall target. And it should -- the second piece, I would say, just to cover for 2020, I think we've got 2 significant event, which hopefully will continue to create more liquidity in the stock. I mean obviously we've given guidance. We need to continue to hit our numbers, and we know that, as we did in the last 3 quarters of last year; when we were a public company, the 4 or 5 quarters before that; when we were in the restructuring proceeds when we had numbers on file. So we've got a couple of years of hitting numbers out there. So I think getting us -- fulfilling that, getting us into the 4s, hopefully, will expand our buyer base. And then the second piece out there is our petition, which we went through significant milestone that I talked about in the earnings call, to get the ability for people of the warrant holders, which is the bulk of where our equity is held right now, the ability to convert into voting shares, the Class A voting shares. And we could talk more about that. But those 2 events out there, I think, will be great liquidity enhancers for the stock this year.

And would consolidation of more stations be additive to your business as you think longer term of that use of capital or maybe more acquisitions in the digital space?

I don't see -- when you reach 91% of Americans for 31 minutes every single day, we're reaching everybody basically. We have the biggest megaphone. So I don't see any benefit in terms of us -- in terms of having more reach out there. I think it's instructive to look at the StuffWorks and the Jelli acquisition that I touched upon earlier. Those 2 acquisitions combined -- that we did 1.5 years ago, combined are a little over $100 million, maybe like $110 million. And when we talk about the future of our company, Ben, and as you raised, we're talking about podcasting, we're talking about digital capabilities, $110 million of combined lifted the rest of our asset base. And so that's why I say substantial free cash flow goes to pay down debt. Could there be something like small that enhances the rest of our asset base, that gives an improved experience to our advertisers? We're always on the look out for that.

Okay. Well, we're out of time. Rich, thank you so much for being here.

Yes, I appreciate it. Thanks, everybody, thank you for the support.

Thanks, everybody.