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

My name is Marlane Pereiro. I'm the High Yield cable and media analyst here at Bank of America. Today, I have with us Stu Rosenstein, CFO of Townsquare as well as Claire Yenicay, Executive Vice President of Investor Relations. Thank you both for joining us. We appreciate having you.

Thank you for having us.

So just starting out at a high level, thinking about broadcast radio, do you think that broadcast radio can fully recover to pre-pandemic levels? Or has the TAM permanently shifted?

I think in our markets, small markets, I think it can. We're not counting on it. To us, broadcast is a mature cash cow machine that helps us generate all our free cash flow. Our main focus will always be digital now and going forward.

And then turning to the advertising environment. Could you just discuss any potential upside drivers for both local and national that we could see materialize as we move into 4Q and possibly into next year?

We have a crystal ball. Everybody has their own crystal ball. Hopefully, our administration start talking more about no more raises in interest rates as we get into the beginning to middle of next year, to talk honestly because Wall Street's financial machines motivated to do so. Hopefully, you start talking about some cuts. I think the American psyche has as much to do with this as anything that's out there. We're in small and midsized markets. 94% of our customers are small local businesses, like HVAC companies, farmers, nail salons, boutique, men's and women's stores. Our advertising is not like the NFL cities where if any of you live in small cities, you'll hear radio advertisements for local restaurants that you go into or stores that you buy stuff at. If you live in big cities, all you hear is wireless ads and GEICO insurance ads, right? So as interest rates rose from levels of next to 0% to 2% to 7% and 8%, it became very hard on small businesses. People took out car loans and second mortgages, college loans and all of a sudden your interest expense triples every month. It's tough. So as we get into next year, I think we'll start hearing leveling off of rates, no more raises, the future prospect and hopes of cuts. I think the psyche will get better, the economy will lighten up, I think we'll start seeing it. Currently today, I think we have more money on the books for Q1 of next year than we did this time for this past year. National is still not doing as well as it had in the past. It started really falling last year in Q2. So we have easier comps for next year.

Great. And then just continuing with advertising for just a moment, what categories are you seeing strength in, which are lagging? And it doesn't seem to be the case, but have you seen any impact from the auto strikes on auto advertising?

So auto is still struggling. Auto is still struggling. Financial services are struggling. Everything that's kind of interest rate related is struggling. But home care and remodeling and renovations and real estate, all that kind of stuff is kind of holding its own and doing pretty well. Also, our markets -- all of our markets have some sort of underlying stabilizing economic base, either a large college, university, town, military bases in the town, state capitals. So we don't operate, and it's one of the precursors of what markets we go into and buy. We won't be in real estate boom buzz markets where when the economy turns bad, there's nothing -- we have businesses with people who live in these towns that have businesses. So when the interest rates are higher, interest rates are low, they still have to be in business. And the only way for them to get people to come into their business and buy their goods and services is through advertising. Obviously, they'll spend more, advertise more when things are better and be conservative and cut back when it's not. But this was a very tough environment this year. And last year 2022 was a record year in revenues and EBITDA profits for the company. And we were one of the few media companies that came out and basically gave full year guidance back in the beginning of the year when we reported full results for last year and we basically reaffirm them and made them every quarter going forward. And we just came out at the end of Q3 when we released Q3, it was reaffirmed full year EBITDA and revenue. So as Tiger Woods says, it's really pleasing to win a tournament when you're not playing your best. So I look at -- we're so proud of our company and our people and our sales force and our presidents and our RVPs to have made EBITDA in a really tough challenging environment. I think we did pretty well, and it really goes back to the thesis. The thesis was, let's go into a market, small midsized markets where we kind of built a defensive moat for ourselves, where we won't see competition from other digital players. And let's morph a traditional terrestrial broadcast business into a new world digital business. And now today, we have digital advertising display, digital advertising streaming. We offer digital marketing services. We ordered digital programmatic sales, which enables us with our own fully -- full funnel in-house. We don't white label anything. We have over 150 world-class digital engineers and coders. All of our digital products, we develop ourselves, we created ourselves. And we're able to put our clients' products in front of people with a 5 to 10x higher propensity to buy their products or services in the next 7 to 10 days, and that's our fastest-growing product, Townsquare Ignite. We're now 54% of our revenues come from our digital products and 52% of our company's profits come from digital. So we're about halfway there in our thesis. We've had some pretty tough robots. We had COVID. This year was a tough year. But this year, we're doing pretty good for a very tough year.

Absolutely. And then political next year, high-margin political ad revenue, you had given a range. Do you see any upside to what you've guided to in terms of political advertising revenue next year?

Political is a tough one to forecast. Political comes in late in the year. It's not huge for us like it is for some big markets and big digital markets. On an off political yield, we'll do between $2 million and $4 million and in a presidential year or political year we'll do between $8 million and $10 million or $10 million and $12 million for a presidential year. I personally -- it's not -- this is not official guidance, but personally -- unfortunately, I think there's such a horrible divide between Republicans and Democrats. And I think the arguments and the fights and the feelings are so at a fever high, the fever pitch, I just think there's going to be a lot more advertising next year than there ever has been before. So we're hopefully optimistic.

And you've talked about $14 million to $16 million, if I'm not mistaken. Is that correct?

We did.

Yes. Our all-time high was $16 million in the last presidential cycle. So we're not going out saying that we're going to beat that, but you never know.

I just think that there are so many people that have such strong feelings for and against the likely 2 candidates on round 2, like the Rocky 2 and Rocky 3. People are going to be spending a lot of money, hopefully on political.

Great. And then moving on to Interactive. Your subscription digital marketing solutions business, which is geared towards smaller businesses. Next year, you expect to return to growth, top and bottom line. So can you talk about the key drivers there? And also from a timing perspective, do we start to see that momentum later in the year, earlier in the year? Just kind of getting a sense of when you think that momentum will start to kick in next year.

Okay. First, let me kind of rephrase step back a little bit. The company -- that division is still extremely profitable. It's a $90 million plus run rate business at high 20%, 28%, 29% margins. And this thing has been on a fever pitch tear since we started in 2012. So growth, as a matter of percentages is all relative. You have one customer you had 2, you had 100% growth. At the end of last year, when we had 30,000 subscribers, it's harder to keep that percentage growth at the same level because your base is so big. Again, this business targets small and midsized customers, right. The independent insurance sales, the local CPA, the small law firm, the nail salon, the small pizza parlor right? Again, it's been a tough business. It's been a tough environment. So we can tell -- we had 2 little hiccups, 2 bumps in a row. One is, we had trouble getting all of our employees to come back to work and work in the office. So we had to go from a one-on-one customer relationship model to a pooled model like the call-in service. So we're pretty much passed that. So I think the customers that we lost due to them not having their personalized service person. I think we're passed that. I think we're good. I think the model is much better. I think service is much better. We've had that feedback. So that's good. The customers going out of business, it's probably at a record high right now. The economy is still very tough. Interest rates caused more businesses to go out of business. And we can tell because they pay by credit card by the first of the month. When a credit card gets denied, you know that they're either out of business or just about to go out of business. And we see it slowly getting better, right? The last few months have been noticeably better than most of Q2 and Q3. Timing on when we're going to get back to growth in subscribers, middle to the end of next year. It takes a long -- like we've lost 5,000 subscribers on a net basis. The churn the customers we're losing is slowing and also the growth in new customers is stabilizing. It's going to hopefully get back to new growth a little bit better as we get into a better economic cycle next year.

Great. And then just moving on to Interactive, the margin profile there is in the high 20s, I think it's about 28%. You've previously discussed that you expect margins to kind of be a little bit suppressed in the latter half of this year. And then as growth resumes or kind of -- or in a better environment next year. How should we think about that margin profile evolving as we move into a more stable and potentially more robust environment?

So we manage that margin based upon growth. And for us, growth is how many new salespeople and how many new account managers we hire. So we've always managed that business to be in the high 20s, between 20 and 31%. So we're going to keep at that growth level. We'll pull back a little of the hiring if business gets worse and we'll accelerate it if it gets better. So I think people could feel confident that we're going to always manage that business in the high 20s.

And then shifting to Ignite, your digital advertising segment. It seems that there's similar products from other radio peers and competitors. So what are the differentiators of your offering versus some of the others that are out there?

So the differentiators are huge, and they're really important. First differentiator is, is that we own the whole platform, we created it, we developed ourselves. So we're not white labeling it. In our size markets, you could get that type of business from other folks, but they're usually using somebody else. So when they get a question, they have to get back there. They never really understand the question. They never interpret the question because the people that are talking to the customers, they're salespeople, right? Like we have Townsquare University, TSU, every one of our sales people have to go through Townsquare University every year. So they know every aspect of how programmatic cells works, and they have somebody in their building, that's coding it, generating it, coming up with the algorithms that they can talk to and speak to. So they all know it before they go out to sell it. There's really no questions that they get they can't answer. So the fact we control the whole funnel from start to finish internally with our own developed and calculated algorithms and products is tremendous. That's a big advantage. It gives a lot of confidence to the customer. Second, we're so large. We can buy from these platforms where everybody else can. So we're able to actually go out and buy inventory at very aggressive prices, very attractive prices, where small shops really can't. And also all of our markets are kind of connected in the eyes of the digital world. So it makes us seem tremendously larger than we are. So we're always able to get product, buy inventory cheaper, put it out there cheaper, that's the second. And the most important thing is, is that we optimize these programs twice a week. Let me give you an example. Let's say we're going to go out and run a campaign for fly fishing -- fly fishing store, and we know that based upon our algorithms that avid fly fisherman go to cabelas.com, flyfishermanusa.com and the weatherchannel.com because that's the first three things a crazy avid fly fisherman looks at in the morning to decide what to buy, where to go and what to and how to dress and what kind of flies to use. So we'll say, okay, let's do a $6,000 campaign. And let's put $2,000 on each and let's see how it works. So a normal -- our competitors and most advertising agencies will wait until the end of the month and say, okay, well, you got a ton of hits on fly fisherman when you were saying weather.com, but not so many on Cabela's, where we'll do it twice a week. So we'll start the campaign on Sunday night, midnight, Wednesday night, midnight, we'll get Google Analytics. We'll see, okay, fly fisherman USA got us a ton, weather channel got a ton, but Cabela's did nothing. So for the first 3 days of the monthly campaign of the $2,000 buy, we only -- we didn't get enough. Let's not continue it. So we spent $40. Let's take the remaining $1,960 split it 50-50 and put it on these two, right? Then at the end of the next Sunday night, we'll do it again. And we'll say, all right, it's going well. And twice a week, we'll optimize that campaign. And we'll even give thought to putting it somewhere else. Whereas with somebody else, if you're advertising over there, you're doing this programmatic with somebody else at the end of the month, they'll tell you, but they've already wasted the one dead source. So it's -- our customers love it. It's very, very helpful for them. It makes the campaign very successful.

That's great. And then just shifting to free cash flow items. To confirm, you do not expect to be a material cash taxpayer until 2026 due to various tax shields and NOLs.

That's correct. We have over $100 million in federal and state NOLs, and we have a lot of other tax shields. We conservatively say 2026, personally, I think it would be a little bit longer. So that really helps with our cash flow generation.

And then on CapEx, could you just remind us, if you could give us a sense of what maintenance CapEx is versus kind of a typical normalized run rate CapEx?

Maintenance CapEx is between 60% and 70% of all CapEx. As we grow and make investments in new markets and get better technology for broadcasting boards and way to do voice tracking. That's the remaining part. And also, we're hiring so many people in the digital space, computers and mundane things like desks and chairs and screens make up the rest.

Great. And are there any assets that you would consider non-core to the business that you could potentially monetize if you chose to or needed to?

No, we've been doing that a lot over the last, I'd say, 2 or 3 years nothing material really that we would get rid of. There are markets that have tower facilities that we own that we don't have extra, that we don't have rental income from. Have other people in it that we've been able to consolidate, put two antennas on one and sell those off, but really nothing material.

Great. And then you do have debt due in '26. So can you give us some guidance on your balance sheet strategy and also what you think is kind of the right leverage for the business?

Okay. So right now, on a net basis, we're levered at about 4.5x. In 2021, we floated a $550 million bond with a 6% and 7%, 8% coupon. In the last 3 years, we've paid down $47 million of that. We bought them at prices below par. So we have $503 million of bonds outstanding. Probably around this time next year, we'll be in the market looking to refinance those. We'll take a look and see what's more advantageous for us if rates are significantly better in the loan market versus the bond market, we'll make that choice. We think that we'll be under 4x levered when we come out to refinance. We have $60 million in our bank accounts today. By the end of the third quarter next year, we'll have $100 million, assuming we don't buy back any more bonds. But that's just a net basis, that will be the same. We'll probably go out looking to borrow between $430 million and $450 million. And that leverage point at that point will put us comfortably under 4x. Long term, I think -- midterm, we'll get to 3.5 and long term 3x leverage is what we think is the appropriate amount for a company of our size.

Great. And as you alluded to, I know historically, before the current rate environment, you had talked about potentially a loan and it's something that you would consider, where would rates have to be to make that an attractive endeavor? Or is it more the trajectory of rates as you kind of perceive them to be?

Well, SOFR today is 5.31, future yield curve has it when we're thinking about the market at 5.1. Current spreads in this environment for both bank and bond are anywhere for a company of our make up 2.5 to 3.5. Hopefully, the administration will start talking about ceasing raises and start talking about lowering by cutting rates at some point. So people that we've spoken to at Bank of America, who are really in tune to this think that spreads could be between 1.5 and 2.5. So the yield curve of SOFR 5 to 5.1, it could put us like 8.5 with the lower -- with our lower amount outstanding interest expense will be less. It will be closer to 30 to 35. Given parity in both markets, we probably want to go with a term loan. It's easier to pay down the debt. We think rates are probably more likely to go down and go up over the next 5 years, starting a year from today. So having a variable rate instrument in a decreasing rate environment, definitely advantageous, probably go that way if it cost you the same.

That's helpful, Stu. And then shifting gears a bit to the FCC. And obviously, the composition of your business is more digital than traditional broadcast radio. But do you think at some point, we will see radio ownership limits eased? And kind of your thoughts on that for yourselves or the industry?

It's unbelievable for us that we haven't already seen that. It's just ridiculous that there are no limitations on digital advertising companies and that we're still handcuffed to the same rules that were put in place over 20 years ago. It's just mind boggling that we haven't seen yet. So I don't know when I've been -- I really thought a couple of years ago before the current administration took over. We were pretty close to getting caps lifted. I think when caps do lift, it will be a tremendous help to the broadcast radio industry. If you have 7 radio stations in a market and you can have 2, 3, 4 or 5, you don't really have to add any more infrastructure. You have one general manager, you have one head of sales, you have the same sales force. It would be tremendous economically advantageous, and I can't believe that we haven't seen it yet. It's -- as we're acting back in the dark ages, it's ridiculous.

That's fair. And then just more broadly, what do you see as the biggest challenges and opportunities for the business today?

Challenges are the continuing raising of interest rates. For us, we have a 900-pound gorilla when it comes to digital competition in our market. So that's not going to be a challenge. It's really the struggles of the small business owner, right? So if interest rates come down, I think the psyche of the business owner and the economy and the buyers will improve. I think there's more upside today looking forward than downside. Some of the potential problems coming down the road are more geopolitical than anything else. Wars, invasions, accidents, but hopefully, those are behind us too or soon to be behind us. And no new ones will come up for lots of different reasons.

Hopefully.

And hopefully, I think the opportunities are really just executing on our digital strategy because there's just so much runway there and tailwinds with the digital advertising growth in the industry.

Great. Thank you. We do have a few more minutes, so we can open it up if there's any questions. Okay. I actually have a few more myself, but I can keep going. On that point Claire, can you just talk about the addressable market opportunity for your digital businesses?

Sure. So there's the Townsquare Interactive business and then the Digital Advertising. For Townsquare Interactive, we've outlined in our investor presentation for several years that how we believe if there is a 9 million customers, SMBs in the United States that fit our target profile. And today, we have a little over 25,000. So we see a huge opportunity there. And there's just -- even with our current challenges this year, we're still so excited about that business and its growth potential that we've continued to invest even as we've seen some subscriber loss this year. So that is a huge opportunity there. And on the digital side in our markets, we only have less than 10% digital market share on average in our markets. So we think there's still a huge opportunity alone in that space.

Great. Wonderful. Well, that's all I have.

Okay. Thank you very much.

Stu and Claire, it was a pleasure having you both. Really appreciate it.

Great to see. Thank you. Bye-bye.