Cumulus Media Inc.
Q4 2015 Earnings Call Transcript

Published: 11 Mar 2016

[Operator:]

Welcome to the Cumulus Media Quarterly Earnings Release Conference Call. I'll now turn it over to Collin Jones, Director of Corporate Strategy, M&A and Investor Relations. Sir, you may proceed.

[Collin Jones:]

Thank you, operator. Welcome all to our fourth quarter 2015 earnings call. Thank you for joining. Before we kick off, please note certain statements in today's press release and discussed on this call may constitute forward-looking statements under Federal Securities laws. Actual results may differ materially from the results expressed or implied in forward-looking statements. These statements are based on management's current assessments and assumptions and they're subject to a number of risks and uncertainties. A full description of these risks as well as financial reconciliations to non-GAAP terms can be found in our press release and Form 10-K, both of which were filed today at 4 o'clock PM Eastern Time. This call will be accompanied by a slide presentation which will be advanced in real time through an online portal, which can be accessed through a link in the Investor portion of our corporate website. The address to find this link, if you haven't already, is www.cumulus.com/investors. After this call, the same link can be used for an encore version, and the presentation will be released via 8-K as well. With that, I'll now turn the call over to our Chief Executive Officer, Mary Berner. Mary?

[Mary G. Berner:]

Thanks, Collin. Good afternoon. I want to thank all of you in the call for taking the time to join us today. Before I turn the call over to J.P. to discuss our financial results for the fourth quarter and full year 2015, I want to share with you the perspectives I have gained since joining Cumulus five months ago on the radio industry and on Cumulus' place in the industry. Additionally, I'll give you some early color on the initiatives we have established to move the company from decline to stability and ultimately to growth. One of the observations I made early on is that radio as an industry have some unique, enviable, and I believe underappreciated advantages, vis-à-vis new media and also in comparison to other legacy media. Radio delivers an average ROI of 8

[Joseph Patrick Hannan:]

Thank you, Mary. For the quarter, total revenue was $308.8 million versus $329.2 million in Q4 of 2014, a 6.2% decline. Broadcast advertising revenue largely finished in line with the third quarter, with total broadcast advertising declining by 0.5% to $290.4 million from $291.8 million in Q4 of 2014. Local spot was down slightly, declining by 0.6% to $171.5 million and $172.5 million a year ago. And national spot declined by 10.5% to $24.9 million from $27.8 million in Q4 of last year. As was discussed in our Q3 earnings call, national spot performance continued to disproportionately underperform versus local spot this year due to the continuation of the same factors we've mentioned historically. Network advertising in the quarter was up 2.8% to $94 million versus $91.5 million in Q4 of the prior year. This is the first positive quarterly performance we've seen at Westwood One since our acquisition in 2013, driven by better execution in the scatter market, a relatively robust marketplace, as well as particular strength in the sale of our sports assets. It's worth noting that the 2016 upfronts for Westwood One are now largely complete, with a few stragglers yet to close. To-date, we are down low-single digit, but importantly the marketplace remains healthy. The decline was predominantly driven by lower supply of inventory in 2014 – versus 2014. This is a much better outcome than we achieved in the two years prior. And the team is now focused on taking this momentum forward from a strong Q4 scatter performance. Our political advertising revenue declined $8.4 million or 78.3% to $2.3 million versus $10.7 million in 2014. We actually started to see some early political strength in advance of the Q1 primaries in fourth quarter. It's one of the reasons our finish for fourth quarter ended up better than our pacing we gave at the time of the Q3 call. Digital revenue was also down in the quarter by $7.5 million or 42.7% to $10 million, versus $17.5 million in Q4 of 2014. This decline was almost entirely driven by the previously announced termination of our relationship with Rdio which occurred in the beginning of the quarter and which we guided for in our last call. Excluding Rdio, which was a non-cash revenue source, digital was down only $300,000 in the quarter, and this is mostly due to the active termination earlier in the year of low margin sales rep deals. The Rdio comparison now starts to diminish as we go into 2016 having booked only about $500,000 of Rdio non-cash revenue in Q1 2015 and approximately $1.5 million in Q2 2015. Finally, license fees, subscription fees, and other revenue in the quarter were down in aggregate by $3.2 million or 34.8% to $6.1 million versus $9.3 million in Q4 of 2014. This is a continuation of the shift in certain contracts from fixed cash fees to an ad inventory-based revenue profile which we first highlighted on the Q3 call. We will continue to see this trend in Q1 and Q2 of 2016 before reaching a clean comparison in Q3 of 2016 and beyond. Moving over to the annual revenue results, total revenue for the year finished with a decline of 7.5% to $1.17 billion versus $1.26 billion in 2014. Ex-political, revenue declined by 6.3% driven by a 5.1% decline in broadcast advertising, a 30.4% decline in digital advertising as the result of the termination of the Rdio relationship, and an 11.7% decline in license fees, subscriptions and other. Local spot for the year was the best performing broadcast ad channel, is down 2.1%, while national spot and network both declined by approximately 9%. On the costs side for the fourth quarter, our content costs were down $7 million or 6% to $109.8 million versus $116.7 million in Q4 of last year. This was driven predominantly by the last of the synergy-related cost reductions at Westwood One. Our SG&A expense for the quarter increased $10.1 million or 8.6% to $126.9 million versus $116.9 million in the prior year period. This was driven primarily by a one-time credit we received in Q4 of 2014. Additionally, the cost of sales related to event and sports-related revenue in the quarter increased year-over-year on higher associated revenue. Corporate overhead costs, excluding franchise and state taxes, which we add back for adjusted EBITDA purposes, were up $3.9 million (25

[Collin Jones:]

Thanks, J.P. We've modified our Q&A this quarter to take questions in advance similar to some of our peers. Given the amount of time since our last call, we wanted to make sure to cover as many questions as possible from our analysts and investors in a thoughtful and thorough way. We've also received questions via email throughout the call already, and we'll try to incorporate those in a live fashion.

[Collin Jones:]

So to start, a number of the more macro level question's around the focus of our turnaround initiatives and early indicators were addressed in the prepared remarks, but we should begin broad. Andrew Gadlin of Odeon Capital commented that industry reports have suggested our main focus right now is turning around the station group and that Westwood One is a secondary focus. So first, Mary, do you agree with those characterizations, and if so, is there a bandwidth to pursue turnarounds at both entities?

[Mary G. Berner:]

Thanks for the question, Andrew, and it's a good one. As everyday as I've said, we try and focus our time and our allocation of resources through the lens of highest and best use. And that necessarily means that we have to make decisions as to which efforts get the most attention. That said, Westwood One remains a very key focus for our organization. As you saw in Q4, it actually had the best operating results of any of our broadcast revenue channels, but while we executed better in the scatter market in fourth quarter, the issues that I've identified for the company as a whole, including operational execution, culture and ratings, and in the network world, we might refer to ratings as audience or impressions (34

[Collin Jones:]

While we're on the topic of Westwood One, which drew a number of questions from our analyst, Aaron Watts of Deutsche Bank ask for more color around the upfront performance as well as how much business the upfront contributes to the year (35

[Mary G. Berner:]

Okay, thanks, Aaron. As J.P. mentioned, the upfronts still actually have a couple of straggler accounts outstanding, but for the most part they are complete. And to-date we are down low-single digits, but importantly the marketplace for network radio remains strong. Our declines, as J.P. said, were driven predominantly by lower supply of inventory versus 2014, which underscores the focus we have to develop – on developing great content and distributing that content so we can increase the amount of inventory we have available to take to market. To the second part of that question, the upfronts historically have accounted for about half of the revenue for Westwood One for a – in any given year.

[Collin Jones:]

And Avi Steiner of JPMorgan ask, what will the network business contribute in 2016?

[Mary G. Berner:]

We're not going to get into any formal guidance for Westwood One for the year that – we don't think that will be prudent given how early we are in the year. But we did mention in our remarks that the network business is pacing again down low-single digits in Q1. That's essentially been driven by the low-single digit results in the upfront, as we said, with a basically flat performance thus far in Q1 scatter.

[Collin Jones:]

So let's move over to a question on culture. Lance Vitanza of CRT Capital asked if we could update on the efforts to address our turnover.

[Mary G. Berner:]

Sure. As with any issue of this magnitude, it's going to take time to deliver measurable results. Our culture challenges occurred over a long period of time and the substantial turnover, which I mentioned on our last call, was just a symptom of those issues. As I mentioned in my prepared remarks, we do have some early indicators of positive progress. But in the same way that these issues didn't occur overnight, they won't be corrected quickly either. We are being relentless in how we operationalize our guiding principles to certainly especially to take advantage of our early momentum we're seeing. So in future quarters, I expect we will be able to comment more specifically on turnover numbers and statistics, but at this stage it's just too early to give you anything meaningful.

[Collin Jones:]

And on ratings, Mike Kupinski of Noble Financial wanted to know if we could elaborate on the issues we've seen with Cumulus' ratings. Is the weakness isolated to any specific markets?

[Mary G. Berner:]

As I discussed, we've put an enormous amount of effort over the last five months into really diagnosing the causes of our persistent ratings declines. If you access the earnings call presentation off the website, you will see on page 15 that ratings in our PPM markets when we weight them for market size and look at persons 25 to 54, which is the money demo for radio, those ratings have declined consistently for the last four years before beginning to stabilize towards the end of 2015. These PPM markets represent about half of the revenue we generate at the station group. So if we drew a graph for the diary markets which represent the other half of station group revenue, it would look very similar. So when you see declines like this for such a substantial period of time, we believe that focusing on the performance of a few stations ignores the graph's obvious implication that there is a systemic problem. And if you try to solve a systemic problem by managing our stations in isolation, you condemn yourself to playing whack-a-mole. So as a result, our challenge is to step back and identify the broader issues behind our depressed ratings and develop and implement a plan to address those. So as I said on day one, we've developed a task force that took a deep dive into our programming strategy, ultimately determining that our most significant problems derive from a command of control operating strategy that ignored or underleveraged local market insights, a lack of analytical tools necessary to make good decisions and a perennial underinvestment in content and promotion of that content. As I outlined in more detail earlier, we've now put in place a new corporate infrastructure that is designed to support – not manage – support the local market. We've returned authority to local stations allowing them to make decisions more quickly and more appropriately for their specific audiences, but with checks and balances in place to moderate the risk that can arise from such a big change. And we've reallocated resources from numerous non-core distractions to efforts that ratings growth in the situations that can impact our bottom line the quickest and with the least amount of risk. I could talk you through a number of encouraging anecdotes about stations that we're starting to see successes, which appear to be at least in part attributable to the execution of our new thesis, like those we mentioned earlier or others like WPLJ in New York City which is a long time contributor to decline, and now a solid 0.3 radio station moving toward a 0.4 in the New York City where each tenth of a rating point can be millions to the bottom line. But anecdotes do not a trend make and it is too early in the execution of our new ratings strategy to even attempt to quantify accomplishments in fixing our systemic issues. So while our PPM markets in aggregate are showing some positive progress, our diary markets, which again are 50% of our station group revenue, are still selling off meaningful year-over-year ratings declines. We won't have the next look at those until 2Q so – and as we wait for our strategies to take hold, so we're still going to be contending with ratings headwinds.

[Collin Jones:]

Thanks. That's good color. And stepping back a bit, back into 2015, David Phipps of Citi asked about market share and then how that continues to trend in 2016.

[Mary G. Berner:]

Looking back at Q4, and I don't think this will come as much of a surprise given that all of our peers have reported already, we lost share in the quarter across the board. Looking forward, since we get share data and arrears for the quarter, we don't get – we don't know yet where Q1 will fall out. However, based upon our current pacing of low-single digit – down low-single digits, I expect we'll continue to see a gap to our peers this quarter and likely Q2 as we wait for our strategies to take hold.

[Collin Jones:]

Now sticking with Q4, but talking about key categories, Mike Kupinski noted that some other broadcasters have recently seen challenges with the auto category and we're pointing toward it picking up a bit as we move into 2016. How is the auto category doing?

[Mary G. Berner:]

Auto was a tough category for us through the course of 2015, and I think that some of our other operational challenges may have impacted our ability to execute against that category. We finished the year down mid-double digits despite continued growth in SAR (42

[Collin Jones:]

And how about political? J.P. mentioned we saw some early dollars in Q4. Amy Yong of Macquarie was looking for some color on political expectations for 2016.

[Mary G. Berner:]

The Q1 primaries have definitely driven strong momentum (42

[Collin Jones:]

And moving over to the costs side, Aaron Watts asked if a more local market-driven approach versus a more centralized one will have an impact on costs.

[Mary G. Berner:]

To that specific question, the answer is no. Returning authority to local market has been accomplished accompanied by appropriate checks and balances and also by a focus on holding markets accountable for hitting their numbers and remaining vigilant on expenses. So in of itself that change in strategy should not increase expenses. However, as J.P. mentioned earlier, we are a large fixed cost business and while investments necessary to support our specific turnaround initiatives will be funded on a cost-neutral basis, we won't be able to fully offset the general expense escalators on the fixed cost of our business, things like sports rights -- rights escalators, rent, talent contract and others even with our tight focus on expense management. This is a business reality and, as J.P. said, it underscores the importance of our turnaround initiatives driving top line growth.

[Collin Jones:]

So a quick modeling question on taxes and land sales, J.P., you mentioned this in your prepared remarks, but can you remind us again of the tax position as well as expectations on land sales?

[Joseph Patrick Hannan:]

Sure. We don't anticipate paying any federal cash taxes in 2016. On the state side, we will pay $7 million to $8 million this year. In 2017, we expect we will have exhausted our NOL balance and then we will be a full federal cash tax payer. On the land sales, there is really no change to the time table from the last call, and we still expect LA to close late 2016 and D.C. sometime in 2017.

[Collin Jones:]

And while we're on M&A, Andrew Gadlin asked about monetization of other non-core assets and potential there.

[Joseph Patrick Hannan:]

I mean, we're exploring all areas where we can find opportunities to generate cash or avoid cash outlays. For instance, the sale of the corporate aircraft and the two trust stations were completed over the last several months. We will continue to explore these opportunities where the math makes sense. Right now, we are required to pay down first lien debt at par subject to our reinvestment right with any asset sale proceeds. Alternately, we were required to pay down first lien at par immediately for things like a sale leaseback for towers.

[Collin Jones:]

And lastly on the balance sheet, a bunch of questions. So I'll just rattle them off, Davis Hebert of Wells Fargo asked about flexibility to repurchase term loan and/or bonds. Do we have the ability to do more discounted prepayments of the term loan like we did in December? What's the threshold of bonds to be addressed to avoid the springing maturity on the term loan? And just generally, what options are the company exploring related to the balance sheet?

[Joseph Patrick Hannan:]

As I just mentioned that we don't have the ability to use asset sale proceeds to buy back debt at a discount, but we do have the ability to do more discounted prepayments of the term loan. A good look at that as time goes on, it's one of the only mechanisms we have available to us today to take advantage of the trading levels in the term loan. As it relates to the bonds, I mean, we will need to refinance or otherwise push out more than $410 million in order to avoid the springing maturity that's in the term loan in Q1 of 2019.

[Mary G. Berner:]

Yeah, and I'll jump in here on the balance sheet. Obviously, we've got a lot of leverage. So while we're focused on the operational issues, we are fully aware that we do have to address the balance sheet issue on a parallel path. It's been a really key focus for the management team and the board over the past several months. We've heard a lot of great ideas, some more actionable than others, and we're focused on finding the best ways to maximize value for the company. We'll continue to explore these opportunities over the coming quarters as it will be critical to both delever and extend our maturities in order to give us the time necessary for our initiatives to bear fruit.

[Collin Jones:]

Thanks, Mary. I think that's a natural place to wrap up and we look forward to feedback on this new format and hope it's allowed analysts and investors to get more out of the time we have on these calls. Any parting words?

[Mary G. Berner:]

No, thanks for your time this afternoon and we'll be reporting again in two short months. I look forward to speaking to all of you then, if not before. Thank you.