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

Hello. Good morning. Thank you for joining us again. We're thrilled to be here with iHeart management. We are joined by Bob Pittman, CEO of iHeartMedia; and Rich Bressler, COO and CFO. Good morning, Bob and Rich.

How are you?

Great. So after doing a direct listing on the NASDAQ in July of last year, the business was actually on a healthy pace to generate substantial EBITDA and free cash flow. Then as we all know, in mid-March, we were hit by COVID, which meaningfully impacted the U.S. economy. So -- whereas trends were improving significantly pre-COVID. We've all kind of had to pull back. How are you thinking about the long-term trajectory of iHeart from here? Is it any different than -- was it any different than pre-COVID? And what do you think -- I just -- I guess, what are the biggest opportunities and the rest from here over the next, let's say, 3 years or so?

Thanks, Jessica. And I think we probably -- before I get to the trends -- Rich and I get to the trends, I want to hit just a second about sort of what we are seeing. And you're right, the momentum was strong, and we saw increasing momentum sort of quarter to quarter to quarter. When COVID hit, it was sort of a tale of 2 cities. We did not see the impact, and usage, just a matter of fact, in some areas, actually increased usage. Over this period of time, the big impact was revenue, and we did see a significant falloff in revenue. And I think it's instructive to just look quickly at sort of where we did see the impact because I think it has some important information about what we think will happen going forward. Our biggest revenue line is broadcast radio, and that was hurt the most. We think some of that is because broadcast radio is primarily short-term contracts. So as advertisers needed to find money, this was the easiest place to find it. As you know the business well, much of TV is long-term contracts, and I think, as a result, they were hit less. As a matter of fact, when we look at our networks line, which does have more long-term contracts, that was significantly better than our broadcast line. And again, we think, because it's basically the same inventory, it's a broadcast radio inventory that, that primarily has to do like TV with longer-term contracts. Digital is affected, but affected much less. Again, I think that's an indication of the power of digital as an important revenue stream. Podcasting, you wouldn't know there was anything going on in the marketplace, continuing to grow like a weed. Strong growth rate in both usage and revenue. You know about events. Events were pulled back on. Now we were able to invent a virtual events and help mitigate some of that loss, especially on the bottom line with virtual events, obviously, having a much better margin than the physical events where we sell tickets. Political, like podcasting, appears really unaffected by the downturn. Very encouraged by those numbers. And SmartAudio did better than broadcast radio, although we're primarily using the same inventory. Again, I think that's an indication we're asking about the future of the importance of having an electronic platform and the table stakes that data has become. And I think over time, we're going to see that become more and more important. A very small piece, which we're beginning to plant this year, has been our self-service advertising, our AdBuilder platform, and it's still really too early to have an impact there. So as we look at the revenue, and as you pointed out, it is recovering. Yet unknown is the slope of that recovery curve, but we're watching it closely. And I think also the other thing which we did want to point out is that, obviously, this is an opportunity and a necessity for us to really address cost. And I don't know, Rich, if you want to spend a second on that, and then we'll get into what lessons we think this has taught us, and what opportunities we have going forward.

Sure. Thanks, Bob, and good morning, everybody. Just one other I might just want to add to what Bob said on the revenue streams, the interesting [indiscernible] we're going to go deeper on podcasting, but just at the top level, it's also interesting how podcasting now has kind of become mainstream news, and we'll talk more about iHeart and podcasting in a few minutes, Jess. On the cost side, there's really been -- and again, I won't go too detailed now because I'm sure we'll come through the more detail, but there has really been some positive implications, both in terms of the dramatic steps we took right upfront, but those implications are going to be lasting throughout the company. And again, like many companies in America, but our employees are going to be and are becoming more efficient. We are going to be more self-sufficient and more efficient. We're going to wind up -- as we talked about furloughs and ultimately taking more costs out of the company, we wind up really with the best performers leading the company. And then you look at things like real estate, like a lot of -- like all of our own experiences. You look at things like travel and entertainment, and we're going to see dramatic reduction in each of those. So you have the other benefit of dramatically reduced cost base, more efficient employees and really having your best performance even rise to the top more is a benefit that will last well beyond 2020.

So we'll get into all of the details and all of the topics that Bob laid out in a second. But just as you mentioned, there seems to be a dislocation between listening trends and revenue for now. And at the same time, you have all these new competitors coming in and going right after the radio pool. Can you address that, like what can you do about the -- is there anything you could do to close the gap between listening and how -- just everybody talks about radio, advertising as their target. You guys are a dominant company, what are you doing to defend yourselves?

I think the first thing you do is -- defend yourself is you make sure that the listeners are with us because we can all talk about how we want to add revenue while we want to. Eventually, the ad revenue does catch up. You've followed it in the cable networks days, I was there with you. It does eventually find it. Now I think what's incumbent upon us, as a radio company, is we do have all this listenership, and we have a tremendous listening advantage over everybody else in audio or anybody else who says they want a piece of our pie. But what's incumbent upon us is actually to sell the advertising in a way that the marketplace wants to buy it. That's increasingly electronic platforms, data infused. And yes, we instead of just dealing with radio buyers that are at the end of the food chain in terms of giving us the money, we have to go way upstream and be talking to clients about big ideas. And if you look at this company over the past few years, sort of the hallmark of our revenue growth has been that relationship with big clients and doing big marketing plans with them and being the go-to partner for it. So I would say, it's really sort of a barbell. On one end, on sort of just the -- we are selling inventory, people need impressions. That is going electronic. And we've built out, I think, our SmartAudio platform. And again, you saw in the numbers we reported that our SmartAudio performed better than broadcast overall. I think you get an indication of that's where it's going. And the second -- and so we're moving that direction, and we need to put data in there and talk about audiences they want to talk about, not just Nielsen audiences. On the other side of the barbell is that we need to be a marketing partner, and clients are increasingly looking for a more limited number of what used to be vendors that are now calling partners to help them in the marketing needs. And we've turned into one of those go-to marketing partners. And I mean, we've got a long list of the programs we've built for clients that really start with, they've got a need, and we'll figure out a solution for them. That tends to be higher CPM business, tends to be high share. They're not giving it among the radio or audio people, they're giving it to this company regardless of whether an audio, video or anything else. And I think we've built out organizations, and we're seeing our success come in those areas. And if I project out the future, I think that's the way it's going, and I think as long as we keep our audience growing the way it is and keep it this kind of incredible reach we've got and engagement. Remember, we've got more engagement, more usage per day than Facebook and Google do, who are the next 2 largest media companies in terms of reach in the United States. So we've got some nice advantages. We just have to make sure we make it easy for advertisers to use it, and that we play on the platform they're playing on. The final thing I would say is that the agencies, if you look at it, and you know that from your coverage, Jessica, are beginning to look at unified media planning and buying, meaning instead of all the different sectors, radio, audio, TV, digital being in different silos, they're trying to combine it into one platform. When they do that, it will be a tremendous advantage for us because on the -- on a common language basis, CPMs and impressions, radio has a huge value advantage. If we look at just TV, radio and TV deliver about the same impact at the same weight level, yet radio is 1/3 the CPM of TV. And I think if that's put side-by-side on a unified buying and planning platform, we'll see that as a tremendous benefit for radio as a whole, and given our position in radio and advantage for us in addition to the multi platforms we're using.

It's great to hear that you're still as innovative as you've always been, but let's cut [indiscernible] here and now. What are you seeing in terms of like advertiser mood and behavior? We're kind of in the back-to-school season, not some live, some virtual. But are there categories that are strong? Companies can change messages very quickly in radio, quicker than any other meeting, really. So what are you -- or almost any medium. So what are you seeing today?

Yes, let me start, and I'll let Rich dig in. I think -- and what we're seeing is every city is recovering at a little different rate. Every industry is recovering at a little different rate. Having owned radio stations at 160 markets in the United States turns out to be a strong advantage for us because we can deal with a national advertiser, but deal with what they need in each city they're in, and I think that turns out to be a major advantage for us. And I think it's, again, a little different by different categories, and again, by the products that we have. One of the important things, I think, which we can't lose sight of is that in every downturn, advertisers open their minds to -- in good times, they don't want to rock the boat. In bad times, they say, okay, I'll try some of that new stuff. Coming out of the downturn in the dot.com bust at the beginning of 2001, we saw search come out of that as a major opportunity. In '08, '09, social came out of that. And it's very clear what's coming out of this right now is podcasting. It's the darling right now. It's the thing people are looking to try. So even though they're -- advertisers are recovering at different rates, they're all interested in things for the future. And I think one of the important things for the future is podcasting. Rich, do you want to jump in?

Yes. Yes. Let me just add a little bit to that, Bob. And just -- I think what's really interesting here and what plays into our hand strength is not just what Bob talked about the country recovering at different levels and different speed, and we're clearly well positioned with that in our 150-plus markets. But also, our friend, Michael Kassan did a report, I don't know, about a month ago, 1.5 months ago, and talked about the most important thing you need to have in this environment is flexibility. Agility, flexibility, advertisers changing schedule. Clearly, in terms of the pace of change, people are booking more last-minute, booking closer to the airing date than they've ever done before. And again, with our ability of owning our 850 radio stations, we can turn copy in a matter of hours and have somebody on air. And the second thing that advertisers are looking for, and I think we evidenced this, is products, unique products that they can't get anywhere else. And I'm sure we'll talk a little more about this in a couple of minutes in detail, but something like Black Information Network that we launched a couple of months ago, something like The Black Effect, our podcasting network that we announced yesterday in partnership with Charlamagne. That's something that only we could bring to the market, and we've seen great receptivity, just as examples, from the advertising community, but our ability to create products do good and which is also good for business. So the combination of both of those.

Right. We will get into all of that. But before we do -- before we leave advertising, one last question. What are you seeing in terms of political? The elections are less than 2 months away. How big will it be?

We're seeing real strength in political. We're seeing growth in political. As I think we mentioned before, and -- so it like podcasting is the -- other revenue line that seems to be completely unaffected by this downturn.

Right.

Yes. I mean, Bob and Jess, everything -- if you go back to '16, '18, where we did about $100 million each year as a total company on political revenue, we have -- at this point, we don't see anything. I would say, this will not be -- without making a prediction about this year, this will not be a very good political year for us. Everything we're seeing is pointing positive.

Right. So let's move on first to cost, and then we'll get into podcasting and other areas of the business. You've taken about -- or you said you expect to take out about $250 million in cost in 2020 with further savings from variable costs. And included in that number is $100 million in savings from modernization initiatives, $50 million of that coming in 2020. How much of these cost savings are sustainable in 2021, and on a run rate basis, following that?

Why don't I start with that, and then Bob will jump in. So the $200 million, just to -- you characterized it well, Jess. It was really that we dug in to take out $200 million when we saw what was in front of us in terms of the pandemic. If you kind of marry that point with what I said earlier, we've just become more efficient, we become self-sufficient. Again, we've got our best performers. I would say, you're going to be a -- you're going to see a sizable piece of that $200 million become permanent. And that's in areas like I touched upon earlier, whether it's the real estate, I'd say, significant reductions in T&E is just going to be different the way we do business, significant reductions in people we use from a consulting basis. So you could tick off all those areas, and we haven't given guidance for 2021 or further. But like I said, I think you'll see a sizable piece of the $200 million become permanent, and we'll talk more about that on our earnings call in a couple of weeks. On the $50 million from the modernization efforts for this year, which, as a reminder, is $100 million next year on a run rate basis. I think our jobs as whether it's during this pandemic period or as we move forward, we're operating in -- like a new normal, whatever that new normal is. And I think this concept of modernization that we first announced last February, Bob and I are going to be -- we're focused every single day. I'm talking about how we improve the efficiency of the company. So again, without giving you a number, as we leave this year and go into next year, we're going to become more efficient moving forward.

If I could add to that, Rich. I think two things to look at there are the rate of technology adoption. I don't think there is any way I would have ever imagined that our company would be using technology the way it is now at this point in time. So there's been some benefit in terms of the employee learning in this period. What that allows us to do now is to use technology for a lot of support and administrative work, which saves us cost, and I think improves our quality of work. I think also the idea that we can operate without regard to geography so that someone providing support for a human being, maybe 1,000 miles away, not in the same office. That allows us to build out centers of excellence, which we think allows us to take functions, put them together, provide better quality, better coverage at a reduced price. And again, I think on the modernization effort that Rich was talking about, a lot of that was about lack of geographic proximity and technology adoption. And I think this COVID period is painful and as awful as it is, one of the bright spots is that it has sped that up, and that will be an important component of our new cost basis and the new normal.

Bob and Jess, I just want to add one verifying point for the benefit of whoever are listening. So you said -- so we've announced that we will achieve those savings, just to be clear, whether it's the modernization effort, the $50 million and the $100 million run rate for next year or the $200 million. I don't want anyone to think any question because I think you said announced that we won't achieve those. And actually, as you look at the way those lay out for the year, just because of timing in terms of when we implement them, and also just due to the rhythm of our business, where the numbers are bigger in Q3 and Q4, you'll see those accelerate. Again, the plans are already in place to them, and you'll see the effect of those in our numbers greater in Q3 and Q4 than you saw in Q2.

Great. So let's move on to the revenue side -- back to the revenue side. After broadcasting networks, your third largest segment is digital. And within digital, podcasting is by far your fastest area of growth. So you've got a portfolio of Podcasts achieving 225 million monthly downloads in July. I don't have the update for August. And downloads and revenue were up 62% and over 100%, respectively, in the second quarter. So how are you thinking now about the podcast opportunity over the next 3 to 5 years? And how much more can you scale up in the podcasting business over the next few years?

Well, we think we can scale up a lot. We're already on track to do that. If you've looked at pod track numbers over the past year, you see that in terms of usage. We and NPR go back and forth as #1 in downloads and unique audience. Month-to-month, we're the #1 commercial podcaster. The next largest commercial podcaster is about half our size. So we have a huge advantage in that arena. Also, podcasting is getting premium pricing. It looks like OTT or maybe even better in terms of pricing. It's something advertisers want, come to us for, look for. I think if you do a survey of advertisers, as we do, you'll find that even the ones that are doing podcasting, say, they want to get into podcasting, and it's one of their real areas of focus. So for us, I think this is a tremendous growth area. We've, as you've seen, are really on a tear. We had the Bill Clinton announcement this week. We had the Charlamagne tha God announcement this week. We'll continue to have a string of those. The good news about being #1 like this and being across all the genres that we are, because if you look at the top 10, most of the -- rest of the top 10 specialize in one area. What -- another thing that makes us unique size is that we have successful podcast across more categories than anyone else by a lot. And so what we are is, we're the stop. We're usually the first stop for someone that says, "I want to make a big podcast. Let me start and see if a deal is possible at iHeart." So just like in the TV or movie business, if you have first look, that is inherently an advantage. We intend to use that. We're building out analytics and other capabilities on top of that at a rapid rate, all of which I think bode well for the future growth there. And finally, we have this unique benefit of being a radio company. Our secret, why -- how are we building all these big podcasts, how are we doing so well, how have we grown so quickly. If we've not grown through our acquisitions -- I mean, we bought Stuff Media. That was about 5 million unique users. We had about 5 million at the time. Most of what we have today is organic growth, and that comes because we can use radio to build these podcasts. It turns out the promotional power of telling people there is a podcast, gets people who are listening to podcast to listen to more, and it brings new people into podcasting and allows us to build with a fairly successful hit rate, hit podcast after hit podcast. I think the only other company that's been able to build podcast is a company that actually doesn't -- isn't a publisher and doesn't sell the advertising in it, which is Apple. And I think here, we now have an opportunity to build podcast on a pretty regular basis. Rich, you want to jump in?

Yes. I mean, the -- Bob, the only thing I would add to that, Jess, you talked about our numbers and put it in context. I think if you look at our numbers year-over-year, we're down up over -- well over 60% on a year-over-year basis in terms of the download numbers, and we're up over 100% recorded in terms of podcast revenue through Q2, and that pace just continues. So it hasn't -- it's been the user engagement and to Bob's that he said earlier, you wouldn't even know there's a pandemic on. We've been able to monetize that. And again, that shows no signs of slowing down.

Okay. So the podcast industry has outpaced most industry projections over the last few years. What's your outlook for the industry at large over the next few years?

I think it continues to surprise us. You were there in the beginning of cable networks. You were there in the beginning of the Internet, so was I. I think those are industries that we put lofty projections on, and we beat them, that has surprised us that both of those industries caught on. I think we're seeing that kind of phenomenon with podcasting. If you look at it, podcasting is already bigger than streaming music services like Spotify and the growth continues. So we are investing heavily into it, think it is -- internally, and we begin to talk about it externally, we think about podcasting as sort of like Netflix was for TV. It's sort of the on-demand version of radio. Some of it is really on-demand than actual radio shows on-demand, but most of it are shows that could be on the radio, but aren't, but are on-demand, very host driven. The criteria in every successful podcast is the host, very important. So we see it as an extension of radio. Unlike the TV people, we don't intend to give our power to create this product to someone else. We're creating it ourselves, and we -- again, I think any rate you look at is probably, as we look back, it's going to be conservative. And I think we'd sort of be silly -- we'd feel silly putting those numbers out today, but having lived through a few of these, I feel like this is another one of those that's going to surprise on the upside.

Okay. [indiscernible] that it was around [indiscernible]

You were a child back then, but I was an adult guy.

I wasn't going to remind you because I saw, the second time Bob reminded you, big smile on your face. I think you were really smiling, but Bob kind of reminded you.

You were going to intern.

Okay. I have like 10 more podcast questions, so let's just keep moving on.

Jess, can I just spend through another financial point, just again [indiscernible] just sizes. If you look at the projections out there, most of the third-party projections are for industry revenue to double -- I'm sorry, podcast industry revenue to double in the United States the advertising piece out there, whether it's double in '21, double in '22, again. And when you think about us, think about we really have 2 ways we're going to play in that. One is, we're just -- as Bob articulated the strength of podcast, we're just going to continue to ride up and take a share of that increase in overall podcasting revenue based on our position, but the other place is if you look at our fair share of revenue. We're just starting to chip away at getting our fair share of the podcasting pie like the way we get in the rest of the audio revenue pies out there. So if you look, there is many more mainstream advertisers, whether it's Pepsi coming in yesterday on the Black Affect network or T-Mobile or many other advertisers or Procter & Gamble, mainstream advertisers are really just in the early stages of discovering podcast.

Well, that's actually my next question. It's exactly, I think, up that alley, which is, how is the podcasting pool of listenership and engagement enhanced your positioning with advertisers? And where are the incremental dollars coming from? I think you started to like even kind of answer that.

Yes. Look, I think it is the hot thing. The first thing anybody will talk to us about is podcasting. If we didn't talk about, every conversation ends with, and then let's also talk about podcasting. So I think we're developing podcast plans for most of our major clients in some way or another. And I think that's -- it opens a door not only for podcasting, but it opens a door for all of our advertising. And one of the things we often see with an advertiser is, once they get excited about a podcast, they also then say, hey, can you find that audience in radio too, and go, yes, of course, we can with SmartAudio. And so they look for opportunities to extend it using this tremendous reach we've got in radio. So it is a door that advertisers come through that also leads to some of our other revenue pools in addition to podcasting.