Townsquare Media, Inc. (NYSE:TSQ) Q1 2024 Earnings Call Transcript May 11, 2024

Townsquare Media, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Townsquare Media's First Quarter 2024 Conference Call. [Operator Instructions]. With that, I would like to introduce the first speaker for today's call, Claire Yenicay, Executive Vice President.

Claire Yenicay : Thank you, operator, and good morning to everyone. Thank you for joining us today for Townsquare's first quarter financial update. With me on the call today are Bill Wilson, our CEO; and Stuart Rosenstein, our CFO and Executive Vice President. Please note that during this call, we may make statements that provide information other than historical information, including statements relating to the company's future expectations, plans and prospects. These statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties, including those that are detailed in the company's annual report on Form 10-K filed with the SEC.

We may also discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted operating income, which we may refer to as profit in our remarks. Such non-GAAP financial measures should be used in conjunction with all the information contained in the quarterly, year-end and current reports available on our website. I would also encourage all participants to go to our corporate website and download our investor presentation as Bill will reference some of the slides during our discussion this morning. At this time, I would like to turn the call over to Bill Wilson.

Bill Wilson : Thank you, Claire, and thank you all for joining us this morning. It's great to reconnect with everyone. We're very pleased to share with you that Townsquare's first quarter results met our previously issued guidance for both net revenue and adjusted EBITDA. We are building momentum throughout the year and anticipate delivering stronger financial results each quarter in 2024, ultimately setting us up for a strong 2025. In the first quarter, we again outperformed our competitors and gained market share, primarily due to our local focus and our differentiated digital platform. Additionally, we continue to generate strong cash flow, granting us the ability to invest in our digital growth engine and affording us financial flexibility.

By now, I believe that our investors recognize that our digital business is a true differentiator for Townsquare. As highlighted on Slide 12, in Q1 2024, approximately 53% of our company's total net revenue came from our digital solutions, more than double the industry average and 53% of our total adjusted operating income also came from our digital solutions. This highlights the point we often make and can't state enough. Townsquare is no longer the radio broadcast company was when it was founded in 2010. Townsquare has evolved and transformed into a digital-first local media company that is truly distinguished from our local media peers, validating our focus on markets outside the top 50 U.S. cities with a world-class team and a unique and differentiated strategy, assets, platforms and solutions.

This critical point of differentiation has fortified my confidence in our business model and our path forward over the next number of years. But it's not me just saying that. I am very pleased to share that Boyar Research founded in 1975 and now a leading firm providing in-depth independent research on publicly traded U.S. companies highlighted Townsquare as their opportunity pick last month, publishing a comprehensive and very favorable report on Townsquare. I would encourage all of our current and prospective investors to read this report, which can be found by a link in the news section of our company website as well as in our updated investor presentation. It is worth noting that the report derives an intrinsic value for Townsquare of $25.30 per share.

Additionally, Jonathan Boyar asked me to be a guest on this podcast the world according to Bayer, which was a lot of fun to do and can also be accessed on our website, Royanoyer's research website or on your favorite podcasting platform. I am very pleased to share that in each of our main businesses, Ignite, Tolsquare Interactive and broadcast advertising, Q1 performed better than Q4 as momentum continues to build for us, which we expect will continue for the remainder of 2024 and into 2025. As I stated what happened on our last call in March, our digital advertising net revenue returned to growth in Q1, with revenue increasing plus 1% over the prior year period. As also noted on our last call, our growth was driven by strength in our digital programmatic advertising revenue as well as stability in our local digital advertising revenue base, which was partially offset by steep national digital advertising declines.

We are really quite proud of our digital advertising business, which when excluding national advertising revenue would have grown at a mid-single-digit growth rate in the first quarter. Our local digital audience on our owned and operated websites has continued to grow, and that is due to the important role we play in our mid- and small-size cities. Because of the dwindling availability of local new sources in small and midsized markets across the country, there is an expanding void of local information available in our communities, both online and on-air. We have stepped in at Townsquare to fill that void. Our local websites are in essence what people would have thought of a newspaper 10 years ago. This has led to our local digital audience to consistently grow.

And in fact, we reached an all-time high 70 million unique visitors to our local websites in March, up plus 16% year-over-year. Local audience growth combined with strong engagement metrics has enabled strong local digital revenue performance. However, we are most excited about our digital programmatic business, where we have unlimited growth potential and extreme confidence and which will be the largest growth driver of our digital advertising business going forward. Programmatic make up about 60% of our digital advertising segment today and is the fastest-growing revenue stream in our company. All in all, we are a digital advertising success to our sophisticated digital products and solutions, which are entirely in-house, giving us 100% control of the client relationship, starting with the client pitch, then campaign design, media buying and optimization and ongoing reporting and insights, which we believe translates to a better customer experience, higher average spend and higher client retention rates.

In addition, we have the unique ability to collect and analyze first-party data from our audience of over 75 million unique visitors to our portfolio of over 400 local news and entertainment websites, 400 mobile apps and 10 leading national music and entertainment websites. This very large first-party data set allows us to provide detailed and unique insights about consumer behaviors, audience interest and importantly, purchase intent that drive real results with strong ROI for our clients, giving us a true strategic advantage over our local competition. We are very confident in our ability to continue to grow this business and capitalize on our competitive advantage in our cities. Owning our tech platforms in-house, combined with the breadth of our digital solutions and quality of our first-party data is a competitive advantage in any size market, yet in cities outside the top 50, it is a significant difference maker, driving our digital advertising to be the strongest growth engine in the company.

Our Q1 digital advertising revenue performance improved from Q4, and we expect to have similar growth trends in Q2 as Q1 before improving more strongly in the second half of 2024. This is tied to ongoing national digital advertising revenue weakness, which we outlined in detail on our last call, which declined negative 29% year-over-year in the first quarter and is pacing even worse in Q2 with an expected year-over-year revenue decline of over 30% in Q2, which is over $1 million. These revenue declines are in large part due to significant changes to algorithms for Google and social media referrals that have negatively impacted our national audience. And as you have probably seen, we are not alone in feeling that impact. Fortunately, just as with our broadcast advertising, national is only a small portion of our digital advertising revenue business, and we anticipate that national digital revenue declines will begin to moderate meaningfully in the third and fourth quarters, leading to stronger results for this segment as a whole in the back half of 2024.

Overall, we are confident that favorable industry trends, together with our in-house full suite of marketing solutions, our investment in our original content strategy and our first-party data advantage will continue to drive strong digital advertising growth for Townsquare. As I shared on our last call, we have been asked if we still believe in the growth strategy and addressable market of Townsquare Interactive given last year's challenges. And the answer is, yes, without a doubt, unquestionably so. To that point, I am very pleased, so pleased this morning to share with you today that Townsquare Interactive, our subscription digital marketing solutions business is firmly on the path to recovery and growth after attacking our 2023 challenges head on.

As I shared the last time we were together, the first sign of the rebound at Townsquare Interactive is the return to subscriber growth. The second sign of the rebound is month-over-month revenue growth. And given our continued ongoing aggressive investment in Townsquare Interactive, the third sign of returning to strength is month-over-month profit growth. Therefore, I'm pleased to share with you that ahead of my own expectation, in March, Townsquare Interactive grew net subscribers for the first time in 17 months and generated month-over-month revenue growth as well. This very positive trend continued in April, and we expect this momentum to not only continue, but to grow in Q2 and onward. I am very proud of our Townsquare Interactive team.

It is also worth noting that net subscriber losses were better than I laid out on our last call, which was what I was expecting, subscriber losses in Q1 to be roughly 50% of Q4's losses. Yet subscriber losses actually declined 60% in Q1 '24 as compared to Q4. And as I just shared, we added net subscribers in March earlier than we originally expected. And again, we did that in April. It is also good to note that ARPU for new sales is increasing. In the first quarter, Townsquare Interactive's net revenue declined negative 15% year-over-year, exactly in line with the expectations that I shared with you on our last call. The positive development is that on a quarter-over-quarter basis, net revenue declined less than 5% because we returned to month-over-month revenue growth in March.

Townsquare Interactive's first quarter profit declined negative 10% year-over-year, also in line exactly with the expectations we outlined on our last call, and we manage expenses very well such that we grew our profit margin from 26% in Q1 of 2023 to 28% in Q1 of 2024. Looking ahead to Q2, we expect to see net subscriber growth for the quarter, which will drive continued month-over-month revenue growth trends. Month-over-month profit growth will be dependent on how aggressive we can continue to invest in the businesses in Charlotte and Phoenix. Yet we still anticipate a return to month-over-month profit growth in Q4 of 2024. Also, as I detailed on the last call, even though we are now back on a positive path of consistent growth at Townsquare Interactive, given the loss of over 7,000 subscribers from Q1 '23 through Q1 of '24, as you would expect, year-over-year revenue and profit comparisons will still look very negative.

With that context provided, we expect Townsquare Interactive second quarter net revenue to decline approximately 13%, which reflects last year's challenges, not the subscriber and month-over-month revenue growth we are currently delivering. In the long term, we are confident that we have a long sustainable runway ahead of us. With over 23,000 subscribers at the end of Q1, approximately 58% of which are outside of our local media footprint and an addressable market of nearly 9 million target customers, we are only scratching the surface. With our existing subscriber base, superior product offering and a huge market opportunity of nearly 9 million target customers as outlined on Slide 15, I am confident that Townsquare Interactive is on track and set up for long-term profitable growth and success.

I am also very pleased to share with you that our broadcast advertising revenue declines have stabilized, and first quarter revenue declined just 1%, an improvement from Q4's negative 2.5% decline. Similar to last year's trends local outperformed national in the first quarter as national declined negative 9% year-over-year. Thankfully, just like our digital business, our national broadcast exposure is limited, with less than 10% of our total revenue coming from Broadcast National Marketplace. Overall, we outperformed the industry in the first quarter, gaining local and national broadcast market share according to Miller Kaplan. I am very proud of our team in achieving this market share growth as it demonstrates the benefits and importance of differentiated local content on our local radio broadcast.

No better team of content contributors and our sales teams. Political is off to a slow start for us and the industry overall due to the lackluster primary season, our first quarter political revenue of $1.1 million is only 80% of our political revenue in Q1 of 2020. However, we remain very optimistic on our full year estimation of $14 million to $16 million of political revenue as compared to the all-time high of $16 million recorded in the 2020 political season. Industry specialists are predicting record political expenditures in 2024, benefiting Townsquare, especially in our Michigan, Montana, Arizona, New Jersey and New Hampshire markets, where they expect close races for governorship, house and Senate seats. We believe Townsquare's ability to drive profitable, sustainable digital growth is a key differentiator for our company.

Digital is and will continue to be our growth engine, and we will continue to invest in our digital business to fuel further profitable growth. We view local radio as an extremely valuable asset with significant cash flow properties, unparalleled consumer reach and an important local connection to our audience. In fact, we would have never achieved the success we've had in building at scale, differentiated digital audience and resulting digital advertising and digital marketing solutions business if it wasn't for a continued strong local radio presence and performance. Our traditional FM over-the-air broadcast continues to reach, on average, 1 out of every 2 adults in our markets, very, very powerful and very, very important. And because of the powerful combination of Townsquare's digital plus radio, plus live events, plus local investment, we believe that our flywheel will continue to place forward and gain momentum.

I would also like to shine a bright, bright spotlight and a very important aspect of our business model, our significant cash flow generatio. Due to our strong cash flow characteristics, we are afforded financial flexibility to build shareholder value. Over the past several years, we have retired $46 million of debt. We have repurchased over 16 million shares, and we also initiated a dividend and then raised it by 5% after the first year, all while continuing to invest in our digital growth engine. In April, using cash on hand, we were able to execute a very accretive share repurchase from MSG and an 11% discount to the preannouncement share price and execute an option buyback at an attractive price point, thereby avoiding shareholder dilution.

Stuart will discuss both of these attractive transactions shortly in more detail. With $28 million of cash on hand at the end of April and net leverage of 4.6x as of March 31. We remain very confident in our current capitalization and the strength of our balance sheet, and we are pleased that we can continue to deliver attractive current cash returns for our equity shareholders as we say internally, how high is high. And now I'd like to turn the call over to Stuart, who will go through our results in even more detail as well as provide you with our second quarter guidance. Stuart, take it away.

Stuart Rosenstein: Thank you, Bill, and good morning, everyone. It's great to speak to you all today. We're pleased to report that our first quarter results met our revenue and adjusted EBITDA guidance. First quarter net revenue declined 3.4% year-over-year to $99.6 million, within our guidance range of $98.5 million to $100 million. Political, which is off to somewhat of a slower start in 2024 than the 2020 presidential cycle came in at $1.1 million, 20% below Q1 2020 $1.3 million. Excluding political, first quarter net revenue declined 4.2%. First quarter adjusted EBITDA declined 9.9% year-over-year to $17.5 million, also within our guidance range of $17.5 million to $18.5 million. First quarter broadcast advertising net revenue decreased just 1%, which was a sequential improvement from fourth quarter declines.

First quarter broadcast profit margins meaningfully expanded on a year-over-year basis. from 19% in Q1 2023 to 22% in Q1 2024 due to cost reductions we made in 2023. As a reminder, broadcast profit margins tend to be lowest in the first quarter of each year due to revenue cyclicality. Broadcast profit margins are expected to expand to the high 20s in the second quarter like in previous years. As we've outlined on previous calls, we anticipate that at Townsquare Interactive, which is our subscription Digital Marketing Solutions segment, net revenue and direct profit will decline on a year-over-year basis due to the loss of subscribers in 2023 and Q1 2024, even though we have returned to subscriber growth and month-over-month revenue growth sooner than we anticipated, as Bill mentioned earlier.

In the first quarter, net revenue decreased 15.3% as compared to the prior year and profit decreased 9.7% year-over-year. Margins were strong at approximately 28% in Q1, an improvement from Q1 2023's 26% profit margin despite our continued investment in the business, including the ongoing ramp of our newly opened Phoenix location. Townsquare Ignite, our digital advertising segment returned to growth in the first quarter as strength in programmatic advertising offset ongoing weakness in national digital advertising, which declined 29% in the first quarter, as Bill detailed earlier. In total, first quarter digital advertising net revenue increased 1.3% year-over-year. We are experiencing similar trends in Q2 2024 with solid programmatic growth offsetting steep national digital advertising declines of over 30%.

As we look out to Q3 and Q4, our current forecast, while early, indicates steady improvement as declines in national digital advertising begin to moderate. Importantly, we expect digital advertising margins to return to mid- to high 20s in the second quarter. Our other category, which is comprised of live events activity, generated $1.8 million of revenue in the first quarter, a decline of 7.8% year-over-year and a small profit of $441,000, representing a strong first quarter profit margin of 25%. In 2024, we are focusing on a refined live event schedule that eliminates unprofitable or barely profitable events. So we expect to see a small full year revenue decline in 2024, but with profit and margin expansion. As a reminder, our live events activity should not be viewed as a growth driver or revenue center for Townsquare, but rather a marketing arm of the company.

Our first quarter net income improved by $3.5 million year-over-year from a loss of $1.9 million in Q1 2023 to net income of $1.6 million or $0.06 per diluted share. We'd like to remind you that any benefit or provision for income taxes included on the face of the income statement is for GAAP financial statement purposes only. We maintained significant tax attributes, including more than $100 million of federal NOL carryforwards and other substantial tax shields related to the tax amortization of our intangible assets. We continue to believe that we will not be a material cash taxpayer until approximately 2026. As Bill highlighted, and I would again like to emphasize, we consistently have strong cash flow generation. We generated $1.7 million of cash flow from operations in Q1 2024, ending the quarter with $57 million of cash, down only $4 million from year-end despite making our $18 million interest payment and paying $3 million of dividends.

During the first quarter, we also repurchased approximately $4 million worth of shares at an average price of $10.80 per share through our ongoing share buyback program. On April 1, we repurchased and subsequently retired 1.5 million shares of Madison Square Garden's Class A shares or just under 10% of our shares outstanding at a price of $9.76 per share, representing an 11% discount to the preannounced share price. This transaction followed the June 23 repurchase of another 1.5 million shares from MSG at $9.70 per share. This share buyback was immediately accretive to our shareholders and we were able to use cash on hand to satisfy the $15 million purchase price. Since 2021, we have repurchased 16.2 million shares at an average price of $7.19 while simultaneously reducing leverage over that period of time.

At the end of the first quarter, our net leverage was 4.56x and 4.7x pro forma for the April 1 MSG share repurchase. In an effort to build shareholder value by limiting shareholder dilution, last month, we repurchased 3.2 million in-the-money options held by members of the management team and Board of Directors. These end-of-money options were granted at the company's 2014 IPO, demonstrating that our long-term incentive plan was and continues to be effective in retaining top talent and were except to expire this July. Our repurchase of these options eliminated the overhang and shareholder dilution that would have occurred when these options were exercised in the open market. Our strong cash flow generation has and will continue to provide us with financial flexibility, giving us the opportunity to advantageously buy our stock when it's trading below value, which we, and as Bill highlighted earlier, from firms like Boyar Research also believe it is today.

As always, our #1 priority is to invest in our local business through organic, internal investments that support our revenue and profit growth, particularly our digital growth engine. We plan to continue to invest in our digital product technology, sales, content and support teams, specifically in our Townsquare Interactive and Townsquare Ignite businesses in order to maintain our strong competitive advantage in markets outside the top 50 cities. In addition, we are highly focused on our balance sheet. We feel extremely confident that we are well positioned to refinance our February 2026 notes before they come due. Our Board has approved our next quarterly dividend payable on August 1 to shareholders of record as of July 15. The dividend of $0.195 per share, which we just raised by 5% last quarter, equates to $0.79 per share on an annualized basis, which implies an annual payment of approximately $13 million on our current share count and a dividend yield of approximately 6% based on our current share price.

We believe our strong cash flow characteristics will allow us to continue to invest in our business, support our dividend and give us flexibility to opportunistically pursue debt and share repurchases as circumstances allow. Turning to our second quarter outlook. We expect second quarter net revenue to be between $117.5 million and $119 million. As Bill already detailed, baked into our revenue guide is a year-over-year decline of close to $3 million at Townsquare Interactive and over $1 million in our national digital business. We expect second quarter adjusted EBITDA to be between $26 million and $27 million. For the full year, we are reaffirming our expectations that revenue will be between $440 million and $460 million. We are also reaffirming our expectations that our 2024 adjusted EBITDA will be between $100 million and $110 million.

And with that, I will now turn the call back over to Bill.

Bill Wilson : Thank you, Stuart. Great job as always. And thanks to everyone who dialed in this morning to be updated on Townsquare's results. We greatly appreciate it. Again, I would encourage everyone to download the updated investor presentation and to review the Boyar Research piece on Town Square. It was quite favorable. In closing, I want to state again that we are building momentum and anticipate strengthening our performance throughout the year as national advertising pressures moderate and Townsquare Interactive returns to growth. Our differentiated digital advertising platform has already returned to growth, and our mature cash cow broadcasting platform has and continues to generate a solid profit contributing to our strong cash generation.

Due to our cash position and strong cash generation, we retain financial flexibility moving forward, and we are confident in our ability to build shareholder value for our investors through long-term net revenue, profit and cash flow growth as well as net leverage reduction, future dividend payments and potential future share repurchases. With that, operator, at this time, please open the line for any and all questions.

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