Cumulus Media Inc.
Q3 2014 Earnings Call Transcript

Published: 11 Nov 2014

[Operator:]

Good afternoon, and welcome to the Cumulus Media quarterly earnings release conference call. [Operator Instructions] I will now turn the call over to Collin Jones, Director of Investor Relations. Sir, you may proceed.

[Collin Jones:]

Thank you, operator. Welcome to our investors, analysts, employees and partners. Thank you for joining our third quarter earnings call. 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. These statements are based on management's current assessments and assumptions and are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied in forward-looking statements due to the various risks and uncertainties or other factors. A full description of these as well as financial reconciliations to non-GAAP terms can be found in our press release and Form 10-Q, both of which were filed today at 4 p.m. Eastern Time. I would now like to introduce Lew Dickey, Chairman and CEO. Lew?

[Lewis W. Dickey:]

Thank you, Collin, and good afternoon, everybody. We appreciate you taking time today to participate in our call to discuss our third quarter results and provide you with guidance on our fourth quarter. Also joining me today is our Chief Financial Officer, JP Hannan as well as Collin Jones, whom you've just heard from. The third quarter was a continuation of the cyclical downturn in ad spend that we experienced in Q2, and now appears to be abating as we make our way through Q4. More specifically, in the third quarter, our pro forma net revenue for the period was essentially flat at $313.9 million, yielding a pro forma EBITDA decline for the quarter of approximately $17.7 million or 18% to $79.9 million. The EBITDA decline was due to 3 factors

[Joseph Patrick Hannan:]

Thanks, Lew. Since we've already filed the 10-Q, I'll be brief, with just a few housekeeping items. Our cash balance at the end of the quarter was $26.8 million. We made a $40 million voluntary debt repayment to our term loan in the quarter, and we anticipate making another payment in Q4 of approximately $60 million. Altogether, this will bring total debt by year end to $2.5 billion. Capital expenditures in the quarter were $2.2 million. This brings us to $13.4 million year-to-date at the end of Q3. We anticipate another $5 million of CapEx will be spent in the fourth quarter due to ongoing studio upgrades. Otherwise, there was no other significant M&A activity or refinancing to report on this quarter. And so with that, we can open for questions. Operator?

[Operator:]

[Operator Instructions] Your first question comes from the line of Aaron Watts from Deutsche Bank.

[Aaron Watts:]

Lew, I think you mentioned that you saw a decline in high-margin ad revenues in the third quarter. Could you talk a little bit more about that? And just to be clear, is that kind of a one-off phenomenon that you're not expecting in the fourth quarter and beyond? Or is it something that's continuing?

[Lewis W. Dickey:]

Aaron, what I was mentioning is that in the number of our largest markets, and I outlined 4 of them, where we saw significant declines in ad revenue, in the largest markets, the incremental revenue falls because you have your lowest cost of sales against that revenue, and it falls at the highest margin. So it can be as high as $0.95 that we lose there. And so that's what we experienced in Q3, and a number of those we're seeing improvement in that in the fourth quarter, but we expect to see, again, that to comp through, and some of the ratings improvements we're seeing in those particular markets -- the stabilization in ratings improvement should set us up for a year of revenue and EBITDA contribution in '15 in those markets.

[Aaron Watts:]

Got it. Okay. And then one clarifier on the synergies. I think you mentioned you're now expecting around $50 million with the integration of WestwoodOne. Is that still kind of an end of first quarter '15 target for that run rate?

[Lewis W. Dickey:]

Yes, the new synergies that -- what I mentioned in the remarks is the majority of the $25 million was going to come in, in the form of our new news product, WestwoodOne News network. And so in essence, we have essentially let contracts that are obligations of close to $20 million a year expire, and replaced it with a contract for under $2 million, and then we have some production costs against that. So it is -- it's a very profitable venture for us to move in that direction, and we will recapture most of that $25 million. Certainly, call it, 80% of that will be captured in 1Q.

[Aaron Watts:]

Okay. And last one for me. Just, JP, maybe if you could just let us know what your covenant leverage stood at, at the end of September and maybe also kind of remind us what your test is against that covenant leverage.

[Joseph Patrick Hannan:]

We don't have a test currently. We don't have exposure on the revolver, so the overall tests are suspended during this period. We do still have several synergy add backs in that number. And Collin is pulling up the covenant count right now.

[Lewis W. Dickey:]

And, there's no maintenance covenants as long as the revolver is undrawn.

[Collin Jones:]

Aaron, if we were to have had a maintenance covenant, it would have been 5.75, and that is a first lien net leverage test, and we were at 5.42.

[Operator:]

And your next question comes from the line of Amy Yong from Macquarie.

[Amy Yong:]

Macquarie. A few questions from me. First, Lew, can you touch a little bit about on the ad market, just where are you seeing strengths, weaknesses in terms of categories, cancellations? And how is the visibility, since we're kind of mid-November, just in terms of political? And can you even see into calendar 1Q? And then can you talk about how quickly you can turn around some of the underperforming markets and how quickly your investments will start to bear fruit?

[Lewis W. Dickey:]

Okay. Let's -- I'll take those in order, Amy. The -- obviously, political is behind us, and we mentioned that we'll be at $19 million versus $23 million in '12, and we were a little less than that on '10. So it's more comparable on a midterm to midterm than it is midterm to general or to presidential election, but -- and most of it was really -- the falloff was really in October, November because we said it was even with '12 through September. With respect to categories, we've seen a general softness in retail and financial services, telcom. And ironically, auto parts and auto aftermarket have been strong for us, but financial services and basically, housing, mortgage, real estate and then retail, particularly apparel, have been very soft, and so those are the areas that have been most difficult for us. Auto, for the quarter, was -- auto dealers was slightly down. It was a -- it was down about 2% to 3%, but it was more than made up for by auto aftermarket, which was up in terms of actual dollars, 2x the decline we saw in dealers. So as a general category, it was slightly positive, but dealers were off. And so that's probably the best visual I can give you on that. In terms of 1Q, we get all of our category information really in arrears, so I don't have any real visibility right now for 4Q or 1Q based on -- by category, but we obviously are seeing business pick up, and December is pacing positively with, in essence, obviously with no political against last year. And then, your other question was on the -- on fixing some of these handful of markets where we've had some issues with, and each one really comes down to individual stations. We mentioned Washington, D.C. We have 2 radio stations there. One of them, WMAL, has doubled the ratings we had when we took over as the news talk station in Washington, D.C. And so executionally, we've got to do a much better job of monetizing that. And we've brought some very talented people into the market to do just that. And then so that one is really a tale of 2 cities. One station is a ratings -- has been a ratings problem, and the other has really been a sales execution problem. And so each one of these is individual. Each one of these has their own set of circumstances around it, but I can tell you that, as I mentioned, Chicago is going to be a tremendous contributor in terms of its growth rate in 2015 and will be actually in fourth quarter. And I just believe, as we see these and go through them one by one, these stations have, in essence, troughed, and so we've got -- and the financial performance of the stations is -- has yet to catch up with some of the ratings improvement that we've seen. And like we saw in Los Angeles with Heidi and Frank, it takes some time for these stations to -- for these new shows to gain traction. So as I mentioned in the remarks, it's really a combination of execution, and then with certain stations, it's programming and ratings. And we are very focused on improving both of these, and have brought a number of new talent, both programming and sales and management, into the company in the last 3 to 4 months, and we're seeing some good results with these folks in the positions of responsibility in these markets, and so on both content as well as on driving sales of the business. So I believe these things have, in essence, troughed. The worst is behind us on this. It's been a tough year as we've worked our way through it, and we're now starting to see the light at the end of the tunnel here.

[Operator:]

And your next question comes from the line of Avi Steiner from JPMorgan.

[Avi Steiner:]

Just the first one, I think in your Q4 revenue range of $331 million to $335.5 million and your political comments, what does that imply for core ad revenue growth? I know you have a couple other line items in there, but I'm trying to figure out how that's looking.

[Joseph Patrick Hannan:]

For the quarter, it's got us up about 1.5%.

[Avi Steiner:]

I'm sorry, you said up 1.5%?

[Joseph Patrick Hannan:]

Correct.

[Avi Steiner:]

Perfect. And then you threw out a bunch of markets as kind of short-term changes, problematic, but I think you said 2 accounted for all of the EBITDA decline. Did I mishear that? And were those 2 New York and L.A.?

[Lewis W. Dickey:]

No, those 2 were New York and Washington, D.C., and they -- and so the entire EBITDA decline for the year will be accounted in the broadcast cash flow decline in those 2 markets.

[Avi Steiner:]

Okay. And then the timing -- I apologize if some of this is repetitive -- just when those 2, I guess, become positive contributors, is it full year '15, latter half of '15? How do we just think about that coming back into the numbers?

[Lewis W. Dickey:]

D.C. will be a positive contributor in -- as soon as 1Q in '15. And New York, I believe it will -- I believe New York will -- certainly second half, potentially as early as second quarter, but let's call it second half to be safe.

[Avi Steiner:]

Excellent. And then on the content cost side, I know there's a lot of moving parts in there. Can you just elaborate what's behind the growth? It's a little bit above my expectations. And then is some of it like advanced spend on the CNN partnership and other areas? I just want -- again, trying to figure out timing for my model.

[Joseph Patrick Hannan:]

Well, most of what you've seen this quarter is timing. It's seasonal. It's a combination of both baseball and football hitting, and the overlap. So we'll have higher content costs during Q3, and then those go down in Q4.

[Avi Steiner:]

Okay. And then sort of same side here, just on the cost side. You called out promotion of NASH, launch of the station in New York. Is it possible to size, on a dollar wise, what all those onetime items were that shouldn't reoccur?

[Joseph Patrick Hannan:]

Sure. There was about $1 million of promotional expense that was one time. There were about -- just under $2 million of expenses for health care claims that were -- a year ago we recorded in Q4, that's just pulling it forward. There was a $1 million expense related to the restructuring of our Katz agreement, our national rep agreement, that happened in the quarter.

[Avi Steiner:]

And none of those were pulled out, correct, to get to that EBITDA number?

[Joseph Patrick Hannan:]

Nothing's been pulled out.

[Avi Steiner:]

Okay, perfect. And then just...

[Operator:]

And your next question comes from the line of Michael Kupinski from Noble Financial.

[Michael A. Kupinski:]

Okay. I'm sorry if I cut out -- if my questions cut off the other caller. Just a couple of things. What was the revenue that was attributed to Rdio in the quarter?

[Joseph Patrick Hannan:]

Just under $5 million.

[Michael A. Kupinski:]

Okay. And then in terms of the core local versus national in the third quarter, what was that? And then in terms of that 1.5% core growth, I think you mentioned, JP, how does that break out between local and national?

[Joseph Patrick Hannan:]

Local was down about 3.2%. National was up about 2.8%. Network was generally -- ad sales were down, but then it was offset by lower cost of sales to be generally flat when it all came together. And I'm sorry, what was the second part of your question, Mike?

[Michael A. Kupinski:]

Yes, just how that was pacing in into the same metric going through the fourth quarter.

[Lewis W. Dickey:]

National was up considerably in the fourth quarter, and we'll get the local number here in just a second.

[Michael A. Kupinski:]

And while you look that up, I was just wondering, in terms of a lot of both television and radio companies were reporting that advertising was pretty soft in some of the top 25 markets, and some were attributing that to some of the national advertising going to cable and broadcast buys and kind of filtering down to radio. Do you have any thoughts about that and whether or not your advertisers are talking about better buys on the network scatter prices?

[Lewis W. Dickey:]

Well, you saw -- 2 questions there. On -- in political, particularly, if the television business is soft, if the general ad climate is soft when political comes up, radio will feel the effects of it, because the television and cable will clear -- will tend to clear more than they usually would if they had substitute business at better rates. And so I think that's what happened to us in the latter part of the cycle there. And then with respect to local, national going into fourth quarter, national is pacing up double digits right now for us, and local is low single.

[Michael A. Kupinski:]

So would you say, Lew, that what we saw in the third quarter is maybe television markets kind of showing a little bit better strength as well, and you're kind of under that umbrella, and that's the reason why you're feeling a little bit better about it?

[Lewis W. Dickey:]

I think so. I don't have perfect data on that, but just anecdotally in talking to people, it's where -- in markets where television was -- will clear more and take more, there's less left over for radio in political and quite frankly, in all ad business. So that's always been the trend. We believe that's what we experienced in political this season.

[Michael A. Kupinski:]

And certainly, you have a lot of opportunities on the expenses with the initiatives that you've got going on. I was just wondering, is there a way to dial that -- those expenses back if maybe these pacing data don't really turn out to be as strong as you hope? And I mean, you have the ability to cut expenses and kind of dial some of these initiatives back a little bit? Or is it just going to be just full throttle ahead and try to power through whatever weakness we might see near term in revenues?

[Lewis W. Dickey:]

Well, let's remember what initiatives we're talking about. As we mentioned, the spend on NASH is extremely measured, and so we are accomplishing the -- in essence, the extension of that brand across multiple platforms through creative partnerships with very competent folks in each one of those areas. So if there's not a lot of financial risk -- a lot of creativity, a lot of effort, but not a lot of financial risk going into that, so that's not really an area of big spend for us. We have made some incremental investments in our core platform, radio platform, as applied to some of these generational shifts we've talked about, and quite frankly, in some of the markets that we're -- that the execution wasn't up to par, and as I say, one of the reasons why we've made some shifts in management and organizational structure of the business. But those are -- I think in terms of the expenses of the business, you're going to continue to see us work to drive margin expansion of the business, which is why I mentioned we fully expect margin expansion next year in the business because of the way we are managing our expense base. So I would say kind of just the opposite on that. It's not a throw caution to the wind and throw money at it. It's -- we're being very measured and very prudent and really running the business for cash, so we can pay down debt in the cycle.

[Operator:]

Your next question comes from the line of James Marsh from Piper Jaffray.

[James M. Marsh:]

Just 2 quick questions here. I was hoping you could drill down a little bit more on the sales efforts investment. Exactly, what -- kind of what are we talking about here? And is this a kind of a onetime expense? Or is this a new run rate? How should we think of that? And then just secondly, on the digital side, obviously, a bright spot for you guys in Rdio, I think you described their user-generation activity being up. And just could you explain exactly what that is? I thought you guys are just selling ads for them. Is there something else in that revenue line? Or is this just a kind of an unusual way to describe advertising?

[Joseph Patrick Hannan:]

James, I'll take the comment about costs. If you recall last quarter, I said we have sort of reached a run rate on direct operating and content. There might be some seasonality to the content side. At the time, in Q2, the direct operating costs, which include the sales cost, was about $118 million. In this quarter, it was $119 million. So it's right in that range, and some of that is just the expenses that we pulled forward. So I think we are in this sort of consistent run rate now of $118 million or so a quarter.

[James M. Marsh:]

Okay, that's helpful. And then, the Rdio?

[Collin Jones:]

On the Rdio side, James, we are doing 2 things for them, or really 3 things, as you recall. The first is an ad sales component where we're the exclusive ad rep agent for all of their ad inventory, whether that is in-stream audio, display, mobile, sponsorships, et cetera, particularly in the United States. Actually, through the course of this quarter, we extended that component internationally as well, as they have relaunched their -- the product with a free ad-supported experience first, and they've done that in 24 countries outside of the United States, so it's provided some ad sales opportunities. That's really ramping as we look at September, really, as the first month for the free ad-supported product to come out. So we've seen some encouraging data on their side, and we're excited about the users. As those users build, their revenue associated with that, that we'll be able to sell on their behalf will grow. The second side of the -- the second leg of the stool for that relationship is a content partnership, whereby we'll have the opportunity to distribute all of the content that Cumulus has on their platform over time. And the third leg of the stool is the promotion in exchange for equity. And when we talk about that in our press release, we talk about that promotion as designed to drive users, and so that was the amount of promotion that we ran in the quarter, just under $5 million.

[Operator:]

Your next question comes from the line of Lance Vitanza of CRT Capital Group.

[Lance W. Vitanza:]

When we talk to agencies like Omnicom and so forth, or ratings companies like Nielsen, both of whom should be agnostic, let alone, Clear Channel and CBS, it seems like advertisers are embracing the radio medium in ways that they haven't done in a very long time, if ever. So my question is are you seeing any of that in your business via new advertisers that have not been traditional radio players? Or are the execution issues that you're facing just kind of keeping a lid on that for the moment?

[Lewis W. Dickey:]

Lance, I guess, the anecdotal evidence, which is the only way to really respond to that, is upfronts are positive right now at the network, and all the plans that we're working on individually at the station levels, we're budgeting for. And this is obviously to varying degrees. We have 93 separate business units on the station side, but we're budgeting for growth across the board. So we are -- the conversations that we're having with planners and agencies and clients indicate positive momentum, not negative momentum in this. And so 2014 was really a case, when we take a look at those small subset of markets that disproportionately underperformed everything else in our platform and very large dollars and very high-margin dollars that dramatically increment -- or dramatically impacted, I should say, our EBITDA. So it doesn't -- but that certainly doesn't get in the way from our read of the market and what's going on, particularly at the network level, where we have about 140,000 clients that make up our business across the entire platform. So we get a pretty good read with 1,500 sellers plus our large national staff under the WestwoodOne umbrella.

[Lance W. Vitanza:]

Well, I guess what I'm trying to get at -- and I appreciate the color -- is the difference between your existing advertisers doing more, or are you seeing new players who had not traditionally advertised in radio?

[Lewis W. Dickey:]

Well, we have -- our businesses is multiple revenue streams, and we kind of view it as a triathlon, and we have our transactional business, which is the availed agency business, what we call our direct and new local direct. And then we have our event, digital and NTR. And so all of them are important components for -- that make up our revenue mix. All of them have different levels of contribution, but we're focused on all of those across the board in our markets. And so we're -- there's always attrition in any advertising-based business, and we're certainly not exempt from that. So we're constantly developing new business. But I think in terms of -- to come back to you and say, "Here are 5 Fortune 500 brands that are advertising in radio now that have never used the medium before," I don't have that information for you. We'll -- and none of that has been, in essence, highlighted. We're in the normal cycle of working our business, but we're constantly getting new brands coming in or coming in after a while. People move around. They try -- we're not a new medium. We've been around a long time. So people will be in radio. They'll exit as part of their mix. They'll try something else. Then they'll come back to us again. So that's really part of the normal give and take, but I do believe what we're seeing is that advertising -- and maybe this is helpful -- but what we do in our discussions with agencies and clients, what we do see is that people are realizing that radio is a very important and very efficient reach medium. And it's becoming increasingly difficult to reach people at home and through video because it's fragmenting, and radio is, in essence, a targeted mass medium, and a very efficient one for them to buy. And so -- and it gets results. As I've said many times, people buy us. Our average order size is about 10 days, which means people buy us over and over and over again because it works, and the efficacy of the medium is really unchallenged. So I think that's helpful as well, and that's probably the best color I can give you on it.

[Operator:]

And there are no further questions at this time. I turn the call back over to the presenters.

[Lewis W. Dickey:]

Great, operator. Well, thanks very much, everyone, for taking the time to join us today, and we'll talk to you with full year in February. Have a good day. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.