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

Okay. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in registration area and on the Morgan Stanley public website. I'm excited to welcome back to the conference, iHeart Media, including the CEO, Bob Pittman, and CFO, Rich Bressler. Bob and Rich, thanks for coming.

Thank you. Thanks for having us.

Good to see you guys. So maybe before we get into the fourth quarter results and the '23 outlook you guys laid out, step back a bit and talk about the strategy at iHeart to try to grow the business over the long term.

Well, I think it's probably the same strategy we've been using, which is we want to get as many engaged relationships with consumers as we can have. And I'll tell you, we're doing pretty well there. We've got about 90% reach in the country. There are only 2 companies to come close to that, Google and Facebook in the U.S. To put that in context, the biggest TV networks are probably 35%, 40% reach today. So we've got that. The time spent we have with them is probably in excess of social, Google, TV, et cetera. So we've also not only got the reach, we've got more time with them than other competing media does. And then the other part of the strategy is once we got all those people, let's monetize them. And you've seen us continuing to invest in the tech stack. We've got the largest sales force in audio. We developed a strategy 5 or 6 years ago, which has turned out, I think, to be very helpful called any seller, anywhere can sell anything, so that instead of having dedicated siloed sales forces, we have sellers anywhere in the country, they can sell all our array of products, which is, I think, one of the reasons we have monetized podcasting so well versus others and so profitably. And by the way, we'll invest in the tech behind it, whether it's Triton, Voxnest, Jelli, et cetera, and building that out. And then the other piece of it is to use that asset we have to also build other platforms for growth. We used to have people say, what's the value of radio advertising? Well, I'll tell you what the value is. We used it to create all those events. We used to create the iHeartRadio brand. We used it to create the iHeartRadio app. We used it to create podcasting. And now we've even used it on stuff like Metaverse. How are we doing such great performance on the Metaverse? And again, we're using the radio advertising to drive it. So that strategy, I think, is intact, and we see a lot of growth out of it. If I look at the TAM of digital, or even the TAM of TV, and I say just our broadcast radio is going to provide, put aside podcast, et cetera, a superior return for advertisers, then that gives me great confidence that we've got a big market to sell into.

Got it. Anything you want to add, Rich?

No, no. I would say back to it. We're going to talk about all the piece parts that kind of support that overall strategy. And I think pragmatically, how we implement it. But it really does just emphasize what Bob said, it really does start with our reach. If you look at our uniqueness, we reach 275 million, 273 million people on a monthly basis. We're bigger than Facebook or Google. We reach over 90% of America. I think if you look at the broadcast networks today on a weekend, maybe with sports, they're at 40%, 35%, 40%, 40-something percent, I think Spotify is like 18% on ad-supported reach out there. So there is nobody that's got the reach mean that we have, and therefore, we're rock solid in terms of our level of engagement with consumers.

So let's shift and talk a little bit about the outlook for '23 and Q1. So you guided to mid-single-digit revenue declines for the first quarter. What are you guys seeing in the business today? And sort of what's visibility like for either of you want to take it?

I think there are a couple. We'll both take it. Let me start. I think the visibility is really about how do we break it down and analyze and what does it mean to us? If you looked at, and sort of as a slowdown goes for advertising, this is a relatively mild one. In contrast to 2020, that was a dramatic one. And in a dramatic one, what happens is an advertiser stops spending because they can't afford advertising. So even the folks that if they don't spend the dollar, are not going to dollar, they still have to stop because business is so bad. In Q1, I think we provided this in our discussion of the Q1 is we're seeing the small advertiser who spends dollars today to get a dollar tomorrow continuing to spend. So it says, okay, the business is good enough that they've got advertising there. It's not affecting the business. The people we're seeing standing on the sidelines are the people who've got money to spend and are deciding whether or not they want to spend it. And in Q4, Q4 even though it was a slow year by the end of the year, we had a record quarter. And in Q4, you have to spend your money because that's a great sales period for almost every company. Q1, the truth is most companies don't sell a lot in Q1. So if you're going to hold back your ad dollars, hold it back in Q1. I think what we're seeing is symptomatic of people saying, "I don't know what this year is going to be, not going to be robust. Let's save every penny we can now and the quarter to do it is Q1." So it's lined up with the advertisers have to spend their spending, the ones they can hold back or holding back, says, okay, this is just what you would expect, which means people are a little nervous, a little uncertain, but the business underneath is very good shape. And I don't think there's a lot we can do to affect that macro. The good news is that Q2 and Q3 are increased importance of people doing sales there, especially people selling summertime products, you'll begin to see that money coming in in probably April and May. And then Q4, everybody's got to spend their money. So I think through the year, we should see an acceleration of people coming back in the marketplace.

Yes. And by the way, the only thing I might just to really highlight that, that's really what the pattern of the business is. Let's put aside the economy and what the Fed is doing, and that's not something, obviously, that we have any control over. But the pattern of the business, this is the pattern we normally see overall in the business from a revenue standpoint. And so we expect that pattern to progress throughout the year, just as Bob said.

Are you able to look into Q2 yet with enough business to sort of say Q2 looks better than Q1 or it's still too early?

We haven't made any announcements on...

Okay. Are there any particular verticals or regions that you would highlight? It sounds like it's sort of a local national thing or small business, big business.

Yes, it's interesting. I think it is. I would say it slightly differently, which is it's people who've got to spend money to get their cash registering or spending the money. The people who don't have to get it through brand advertising or building a new halo or whatever, hold on that. Do I spend it this month? No. We'd spend this next month...

For more brand performance breakthrough...

And so I think you're finding that split happening. As far as our business goes, we are and I said it before, we're only no sectors, more than 5% of our revenue, no advertiser greater than 2%. So we're somewhat hedged on anybody up or down. Having said that, look, auto is strong. People talked about when it was slow, yes, it's strong. Some of the financial stuff is a little slower. But I think everything is within the band of this being not again, sort of moderate in terms of a downturn for us.

Bob, you talked a little bit, and I think you both did about some self-inflicted wounds. I think the thing that probably surprised people on the earnings call and while the stock reacted the way it did was certainly in the top line, more of the negative operating leverage. So maybe this is an opportunity of more time to unpack it a bit, give you guys a chance to sort of walk people through what you were referring to and sort of how you mitigate and then improve upon those strategies going forward?

Look, we have multiple platforms, multiple products. And the sales management, and it's not strategic, this is very tactical, is you're constantly trying to say how can I get people to bundle more stuff with my package. If I lead with this and then bundle the other, can I get incremental revenue and within our digital audio group, we've got some products we own, like our streaming and our podcasting. And then we've got products that we resell most of them local products to resell. And within that, there's a range of different margins. And what we did in Q4 is we thought that there is some lower-margin products that if we led with that, and we packaged other stuff with it, it would be incremental to everything going on. Instead, what we found was they shifted from high-margin stuff to the lower margin stuff. And I think actually, that was probably a symptom that the economy is somewhat slow that in normal times, I actually think it would have been the great sales strategy, and I think our people made the right decision because I think they would have said, yes, for this also, I found some extra money, they didn't. So we go, okay, we've hit our limit, let's back that out and by the way, sellers sell what you commission them to sell and what you package for them to sell. And so we've adjusted the commission rates, we've adjusted the packages and it'll take us through probably into Q2 for it to right itself. And by the way, this is what we do day in and day out. had it been probably multi-platform group, which is much larger, and we probably would have known this is the delta. But in the digital audio group's big enough to see the flow-through on it.

Yes. And by the way, just maybe to build on that for a couple of points. I think it was a multi-platform group, but maybe even a different quarter with digital than going into just mathematically what we talk about. It's just on the absolute numbers. It's our smallest quarter of the year. So by the way, always has been, probably always will be our smallest quarter. So just when you do the math, it has a bigger effect on your overall margin going to Q1. And the other thing I'd point out is as a business standpoint, a structural standpoint and our view about the future of the business, and I'll just touch on any part, but digital audio group for purposes of this question, we've said it to a mid-30% EBITDA margin and nothing's changed in that in terms of our view. I think what this period of time has shown us a little bit is because digital has gone such mainstream over the years, digital and podcasting with all the strength that we have and continue to have, it's just not a mute from the overall economic environment that's out there.

Everything's digital now.

What's that? Everybody is digital. And again, our performance will continue to be very strong and whether it's finishing the year or on a digital front as you go into Q1. But we're just affected by the way, is I think everybody you followed in the digital world is affected.

I think for us, we're probably a little more sanguine about it because we deal with it with a more traditional media. But I think your point about everything is digital is actually really important because I think even our broadcast radio, we're turning into digital. Once the world of one-to-one goes away, which is going away and everybody is selling cohorts, then our broadcast radio can compete on a level playing field there. And so I think you're finding the agencies and the advertisers just saying, look, we prefer to look at advertising the way we've looked at digital with cohorts, would measure attribution. We can target better. And they're now demanding everybody come aboard. The upside for us is, okay, that means we now can take that broadcast inventory and put it into that digital TAM instead of being limited by radio TAM. So positive for us.

I just want to follow up because I do think this is important as people think about buying the stock after the sell-off that you've had. Bob, you mentioned I think that this will work itself out sort of through Q2. Is that the right way to...

I think we think in the Q2, I think Q1 is working itself out in terms of the commission piece of it.

Okay. And for those of us who don't run a radio company, which would be all of us other than you guys, how frequently do you toggle these sales incentives up and down? Is this the kind of thing that you would say happens once a quarter, once every 5 years, because I don't think I've ever heard this message before from you guys... It impacted the business...

It is actually something I hope our sales management is doing at every level, every day. And occasionally, they take a bigger swing. It's something somebody's got a big idea, which this was, and by the way, normally, they do stuff like this, and it works and it carries a package. I mean, why is podcasting doing so well? We add it to the package. And so we continue to build on it. And I just think it was a confluence of we probably pushed it a little too far and try and say, "Oh, I'm going to get this low-margin thing to drive the high-margin stuff," probably pushed a little far and the economy was just slow enough that nobody had extra money. By the way, I don't think it's even a failing of the sales management because we pay them to constantly be looking for these breakthroughs and look for ways to add additional revenue.

I just will add a third one, just what I said before at the risk of repeat what I said, but it's worth and you see it in Q1 in terms of just the effect a little bit in terms of the absolute number because of the size. I just want to remind you also, and I guess it's a Q1 phenomenon, which we should learn from. A year ago, we did additional sales support because of the growth in digital. Margins were a little bit lower in Q1. We said that we'd get back to back on track to normalized EBITDA margins of the digital audio group by Q2, and we did during that period of time. So I just think from a commitment and our belief in the business, you always want to look back to look forward there. And so look back at that fact pattern, you give people comfort looking forward on this fact pattern.

Look, I think if you're going to grow a business, you're constantly doing things. We got up to sales service, which Rich mentioned we did a year ago or 1.5 years ago, and we do stuff with playing with commissions is we're constantly doing that because this is a company that's growth is essential to the company that what we don't want to be a static and we try and impress upon our people that changes the constant that we're not going to ever get there. It's just we do one thing and that we do another and another. These are stepping stones.

Okay. Well, thank you guys for spending time on it. I thought it was important to... Investors are obviously focused on it. So maybe shifting gears a bit, Rich, you've already sort of answered part of this question around digital margins long term. You've got a lot of businesses inside of digital. We've been talking about the different margin structures. What are you guys expecting in terms of the podcast business when you look out over the course of this year and beyond? And broadly for digital, what do you think are the sort of growth drivers for that segment over the longer term?

I'll let Rich get into some specifics. Let me give you just the overview, is podcasting for us is this sort of phenomenally successful new growth area. It is an adjacent business to radio. In radio, what we're really doing is we don't have programs. It's not TV without pictures. We're keeping people company. If you hang out with Ryan Seacrest every morning, he gets to be your go-to while you are getting dressed in the morning, by the way, while you're cooking breakfast, while you're driving to work and that becomes your habit. Podcasting is also very host driven. And it turns out that it is on demand, and I'm going to use a Netflix example here, we could argue Netflix is really TV on demand. You can argue podcasting is really radio on demand. As a matter of fact, some of our biggest shows are actually radio shows that then are on demand as well. And unlike talk radio, which tends to be older, this tends to be younger. The sweet spot are millennials, even Gen Z into podcast listening. And again, we've got the critical mass to drive podcasting. If we look at the characteristics about what's it going to be? Well, it's a form that's very comfortable for our company, both in terms of product creation, we're expert on creating audio product like this and in terms of monetizing it. The second thing is that how do you, we can make it. Now the question is, how do you get an audience for it, you got to promote it. Well, it turns out using our broadcast radio to promote the hit podcast has turned out to be a secret sauce of ours. And by the way, since the next largest audio company reaches less than half of what we do, it's a unique asset for us. And then I think as you look one more level down, now that we have so many hit podcasts, we have more downloads in a month than the next 2 podcast publishers combined. So with having that array of hit podcasts, by the way, we're the only podcast publisher that has ranked content in all 19 content categories that Podtrac measures. So by having that kind of library and current crop of podcast, we're able to promote other podcast. And if you listen to our podcast, you'll often hear you're ready to listen your podcast, we will give you a little promo for a new podcast coming. And so we're able to get this cycle going, which has been very positive. I think in terms of the monetization of it because we set up our sales force not in silos, but every seller can sell everything. That means we can put the full firepower of not only our 1,500-person sales force, but also our ad tech stack against podcasting. And finally, as you look at, you talked about everything is going digital, you're right. And now you have advertisers say, "I want this audience." Well, we can find that audience from them for them across not only streaming audio, we can now find it in broadcast radio and we can find it in podcasting, and we can link it seamlessly. And we can even do instead of the direct match, we can also do the looks like, which has been, of course, the big winner in digital over the years and provide that. And if you look at the performance of podcast is the consumer engages with podcast on a level, we don't see in any other medium in terms of the vast majority, listen, to the entire podcast all the way through, that's unheard of in radio or TV or anything, and they don't tune out during the commercials. They sit through and they actually have a very different and positive view of the advertisers about, oh, this is supporting my favorite podcast. There's such a bond with the podcast that, that accrues to the advertiser as well.

By the way, I just want to add 2 other quick things. Bob made the point about the listening, which is close to 90% people don't realize people that start up podcast listen all the way through. So for all of us that have been running media companies for many, many years, none of us have seen consumer medium that's that engaged. And also, if you were listening to a podcast just like you had on online video, you have all the capabilities. So you do have some people out [indiscernible] because you can't skip through. Well, you can. So you have all that capability. So I think that's important. The second piece, and then you said in a little bit the premise, the strategy and the reasons why we embarked on the podcast strategy hasn't changed, for everything Bob articulated, for everything I said on consumer engagement and from a monetization point, remember, these are early days for podcast. And big advertisers really just discovered podcasting over the last couple of years. And that's so important because big advertisers bring big dollars because of the effectiveness of podcasting. So again, without putting any numbers on it, but our optimism about obviously our entire company, but particularly podcasting hasn't changed and if anything, I think the conviction is even stronger.

Podcasting has been very much a host read ad medium, which is great as a consumer. But I'd imagine that could be a little hard to scale. You can only get Ron Burgundy to read so many ads on his podcast and then scale up. So have you figured out ways or are there opportunities to sort of scale the business beyond host-read ads to sort of something that's more scalable?

Most of what you think as a host-read ad is a dynamically served ad. It's not host read any more embedded in the podcast. So yes, we're ahead of you. And by the way, we knew in radio, the most effective ad is an on-air talent, read ad or endorsement. Same true is podcasting. We'll charge people more money to have the host do the ad. But you're right. You couldn't scale it if I embedded it in the podcast, which was happening, as you know, forever, never. And we have now dynamically. So it sounds like it's host read it is, it's just serving you a different one that's serving me and a different one that's serving him. And by the way, when that advertiser goes away after the campaign, they'll bring put another ad in as opposed to they have a permanent location in that podcast forever and ever and ever. So it allows us to effectively monetize the long tail of podcast, old episodes again and again. So I think, again, it's an important part of podcasting. And I think we're getting premium pricing for it. And I think the ability now to dynamically insert it has just opened the door for really scaling it.

By the way, I would say, actually, we are scaling. Like I would actually say, not in anticipation, we're scaling right now. And Ben, back to your point, again, on host, you mentioned Ron Burgundy. And obviously, that's been tremendously successful for us.

Otherwise, [indiscernible]

We're not allowed to break out. But that's been tremendously successful. And we have a lot of other high-profile hosts that are tremendously successful. But again, going back to something that Bob has been saying for a long period of time, a great podcast is like a great dinner conversation, and the host is critical. It doesn't always have to be high profile. It's that person initiating a conversation, getting you to talk about the topic. And so again, we have a high-profile host. But if you look at, we've got more podcast #1 in 15 or 17 categories...

19 categories.

19 categories. Thanks Bob. In terms of Podtrac, we have more podcasts that have more than 1 million downloads than anybody else out there. And so you don't get that by not having scaled the business. So I'd argue we scaled it right?

Yes. I think also you'll find in the podcast business, it's consolidating, just like every industry does around the big players. And I think it's getting easier and easier to get our scale. And I think for the small players, they're finding themselves going, how do you play in a world where you're getting crushed by the number of podcasts out there. People can't find it, not going to do them much good.

Yes. Let's shift gears a bit. I want to make sure we talk about free cash flow, which is obviously pretty important to put a...

My topic -- thank you.

How should we think about that for this year, particularly given the start to the year as you guys have acknowledged is tough. What are the opportunities, Rich, that you see on the cost side to continue to optimize free cash flow?

Well, maybe I'll take the second one first and then I'll turn to free cash flow. It's interesting companies announcing cost programs, we announced an additional $75 million cost program. I think, as you know, at the end of last year, on top of the other cost programs we announced previously. We also announced or have been talking about we've done a pretty dramatic consolidation of our real estate footprint in the United States. We were at about 4 million square feet. We're down to about 2 million square feet. And I'd say the bulk of that has been implemented already. And also, if you look at our capital expenditure numbers and then I'll come back and tie it all together, we spent about $160 million in capital expenditures in the previous years. Our guidance this year is $110 million to $120 million. A significant piece of that higher capital expenditure number was to help force to the consolidation out there. But to us, I always find it and I've said this frequently, what do Bob and I do, we're constantly looking at saying, gee, if we started iHeart today, how would we build the company, how would we take advantage of efficiencies, how would we take advantage of AI? So this is a continuing process for us. So we have announced additional cost programs, but at the same period of time, what do we do every day. We look to say, how do we take advantage of efficiencies and the money we've invested in capital expenditures to drive more to the bottom line? So if you look at last year, I think last year was about the second best free cash flow year or close to the best free cash flow year we ever had as a company, and Bob already mentioned, was the second best EBITDA year for the total year and the best quarter we ever had leaving Q4. You look at this year in terms of free cash flow, we expect it to be a very strong free cash flow year. I think most of the sell side has us like around 225 or so in free cash flow out there, which is driven, obviously, starting with the EBITDA number, where I think the consensus is about 820 or so thereabout on the sell side. The reduction in capital expenditures, as I just mentioned. And just as a reminder, unlike most companies, I'm sorry, we can flex up and flex down our capital expenditures depending on what's happening in the operating environment out there. So we have the ability to flex that down. And I think as we've demonstrated in previous years because also during the pandemic, the worst pretty time any of us have ever seen, we generated positive free cash flow as a company. And I think that's a good reminder about the levers that Bob and I and the rest of the gang have to pull. I assume we're going to be a full year taxpayer, which is think about that is about 15% of EBITDA, and we have about $390 million a year of interest expense. We also continue to chip away at that as we've aggressively managed the balance sheet. We have been just I'll say what we've done publicly, we purchased about $300 million of the [ 8.375% ] bonds with [ 3.30% ] or so face value, so a pretty good deal, 11% yield on those. And we're opportunistically going to always look to improve that. And I think that brings about a little less than $30 million a year in annual interest savings. But at the same time, we've got a piece of our debt that's floating, so we're not unaffected by the increased interest rates. But the net result in summary, we're going to have a good free cash flow year in 2023.

Okay. Any questions for Rich or Bob. Happy to go to the audience. If you have any, please wait for a microphone. Clearly, we covered all the important topics. Anything you guys want to close on? Any comments you want to leave us with as you think about the rest of this year and sort of where you guys are focused?

Well, look, we continue to be excited about the [indiscernible] audio. And if you look at that work study done, what about a year, 1.5 years ago showed that the daily consumption, share of daily consumption media is up to over 30% for audio. In this world, the biggest piece of audio consumption is broadcast radio. We're there. And with a major footprint. We're also there with a major footprint in digital radio. We're there in a major footprint with podcasting as well. And so I think we're well positioned. And I think if you look at the video marketplace, pretty well saturated. It's a zero-sum game. If I got a new show or a new network, I have to take the time from someone else. In audio, what we're taking our time from is peace and quiet. People had times of their day, they did nothing and they go, nothing is going up. Nobody does that anymore. They're filling up every second. And so mainly, they're filling up with their ears, not their eyes because they sort of filled up the eyeball time already. And I think we're in a position to take advantage of that.

The other thing I'd add is we are laser-focused [indiscernible] as Bob said, on driving results, creating equity value for our shareholders. I think that's important why the 2020 reference was important in terms of the generation of free cash flow. So we're not confused about that in terms of why we're here which is to create that value.

Great. Well, listen, thanks, guys, for coming. Great to see you. Thanks everybody.

Thank you.

Thanks for the time.