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

Good afternoon, everybody. I'm Sebastiano Petti. I cover the media and communication services space at JPMorgan. I want to introduce Bob Pittman, Chairman and CEO of iHeartMedia; and Rich Bressler, CFO and COO of iHeartMedia. Gentlemen, thanks for joining us.

Thank you.

Thank you.

Just to start, we're closing in on 3 years since the new iHeart emerged from bankruptcy. Can you take us through the evolution of the company's strategy over the last several years? How have you positioned iHeart for success in the audio space?

Well, look, I think first is you mentioned that we believe in the audio space done with this company is we've used this incredible position we've got in broadcast radio, which reaches in the month, 90% of Americans in 1 month and use that reach to build out other platforms. We believe that the way we build strong audience relationships is be where the listeners are with the products and services they expect from us. So as they have moved and they can pick up something on their phone or they can get something on a smart speaker or they can get something on their TV, they expect to find our products there. And we've built out the iHeartRadio app. We've built out the podcasting business. We built out events. We've built out a social relationship. We have 270 million social followers. That's about 7x larger than the next audio player. And I think that -- and we've invested behind it in terms of monetizing it. So first, build the relationships, next monetize it. And as we monetize it, we realize that advertising always follows the consumer unless you put up hurdles. And in the radio business, we were, as an industry, slow to respond to the changes and how advertising is bought and sold. We were still selling spots at a time that the world had moved to data-infused audience buying. So we built out those capabilities. We call it SmartAudio. And we basically turned our broadcast radio business into a looks like audience, looking at the success Facebook and others have had in that world of expanding into using more inventory. And as we look at podcasting and digital, we bought the Triton organization to be the final piece of our audio tech stack. So that we can have a unified audio platform, advertising platform so that people can seamlessly buy across broadcast radio, digital radio, digital audio and podcasting. Find the audience and we can serve seamlessly across it, targeted and look for attribution there as well. So the strategy, again, has been always built on follow the consumer and then figure out how best to monetize them. And that's what we've been doing. Rich, I don't know if you want to add to it?

No. I mean the only thing I just might put a fine point on the last piece, Bob said, if you're an advertiser, what do you want to be able to do because Facebook and Google years ago changed the way advertising was bought and sold. So Bob's point about the audio tech stack, if you're saying an advertiser seat, you can plan an advertising campaign. You can then monitor that campaign. And now with Triton, we can report on that campaign out there. And that is a significant difference we have in this marketplace. And by the way, just as a reminder, 2022, it's a political year also. So our ability now to go-to-market with those capabilities, which we didn't have in the last election cycles.

I want to come back to a lot of the stuff we just touched on there, but obviously, a lot of questions on near-term advertising visibility and the macro uncertainty. What is the tone of conversations with local and national advertisers? Any change in outlook? As you -- since you've come into the year?

Yes, it's interesting. We are sort of unique about this company, have enormous diversity in our advertising base. We've got no single category that's more than 5% of our advertising revenue and no single advertiser more than 2% of our advertising. So in times like this, where there is uncertainty, I mean, we're seeing the same thing, everybody else is seeing. There are some advertisers saying, "Wow, this is really good for me. I do well in times like this". And the other advertiser, "Oh, I got to pull back." So we have always sort of seen that balance in what's going on. And I think this is no time. I mean looking at what's going on in the stock prices of advertiser-supported companies, I don't think we're seeing anything that looks like that in the marketplace talking to advertisers. As a matter of fact, we've seen even through the pandemic, we saw advertisers that saw opportunities and seize them. We saw advertisers -- let's take auto, for example, we saw some dealers that said, "Oh, my God, I don't have any supply. I'm cutting back advertising". We saw a lot of dealers saying wait a minute, it costs me more money to get a loyal customer than it does to maintain it. I'm going to continue to spend through this period because eventually, I will have supply, and I want that relationship with the consumer. I think you're also finding that as people get a little nervous about things, efficiency becomes important again. In good times, people can afford to do what they think is going to get them a lot of customers without a great regard to price. During a time like this, they pushed toward efficiency. And if you look at where efficiency is the 2 media that are really well below the mean of sort of average CPMs are outdoor and radio. So we think there's an opportunity during this period that people who've been buying things above the mean, expensive media, we'll say, look, I want to keep advertising, I need to really focus on cost, I need to focus on efficiency that this is an opportunity for us. And indeed, we've sort of refocused our pitch to the marketplace, understanding there's some anxiety here, let's sell into this that what's most important to people at this moment.

Yes. And by the way, I might just expand on one thing Bob talked about, diversity, and Bob talked about advertiser-based diversity, but also think about two other items: geography from a diversity basis. We're in almost 160 markets around the country. So we get the benefit of the geography diversity. And also, we have a multi-platform approach that Bob articulated in the first question. So think about it again, from you're an advertiser, we've got broadcast radio. We've got our premier national networks. We've got total traffic and weather. We've got podcasting. We have our digital -- we have our digital business, excluding podcasting, in terms of websites and newsletters and social extensions. And we have our events. So I think when you think about diversity, it goes to so many different categories, which, again, is why we've been resilient during this period of time.

I think you touched on it at 1Q results recently, but remind us on what -- reiterate, I guess, what you are seeing in terms of what happened in March relative to April just maybe some of the trends in -- just informing your view of the advertising.

Yes. We had a -- it's interesting sort of the opposite of what's being reported by Snap. We said April was down a little bit, but that May and June were expected to be higher or pacing higher. And so we find that during this period of uncertainty that when something weird happens in the world, there is a reaction of freeze up for a second and then people go, hey, the world didn't come to an end, let go. April, we think, was one of those months. And we see May and June. It's okay, the world is not coming to an end. Let's keep going.

Let's start off with the iHeart's digital business, which grew 36% in the first quarter, led by podcasting, which was up 79%. What does digital audio advertising demand look like today versus perhaps 6 to 12 months ago? And what trends inform that view?

Well, look, I think the demand is there for audio. And as you know, the natural demand is anything digital, which is why we not only have built out all these great digital products and why we lead in digital audio, but also why we're turning broadcast radio into digital like audio why we want it to be a looks like audience for digital. So for people who have a natural propensity or a natural comfort with digital that we can add it to it. In the TV business, most of the impressions are in digital TV or in some sort of digital video. The opposite is true in audio. In audio, about 75 -- there's a 75-25 split, 75% of listening is done on broadcast radio, 25% on streaming services. That includes, by the way, commercial free streaming services. If we adjust for advertising loads, meaning some of them are completely commercial-free, others had a lighter load, probably the impressions are something like 85% or 90% in broadcast radio. So for an advertiser to ever get the impressions they need for a successful campaign, it's sort of hard not to use AM/FM. Also just to put the size it for a minute, in broadcast radio, we reach 90% of Americans every month. The next largest TV service, the biggest commercial service reaches less than 50% of the people in America, the biggest cable network, less than 30%, and the biggest digital-only services and their ad-supported versions are about 20%. So it's not like it's us versus some other options, which are close, we have this enormous reach. So by providing that reach to someone looking to do a buy. If we can make them comfortable that it's provides all the attributes they look for in digital, we think we have an enormous opportunity to change the value of our broadcast radio inventory. And when you sort of -- when you look at advertising and you understand that, over time, advertising always follows the consumer. The great thing about broadcast radio is it hasn't lost the consumer. Still got a 90% reach. had 90% reach 10 years ago, 20 years ago, 30 years ago, TVs lost, enormous reach, live TV in the moment. And so we are looking at it sort of as the combo and really blurring the lines between digital and broadcast and providing, again, that data analytics and electronic trading capabilities, which people are so accustomed to in digital.

By the way, and just one last point there. Just as a reminder, we talked about our 150-plus markets and our 860 radio stations -- almost 860 radio stations, we own all those stations, just to remind. So this is not an affiliate model. This is not a TV model. So as to take advantage of all the attributes we've been talking about, whether it's technology or all the different platforms. It's a complete ownership model, which gives us that efficiency and that ability to meet the advertiser needs.

In podcasting, can you update us on recent trends in CPMs engagement? Just what are you seeing from an adoption perspective as well?

I've never -- look, I've started in the business in 1969. I've never seen anything grow quite like this. It is the American public seems to have taken to podcasting, not a surprise because people love companionship and they love a good story. And podcasting embodies both of those. It's also -- if you think about sort of the macro picture In video, we've run out of time for our eyeballs. So if you want to watch something, it comes at the expense of watching something else. In audio, we're filling up time that used to be attributed to peace and quiet. So now instead of whistling while I work I listened to a podcast while I work, instead of trying to jam my computer into the side and watch a movie while I'm cooking, I now listen to a podcast. And so it has built up this period. It's captured people's imagination, continues to grow. And what's great about podcasting for us. And I think it may you follow our company in the last earnings, we've had a diagram of it, that most of the growth in podcasting downloads from prior year to this year were from existing podcast. I think only about 35% of the growth came from new podcast. So this is not something where you hit something and it's gone that you continue to build on these franchises and build listenership on podcast you already produced. So the flywheel effect gets enormous in podcasting. And for us, 18 months ago, we were sort of neck and neck with NPR. Today, we have more downloads than the next 3 largest publishers combined. And the reason for that is, one, because this is very much like radio. It's sort of an adjacent business for the perfect adjacent business. And two, is we have the ability to promote and get audience to a podcast. When you reach 90% of America, we have this incredible tool that we can use. How do we build the iHeartRadio app so big? How do we build podcasting so big? We used the broadcast radio to talk about it. We got our personalities on podcasting. They do podcast. They talk about podcast. We use podcast over as content on radio. And we also have so many hit podcasts now that we can put, in essence, trailers on the existing podcast to promote the next podcast. So just like in the movie business, once you get a franchise, you can start selling everything else in the franchise. So can we the HowStuffWorks franchise has blossomed out to about 4 or 5 shows off that same franchise. And again, it sort of feeds on itself. And when you're #1 with the kind of lead we are, if you're a podcaster or you want to be a podcaster or you've got a great idea, you're a big brand name. You probably talk to us if not first, at least before you do anything else and give us a shot at looking at it. So we get to look at almost everything. And because we have such a great monetization engine and such a powerful promotional engine, if you want to hit podcast, your chances of having that hit podcast are going to be much better with us than with anyone else.

And by the way, when you think about the current and the future state of podcasting and advertising revenue, so the [ IAB ] came out with, I think it was yesterday, a couple of interesting numbers. they said, and these are domestic U.S. advertising numbers for podcasting. 2021, they estimated the market to be about $1.2 billion in 2021. 2000 -- they expected to almost double again for this year. And then 2024 or 2025, they talked about, again, that same market going to $4.2 billion, $4.3 billion. And you take a step back and you say, "Oh, my god, can these numbers continue to grow at that pace? And then you peel back a little bit and look at the facts. One, what Bob just talked about in terms of the level of engagement, not just the absolute numbers, by the way listeners are engaged overall in the medium. And two, for any of you that follow podcasting for a number of years, if you go back 2, 3 years ago, podcasting was typically a DR, direct response medium. It's only been the last couple of years since we've gotten so involved in podcasting and led the industry that mainstream advertisers, the big advertisers are coming to the medium and seeing the effectiveness out there. And so what's important about that is big companies where the big dollars are, where the big CPMs are, are just beginning to explore the medium. So when you think about it in that context. The growth numbers that are out there and make an awful lot of terms.

And I just want to add one more thing. In 2019, our entire digital business was 10% of our revenue. And now our podcasting business alone is 10% of our revenue with a margin that's greater than the overall margin of the company.

How much time do you give new podcast to make it before you pull the podcast from the [indiscernible]

The great news about it is because we don't have unlike radio where we've got a limited amount of shelf space. So if something is not working, we need to get it off to get something else on. In podcasting, we have unlimited shelf space. So you never have to get anything off. Now what's interesting, and I think implicit in your question is because we can promote it, we can't make something that's not a hit of hit. But if something could be a hit with promotion, we can make it a hit. And what we can generally find is in probably 2 or 3 weeks, we can see if we got a hit or not with heavy promotion.

By the way, and the other great thing about it is they're inexpensive to produce. A great -- there's no correlation between cost to produce something in a podcast and its success.

By the way, what you're looking at here is about all I need to make a podcast for having spent a lot of my career in TV. It's enormously expensive in TV. And in podcasting, it's -- basically, it's the talent.

So just shifting back to the Broadcast segment for a moment here. Do you think you can recover to pre-pandemic levels? Or has the TAM been permanently lowered?

Look, I don't think there's -- I think the TAM is a result of what we do. So I think again, I think advertising follows consumers. And as long as consumers are listening and using it, advertising will wind up being there? Or is there a natural inclination to buy the hot new shiny thing more than the old thing, of course, always. But that doesn't mean that's where it winds up. And again, we have so many advertisers because now we have all these multiple doors to come into our organization is we have people to come in because they won't like podcasting, they wind up with broadcast radio. We have people who come in because they like one of the events we do, and they wind up with broadcast radio. That when you reach 90% of America, you can't begin to understand how important that is to getting a message out. And as soon as people come in for something shiny, what they really want our results and the best way to get results is with a lot of exposure.

And by the way, I think in listening your question is that -- or maybe not implicit your question. Remember, we are a different company than we were pre-pandemic. Bob articulated the audio tech stack we have the capabilities -- we have the capabilities for our digital infused buying on the broadcast level for -- with cohorts. We didn't have those. We didn't have Triton during that period of time. We didn't have Jelli really much before pre-pandemic. So we have different technology capabilities that tap into different advertising buckets like the digital budgets, the digital marketing budgets. And just factually, they weren't their prepandemic.

Are those capabilities, what -- because the decline in Pay TV is not a new phenomenon, but it just kind of kept going, right, at this point. The pace has kind of just been pretty steady. But the new ad tech is that would really give iHeart the opportunity...

Well, look, I think if you -- when you talk about TV, TV lost audience. TV once reached more people than radio. It doesn't -- live TV of the moment doesn't come close to radio anymore. And so the decline is related to audience. I mean I've been around this business a long time with business is both growing. I was there when cable networks were born. I was actually there when FM was not in the car, and we were trying to drive FM as the new medium. And what you find is when the consumer gets there, you'll have the money. When the consumer lose, you'll lose the money. It lags both ways. I mean newspapers arguably still get more revenue than they probably deserve based on the readership. But anytime -- look, I was at AOL, we were slow with digital advertising. It would shock you to tell you the people I had conversations with, we I'm literally almost shaking them friends going, you need to be on the Internet and they go to Internet. I don't know how I need to be on that thing. It's slow to come to it. But once you're there, over time, you begin to reflect where the consumer is. So I think in terms of radio, unless we start losing audience, there's no reason to think that you're not going to be there in terms of revenue, also when you consider that today, radio is 1/4 the cost of TV on a CPM basis. Now almost every study says radio and TV deliver about the same impact at the same weight levels. In 1990, I was running a couple of companies during that decade, where I bought a lot of advertising. And back then, radio and TV were basically the same CPM and one wasn't cheaper than the other, and you had to decide which one is the best creative solutions. I use some radio, use TV and use them for different things. When I took this job a little over 10 years ago, TV was about twice the cost of -- TV was about twice the cost of radio. Today, it's 4x. So at a certain point, when people need efficiency, look, I'm getting the same impact at the same weight level, am I going to pay 4x as much for it that you have to believe that at the end of the day, economics also are a very powerful force in this. And we see it. I mean, you look at our broadcast radio group was up about 25% year-over-year. So we're seeing growth there as well.

So are you -- do you think you are taking some share on the TV side now?

Look, I think we are. And I think we're taking it from there. I think we're taking some digital. I think we're taking some event stuff. I think we're taking some promotional. We're taking some PR. Recently, we've been taking it for HR departments for recruitment ads. Again, when we talk TAMs, I have to be careful because it's not like there's a magic TAM that we're taking money from whatever money we have adds up to be the TAM. And so for us, again, I think it is what's the value we produce for an advertiser, they're interested in one thing. I invest the dollar, what do I get back. And I think that's what we're really focused on.

Shifting to the most recent earnings call. Revenue growth came in at the high end of the range. You called out some transitory costs and some permanent costs in the first quarter results. Tell us a little bit more about those costs? And how should we think about them in 2Q and beyond? .

Rich, do you want to answer?

Sure. Sure. And just to remind everybody, we just set the stage, I always remind that very Q1 is our smallest quarter of the year in terms of numbers. If you think about the -- we talked about investing in the business and really primarily the digital business. Bob and I's philosophy even with the fast-growing digital business, including podcasting, is, okay, let the revenue come first, everyone will work a little bit harder, and then we'll invest behind the revenue to make sure the revenue is there. We talked about what our growth numbers are in the digital business, and we said during Q1 that we've invested approximately $12 million of what $6 million was a onetime item and $6 million will be more permanent on an ongoing basis out there. But to think about it, these are all revenue-driving investments where we have not -- as the revenue going to come, we have proven revenue streams out there. So we expect in terms of these investments, there are things like sales support to support all of our sellers out there. One of the key initiatives I don't think we've touched upon this company strategically is we have 1,500 sellers. We made a strategic decision that those 1,500 sellers across the country can sell any one of our products that Bob and I just articulated of course, multiple platforms. And so as we've seen the explosive growth on digital and on podcasting, the question is how do we build more infrastructure behind so the digital sellers are our sellers, I should say, spend more time selling than they do on back office operations. So that's really the way to think about it. But if you go back to the financial, which is implicit in your question, the financial dynamics of the company, we also said that we expect to have over $1 billion of EBITDA this year. Our previous high watermark was $1.003 billion. We also say we expect this to be a record free cash flow year for the company. I just want to make sure we cover that. Previously, that was $350 million of free cash flow in 2019. And just as a reminder, we weren't a free -- I'm sorry, we won a taxpayer in 2019, and we will be a taxpayer this year, but this is free cash after that. And then Bob alluded to just when we opened up about the stock price and what's happening, some advertising stocks, and we just look at our particular stock and you take the numbers that we just talked about, we're well over a 20% yield on the value of the equity as we sit here today into the 20s. And on any free cash flow per share measurement I don't know, we're $3 per share plus -- but somewhere in that range, just based on again the numbers we've disclosed publicly. And we're coming into a period of time where I think the only I wouldn't say it's good news. But as we think about it, investors now focusing back on EBITDA, real earnings, real free cash flow, which we as a company have always had. It's one of the great characteristics about radio and quite frankly, about iHeart, fixed cost business. We get great incremental free cash flow for both the multi-platform and the digital side and the generation of that free cash flow and maybe to state the obvious, but to state the obvious, the other things in time like this is you watch your cost like a hawk out there and make sure you're bringing the most you can to the bottom line.

I think going to your point, Rich, if you looked at 2020, which has been the biggest hit I've ever seen to advertising in anything in my life, what's interesting is that we did have a lot of control over the fixed cost and we took a lot of fixed cost out of the business. People have said, "Oh, my god, I mean to come down, your revenue ever dips. You've got this big impact on the bottom line. Well, not if you're really committed to adjusting the cost. And even with that, we looked at the various revenue streams we had. And broadcast radio was the most affected. A little less than that was network radio, same inventory really less than that was SmartAudio, which is sort of our programmatic trading on it. Digital grew during that period and podcasting, you wouldn't know there was anything going on because it just grew right through it with no blip whatsoever.

So I asked this on the 1Q call that just in light of your comments now, confidence kind of in the business, any reason why it wouldn't make sense to pull forward capital returns to take advantage of the pullback in shares? You talked about the 20% yield. Outside of your leverage target, are there other considerations holding you back that perhaps we should be thinking about?

No. I mean I don't think there's any consideration to hold on that. This is -- Bob and myself and with our independent Board members, we've got one objective in this company, just to be clear, whether it's the management team, us, Mike McGuinness is here. Our Board of Directors, is to drive the equity value of this company for the shareholders, full stop period. So we are constantly debating capital allocation, Bob just covered it, and I just covered in terms of what the right cost structure is. We've got a stated leverage target out there right now of 4:1. We said we're going to make significant progress on that this year. And I think you've seen the way we've de-leveraged. We've been making significant progress on that. The 4:1, by the way, wasn't arbitrary that we just picked out of the air. But listening to our current and potential shareholders is, okay, what's the right risk profile for the company, and that's kind of been 4:1 leverage. But at the same time, we've covered it, how much free cash flow we generate. So it's just people's appetite for risk from an equity standpoint. But it's something I think this world is so fluid is all evidence, particularly the last few days. And so vibrant. We just constantly have to challenge ourselves, but our target is to use our free cash flow to pay down debt. to get to a 4:1 ratio.

Got it. You have higher CapEx this year related to the real estate rationalization. You touched on continuing to drive fixed cost out of the business. Are there future -- further cost savings as you complete this real estate rationalization that may be are you've touched on it earlier, but continuing to probably drive down costs, do you see further opportunities?

Sure. I think technology continues to offer us an opportunity to reduce cost and we are committed to looking at the business on an ongoing basis to get more and more efficient. I think whenever we add new costs or change things, we can't possibly be getting it right 100% of the time. So we have to go back and take the cost out where it didn't work. And then I think there are areas where we're rebalancing the focus of the company. And this company is clearly going through a digital transformation. Digital is now 25% of the revenue of this business. And we continue to feed it and we probably deemphasize other areas of the company as a result, and we pull costs from there to feed the new growth.

I mean lastly, a couple of minutes we have here. Global Media & Entertainment has raised its position to 14.99%. Where does it go from here? How does the team think about it? Is the team thinking about it?

We look, I don't think we can say any more than we're delighted with any shareholder that comes in that likes our strategy and wants to invest in the company.

And by the way, a shareholder, that knows something about -- not here in the U.S., but in the U.K., the medium in the industry we operate in. So we think it's a good validation.

Last question, the company has its hands in Web3. NFT sports betting, other high-growth opportunities we talked about with digital and podcasting. As you look across various -- iHeart's various business lines and landscape across audio -- what excites you guys the most?

Well, look, what excites me the most is actually the business we have and everywhere we can help an advertiser and everywhere we can attract the consumer. We do look at everything new because, again, our strategy is to be where our listeners are with the products and services they expect from us. So if they're playing with Web 3, that's of interest to us. Are there things about Web 3 that would be good for our business absolutely. Tokenization is a wonderful way to get -- to build audience loyalty and begin to monetize it in a way that's not possible without tokenization. But there are some other benefits as well, and there are some great things for our user. The good news for us is we don't have to spend much money right now to begin to play in it. It's not quite ready for prime time. It's not ready for mass market. When it's ready for mass market, I suspect will be critically important because we reach 90% of Americans. When I think about the biggest TV network reaches half of that, then we become really important to the Web3 world to get the word out and to help people understand. We also have products that are of value to the consumer. And that, again, is the way you create NFT or created a token. So we have both the ability to get awareness and we have products that are valuable. So I think we've got the key elements there to drive it home.

I think that's a great place to leave it. Gentlemen, thank you very much.

Thanks very much, everyone.

Thanks.