Cumulus Media Inc.
Q2 2016 Earnings Call Transcript

Published: 5 Aug 2016

[Operator:]

Welcome to the Cumulus Media Quarterly Earnings 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 second quarter 2016 earnings call. Thanks 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 SEC filings including our press release and Form 10-Q, both of which were filed today at 4 o'clock p.m. Eastern Time. This call will be accompanied by a slide presentation, which can be accessed through a link in the Investor portion of our corporate website at www.cumulus.com/investors. After this call, the same link can be used for replay of this webcast and the presentation will also be posted to our website. With that, I'll now turn the call over to our CEO, Mary Berner. Mary?

[Mary G. Berner:]

Thanks, Collin. Good afternoon, everyone. Thanks for dialing in. After a busy first month getting up to speed, our new CFO, John Abbot, joins us for this call. We're excited to have an executive of his caliber to help guide Cumulus through our operational turnaround and lead the effort to rationalize our capital structure. In a bit, I'll turn the call over to John to discuss second quarter financials in more detail. But I'll kick off now by briefly characterizing our operating results for the second quarter. Then, I'll update you on the progress we're making on each of our core turnaround initiatives that we believe will in time lead to financial stability and ultimately growth. Second quarter financial results came in as expected in line with both pacing and expense commentary from our last call and also versus consensus estimates. Revenue finished down approximately 4% as compared to the second quarter of 2015. The Radio Station Group improved as the quarter progressed, finishing flat versus last year with national spot capitalizing early on our recent ratings improvement. As we previously noted, the network marketplace experienced a sharp drop off in demand, which we first started seeing in March. This overall weakness in the market exposed the unique challenges that we faced at Westwood One; namely, our lack of new business development capabilities to offset a sluggish transactional marketplace. The weakness resulted in a year-over-year revenue decline of Westwood One of approximately 14% for the quarter. On the expense side, we continue to focus on intelligent cost rationalization where possible. However, a number of factors contributed to expense increases compared to the second quarter of 2015, including contractual programming and content expense escalators and unanticipated increase in music licensing fees resulting from a recalculation of amounts due in prior periods, and our continuing and successful investment in the programming side of the business. These expense increases deepened the margin impact of the revenue decline resulting in adjusted EBITDA for the quarter down $17.6 million or 22% versus Q2 2015. Our results in the second quarter while largely in line with expectations due continue to highlight both the depth of the challenges that we're addressing and the lengthy time table needed to achieve a sustainable financial turnaround. However, from an operational perspective, we're making identifiable and significant progress on our turnaround strategies and in certain areas at an accelerating pace. Given time, we expect this progress to manifest itself in positive revenue performance and with continued focus and discipline around costs and adjusted EBITDA growth. As I said in the past, a turnaround of this magnitude requires a consistent, grinded out effort that starts with clear and well thought out strategies, which we have, followed by extremely focused execution of those strategies, which we are doing. And we remain relentless in optimizing the business in ways that provide the greatest financial impact, with our efforts centered on our four turnaround strategies

[John F. Abbot:]

Thanks, Mary. First, I should say, how excited I am to be here and be part of the team that's leading Cumulus through this turnaround. Also, I should say thank you to the investors and analysts, who've reached out to me since I joined the company. I look forward to getting to know you over the coming weeks and months. Now, on to the Q2 financial results. For the quarter, total revenue was $287.2 million versus $299.3 million in Q2 2015, a decline of 4.1%. For the Radio Station Group, revenue increased 0.2%, driven by national spot revenue, which was up approximately $1.5 million or 5% in the quarter and also by political advertising, which increased by $1 million this quarter. Westwood One revenue declined 13.8% driven primarily by the sharp drop off in market demand for network advertising, as Mary mentioned earlier, as well as the shutdown of the print version of NASH Country Weekly, which was operating at an EBITDA loss. Corporate and other revenues declined approximately $400,000 in the quarter, off a small base. On the expense side, the Radio Station Group expenses increased $12.2 million to $150.6 million from $138.5 million in Q2 of last year, an increase of 8.8%. This was driven by an increase in music license fees of $5.1 million of which $3.6 million was a correction to music license fees for prior periods. Just to explain that one-time $3.6 million entry a little further, $3.2 million of it was an expense related to 2015 and $400,000 was related to Q1 of this year. Expense increases were also driven by new sports broadcast rights as well as contractual programming cost escalators and the programming investments spend that Mary mentioned earlier. Westwood One expenses decreased $6.7 million to $63.6 million from $70.3 million in Q2 last year, a decrease of 9.5%, and this was driven primarily by lower cost of sales associated with Westwood One's revenue declines. Corporate and other expenses were essentially flat, which combined with the Radio Station Group and Westwood One expenses yielded total expense increased of $5.5 million or 2.5% for the quarter compared to Q2 of last year. So, as a result of these revenue and expense changes, adjusted EBITDA came in at $63.2 million versus $80.8 million in Q2 2015, a decline of 21.8%. Radio Station Group adjusted EBITDA declined $11.7 million or 16.5% and Westwood One adjusted EBITDA declined $5.6 million or 30.2%. Corporate and other was a slight decline in EBITDA of $339,000 or 3.9%. Moving below adjusted EBITDA, in the quarter we booked $1.4 million of restructuring costs, predominantly related to the shutdown of the print version of NASH Country Weekly. LMA fees in the quarter were $2.5 million, the vast majority of which relate to the LMA we have with Merlin Media for the two stations in our Chicago market. And moving onto capital expenditures, in the quarter, we incurred CapEx of $7.3 million, predominantly related to the studio move and consolidation project in our Chicago market, and that compares to $4.8 million of total CapEx in Q2 last year. We finished the quarter with $49.8 million of cash on hand and had no changes to our total debt balance of just over $2.4 billion. Now to update everybody on our land sales. First, with respect to the studio and tower location in Los Angeles, this is under contract for a $125 million. The local city council voted unanimously to approve the development project on the land on May 25. And then the entitlement process entered a 90-day appeal period. Unfortunately, around 30 days into the appeal period, the complaint was filed by a party interested in stopping the project. So, at this stage, we're still evaluating our options and the potential impact if any to our closing timeline. With respect to our WMAL-AM tower location outside of D.C., there is no change to the timetable for likely close since we talked about this on our last earnings call. The process is moving along consistent with our original expectations and we expect – we still believe $75 million of gross sale proceeds with a close sometime in 2017 continues to be a reasonable outcome based on what we know today. With that, I'll turn the call back over to Collin to moderate Q&A. Collin?

[Collin Jones:]

Thanks, John. Before we jump in, I've been asked by a number of interested parties, investors, analysts, the like, since the announcement that you were joining, what attracted you to Cumulus?

[John F. Abbot:]

Well, great question. As some people probably know, I covered the media industry and a number of radio companies during my banking days. I have always thought that radio more than any other media was uniquely positioned because of its unparalleled reach, unique local presence, resilient listener base and strong ROI for advertisers. Cumulus is obviously, facing some significant challenges. But as I got to know the company and in talking with Mary, it became clear that Cumulus had a great collection of assets and that the course she had set for the company made a lot of sense. And as I learned more, I found that this new operating strategy really aligned with my own leadership values and views on how to run a business. I also saw some of the early culture survey results, which really were amazing. And those were good indicators that the strategies the company had undertaken, especially those related to people were already starting to take hold. And I got the same picture from independent sources, places like Glassdoor. Lastly, as I came to understand the company's operational challenges and capital structure issues, I felt like my own experiences and skills could allow me to contribute meaningfully to helping Mary and the team to achieve their goals. And by the way, I've been very impressed with the leadership team at the company, and how they've come together so quickly to align with the strategy and also how engaged and enthusiastic all the company's employees are about the business and the opportunities ahead. That's a long answer I know, but to sum it up, I guess I would say, there's probably no more rewarding challenge than a turnaround. And at Cumulus, I saw the chance to jump on a train that was already moving in the right direction and to play a meaningful role in helping that train reach its destination. No question, it will be a lot of work, it already has been and – but it's definitely an exciting opportunity too.

[Collin Jones:]

Thanks for the color. And I'd reiterate what Mary said earlier, and we're really happy to have you on board. So now, let's move over to few questions from our analyst and we can knockout some of the straight forward questions on the numbers first. Starting with political, we always get a number of questions on that category. Mike Kupinski of Noble Financial asked, how much political was in the quarter, this quarter? So, Mike, that number was $2.4 million, it was about a $1 million higher than last year, this quarter as in line with our expectations for the quarter. Lance Vitanza now with Cowen & Co said he heard from others that political hasn't filled in yet and he has asked if it concerns us at that this stage. Avi Steiner of JPMorgan asked how much we expect for 2016, and if there is anything that changed that perspective as the year has gone on. So, Mary do you want to give us some color on that?

[Mary G. Berner:]

Yeah. Thanks. I think, we're doing a good job of capturing our fair share of political dollars that are out there and for sure our ratings try to help us a bit on the national side. As we said earlier calls, we're all over and to the extent that we proactively shifted inventory obligations around to free up space for political in high demand areas, which we've already seen has produced incremental political dollars for us this year. But concerning the rest of the year (26

[Collin Jones:]

And moving over to the expense side, Amy Yong of Macquarie Capital asked if our cost control efforts are hurting growth and if you could elaborate any on additional investments and programs?

[Mary G. Berner:]

Yeah. First, I really appreciate the question because controlling cost intelligently is one of the biggest challenges in any turnaround and particularly one like this where there has been such a significant underinvestment in core functions for such a long period of time which, of course, limits the amount of net cost reduction we can actually achieve. But, in direct response to question, we always look at everything through the lens of the highest and best use of our resources, whether that's people or time or our financial resources and we always take a holistic perspective on the whole business and put rigorous analytics around any kind of opportunity. I would pretty much characterize at this point we're looking at much at cost – spending as much time of cost shifting as we are on cost cutting to ensure the highest and best use for our resources. And so programming that I talked about is one of the reinvestment areas. Generating better ratings, as we said, again and again, it's just so critical to the company's future. And so we have no choice but to make smart and highly targeted investments in everything that we can to drive programming and that ranges from the people, the marketing, the data strategies, technology, whatever it is through the lens again of highest and best use of those resources. And so far on the investments we've made, we are seeing good aggregate results and returns for the money we put in and we track that very, very carefully. So, that's kind of long way of saying I don't think the cost reductions are holding us back. Again, we're always looking for them. However, certainly, if we had the ability to invest more in the short-term, recognizing the lag to get to an ROI, we would be making more investments in the business for sure.

[Collin Jones:]

And now, a bigger picture question from Davis Hebert of Wells Fargo. Davis has asked, Mary, can you give us an outlook on your content strategy?

[Mary G. Berner:]

Yeah. I mean, my view on content strategy really hasn't changed since the day I started and I look at it as someone who has been in media long time and the way I describe what I do is this is really the same church, different queue for me. And so, the same principle is applied, which is that the winners in media landscape are those that can create and deliver content brands that people want regardless of how that content is delivered and radio is simply no different from any other media businesses fundamentally because it always, always start with the customer or the consumer and obviously for radio that's the listener. So what we've tried to do and we seek to do is to create content that generates the most listener shift, which fortunately we can measure with a good deal of accuracy. So, whether it's a Top 40 station, a big sports brand, NASH station or a nationally syndicated show, we're really focused on creating differentiated content that the most people want to listen to and also this positions us or gives us some kind of a competitive edge with our advertisers or listeners. So creating a unique value proposition for our listeners in turn and creating unique value proposition for our advertisers. My particular role in that effort is to reinforce this strategy and to make sure that we have the best programmers and empower those programmers to create the best content. And as importantly to establish expectations for what that content can deliver and more specifically in terms of audience, because at the end of the day definitely monetize. And, of course, one of the things that we got very good at, a great example of walking, tackling strategy is holding people accountable for hitting the metrics we've established for audience and also for generally moving the ball forward. As an aside, part of moving the ball forward is to broaden our view of what our content and brands can be. An example of that would be, if you take the country platform for instance, Cumulus is number one for country. And as I said on other occasions, the concept of the NASH brand as a marketing and programming platform to reach and capitalize on our country audience makes a lot of sense. So part of that strategy is we're working – doing a lot of work now to get that right.

[Collin Jones:]

And then another bigger picture question on Westwood One, in general, a series of question Aaron Watts from Deutsche Bank is asking how Westwood One is progressing from sales standpoint? Andrew Gadlin of Odeon Capital asked for an update on the business given the weakness we experienced in Q2, and now that we're already starting with the upfronts for 2017?

[Mary G. Berner:]

Well, when I came in and I said this before, I knew, we had challenges at Westwood One that we need to be addressed quickly. It's a complex business. There is a ton of moving parts, and I knew immediately that we needed the right executive to take ownership of it going forward. And so we brought in Suzanne Grimes because she is a talented executive and who not only knows how to sweat the details, she has a track record of running complicated businesses as well, but she also has a broad marketing acumen that's been somewhat missing in network radio space and can allow us to ultimately extend beyond the core transactional strategy, which as we saw in the last quarter, hit us hard. So, since the beginning, she was put to task to diagnose Westwood One's problems and come up with a holistic solution to drive its long-term success. However, the market weakness that we've talked about before in Q2 really exposed the depth of some of those issues that we have in this business. And since then, Suzanne has done I believe a great job of developing a back-half plan that seeks to tactically address these issues in the short-term to deliver the best possible short-term outcome. But simultaneously, we're really focused on continuing to develop a holistic perspective of what the business can and should be in the long term. As it relates to the 2017 upfronts, it's really too early to give much perspective. It's only the second upfront season many of the team members have seen and the first for some, but we're focused on it. I think Suzanne brings additional expertise and perspective to this. And, of course, it's a meaningful piece of our 2017 revenue picture. So, there's an enormous focus on it right now.

[Collin Jones:]

Thanks, Mary. And then, one last one over to John, somewhat housekeeping. David Phipps of Citi asked for an update on the stock listing?

[John F. Abbot:]

Sure. As many of you know, we're in the middle of the 180-day grace period that was reported to as following acceptance to the NASDAQ capital market tier on May 4. So, if we don't reach compliance with the minimum bid price requirement, which is 10 consecutive days prior to the expiration of the grace period, which is on October 31, we would need to evaluate other potential avenues to achieve compliance, which could obviously include a reverse stock split.

[Collin Jones:]

Thanks, John. Thanks, everybody for joining. That concludes this quarter's call and we look forward to speaking again in about 90 days.