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. We're very pleased to have with us from Townsquare Media, Bill Wilson, CEO; and Stu Rosenstein, CFO. Thank you very much for joining us today.

We're good to be here.

Great. Thank you. So just to start off on the advertising side, has there been any shifts in conversations with local and national advertisers post-election? And any insights into 2025 that you can share?

Yes. So we heard a lot of hesitancy going into the election. Obviously, I'm sure you've heard that from many in advertising, a lot of clients waiting to see what's going to happen, also how quickly the determination of what was going to come out would take place. So we're very pleased, and it was our expectation that once the election happened and it happened quickly with the result, we've seen people starting to place particularly for December and into Q1, local and national. When we reported our Q3 earnings just around a month ago, we had shared that our national broadcast advertising was down over 20% and that's moderated down to still a double-digit decline but not near the negative 20%. And we've seen a nice uptick in local as well, placing for Q1. So definitely moderated since the election, which was our expectation. Very happy to see that. And then for Q1, our pacing is improving for national as well as local. So feeling going good into next year. And the results we've seen in the last 4 weeks and what we're facing now in December are right in line with the guidance we gave on our last call for our broadcast advertising.

Great. And are there any particular categories that you can call out in terms of maybe better than expected 4 weeks ago? Just what are some of the larger categories that are key drivers on both the national and local side?

Yes. So the good thing for us is our broadcast business is really driven by local. National broadcast advertising is less than 10% of the company's revenue. So it's about 7%. And that's been coming down quite consistently. Our view is that national is in a secular decline. We don't expect that to return to growth. That may plateau over time. And local is, in our view, a traditional cash cow. We view our broadcast business as a traditional cash cow, will moderate the expense base with the revenue. In terms of our 5-year plan, we expect broadcast to be a slow decliner with national performing worse than local, but all baked in down a couple of points. Some people have a different view and they end up being right, that would be wonderful. But in terms of categories, things like auto, commercial real estate, retail, entertainment, all of those are probably the primary larger categories. But really not a significant change in terms of certain categories driving growth versus others declining. Our view is the industry is generally in a secular decline across all categories.

Great. And then as you did mention, Bill, that national is in a secular decline. So how do you think about that business and especially within the context of Townsquare overall, let's say, 2, 3, 5 years out?

Yes. So we -- again, we view broadcast as, call it, a negative 2% to 4% CAGR ex political. And we've been moderating the expense base so that our broadcast business is still, I think, in the trailing 12 month, 26% profit margin. which is better than iHeart much better than Odyssey, Cumulus Beasley, so forth, the other publicly traded companies. So we've been able to do a great job of moderating the expense base along with the revenue, and that's what we expect to see going forward and manage it that way. Our growth driver is digital, which I know we'll talk about in a few minutes. And we don't think we'd have the success we've had in our digital advertising and digital marketing solutions without the connection of radio. I think one of the key differentiators from just a pure radio perspective is Townsquare is the only local media company, not just broadcast that is focused on markets outside the top 50. So when you think about -- our average population is about 300,000 people. And these cities were in 74 markets have been decimated from a local news and information standpoint. I'm sure everybody is familiar with the decline of the newspaper. There's many markets that used to deliver a newspaper printed 7 days a week, even 5 years ago, who don't even have a printed paper anymore. So we've come in to fill that void from an online perspective as well as an on-air perspective. So our time spent listening in cume has been tremendously stable over the last several years, where I think the industry at large has great cume, but the time spent listening has been decreasing. So again, I think there's potentially plateauing in that business. But from a strategic planning standpoint, we look at it as a slow decline, we'll moderate the expenses and our growth will be in digital.

And then on political, obviously, a little bit lower than expectations. So can you just discuss some of the puts and takes there? Was it race dependent? Was it dollar shifting to other mediums? What's your expectations also on a go forward?

Yes. And I think TV did pretty much where they thought. Our expectation on a full year basis was $16 million, which would have matched our best year in 2020. We came in just short of that at $13 million. So still the second best year ever in the company's history, but not what we were hoping for. Obviously, a $3 million variance there. We thought we'd get a lot more dollars in Michigan because it was a swing state, but we were really only in Michigan. That was the only major swing state in terms of battleground. And there was obviously no primary where previously in 2020, we had a lot of money from Bloomberg and others early on that didn't happen. So didn't meet our expectations by about $3 million. It's a high profit margin, almost 90%. So that's a decline of about $3 million in our EBITDA that we were expecting. And that's -- we lowered our guidance on the Q3 call or narrowed it from [ $100 million to $101 million ] as a result. But again, still the second best. So I don't think it's in a situation where we're not going to get those dollars in '26 and '28. I just think it's also where you situated in terms of the battlegrounds.

Got it. Great. And then moving on to Interactive. Obviously, the digital marketing solutions business. For 4Q, you're actually looking at or expecting revenue growth in that quarter. Can you discuss some of the key drivers, whether that be the SaaS management platform? Basically, what is driving some of that growth?

Yes. Really proud of the Townsquare Interactive team. It's a division of the company that we built organically over a decade ago, and we were growing top line revenue, about $10 million profit, about $2.5 million to $3 million a year, hit a speed bump as a return to work and high inflation focus on small businesses with less than 20 employees, less than $5 million in revenue. So we definitely had a couple of challenges over the last, I'd say, 6 or 7 quarters. And as you just noted, thankfully returned to subscriber growth and sequential revenue growth month-over-month and quarter-over-quarter back in March. And now for Q4, it will be the first time we returned to year-over-year revenue growth, which is a nice place to be going into 2025. As you noted, we launched a business management platform. So in addition to building people's websites, hosting those websites, driving search engine optimization, organic search traffic, reputation, all the things we've been doing for a while, we've built a CRM for clients. We built accounts payable and invoicing for clients and that's been doing extremely well. So not only having a great web presence and driving new audiences to the website and therefore, new customers to the business, but now helping them manage their business more effectively as a SaaS business has been a real nice uptick for our business going into 2025. So when we think about 2025, we expect to see not only continued revenue growth but given the investment that we've continued to pour into that division, we'll return to profit growth, which we haven't had for -- in essence, since 2022.

Great. And I think right now, there's about 24,000 subscribers in Interactive. You've discussed the TAM being around $9 million. So how do you think about how far you can extend that subscriber base? For example, what's the target, let's say, maybe by '25, '26? What is the timing and pace of that expansion? And how much of that can you capture?

Yes. And we just opened a second location. Our primary location is in Charlotte, which about 400 people that we opened about a decade ago. We opened the second location about a year ago in Phoenix. That's growing quite nicely. And then we think about 2025, we're really focused #1 and #2 on profit. That's our primary driver just since we didn't have that profit growth in '23 and '24. The team is laser-focused on profit growth and then revenue growth and then subscriber growth in that order. So when we think about next year, I would say we're looking at $1 million to $2 million of profit growth. Again, we had lost some profits over time, so it will be nice to return to that. And that would translate to about $5 million to $6 million of top line growth. We operate that business at a very healthy margin. And then I think when you think past '25 going into '26, we'll go back to where we were historically, if not greater than that, which would be $10 million top line revenue and $3 million profit growth every year.

Great. The margin in that segment is about 28%. So do you see that as a normalized level on a go-forward basis?

Yes. The great news for us, even in some of the challenging times in terms of revenue growth, we've operated that consistently at a 28% margin and that is our expectation for next year and ongoing to continue. We moderate our investment in terms of personnel and technology to maintain that. Even in 2020 during the COVID year, we operated it at a 28% margin in that zone. So that is our expectation and our plan.

Great. And then moving on to Ignite, which is your digital ad segment. How is that segment differentiated from some more offerings from competitors? And similar to Interactive, what are the growth drivers there?

Yes, I couldn't be more pleased. So our Ignite division is our digital advertising division of the company. It's been the fastest-growing part of the company for the last 5 years and not only in terms of revenue growth but also profit growth. It's one of the drivers of the reason that Townsquare has more revenue and profit in our digital businesses than our broadcast business. . And in terms of the differentiations to your question, it's really multifold. One is we're one of the largest publishers of original local content in the United States. So as I described earlier in the broadcast business, for online, we fill the void of a newspaper. So if anybody would go to one of our local websites WJON and Saint Cloud, you think you'd be at a newspaper. If you go to WGRD and Grand Rapid, you think you're watch -- seeing GQ online. So we've really amassed a significant at-scale audience that has allowed us to collect first-party data. So we believe in our 74 markets, we have more information about demographic, psychographic interest about the communities than anybody else. So that is a major differentiation for us as a publisher at scale. But then you factor in that in Ignite, our digital advertising segment, 60% of the revenue and 60% of the profit is programmatic. So programmatic, if you're familiar with that, it's the fastest part of digital advertising, the fastest part of advertiser growth in the United States. It's in essence serving the right message at the right time across any connected device. So the greatest drivers of that growth for us are streaming TV. So 5 years ago, we couldn't compete with cable TV or local TV. Now we're creating television ads, serving television ads in front of Hulu, Netflix, Prime Video, obviously, a significant opportunity for the company moving forward. So great opportunity in streaming video, social video in terms of reels on Instagram, TikTok, Facebook. So that is a huge growth driver for us and very differentiated. We're integrated with, in essence, every DSP. So Xander, Simplify, Trade Desk, Madhive, literally dozens of DSPs. And then we have a technology stack that we've created to determine where is the best place to buy the inventory to serve it in terms of not only pricing but at the right site with the right message. So it's very, very differentiated. There's a lot of competitors out there, be it television and print, digital agencies. But we think we have a highly differentiated offering. And I think when you look at our results in that segment to date and what we expect moving forward, I think the results show that it's highly differentiated.

Great. And what is the opportunity from SummitMedia, for example, just discussed on the last call? And when could we expect that to flow through the financials?

Yes. So for those who aren't aware, we've been approached by others in the broadcast space, not only radio but also television as well as people in outdoor and print to begin to white label our programmatic offering. So the first beginnings of that was in Q1 of this year with a company who hasn't disclosed it publicly, and we're under NDA, but they're in Nevada, and they had one market. That has gone very well for them. It's gone very well for us. And then SummitMedia, who are in 9 markets, none of them overlap with Townsquare, came to us over the summer asking us the white label, and that has begun in terms of training as well as some ad placement in Q4. We're extremely excited about the opportunity with Summit, a great operator in broadcast, but we're looking to diversify their revenue stream to grow in digital. They looked at us in best-in-class and partnered with us. We expect next year that could be an incremental, call it, $4 million of revenue to us. The model there is that we, in essence, charge them a wholesale rate. And we do everything for them just like we do for our clients. We create the marketing message, do all the creative, not only serve the ads, do all the reporting, all of those things in essence, what Summit's in charge of us selling it to the client and meeting with the client. We think that could be a $50 million division, if you're thinking 3, 4 years out. We're already in discussions with some significant other broadcasters in the space who would like to see the success we've had in programmatic as well as some smaller mom and pops. For us, I think the minimum threshold would be roughly $0.5 million of market for us to make sense initially to put the time and investment in energy towards it. But couldn't be more excited about where that's going. And I also think it speaks to us being highly differentiated in this offering or else, why would they be choosing us versus others in the space.

Great. And then for your full year guidance, you're looking at [ 4 48 to 4 52 ] on the revenue side, $100 million to $101 million for adjusted EBITDA as we think about next year, what are some of the elements of the business that you're focused on that will be puts and takes to the overall EBITDA for the full year?

Exactly. So when we're thinking about EBITDA next year, let's just call it for round numbers, $100 million this year. I just mentioned we did $13 million -- roughly $13 million in political next year. We think we'll do roughly $3 million. We usually do about $3 million in our off political year. So we'd be losing about $10 million of political revenue, call that $9 million in profit. So that $100 million would go down to $91 million. As I just noted, we think our broadcast business conservatively probably loses a couple of million in terms of EBITDA to be conservative. So you're talking about, call it, $90 million, $89 million. And then we think we get into that $97 million, $98 million range for next year because of growth in our digital advertising division quite significant, and that will be by far the largest profit growth in 2025. But then again, as I noted, we think we're going to grow our Townsquare Interactive, call it, $1 million to $2 million next year after having that decline $5 million over '23 and '24. So that gets us into the $97 million, $98 million point. And then when you think further out, we see continued growth in Townsquare Interactive after next year, we think, as I said earlier, growing back to $3 million in profit ongoing and then growing from there. And then from a digital advertising perspective, quite honestly, sky is the limit. We really -- right now, today, in our size markets, we have less than 15% market share of the revenue. So even without that market growing, we're already seeing a lot of share shifting from dollars being placed with others to us, but the market is growing high single digits to low double digits. So with the combination of differentiation and market share shift and growth in programmatic, we feel extremely well positioned for ongoing success. So over time, get our EBITDA up to [ 1 05, 1 10, 1 15 ] over the next 3 to 5 years.

Great. And then moving on to some free cash flow items. From a tax perspective, you're not a material cash taxpayer won't be until roughly 2006 when you basically use up all your NOLs and other tax shields. Is there any way to just gauge roughly what the tax level could be once the NOLs are...

So we have a normal effective corporate tax rate, 27%, 28%. But it's not -- it may be 27%, it may even be 28%. Let's see what happens, but not necessarily over in 2026.

And that time line is still in place roughly to '26?

Yes.

Great. And then in terms of CapEx, can you just talk about some of the uses there? And how should we think about maintenance CapEx levels?

Okay. So all in, total CapEx, maintenance plus growth CapEx for computers and desk and furniture and also technology CapEx, you should think about it as $15 million a year going forward. This year, we accelerated that a little bit and it will be probably $17 million or $18 million because we put in a lot of new technology that will help us grow EBITDA. The other thing is, is that CapEx is a gross number. So there are times when we get -- if we lose a tower or an antenna in a storm, it's $2 million, and we have to replace it. That's included in that $15 million CapEx, even though we've gotten insurance proceeds of $2 million or $3 million. So it's really net less than $15 million. So you should think about cash flow CapEx or cash outflows CapEx, the $12 million to $13 million a year.

Great. And then what is the lowest cash and liquidity balance that you'd like to maintain?

I mean we could run this business with $2 million, $3 million, but we'll always keep somewhere between $5 million and $8 million. We've spent -- we've paid down -- where we floated our existing bond back in 2021 was $550 million. We've paid down $83 million of that debt in the last 4 years. Our level -- we now have $467 million. We're going to refinance that early next year and instead of taking a bond because now 4 years ago, when interest rates were 0, we thought interest rates had no place to go up, so let's lock in a fixed rate. Now we think interest rates will come down over the next 4 to 7 years. So we're going to issue term notes of bank loan. . So for those of you who are interested, we have been a perennial $100 million a year EBITDA business with $35 million to $45 million of free cash build every single year. We're thinking -- we're being told, we'll probably have a -- we'll go out at SOFR plus 3.75% to 4%. So it's a nice coupon, it's 8%. And you guys should think about this as a sleep at night loan. You should have absolutely no concerns. I mean you could look at us for the last 10 years, we've been a hair over a hair under $100 million of EBITDA with $40 million to $45 million of free cash flow. So we're looking forward to locking that down because now for the last 4 years, we've had to go out into the marketplace and find people willing to part with our bonds. And it hadn't been until this past year that they came down under par. So we bought a bunch at par, a little bit over, but this past year, we bought a bunch under par. So we'll be able to pay down debt monthly with a bank loan, as you know. And it will be a lot easier for us. So we'll go out at a $460 million bank loan. It will be about 4.6x levered to start with -- we expect rates to come down. I mean they're talking about 0.25 point each quarter next year. So we expect to delever relatively quickly, and we'll -- our midterm goals are between under 4% to 3.5% in the near term. So...

Great. And is that something you still look to do before February 1?

Yes. We'll get this done in January.

Okay. Great. And then other capital allocation priorities, obviously, the balance sheet, very focused on that, but other priorities in terms of investment, which parts of the business any flexibility on the dividend?

We've always -- well, historically, we've increased our dividend 5% a year, assuming nothing radical changes. We hope to be able to continue to do that every year going forward. The dividend is a really good incentive for equity holders. Investments are $45 million -- $40 million to $45 million of free cash flow, include investing in these businesses as we go along. We've invested tens of millions of dollars every year into our digital platform and our programmatic platform. So we'll continue to always do that.

Great. And are there any cost-saving opportunities as you look at the business, the business is shifting that you can take out next year and forward? Any...

So we constantly look at costs. If revenues decline faster than we expect in the broadcast business, there's a lot of levers you could pull and save a lot of money in the broadcast business. . In our digital business, we're continuing to invest. We're not looking to cut costs there. I mean we're in the very low percentage penetration rates of the total TAM market for the digital marketing services business, I think programmatic is just such a great ROI for investors in these small markets. We are -- when you think about it, we're not really competing on a digital basis against anybody in our markets because we compete -- the radio competitors are either small mom and pops, and they have 1 or 2 stations or even 2 clusters. Their platform is not big enough to invest the tens of millions of dollars every year to build a digital business. The large radio aggregators, they never built a digital product because they were always going to Facebook and Google. And we've just not -- it was not an adversary, but they thought they wanted to invest in and fight with. So we're the 900-pound gorilla in digital in our marketplaces. So we really like the space that we're in, and we really like the position that we're in. I think over the next 2 years, you'll see us delever a lot with this bank loan and get a little help on inflation, and we give a little help on interest rates and get a little help with the psychology of our customers in the marketplace. It's been tough for the last couple of years. They borrowed a lot when rates were 0. They were in -- I mean, I don't want to say anything bad, but they chose to take lower variable rate and now that rates have gone up, it's hard for them. And with inflationary pricing in Mid-America, I mean, most of us in this room live in big cities. I don't know if anyone's ever lived in a small city. But our customers are pretty much sole practitioners, 5 to 10 employees in the business at the most. And it's been tough for them over the last 2 years. And we've been steady. We've helped them. They've relied on us. We actually -- they think of us as partners they look to us to help them. We do their media buying. We do their creative because it's all included in the price, and it's a real good deal for them. And we're thankful of their loyalty, and we like to help them because they're real working communities and these communities need to advertise. And it's been -- it's a really good spot.

And Stu, you touched on this briefly. You said getting leverage down to 4, maybe [ 3.75 ], is that the right leverage profile for this business in your view?

Well, I would turn that question out to the audience because personally, I think we could manage this business at 7x level, and it's fine. But when I say that, people cringe, yes, we'll get this down on the 4 in the moderate time. And I think we'll level off somewhere between 3 and 3.5.

Yes, 3, low 3s.

Okay. And then obviously, in a post-election environment, there's a focus on any regulatory changes? And do you have any views or optimism about loosening some of the ownership caps or M&A or obviously just duopolies or some limitation on markets, I'd love your thoughts on that.

Yes. I was the radio chair board at the NAB for a few years, just termed off recently. And my perspective is that the rules -- the current regulations are completely outdated. There's obviously a lot of discussion around that. Now with [indiscernible] being nominated to head the FCC, my expectation is [indiscernible] is definitely going to happen. I've been saying that for years. It's just a matter of when that's going to happen. I think the longer it takes, you see more and more industries getting hurt by it in terms of newspapers, television, with core cutting, broadcast. And I think once that loosens up, we'll have a more competitive landscape to compete. And I think the opportunity for acquisitions will be there. Our last acquisition was Cherry Creek. And our expectation, that was about 2 years ago now, about summer of 2022. And we said, hey, we're going to buy this. I think we bought, call it around 6x, but we're going to double the profit and the cash flow within 3 to 5 years and 2.5 years in, we're right on target. We'll probably double the cash flow within 4 years. So the opportunity to acquire other great operators who are great in broadcast, but don't have the diversification of digital is clearly something that we've done well. We bought 20-plus markets from Cumulus. We bought Connoisseur markets. We bought Cherry Creek. And each of those, as broadcast has declined, we've still grown EBITDA and profit based on our digital strategy.

Great. And Bill, you actually touched on one of my questions in that. Do you see Townsquare in a position of being an acquirer and/or possibly seller of assets kind of in a different regulatory environment?

Yes. I think anything is possible. Clearly, the record is showing we're clearly an acquirer. I don't think we've sold anything other than we did swap a while back with Cumulus. But that -- so I think we'd be an acquirer in that state because of our diversification of Townsquare Interactive and Ignite. Having said that, when you look at the Summit partnership, we don't have to deploy any capital and we get a lot of benefit in terms of not only revenue but importantly, cash flow and profit. So it allows us to now continue our footprint of digital advertising with partners like Summit into 9 markets that, as I said, next year could be $4 million. We think that doubles in 2 to 3 years just from a Summit perspective. As we talk to others, that could be a $50 million opportunity in '27, '28. And then we could use that cash as opposed to buying these partners, we could delever, and that would be our #1 focus to get down into that 3% to 3.5% so...

Yes. And what do you think are the biggest opportunities for kind of radio, digital segments and for Townsquare in general over the next [ 2 ] years?

I think it's exactly what we're -- we've been doing and continue to do, which is, as Stu just said, we're very well situated, diversified, have a great competitive moat in these markets outside the top 50 cities, really, as Stu said, a partner to these local businesses with Townsquare Interactive being a great subscription-based business to help them run their business, drive incremental customers. And then the benefit, listen, broadcast is still a great business, great cash flow. On average, in our size markets with our AM/FMs, we own average 6 in the 74 markets. We reach 1 in 2 adults over AM/FM.. So to go into a local business owner and say, if you advertise with us on air, you're going to reach 1 in 2 adults in this market. If you do that and then also advertise on our local websites in your market, you're going to reach 70% to 75% of the adults here. . So we think there's nobody else who can say that or do that. So we think digital advertising growth is going to be significant as it has been. Townsquare Interactive returns to grow. And then broadcast will be a traditional cash cow business, and we'll manage it as we see fit.

Great. And then on closing minute, I just love your thoughts on what do you think is most understood or underappreciated about radio, digital, Townsquare the industry right now?

Yes, I'll take -- I think the most misunderstood issue about Townsquare is that people just think we're a radio business. We're not a radio business. We're a local media partner, and we're in markets that are fully functional, economic, stabilized businesses. They're not boom-bust markets. It's not -- they're not doing great when oil is drilling. It's not doing great when real estate is high and bust when it's slow. So we have real economies, with real businesses that people live in and work in and they need to advertise and whether times are good or bad, they always need to advertise. So we are a pretty stable -- we're in stable economies. Our business is very stable. If you look at it for the last over a decade, EBITDA has been over $100 million. Cash flow has been between $38 million and $42 million even in a bad COVID year, we still beat cash. So if you're thinking -- if you're lenders, my last cheesy plug here is, you should think about our bank deal as a really safe sleep at night loan, right? You're going to get a much higher coupon than we think you should get. We think we're being tagged as a radio business. We think we should be SOFR plus 2. We're a B+ B2 company, which -- because I think we're in the radio space. But this is an unusually good loan to make, and we're happy to have anybody that has any questions about it, come talk to us.

The last thing I'll just say is, I think as our revenue has grown from a digital perspective, 4, 5 years ago, it was 20%, 25% of our business. Now it's 52% of our revenue, 52% of our profit. Fast forward probably 2, 3 years, going to talk about 70%, 75%. So I think that changed the whole complexion of the company. Right now, we've got 3 divisions, and broadcast still is the largest of the 3 divisions from a profit standpoint. And I think that is changing rapidly with the growth of our Ignite business and the return to growth of Interactive. So I think once you see that complexion of 70% to 75% profit coming from digital and being sustainable every year and being able to manage the traditional broadcast business as a cash cow, I think people reevaluate the company and see it differently.

Great. Well, Bill, Stu, thank you so much for your time. It's a pleasure having you.

Thank you.

Thank you.

Thank you for being here.