Audacy, Inc. (AUD) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Audacy's First Quarter 2021 Earnings Release Conference Call. This conference is being recorded. I would like to introduce your first speaker for today's call, Mr. Richard Schmaeling, CFO and Executive Vice President. Sir, you may begin.
Richard Schmaeling: Thank you, Stacy, and good morning, everyone. This call is being recorded. A replay will be available shortly after the conclusion of today's call at the replay link or number noted in our release. During this call, the company may make forward-looking statements, which are based upon the company's current expectations and involve risks and uncertainties. The company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are described in the Risk Factors section of the company's annual report on Form 10-K. As such, risks and uncertainties may be updated from time to time in the company's SEC filings. We assume no obligation to update any forward-looking statements, except as may be required by law.
David Field: Thank you, Rich, and thanks, everybody, for joining Audacy's first quarter earnings call and our first call since we rebranded the company at the end of March. On our last earnings call, we spoke of how we committed ourselves to not just navigating the pandemic effectively but to accelerating our transformation and emerging from the pandemic as a meaningfully stronger and better-positioned company with significantly enhanced growth potential. We are achieving that goal and have made excellent forward progress on a number of fronts during the quarter. Highlights from this quarter include our highly successful rebranding of the company to Audacy, the acquisition of Podcorn, the country's #1 podcast influencer marketplace, the announcement of our new multiyear partnership with BetMGM and strong progress in our growth initiatives across our multiple platforms. Rebranding the company as Audacy is a reflection of the deep and fundamental change that has already occurred across the organization as well as a sign of where we are headed. Audacy today is a very different company than before, and we needed a holistic brand that works for all of our audiences, both B2B and B2C and captures the full expanded breadth of all that we now do. We have been purposely transforming the organization into a leading multi-platform audio content and entertainment company with scaled audience reach and an important leadership position across the full spectrum of the dynamic and growing audio market including broadcasting, podcasting, digital, network, events, music, news and sports. The acquisitions of C13, Pineapple Street Studios, the QL Gaming Group and Podcorn, as well as the significant investments we are making across various growth initiatives on our radio, digital, podcasting and sports betting platforms are fundamentally changing how we serve our listeners and customers and enhancing the growth profile of the company. We are in the midst of a strong, albeit uneven advertising recovery, reflecting the nature of our business mix. First quarter digital revenues grew 17% and national revenues rebounded to prior year levels. But local ad revenues remain well behind as many of our customers continue to be deeply impacted by the pandemic.
Richard Schmaeling: Thanks, David. For the first quarter, our total net revenues were down 19% year-over-year, driven largely by spot advertising revenues, which were down 24%. In addition, our Events business with pre-COVID made up about 3% of our first quarter revenues, continued to be significantly disrupted and for the quarter were down 98% year-over-year. After a slow start owing to peak of COVID cases in January, our spot revenues improved each month during the first quarter. And as David mentioned, our national revenues came in flat versus prior year. Local spot continues to be significantly disrupted. Many of our largest markets, which account for the majority of our local revenues, like New York, L.A. and Chicago remain locked down through the end of the first quarter. And these cities have only started to meaningfully ease restrictions over the last several weeks. From an advertising category perspective, our top category, auto dealers, is still fairly disrupted due to new car supply shortages and COVID restrictions. Other key categories that require people to get out and go somewhere and amongst other people, like concerts, sporting events, amusement parks, and casual dine-in also remain depressed. In the first quarter, active local advertising was down more than 1/3 from pre-pandemic levels. And those that were active spent more on average than prior to the pandemic, which we'll take as a good sign for the future.
Operator: Our first question comes from Aaron Watts with Deutsche Bank.
Aaron Watts: Appreciate all the color and encouraged to hear that it seems like you're turning the corner on advertising. David, I'm just curious, as you sit today, do you view it as a matter of kind of when, not if you get back to pre-pandemic, either revenue or EBITDA levels? And if it is when, a matter of time, any sense for when you might cross that kind of threshold and get us back above those prior levels?
David Field: Yes. Thanks, Aaron. We spend a lot of time thinking about it, and we evaluate a lot of information that we have to access. As I mentioned, we're looking at, as Rich mentioned, an increase in revenues of 70-plus percent in second quarter coming off of that very rough second quarter of last year, and we expect to see further recovery as we go through the year. We see no reason why we shouldn't be back to 2019 EBITDA levels in 2022. And that's our best thinking as of this point in time.
Aaron Watts: Okay. That is helpful. And then kind of secondly, on the digital side, maybe specifically with podcasting, you made some early moves into the space. You've continued to bolster your assets there, are you happy with kind of your mix in terms of like publishing versus distribution? And are there any areas there that you'd -- you think there's opportunity to continue to grow, whether that's organically or inorganically?
David Field: We feel great about the progress we've made in establishing a digital business pretty quickly and having to catch up to some others that have been ahead of us by a few years, both inside and outside of our space, right? I think that we've created a podcast studio between C13 and Pineapple Street that stands tall with anybody and everybody in terms of their reputation, the quality of work we're doing, the quality of partners and the pipeline that we are building. So we feel terrific about that. On the distribution side, I think you're going to see us continue to take the Audacy app and build it further and enhance that consumer experience and make it into an even more robust player, which we think is an essential part of the world we live in today. And that was part of the motivation for the rebranding, was to give it a new patina that we think will be compelling to all audiences going forward. So we're excited about that. The addition of Podcorn is a really terrific enhancement as well because we have differentiated ourselves by the quality of premium content that we have on our radio stations, with our news and our sports and a lot of our great personalities and the high caliber, the intelligent caliber of the influencers across our network. And so to be able to extend the platform into sort of the mid and longer tail of influencers and have now over 44,000 there, we think that creates lots of opportunities for us going forward to serve our advertisers in ways that are really important and previously a problem in the marketplace to solve. And all that said, we're still hard at work, and we're still looking for opportunities to embellish and enhance our offering for listeners and customers, and we're excited about how we're positioned going forward.
Aaron Watts: Okay. Great. If I could squeeze 1 last question in, maybe for Rich, and I apologize if I missed this earlier in your comments, but putting my credit hat on, as I think about your leverage, obviously, that will recover as EBITDA recovers, David and you just talked about that. But how should we think about your ability and focus on bringing down the leverage? And where would you like to see that live maybe 1, 2, 3 years out? And that's it for me.
Richard Schmaeling: Yes. So look, right, we're focused first things first on reducing our total leverage and our first-lien leverage. We do expect to be comfortably compliant with our first-lien covenant at the end of this year, and that's a 4x covenant. And longer term, we're targeting to be inside 4x total net leverage. So I think a little bit, but we see a path to get there in a couple of years time.
Operator: Our next question comes from Steven Cahall with Wells Fargo.
David Field: Steven, you maybe muted.
Steven Cahall: Sorry about that. So apologies, I joined a little late. And apologies if you already answered this. I think digital decelerated a little bit sequentially. Just wondering if you could speak to some color there. Is that timing of sports? Is that timing of new podcast deliveries? And any sense if you could give us maybe as to what the podcast growth was in the quarter and the non-podcast digital might be helpful.
David Field: So you did miss some comments on that, and we talked about the fact that our streaming audio and our digital marketing solutions businesses performed really well. And in fact, ahead of our fourth quarter digital overall growth rate. We got held back by softness in podcasting, which was really about the parting ways with Pushkin, our second largest partner as well as the -- a slower podcast slate or a reduced slate of offerings in the first quarter. And we talked about how in second quarter and beyond we have an accelerating schedule of new releases and partners and so forth. So we feel good about our podcast business, and we feel good about our digital business, recognizing that in first quarter, we were held back by the softness in podcasting for the reasons I mentioned.
Richard Schmaeling: And then we also said, Steven, we expect our second quarter digital growth rate to be more than 2x our first quarter growth rate.
Steven Cahall: Great. That's helpful. And then maybe either for Rich or JD. Just wondering if you could talk about the line of sight that you get on content from Podcorn. That sounds like a pretty interesting area of influencer opportunity. So as we just think through the podcast ecosystem, what benefits do you feel like you'll get from that acquisition that maybe you didn't have before? And the Pushkin example is an interesting one. Do you feel like you can sort of lock into this content a little better with the Podcorn acquisition?
Richard Schmaeling: Well, you don't have JD on the call. So you're stuck with me. I guess what I would say is that the Pushkin was our lowest margin partner. And we do feel that it is a robust marketplace. We have a very active engine of original products that we are building. We have a great slate of new partners and new products that we discussed on the call and a bunch that we haven't mentioned or that we haven't announced yet. So we feel good about that. And yes, there'll be a little bit of movement in the marketplace, as we've already seen and will continue to see as some of the creators jump from 1 partner to another. As far as the strategic importance of Podcorn, again, I think that it has great value as we integrated into our business to create a differentiated and important opportunity for brands to connect with influencers -- with micro-influencers who are providing terrific ROI, but where the marketplace requires a technical solution, which these -- which Podcorn delivers. Before this solution, there really was no way to do native advertising at scale across 44,000 and growing participants. So we think it's really important for that for our customer offering in the marketplace and will be an important part of our growth going forward.
Steven Cahall: And then last one for me. I know you all have been maniacal on costs, and the business is a little different today than it was in 2019, more digital, more sports betting. So as we think about sort of getting back to '19 level run rate of EBITDA, what else do you think we need to kind of get through? Or do you feel like that we're on pace to get there sometime this calendar year on a run rate basis given the cost efforts that you've made?
Richard Schmaeling: Yes. Look, I'll repeat what David said earlier that our best guess is that we're going to get back to 2019 EBITDA levels in 2022. That's what it looks like to us now. We do see a pretty significant rebound in local in the second half. We're seeing increased sales activity now. So there's good signs, and we think that's a pretty reasonably possible scenario. In addition, Steve, you might not have heard that we also said that we now expect our full year total operating cost -- cash operating costs, fixed plus variable, to be $140 million or more less than 2019 pro forma. Not all of that is permanent. Most of it's permanent. Over $100 million of it is permanent. And we'll provide more specificity about that later this year. But the company continues to work on additional efforts to improve our productivity to work these type of costs. So I do expect more good news in that front over time.
Operator: Next question comes from Avi Steiner with JPMorgan.
Avi Steiner: So a couple of questions here. One, and I apologize if some of this may be repetitive, but how do we think about the flow-through of margins as revenue recovers and your mix of broadcast versus digital changes?
Richard Schmaeling: Yes. Look, it's -- the digital business on a marginal basis is as profitable as broadcast. And I'll say more the legacy business or the business ex-podcasting. Podcasting right now for us is a single-digit operating margin. We're making progress, and we do expect over time to get that margin up into the low 20s, but it's an effort to reshape the content mix. It's an effort to do a number of things. It's going to take a little time. But the rest of the business, the streaming business, the marketing services business, the marginal flow-through rate is low to mid-20s. The broadcast business, still, if you look at the spot revenues as they recover, the flow-through on that mid- to upper 80s. So when we look at the back half of the year, if the spot does accelerate, as we hope and believe, we should see our EBITDA margin start to recover and expand back to more like it looked like in 2019.
Avi Steiner: That's very helpful. And then just on the acquisition front, you've been fairly acquisitive, albeit small tuck-ins as I'd characterize them. As you look at kind of your core competency set and where you've been focused, are there any interests -- areas of further interest of either expansion or bolstering what you have? And how should we think about that going forward?
David Field: Look, I think that we had a strategic need to be in the podcast space. And when you look at the price points that we've paid to enter that space and become a formidable player in it, it really is a fraction of what some of the others in the space have paid. And we have been able to be strategic, while at the same time, I think, very disciplined in that. It's also worth noting that the headline on the action network having been sold for, I want to say, $240 million, give or take, our recent purchase of QL Gaming Group, which is smaller and at an earlier stage, but acquired at approximately $30 million. And we think with a path to get pretty darn valuable here going forward as that gets built. So we feel really good about our track record and what we've been able to do and create value while minimizing the impact on our balance sheet. And I think that we'll continue to be prudent and disciplined. We're very mindful of our balance sheet and the importance of getting our leverage down quickly here as we see recovery. So we will be very selective. But we will keep our eyes open if we see anything that we think is really value-creating for our shareholders and smart for us.
Avi Steiner: That's great. And maybe 1 last 1 at kind of a high level, if I could. How should we think about CPMs? Or how do you see CPMs evolving as maybe more listenership happens on smart speakers, et cetera, where you've got better targeting capabilities and can deliver more to advertisers?
David Field: I'm sorry, you broke up. Can you repeat the question, please?
Avi Steiner: I'm just curious how you see -- go ahead.
Richard Schmaeling: Yes, I'll take it, David. We're seeing a very significant increase now, Avi, in our RPMs. So as we've seen increased demand, we're streaming inventory as that increasingly becomes an important part of marketers' arsenal. We're seeing those CPMs increase quite significantly. And so we're optimistic about continuing growth in our CPMs in both streaming and in podcasting. And we're -- and we also expect as demand recovers our CPMs in the broadcast space increase also. So the outlook on that front is quite good.
Avi Steiner: I guess, is it fair to say that CPMs should be better than broadcast on a relative basis longer-term as the industry moves more towards targeting?
Richard Schmaeling: Looks that way. That's -- there's obviously local CPMs of broadcast can be quite high. But when we look at it on an average, we do think that the digital CPMs will eclipse the broadcast CPMs.
David Field: I agree with that with the 1 caveat that one of the things that makes the broadcast radio so valuable is the power of the influencer and the endorsements. And I do think that also justifies premium CPMs that we will continue to garner in the future.
Operator: Our next question comes from Dan Day with B. Riley.
Dan Day: I just wanted to ask a couple about the rebranded Audacy app. Just first, any specific metrics you guys are looking at sort of over the course of the year that maybe you think to find success for the app, whether it's monthly active users, et cetera, et cetera. And then it seems like you're kind of putting some content exclusively on the Audacy app, I guess, to kind of drive engagement there and drive downloads. Just I guess, talk about the balance between continuing to put content exclusively on that app to get people download it versus -- obviously people want as wider reach as possible with their podcast. So just that and anything else you think is important with the new Audacy app.
David Field: Sure. Thanks, Dan. Well, look, we are putting a lot of energy into the road map. And I think you're going to see us continue to capitalize on our differentiated content slate. And a great example, what you've cited is our first effort at the exclusive content window. And it's important to recognize that what we're doing there is allowing for a binge window. So these 8-episode-or-so series are being rolled out on other platforms on a weekly basis. But for those hungry for the next episode, the only way they can binge it is on our platform. And I think you're going to see us doing similar types of innovative product rollouts to drive further adoption of the platform as we continue to incorporate other compelling features and continue to add more great content. The Audacy app has been a -- the fastest-growing digital audio app in the country for the last couple of years. But we recognize it's much smaller than some of the peers. And yet when you look at the content that we offer and you look at the bully pulpit of our broadcast radio group, particularly in spoken word, we think there is an opportunity for us to really accelerate that growth and make it into a really nice value driver for the company going forward. And you'll see more announcements on that as we go through the year.
Dan Day: Awesome. Just any thoughts on some sort of paid music streaming offering like a Spotify or what iheartmedia has in there. And then Apple and Spotify and both obviously said that they're going to roll out options to allow creators to monetize their podcast via subscription. So any thoughts on throwing that in there as well?
David Field: Look, you would expect us to look at everything and anything, and we think it's just an exciting time to be in this hot space. And as they explore new business models to enhance value, we'll continue to work hard to accelerate our growth. And if we see opportunities there to augment our model in ways which work for listeners and shareholders that would be great. But right now, we've got work in front of us, and we'll see everything plays out.
Dan Day: Cool, just 1 more for me. Any difference in the rebound between sports versus news versus the music stations, just particularly interested in sports with the sports betting headwind -- tailwinds there. So just anything you could point to would be great.
David Field: Sure. Insofar as sports-specific revenues are concerned, meaning sports betting, no question, there has been a disproportionate impact on our sports stations and our sports content, pretty much limited, though, to the states where mobile gaming has been legalized, obviously. And we'll see that evolve over time. I think our news and sports stations more broadly have done a little better than music. But I think the broader point here is it's less about the format than about the customer base. And so if a local customer is still in hibernation mode or not ready to get back on the air, that's going to affect all of our stations. And that's why you see sort of a more -- a broader slowness in local advertising across all platforms.
Operator: Our next question comes from Craig Huber with Huber Research.
Craig Huber: I apologize if you've covered some of this. I was on another conference call at the same time. Can you just explain, if you would, your network advertising, why it was down so much? Obviously, it was very strong year-over-year in the fourth quarter, middle of pandemic. But what happened in the first quarter? What changed the marketplace from your vantage point?
David Field: Yes, the biggest driver for us was we reduced the amount of inventory that we work with one of our industry partners. And that was the biggest driver as we recovered that inventory. And I think going forward, you'll continue to see us do well in the network space, as we concentrate to a greater extent on our own Audacy audio networks.
Craig Huber: So you pulled it back to your own sales force, you're saying, that inventory and then you're going to try and sell it yourself. But you might not necessarily sell it on network or what are you suggesting? I mean, what should we expect for the rest of the year, I guess, what I'm asking for that line.
David Field: Right. I think that remains fluid, and we'll continue to allocate inventory across our local sales force, our national content -- our national partnership team and our own networks as we see fits best given demand patterns and how things evolve going forward. So that's not locked in stone. But what is important is that we see an opportunity, I think it's in our best strategic interest to have more control of our inventory than we have in the past.
Craig Huber: And then on your spot advertising, if I could, was there a material difference in the year-over-year percent change for local versus national?
David Field: Yes. We did touch on that in the remarks. Our national business actually got back to last year's level. Local was significantly down for reasons discussed.
Craig Huber: Okay. I appreciate that. And then, Richard, curious if you could answer this. How much net debt are you expecting to be able to pay down this year, assuming you guys don't do any further small acquisitions, just to kind of cut to the chase here than the story?
Richard Schmaeling: It does about less than $100 million to more than $75 million, like in that range.
Craig Huber: Okay. That's helpful. What percent of your ad revenue is sports betting right now?
Richard Schmaeling: Yes, we said previously that we expect sports betting revenues this year to be about $30 million to $33 million. So it's a small percentage of our total revenue today, but growing. We expect it to be up 50% or more versus last year. Then I think you know, Craig, that our outlook is we expect it to be a 9-digit category for us in a couple of years.
Craig Huber: And my last question, guys, on the cost front, what is your latest thoughts on the rebound of your cost that you're expecting going forward, assuming the virus keeps getting hopefully better here? And so how much -- what do you think the costs will end up settling at versus your pro forma cost number for, say, 2019?
Richard Schmaeling: Yes. So what we said is we updated our outlook for this year, Craig, that we think our costs will be down versus 2019 pro forma by $140 million or more. And then with regard to the outlook, I mean, more than $100 million of that is covenant, and we'll give bigger guidance about 2022 and beyond later this year.
Operator: Thank you. I would like to turn the floor over to management for closing remarks.
David Field: Great. Well, thanks, everybody, for joining us today, and we very much look forward to reporting back to you all next quarter. Take care now.
Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
