Townsquare Media, Inc. (TSQ) Earnings Call Transcript & Summary

All right. Good morning, everybody. Again, I'm Stephen Weiss, the high-yield cable media and entertainment analyst at BofA Securities. And I'm very pleased to welcome Townsquare Media back to our annual Leveraged Finance Conference. With us on hand from the company today is Bill Wilson, CEO. As always, if anyone has any specific questions, they would like me to post just submit those through the webcast, and I will do so. And with that, welcome, Bill. We can dive right in.

Thank you, Stephen. And good morning. Thanks for having me.

Good morning. So let's just start with the operating outlook. So third quarter, your top line was down about 15%. And I think on your early November earnings call, you shared a goal to perhaps have that cut in about half to about 7.5% or so in 4Q and that EBITDA would improve sequentially. So we've obviously had some positive news on the vaccine front in the last several weeks, but the overhang of the second wave persists. Now as we enter December, how are you feeling relative to about a month ago? How do you see business carrying into '21? And how soon do you think you can recapture what you lost in '20?

Yes, makes sense. So as you just noted, in Q3, our revenue was down 15%, which was an improvement from Q2 is negative 35%. And I stated on our Q3 earnings call, I was hoping to get that 15% down in half to about 7.5%. So as we sit here, today, on the last day of November, feeling quite good about that. We've seen a solid rate of sequential improvement month-over-month in October and November as well for Q4 as well as pacings in December. And quite honestly, impressed, even more so since our call. And it's consistent with our call, but feeling really good about the goal we outlined. Advertising continues to improve month-over-month, both on the broadcast advertising standpoint as well as digital advertising. We noted on the Q3 call that our broadcast decline moved from negative 45% in Q2 to negative 23% in Q3 and September was down 14%. So we see continued improvement there with political, obviously, but also importantly, without political, now that political is behind us. And probably most importantly, given that we've really pivoted to become more of a digital company, definitely from a growth perspective, digital advertising returned to growth in Q3 with our Ignite programmatic and 10%, so double digit. So feeling quite good about Q4 and the rebound. And as you just noted, expect our EBITDA not only to sequentially improve but we think we have a solid opportunity to match Q4 2019 EBITDA levels, and that was a goal that we said we'd focus on, on the last call as well.

Okay. That's good to hear. So I know you mentioned digital in your initial comments here. So you're -- Townsquare is very unique and that you generate a very outsized proportion of your revenue from digital relative to most of your so-called industry peers. For those less familiar with your company, can you explain maybe what you're doing? How you've diversified into a local media and digital marketing solutions company? And perhaps why this is not being easily replicated elsewhere, do you have a unique proposition, given the type of markets you target?

Yes. I think there's 2 key differentiations from us and the peer group in the broadcast industry. One, as you just noted, is we don't compete in the top 50 markets. We've been very focused on operating outside the top 50 markets. And it is quite -- in my view, it's very different business although we're in the broadcast business, it's a very different broadcast business in those markets. So that is one clear differentiator. We can talk more about small markets versus large later, if you'd like. But probably the most important differentiator is our digital revenue. As you just noted, the industry, as noted by Borrell is less than 10% revenue is digital of their total revenue for radio operators. For us, it's 44%. This year, through Q3 as well as in Q3, was 44% of total revenue was digital. Last year, we ended at about 1/3. And now, we'll continue to increase year-over-year. So we will clearly approach 50% quite rapidly. Our digital revenue is made up of 4 key components: one, which is the smallest, is monetizing our online stream. So people who are listening to our AM FM broadcast, but they're listening to it via mobile phone or a smart speaker or a stream in that capacity. The second bucket is monetizing our owned and operated websites through display, video, social media. So those 2 are really owned and operated, but those 2 comprise the first 2 buckets. The third is our fastest-growing advertising solution in the company, and that's called Ignite, and that's digital programmatic advertising, primarily video, display and social. And we're, in essence, hyper targeting customers, clients for customers. So they define who their target audience is. And we go out craft the message, create the message and deliver their message at the right time to that individual across the Internet, including OTT. So if someone's watching Hulu or Roku or YouTube on their TV, we're serving those ads. The fourth bucket is probably the most differentiated vis-à-vis our peer group, and that's Townsquare Interactive. It's a digital marketing solutions company, where it's a monthly rate that SMBs provide, on average, $300 a month, and we build their websites, host their website, create all the content on the website, all the written word, all the photography, all the images. We do unlimited updates, directory listings, reputation management and probably most importantly, to the client, in addition to having the web presence, and speaking directly to the customer is organic search traffic. So not paid media, but people who find their website organically, we guarantee first page placement on Google for a certain number of keywords. So that for, say, for a plumber in Abilene. I ask the plumber in Abilene, how much is a new customer worth to you. Let's say that customer says that -- plumber says $600 a year on average. And I ask the plumber, how many searches in Abilene, Texas are there for plumbers on a monthly basis? They say, usually, they don't know. So we pull that information, we provide them those insights and say it's 1,000 searches for plumbers in Abilene, Texas on a monthly basis. I ask the client if based on these keywords, do you offer all these services. They say they offer 8 out of those 10 services. So let's say, 80% of the traffic is something they could get business from. So that's 800 search queries a month. I'd say to the client, if I could get you 1% of those clients, so 8 clients, at an average annual lifetime value of $700, would you pay $300 a month for that? And then obviously say, yes. So that's the fourth bucket as Townsquare Interactive. It is a recurring monthly subscription and we noted on the last call, that's grown consistently through the pandemic. And in Q3, we had the highest number of net subscriber adds that we've ever had. And we noted in Q4, it will be plus 17% year-over-year, Q4 '20, Q4 '19. And probably the last point before I turn it back to you, Stephen is that will be over $70 million in revenue this year at a 30% margin. So approximately $21 million in profit. But probably most importantly is the target market and the opportunity over the next 5 to 10 years is so vast. We've said within 2 to 3 years, it will be $100 million in revenue, but more importantly, we have 22,000 customers today. There's 8 million SMBs that fit the target profile for this business for us. And that's clearly a differentiator that's driving that 44% digital revenue that you alluded to is very different from the rest of the peer group.

That's helpful down for us. So I know you've talked about a goal of 30% margins, but how do you balance investment and growth as you pursue that. I know you spoke of a second location possibly out West. And then maybe can you just touch on the competitive landscape, like who're you bumping heads with when you pursue this business in your markets?

Yes, I'll start with the competitive landscape. So the majority of our 22,000 clients today as well as when we speak toward the addressable market, they have a website already. They're either utilizing a self-serve platform like Wix or web.com or something along those lines or they're with a local digital agency in town. And that digital agency usually has an upfront fee in 5 figures and then charges them a annual rate for updates and things along those lines. So we come across and say, "Hey, for a price point of roughly $300 a month, there's no contracts, you can leave at any time if we're not providing you great service. And importantly, we're not driving those target customers to your website organically for you to get a good return on your business. So it's very sweet competitive spot for us based on the price point and based on the competitive set. Second point, you asked about was in terms of the second location and the margin. So this is a very, very predictable business for us. If you look -- we -- when I moved into the CEO role, the first thing -- one of the first things other than selling live events was breaking out the financials for this business. Because as I was talking to investors, I just got the sense, a, they really didn't understand the business, but that was our fault because we really weren't describing it, and they didn't understand the growth profile as well as the margin profile. So we started breaking out the financials a couple of years ago. But every year for the last 4 years, we've grown top line revenue roughly $10 million, and we've, therefore, added $3 million in bottom line every year. And that's fully loaded with all expenses, including accounting and all corporate type of functions. So we can clearly improve that margin by hiring less salespeople and/or raising the price point. Right now, particularly during the pandemic, we continue to manage to that 30%. So we continue to manage our hiring base, which is really salespeople and customer service to maintain that. At some point, we may accelerate our growth trajectory and take our margins down. Say, I double the amount of salespeople, take the margin from 30% to 22%, just because we know the addressable market is so vast, and it's very predictable in terms of our model. We may do that in the future. The second location, we definitely will open post pandemic. We were about to open it during -- pre-pandemic in this year. But I think it's 2022. I think it's safe to say we'll have a second location out West. And to that point, even during this pandemic, we've been hiring aggressively incredibly talented salespeople, for one, and some of those salespeople have been in Phoenix, and we expect to continue to hire people in Phoenix, even though they're remotely as we build up this infrastructure.

Okay. That's great. Got a question on the podcasting, separate from TSI and Ignite, podcasting has been a major tailwind for many of your peers. It's seemingly not been a big focus of yours to date. Why is that? Is it important in your footprint and to you as a company at all?

Yes. So definitely, I've seen some really great acquisitions from some of the peer group. Our strategy on the digital front, everything we've done digitally has been built in house. We have the -- really, the engineering team and the product team and a core competency to build these products. So we've been -- any acquisitions we've done in the past have been about radio markets, but all of our digital products and solutions have been built in-house, which is a clear differentiator for us. So podcast, obviously, is a double down in audio. Our digital strategy is much broader than that. That said, I'm a big supporter of broadcast, and we really focus on local talent. So we'll leverage the local talent who are on our existing AM/FM broadcast and we'll either take customized bits from those shows or most of our podcasts are content that's specific to the podcast platform. But similar to our broadcast strategy, it is hyper local. We are really focused on the 67 local markets that we serve, particularly with newspapers really being decimated to stepping away from filling that local news source. We've really filled in that void and our online traffic has shown that. And that's really where our podcasting is. It's really, I'd say, complementary to our broadcast business. Clearly, there's an audience for it. Clearly, there's a monetization model but a very, very small piece of our digital strategy. It's really not the focus of our digital strategy, where Townsquare Interactive and Ignite are the focus, but it is a great consumer offering, and we continue to super serve our communities via the podcast platform.

Got it. And then just a question on live events. I guess the question is how much of a contributor do you think this segment can be for the company once things get normalized? I know the portfolio has been pruned and the expense base is largely variable.

Yes. So we -- when I stepped into this role, we owned a largest carnival company in North America called NAME. We had multi-day music festivals outside of our local markets. And we sold the Carnival company, we sold the music festivals to Live Nation to really focus on our local markets. So today, our 200 live events, if there was not a pandemic are happening in our local markets, and that is roughly $16 million in revenue and $3 million in profit. So it's important from a marketing perspective, but not important from an overall financial perspective.

Got it.

If that makes sense.

It does. And then just on your cost base, if you could sort of remind us what's been taken out to date, how much is yet to be fully recognized in your numbers? Where is this primarily being derived? And then of this, what's perceived to be permanent versus more temporary in nature? Are you where you need to be?

Yes. So we've shared publicly on the prior calls that back in April, we took out $1.7 million of monthly expenses. About $400 million to $500 million of that was non-payroll. So T&E, 401(k) match, we suspended G&A, corporate. I expect about 1/3 of that to come back in a year to 2 years. The remaining $1.2 million was headcount reductions primarily in corporate and support roles versus local market roles. We didn't make any cuts in Townsquare Interactive or Townsquare Ignite given their growth profile. Of that $1.2 million in headcount reductions, maybe 1/3 would come back. I mean, a lot of that is based on our digital growth and digital hiring. We also, as you may recall, not only suspended the $8 million a year dividend, but we withdrew it. So there is no plans to ever pay a dividend again. That is a great -- particularly with our profile, I think that saves us a lot of cash, which will help us on the leverage side as we go into '21 and '22. We also expect CapEx reductions that will be permanent, roughly $3 million. And we recently, in the last 100 days, implemented an additional about $5 million in annualized savings, again, mostly through restructuring. So we're where we want to be, vis-à-vis the peer group. We clearly didn't make we consciously made the decision and with the Board's support, we cut 6% of our full-time workforce back in April. Obviously, it was a difficult decision, but it was much smaller in comparison to our peer group because we wanted to be not only well positioned but the best positioned for the rebound whenever that may come. And quite honestly, I think we've navigated this from a revenue and expense standpoint, be it advertising, be it broadcast, be it digital, be it TSI, and you'll see that our revenue declined, I think, is best in the peer group year-to-date as well as in the Q3.

So let's pivot to the balance sheet and then come back to other areas with time. So your leverage profile is obviously taken ahead as everyone has in this pandemic. Where do you see your leverage bottoming out from here? And how quickly do you think your leverage metrics can snap back. And then if you have any just comments on your liquidity and overall runway. I don't think there's any maintenance covenants you have of note, but it looks like you'd stay free cash flow positive even if EBITDA were to merely hold at these levels. So just any comments on like liquidity and covenant comfort as well.

Got it. So I'll start with the leverage point. I think Q3 2020 leverage on a net basis was about 7.8x, 7.78 to be exact. On a gross basis, was 9x. We view net as gross just because we're stockpiling cash. So call it 7.8x. But I believe that will be the worst point because every quarter starting in Q4 2020 we'll improve. Obviously, the biggest improvement in our total and net leverage will be after Q2 2021 because the worst quarter of Q2 '20 will roll off. As you may recall, for those who aren't familiar, back in 2019, at the end of the year, we were 4.65x net leverage at 2019. So I expect at the end of '21 to be back in the mid-4s on a net basis and then decline from there in '22. We have 0 liquidity concerns, none at all. We are growing cash, as you mentioned, even during this pandemic. We're growing income from operations. So we have no liquidity concerns whatsoever. We'll end the year, I think we noted on the Q3 call was roughly $85 million in cash, and we continue to build cash, and we have a $50 million undrawn revolver. So liquidity is not a concern right now. And I believe our net leverage will return back to '19 levels towards the end of '21 and go even lower in the low 4s in '22.

Well, but it's good to hear. That's a good segue to my next question about your debt maturities, I guess, they're not that far off in terms of the term loan in '22 and the bonds in '23. I guess the question is, how do you plan on addressing this, I guess, the term loan will go current at some point next year. And then if you had any ability and inclination to repurchase your debt at discounts, I recognize that discount has certainly shrunk with the market rally in recent times. But any comments on that as well.

Yes. We took advantage of some really low rates and did buy some bonds during this time period. But as you noted, they bounced back quite significantly since then. So our current plan, as you just noted, we have $545 million of debt currently, half bank and half bonds, both approximately $270 million are very small. So part of the challenge we hear from our bondholders as well as our bank debt holders is lack of liquidity, and it's just such a small bond as well as bank, and we actually went out and tested the waters on amend and extend on the bank, and the feedback was, it's just way too small of a loan. So our current plan Stu, our CFO and I, Stu is also the co-founder of the company is, at the end of '21 look to refi, and we'll probably do -- we'll stockpile the cash. So as I noted before, we'll be, call it, $100 million cash conservatively. And then we'll refi probably 400 million at that point, call it in the low 4s and probably do an all bank deal versus having a bifurcated bank/bond structure just because if we did that again, our belief and the feedback we're getting from our debt holders, that would be too small. So we expect, as you just heard from me, to return to our leverage levels of '19, if not better. Return to our EBITDA levels, quite honestly, in Q4 of '20, where they were in Q4 of '19. And then refi based on that environment and take advantage over the next 16, 18 months until it does come current, the first part in April '22 to take advantage of the low interest rate we're paying.

All right. Sounds like a good plan.

Thank you.

In terms of your -- I guess I wanted to ask you about vantage point of your primary equity holders have been with you for some time, as I understand it. I think they began putting your company together in the aftermath of the last down cycle. How would they characterize the play from here from their vantage point if they were on this call?

You're correct. Stu Rosenstein co-founded with Steven Price, who's our Chairman, started to build these -- the company out of the assets off of the last downturn in '08 and '09 and then they hired me where I was the President of AOL. I joined the company as it began operations in 2010. So as it relates to the primary equity holders and their vantage point, quite honestly, a tremendous opportunity going forward. We shed our Events business, which a lot of our investors felt was highly cyclical, highly risky, very low margin. If you look at our earnings transcripts since we went public, almost every call, every question on the call as well as post the call from analysts and investors as all about live events, our Carnival business, our music festival and really nothing about our digital business. And now our digital business at 44% of our current revenue, but more importantly, the growth profile as well as the margin profile, most investors and most folks don't realize that yet, and that's our fault. And that's my job primarily over the next 18 months to show that and prove that out. And we really feel strongly that there's a tremendous hidden gem and hidden value in Townsquare Interactive. If you think about what I was describing before with a recurring monthly subscription business, nobody else in the peer group has that, be it TV or broadcast. But if you look at a company with right now, an annualized run rate of $80 million. We've publicly stated and reaffirmed on our Q3 call that, that will be $100 million within 2 to 3 years at $30 million in profit. You look at a company like Wix or web.com, and they're trading anywhere from 16 to 20x multiple. If you apply that multiple just to the $30 million in profit in the future of the $20 million in profit today with Townsquare Interactive, you're -- in essence, north of our market cap, with just that piece of our business. So I think when you add in Townsquare Ignite and all of our digital assets to that profile, there's tremendous upside. It's really our job to continue to execute, but probably just as important, make our company more understandable and have more people recognize that we're proud of our broadcast roots and that broadcast is part of our DNA, but we have completely pivoted to be a digital company. And our growth profile, our margin profile is all about digital, while we manage the broadcast business, which is a cash cow is incredibly advantageous in our size markets where we reach 1 in 2 adults on average via our radio station, just to broadcast in our 67 markets. So if I told you, you can market for free to 50% of the adult population in our markets, what are the digital products and solutions you could build for those markets, it's a really compelling story opportunity. So we'll manage the broadcast business in line with its revenue, meaning if it grows slightly, we'll manage the expense base appropriately. If it's neutral, we'll manage the expense base. Have it declined over the next 5 to 10 years, we'll take out the necessary expense so that it remains a cash cow, while we continue to supercharge digital and that drives not only top line growth, but importantly, very strong margin growth.

So do these businesses belong together for the long term? Or is it not really a good way to segregate the 2 and capture the valuation differential?

Yes. The great news for us is Townsquare Interactive, which probably is potentially the most separable because it does have a separate sales force outside of our markets. And 55% of the client base is outside of our markets, and that compares to roughly 40% a couple of years or so. So clearly, the growth profile there continues to be supercharged by outside the market. But that said, we're growing a lot of customers in our markets through Townsquare Interactive, and Townsquare Interactive has great advantages to our Ignite business and our digital O&O business. So although from a distance, it may look separable, we definitely want to communicate the value better and the value proposition and the business better, and that's on Stu and I. But it really is one ecosystem, particularly you have slightly lower churn in our markets versus outside. But more importantly, our Ignite business, which currently is only offered in our markets, and we've said on public earnings call that we will do what we did with Interactive. So Interactive, we started for the first 3 or 4 years only in our markets, and then we expanded outside our markets. Ignite is now roughly 3 years old, coming up on 4 years old, and we're testing selling outside our market. Test early are very positive. So I would expect with confidence that Ignite, just like Interactive, fast forward 5 years, will have more clients outside our markets and in our markets, but Interactive and Ignite play very well together in our markets. So I don't look at them as separable. I think there would be more opportunities by combining them as we are, and that's why we've done it. So it's more our -- it would be easier to show the value by separating it but I think there's a lot more value to unlock on both sides of the business, keeping it together. It's really -- the onus is on me to make sure investors understand it better.

Got it. So let's -- I guess, we have a few minutes left here. Let's pivot back maybe to radio again. And if you could share any updated thoughts on streaming in the digital dashboard. From your perspective, is radio taking the right steps to remain relevant in the digital age? Will the connected car support traditional radios, prominence going forward?

Yes. I think one thing that pandemic has shown is that a lot more people are streaming because they're in their home, be it through Amazon, Alexa or Google Home. So we've seen the increase in streaming based on consumer behavior, maybe being less in the office, less in the car. So I think that's a great proof point that particularly local, we're so different than other companies that were hyper local. Where you're seeing others in the peer group go to a national model, which I trust makes 100% sense for them and their strategy, ours is the polar opposite of that, where we're hiring local talent, not only in sales, but over-the-air and digital to fill that void and serve that customer. So the dashboard point is an important one. So each one of our radio station brands has a stand-alone app. So unlike radio.com or iHeart, which again, I'm sure makes sense for those companies. Our focus is on stand-alone brands and stand-alone apps. So it's not just streaming, but it's content. And when you get in the car, what do you do? Most customer consumers plug-in their phone because they want to charge their phone and keep the battery charge. So all of our apps are integrated with Apple CarPlay, Android Auto. And when you plug-in your phone, your dashboard replicates your apps that are compatible with those devices. So for us, it's a great advantage because people are plugging their phone in more, and all of a sudden, forget where the AM-FM button is, our apps are front and default on their screen. And not only that, all of the audio controls and the voice activation and steering wheel work with our apps. So it's a -- it's actually a great advantage for us because now we control the distribution.

Excellent. I'll squeeze in one more. M&A, how does that factor into the equation once you get back towards your target leverage goals? And how do you regard the overall state of the portfolio as it stands today? Are there any other candidates that would be obvious divestitures at this point that would move the needle?

No divestitures. All of our assets are providing quite a good return for us at this point and provide great benefits. As it relates to growth, our current plan, as we noted before, is to refi, primarily do a bank deal at the end of '21, beginning of '22. So we're going to stockpile cash between now and then. So I wouldn't expect any acquisitions between this point and until we do that. Post that, I think there'll be a tremendous amount of opportunities in the broadcast space in the local space. And again, we would be disciplined as we've been for the last 11 years. And when we look at markets that fit our size profile, so outside the top 50, but also being #1 or 2 in market share. So we don't want to be looking at leading positions with great sales team that we can execute the playbook that we've executed based on other acquisitions we've taken from Cumulus or Millennium or others. So I think there's an opportunity, particularly in the backdrop of potential D Reg. But even without D Reg, a lot of these broadcasters, as you noted at the top of this call, don't have a diversified portfolio to grow their revenue, they're primarily audio or broadcast and particularly mom-and-pop or regional operators, I think even if broadcast returns to growth, they don't have the hyper growth of the digital opportunity. So I think there'll be many opportunities in our sized markets to grow the portfolio. But I wouldn't look for us to do that until '22 post the bank deal that we've done a complete refinancing of our company.

All right. Understood. Bill, I really appreciate your time. I think we are out of time. I think we've had a very productive half hour together. Hopefully, the audience agrees. And we look forward to getting you back next year, hopefully, physically.

I look forward to. Yes, I believe, hopefully, November, we'll be physical again. But Stephen, as always, thank you for the questions. Appreciate the opportunity to talk to all of the conference attendees that joined for this session. Be safe, be well.

Take care.

Bye-bye.