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

Well, that's something we've been working on a long time. And the good news is, when we talk about SmartAudio and our electronic platform, we're finally able to serve impressions, which is what the digital folks have. And with impressions, they don't really tell you, you got that impression at 1 a.m. or that impression was delivered at 10:00 a.m. or 3:00 p.m., they said you got that impression. We're -- basically, our big sell-out time periods are morning and afternoon drives. So there's not a lot more inventory there. So all you're really playing there is either a packaging game or pressure on pricing game. But the real upside for us as a company is we're probably the only 10% sold out overnight. We've got tons of inventory at nighttime, on the weekends, got some in mid-day, we've got some on other stations. So if we can add to the buying advertising, which everybody wants drive times, or that's the big preference, and add to an impression base, so we can sell an audience person no matter when they are or where they are, that really is great for us because it helps fill up sort of that 30% of unsold inventory we would probably have in any given year. I mean, sort of think of it as a jar with the big rocks in it. That analogy, we can pour a lot of sand around the rocks. And this is the opportunity to pour that sand around and find additional revenues. So that investment is not only there because it's the future and advertisers are looking to buy that way and setting up their side of the equation that way, but it's also there because it really does play into the biggest opportunity we have for additional revenue, which is to sell the inventory we've already got but under the traditional way of buying and selling remains unsold or not sold to the maximum level.

And Jason, I just want to make one point, just to put this in perspective from a strategic standpoint. We made a decision a number of years ago, I mean, really since the day Bob and I have been in this company, is that we have to follow our consumers wherever they are, whenever they are. And by the way, again, we'll come back and talk about podcasting, like how did we get into the podcasting, why are we getting into podcasting? Because consumers were there first. But it's the same thing. We've got to follow our consumers where they are. And I think going through this pandemic, really validated or revalidated that strategy in a big way. We're in over 250 platforms. So if you talk about what happened here in the pandemic period and we talked about the car, Bob talked about the in-home listening during that period of time. For years and years, we talked about, okay, what's going to happen with clock radios, is clock radios are going to go away? How are we going to replace that in-home listening? Well, then along came Alexa on that platform, right? And that -- and smart speakers. And then if you look at what's happened within home listing on devices like Roku on the web, are up dramatically, about 30%, 40%, 20% in cases depending on which device is out there. So I think that strategy, because you never know what's going to hit on being everywhere our consumers are and being on every platform out there, because you don't know which one is going to be successful got revalidated during this pandemic period.

And as a company, we spend a lot of time. We have a team that works forward with companies building out these platforms. And I must tell you when Alexa was being built, we didn't that's going to be a big success. Amazon, I think, was surprised by the success it had. But because we were there building early, we weren't a skill that you had to download. We were built into Alexa. So from the day Alexa came out, you could say, "play Z100" and you got Z100. And that, again, being on the forefront of that, gives us an advantage. And because we have twice the size of the next largest radio company on broadcast listening AM/FM and 5x their size on the digital platform, it stands the reason that anybody building a new device wants to come to us first and wants to use us to help build their platform.

So we do want to podcasting, but I do want to ask a little bit about the events business, which has been a nice complement to your overall business for quite a while. Obviously, the live events have been, I think, hit by COVID. How do you see the revenue streams from this segment, Bob, and from here? And how do they interact with your core radio business going forward?

We've always used events as really another door to bring sponsors in and to add to both on a promotional level, add to the brand with the consumers and for the revenue to bring advertisers in and also to make money on them. They have -- where we have to sell tickets, it's relatively low margin. A tough way to make money. Sponsorship has always been the high-margin part of events for us. We have been able to, during this period of time, come up with a number of virtual events. Wednesday concerts, the Friday events we did with AT&T, the commencement speeches that we did using our podcast and radio platforms. We did a virtual prom. I mentioned earlier the Living Room Concert, which we sort of opened up this pandemic on in March. And on those, the sponsorship revenue has been surprisingly strong. But obviously, we missed the ticket revenue, which is when you sort of look at that events line, it's way down. That's because all that ticket revenue is gone. But I think in terms of keeping the franchises alive, like we'll do with the Music Festival, most people interacted with the Music Festival over on the radio. Streaming or on the CW, on the TV show. So all those will still be there. So we'll continue that. And for our advertisers, the real value for them had to be those huge numbers. The social numbers that come off of that, I mean we're talking billions and billions of social impressions coming off of the festival. And those we expect will still be there as well. So we're trying to look forward think about which events would actually be better as just the virtual event. Are there additional new events like will we do commencement every year now? Do we have a new franchise to give commencement speech, and we have had fabulous speakers, you can go online and see who they were, is that an annual event? And then which physical events do we want to bring back and would Jingle Ball, Music Festival clearly are ones you would think you bring back as the big physical event. But some of the others may come back as virtual events. So we're still looking into it. It sort of opened our eyes. And I think it also opened the eyes of consumers and taught them something new. And we'd be foolish not to take advantage of it.

Going to the podcasting business, which has been the tremendous growth driver for the company and for the industry as well, and even during COVID, you mentioned the second quarter podcasting revenues were up significantly year-over-year. Now Bob, I know that you yourself pose a show where I had radio, show called Manhattan Project, which I do listen to. But space is getting more crowded, it's getting more competitive. The cost of acquiring talent seems to be going higher. And you want to competing in the space where there's some very well capitalized, strong balance sheet companies and [indiscernible] less music space. So against that backdrop, can you talk about the [ overall ] podcasting business, what do you think about the iHeart platform that gives you the competitive advantage versus peers and...

Sure. Look, it's -- in businesses that are fast growing, size matters and scale matters. And it's your biggest protection against competition. When I was at MTV, Ted Turner, backed by John Malone and then Time Inc. came afterwards with the cable music channel, I think it last 34 days. And Spotify certainly doesn't have the balance sheet of Apple. But I think, again, being there first and being a size helps them. Netflix has got a lot of better balance sheet companies coming after them. They don't appear to be damaged. And I think we -- when you say the -- it's expanding, I think that plays into our hands because what you're really looking at is the big players can afford to pay more on a minimum guarantee. We can more likely make somebody a hit. And we found when we're talking to big names, it's not usually about how much is the minimum guarantee because they just have pretty good faith in what they can do. As long as we're in the ballpark of the split, what they're looking for is, what's my best chance of having a hit because even if the splits twice the size of what the podcast will be somewhere else, they'll make a whole lot more money with us. So it's not the percentage, it's the end result. And also, most creators want a hit. And I think what we've proven is that we can make hits again and again. At the beginning of the lockdown, the podcast industry went down a little bit in March, and we went up. The reason that I think we went up is because we have diversified genres. And if you look at the top 10 of Podtrac of the podcast publishers, everybody else specializes in something, sports, news, opinion, whatever. And we have it across them all. So yes, in March, some categories went down, others went up, and we were there. Having that huge radio footprint is very powerful. Because for us, we think of podcasting as an extension of radio. It is sort of radio on demand. It is either real radio that we put on demand or it's programs that you would expect to hear on the radio because they're host-driven, but not, sort of like Netflix is with TV. But as opposed to Netflix being separate from the TV networks that are building the content and have the relationships. In our case, we own both. And so we're able to -- when we want to launch a big podcast, we promote like crazy on the radio. And that is -- by the way, we see the correlation directly, and it's one of our weapons in our arsenal that almost no one else can offer a podcast creator or partner. And so that, I think, puts us in a pretty good position. We also -- having so many hit podcast allows us to promote from one podcast to another. Oh, you like this one, you'll probably like that one. And then finally, being able to monetize at the level we can. And by the way, using sellers that already understand how to sell audio is a good advantage because I think it lets us monetize better than others. Whereas others are talking about their working toward profitability in podcasting, our podcasting margin's better than their overall company margin. Yes, we're profitable. And we don't intend to run a business, podcasting, on any other basis. So for us, we're excited about the growth of it. We think we're one of the beneficiaries of the growth. Again, as I pointed out, we have 2x according to Podtrac, 2x the lead over the second largest commercial podcaster. And if you think -- go back to when we bought Stuff Media, we were in the podcasting business. We were slightly #1 commercial podcaster at about 5 million users. Stuff was, I think, next or 2 down, and it was almost 5 million. We combined the 2, we had 10 million. Today, we have 25 million. So we didn't buy our way to 25 million. 15 million of our 25 million is organic growth. And I think that's an indication. And by the way, in sharp contrast, the others that are trying to buy traffic, I mean the real metric is not how much did they buy, because that's fully priced and fully valued, maybe overvalued, it's what were they able to build on top of that. And I think there are very few examples other than us and NPR that have been able to build. And I think it's no coincidence that the 2 biggest podcasters are both radio and both use their radio to drive their podcasting. I mean, we probably -- if you price the promotion we do on podcasting, we're probably putting $100 million a year in promotion under our podcast. I don't think there's anybody out there spending $100 million on promoting their podcast.

And by the way, the only thing I'd add to what Bob articulated, if you, if yourself and the audience kind of thinks about the financial opportunity in addition to what we're facing here, think about -- there's really 2 vectors in podcasting that we're going to benefit on the revenue stream and create shareholder value from. One is the overall U.S. advertising dollars, to be clear, of the overall podcasting industry, which historically, I guess, last year, it was like $450 million, depending on who you read out there. Everybody's got their own estimate. The estimates for this year, again, in total for the whole U.S. advertising industry $800 million, $900 million, $1 billion, doubling, then people talk about it doubling again and doubling again after that. And so if you think about our ability, one is we're going to participate in the overall pie going up. But the other vector we're going to participate in is the fact that we do not get our fair share or as defined as our fair share is what we've gotten typically of the, let's say, the broadcast radio pie out there. And part of that is because podcasting historically have been a DR, a direct response, industry much more than what you may all think about as a mainstream advertising industry. We've now started to bring mainstream advertisers into the marketplace, whether it's a Procter & Gamble, whether it's a T-Mobile, whether it's a CBS, whether it's a Bank of America, we've started to bring them into the industry. And so we will continue to increase our percentage, get more of our fair share of those dollars, and we're not there yet. And so again, that's one of the reasons, among others, in addition to the listenership that Bob talked about, which, by the way, all of a sudden may kick around the media industry. None of us, no matter whether it's been video, movie, television, even have seen engagement at a consumer level. And then you couple that with this ability to monetize through those 2 vectors, that's really driving our excitement.

Yes. I would add too, there's a secondary benefit of podcast, you didn't ask this question, but I think it's very important to understand is, I mentioned earlier that the biggest issue we have in radio is getting people just to try it. If they'll try it, we'll do fine. Well, podcast has gotten people very interested in audio. If you think about -- and I look at -- because I've been around for a lot of them, every time there's a downturn, the good news is people will try something they didn't want to, good time. In good time, you say, well, that may work, but I don't want to rock the boat. Things are going well. When things aren't going well, you'll say, okay, I'll try it. Well, in the '88 downturn, we got cable networks, finally got a big boost from advertisers. They came out of that. I was at AOL in the '97, '98, and we got the big boost for digital online, if you will. 2001, 2002, search was the beneficiary; 08; '09, it was social, Facebook. And this one, it's podcasting. Nothing comes close. It's the beneficiary of people trying it. But when they try podcasting, they're also trying audio. And so one, we get them to understand that consumers have run out of time for their eyes, but they do have more time to use their ears. When I'm cooking, I'm not going to watch a movie, but I am going to listen to a podcast. When I'm walking, I can listen to a podcast. There are use situations which podcast are the only thing I could do if I'm interested in hearing a story like that. And the final thing on that -- in the secondary benefit is actually opens the door for our other revenue streams. We've got quite a few advertisers that come in for a podcast. And as we begin to discuss the plan, they wind up using our SmartAudio to find the same audiences out on broadcast radio at this huge scale so they can extend the reach of their message and tie them together. Some people have used our broadcast radio to promote their involvement with the podcast, so that everybody knows they were doing the podcast. And so it both opens directly the door for additional advertising to broadcast radio. And it also brings people to audio of which, given our audio assets, we're a major beneficiary.

Thank you for that. We have just a couple more minutes left. I do want to get to some financial questions. So you did an incredible job of cutting costs very quickly as you responded to maybe changing revenue environment in the second quarter. You talked about some of those initiatives. As revenues do start to come back going forward, how much of those cost cuts can be permanent versus temporary? And historically, when we've had about a radio business, incremental margins of 75%, 80%, which are [ rolled up ]. Well, first of all, does that apply to a company like iHeart with the most modern set of business? And then number two is given that you've already cut a lot of cost on the way down, how do you think about the margin recapture capability of your company on a going-forward basis?

Well, maybe I'll...

Rich, you want to start?

Sure, I'll start. And there's a bunch of questions in there. I know we don't have a lot of time left. So let me try and succinctly get to each of the point. So if you look at this year in terms of cost-cutting and to put it in context, we started in February of this year. We announced a modernization effort, which was $50 million of in-year cost savings to be clear for 2020 and $100 million of run rate savings by the time you get to mid-2021, and we're well on track to do that. Pandemic affects us a hit. And we announced in April a $200 million in-year cost-cutting program. And that related to everything from things like real estate to dramatic reductions in T&E, to dramatic reductions in consulting. So really across all -- across the whole sector of things to not having 401(k) match anymore. And this is actually the benefit, if there's such a thing as a benefit, in terms of forcing you to look at how you do business. At that point in time, we haven't -- we didn't make any statements about the $200 million, which I think is your question. Although it's permitted. And again, we're still, as Bob pointed out, we're not going to make news about projections going forward other than, I would say, a significant amount of the $200 million as we move forward, we think will be permanent. I'd also say that one of the things I touched upon earlier, Bob and I are spending an awful lot of time. And by the way, probably like a lot of companies in America, what is the new norm? How are we going to operate? How are we going to operate with a dramatically smaller property real estate footprint? We're never going to go about to spending the amount of money we did on T&E or outside consultants as we go forward. And we're just all going to be more efficient in terms of taking advantage of technology. And quite frankly, and Bob and I have a bunch of anecdotal examples we don't even probably have time to [indiscernible] today, even each other, how do we become more self-sufficient as we start to move forward. You asked about incremental margins. This is -- just to remind everybody, pre-pandemic, during pandemic as we leave the pandemic period of time, this is a great financial business to create shareholder value. It's a fixed cost business that I just touched upon that we're reducing high incremental margins, 75%, 80%, 80-plus percent on the broadcast radio and on the network radio business, on incremental advertising revenue dollars. Bob already touched upon things like a lot of our new initiatives that are podcasting which may not be that high on net margins but clearly incremental to the company's overall EBITDA margins. And yes, our focus is, as advertising revenue has started to firm up and continues to firm up and gets back to growth. Our objective 100% is to continue to get margin expansion with the goal then towards as that's one of the proxies for driving shareholder value.

And to add to that, we do also look at free cash flow as being a very important component of that. And that, again, that's one of the advantages of the structure and this business, and we intend to continue to put that strong focus on that as well.

Yes. I mean, by the way, just to round that out, low working capital, low fixed capital expenditures that you can dial up and down within the years, which is what makes it such a great free cash flow business. And just as a reminder, there's a data point, in Q2, which is about the toughest operating environment, I know Bob and I have ever seen, and probably everybody on this call has ever seen. We were effectively cash flow breakeven. Even with revenues being down over 40% during that period of time. So again, that's just a data point to show you that -- the strength of this company from a financial standpoint.

I think that's a good place to end. So with that, we're out of time. Bob and Rich, thank you so much for joining us today.

Thank you. Thank you, appreciate it.

Thanks, very much. Thanks, everybody.