Cumulus Media Inc. (CMLS) on Q1 2023 Results - Earnings Call Transcript
Operator: Welcome to the Cumulus Media Quarterly Earnings Conference Call. I will now turn it over to Colin Jones, Executive Vice President of Strategy and Development. Sir, you may proceed.
Collin Jones: Thank you, operator. Welcome everyone to our first quarter 2023 earnings conference call. I am joined today by our President and CEO, Mary Berner, and our CFO, Frank Lopez-Balboa. Before we start, please note that 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 are subject to a number of risks and uncertainties. In addition, we will also use certain non-GAAP financial measures. We believe the supplementary information is useful to investors, although it should not be considered superior to the measures presented in accordance with GAAP. A full description of these risks as well as financial reconciliations to non-GAAP terms are in our press release and SEC filings. The press release can be found in the Investor Relations portion of our website and our Form 10-Q was also filed with the SEC shortly before this call. A recording of the call will be available for about a month via link on our website. With that, I will now turn it over to our President and CEO, Mary Berner. Mary?
Mary Berner: Thanks, Colin and good morning everyone. In the first quarter, the continued weakness of the national advertising environment to which we have significant exposure drove total revenue declines as reported of 11% year-over-year or more comparably, excluding political and WynnBET, total revenues were down 7%, a result that is consistent with the pacing we provided on our last call. Despite that challenge, we generated significant growth in our digital marketing services business, increasing revenue 23% year-over-year on a completely organic basis. We executed meaningful non-revenue impacting cost reductions to further enhance our operating leverage, adding approximately $10 million of additional annualized cost reductions to the approximately $90 million that we have already executed since 2019. And during the quarter, we continued to enhance and benefit from our advantageous liquidity position and balance sheet, generating $16 million of free cash flow, completing a highly accretive asset sale for $7.3 million repurchasing $1.5 million of shares and retiring $6.3 million face value of debt at a discount. The dichotomy we talked about last quarter between a weak national advertising climate and a relatively stronger local advertising environment continues, but we expect that eventually both will revert to more normal spending patterns. Until then, as we have consistently proven, we know how to optimize results in difficult environments and emerged from them in a strong position to take advantage of recoveries and when they occur. To that point, since 2019 and through the COVID impacted years, we have taken out more fixed costs on a relative basis, recovered more EBITDA margin, converted more EBITDA to free cash flow and reduced our net leverage more than our peers. We finished 2022 with best-in-class 3.7x net leverage and over $200 million of liquidity despite having been the only one to return capital to shareholders through buybacks, which is why we believe we are in the best position to weather this current storm and capitalize on the eventual rebound, while maintaining our ability to opportunistically deploy capital to long-term benefit of our shareholders. To understand the current markets particular impact on us think about our company is split between businesses whose revenue generation is predominantly from national advertisers and businesses who rely on local advertisers. The national businesses, primarily consisting of the net Westwood One network, national spot, national podcasting and national streaming make up approximately 45% of revenue. And our local businesses primarily consisting of local spot, local digital marketing services, local podcasting and local streaming make up approximately 50% of our total revenue. The weakness that has characterized the national advertising climate for several quarters has not abated. National advertisers continue to demonstrate significant reluctance to spend across virtually all ad categories. With that, it is increasing somewhat since the last earnings call. Given the high margin nature of our national broadcast businesses, the associated drop in revenue has and will continue to impact EBITDA as long as the softness continues. These same national headwinds have also been a drag on our overall digital revenue growth as most of our podcasting revenue is tied to national advertisers. Looking ahead, we of course don’t have a crystal ball as to when the national headwinds are going to reverse. However, what we do know is that historically, when the advertising environment does recover, national advertising has typically been the quickest to bounce back and when it does, the same operating leverage that hurts us on the downside will be of significant benefit to us on the upswing. In comparison to national businesses, our local businesses were approximately flat for the quarter fueled by strong growth in our local digital businesses. Local spot, which makes up approximately 80% of our total stock revenue, was down about 4% in Q1. Like national, we have also seen local get a bit weaker into Q2 pacing down 7% currently. Small and mid-sized markets have been outperforming and continue to outperform larger markets. So, our portfolio management strategy over the last 5 years, which has reduced our exposure to larger markets, has been favorable for us. Despite these mid single-digit declines, we are seeing some green shoots in local demand. Encouragingly, automotive continues to rebound as we are experiencing quarter-to-quarter improvement in automotive as dealer inventory levels improve. To put this upswing into perspective, in 2019, auto was about 10% of total revenue and we lost nearly 50% of that mostly local revenue during COVID. So even with the improvement we are already seeing and we have already seen, there remains significant upside from auto returning to more normal levels. The brightest spot and an area that we are really leaning into given its growth pro profile is our local digital marketing services business, which as I mentioned, grew 23% in Q1 driven by a combination of new customer accounts and new product offerings. This business is now run-rating at over $40 million of revenue. And as you know, we have achieved that growth and profitable performance from Day 1 with very little upfront investment. We continue to be excited about our DMS position, so we are investing in it to accelerate its growth. Looking at the big picture, the U.S digital marketing services total addressable market for our target market of SMBs is approximately $15 billion and growing at 5% to 10% a year. While there are many small digital agencies that have built paid media capabilities as well as several large providers of single point solutions, there are very few companies in the DMS world that can successfully offer SMBs the full spectrum of digital marketing solutions to meet their needs. We focus on being that full spectrum provider deploy a unique go-to-market strategy with feet on the street selling of a suite of integrated audio and digital marketing solutions. We are nimble in our sales execution, because we leverage our fully distributed sales force, sales infrastructure, and notably, our ability to seamlessly add in new products and services. This is because in addition to our own in-house capabilities, we utilized several white label providers to fulfill our orders, which has given us flexibility to adapt to a dynamic market and quickly and efficiently procure and deliver new digital products and services as they are created. As importantly, the double-digit growth trajectory we have already ramped to supports our conviction that our go-to-market strategy, in particular, is focused on feet on the street sellers has been a good mousetrap and an important differentiator in the market. Because we have a proven ROI from adding incremental sellers who are armed with a growing toolkit of both digital and audio products, we are enthusiastic about the returns we can deliver from continuing to expand our sales force, enhance their capabilities and generate efficiencies at scale. Meanwhile, to support both these – to both support these types of investments and mitigate the EBITDA pressures from national revenue declines and the inflationary environment, we continue to aggressively reduce costs. Since 2019, compared to our peers, we have achieved higher cost reduction as a percentage of the 2019 baseline and as noted, a best among peers’ EBITDA margin recovery against pre-pandemic levels. Year-to-date, we executed an additional $10 million of annualized cost reductions and we will continue to make strides as the year progresses with multiple additional cost initiatives. Ultimately, all these efforts continue to support healthy free cash flow generation even in difficult economic environments, such as this one. In the first quarter, we bolstered our cash balance by generating $16 million of free cash flow and completing a $7.3 million sale of WFAS-FM, a station which contributed insignificant EBITDA. Given our healthy cash balance, we continued our open market repurchase program in Q1, buying back an additional $1.5 million of shares. In parallel, we were also able to complete discounted debt buybacks retiring $6.3 million face value of debt for $5.6 million of cash. Since announcing this capital allocation strategy in Q2 of last year, combined with our last excess cash flow suite of $2.5 million, we have retired $92.8 million of – in face value of debt and we have repurchased 2.9 million shares, representing approximately 14% of the company’s shares outstanding as of year end 2021. Before turning the call over to Frank, to give you more color on the quarter and our current Q2 pacing, I will go back to where I started. Maximizing results in challenging environments is something we do well. Over the past few years, this management team successfully executed an operational turnaround, while right-sizing an inherited overextended balance sheet through restructuring. And since the pandemic, we have driven best among peers performance with respect to cost takeouts, EBITDA margin recovery, free cash flow conversion, net leverage reduction and cash generation. This track record should give you confidence in our ability to once again optimally navigate and emerge from this difficult advertising environment. With that, Frank, I will turn it over to you.
Frank Lopez-Balboa: Thank you, Mary. Revenue in Q1 was down 11%. Excluding non-recurring revenue received from the termination of our WynnBET partnership last year and political revenue was down 7%. This is consistent with the pace and commentary that we have provided on our last earnings call. The continued weakness in the national advertising environment remains the main factor driving the decline in total revenue. Our businesses generating revenue from local advertisers continue to outperform those dependent on national advertisers. In aggregate, our local businesses were approximately flat year-over-year. As Mary mentioned, local spot was down approximately 4% in the quarter. From a category perspective, general services, auto and home products were top performing major local spot categories. The weakest categories were financial, sports betting and telecom. Our local digital businesses consisting of local digital marketing services, local streaming and local podcasting were up in the mid-teens. Within national advertising, we continue to see strong relative performance in live sports as the NCAA March Madness tournament significantly outperformed our broader network radio and national spot businesses. From a category perspective, we saw declines across most major ad categories with financial and sports betting showing significant weakness. As Mary mentioned, we were also impacted by the continued national headwinds in the podcasting space. As a result, our digital revenue on an aggregate as-reported basis was flat year-over-year. That said looking ahead to the second quarter we continue to see significant weakness in the national advertising environment. Our local businesses continue to outperform national led by solid growth in local digital marketing services. On a total company basis, we are currently pacing down low double-digits for the second quarter. Moving to expenses, total expenses in the quarter decreased by approximately $5.5 million year-over-year driven by our cost reduction actions as well as lower variable costs from lower revenue. Year-to-date, we have executed an additional $10 million of annualized cost reductions. In aggregate since the beginning of 2020, we have reduced approximately 20% of our 2019 fixed cost base. As always, we will continue to be aggressive in pursuing cost reductions to mitigate the top line impacts of the current environment and make room for investments and growth. In the quarter, we generated $24 million of cash from operations and $16 million of free cash flow and completed the highly accretive sale of WFAS-FM for $7.3 million, which will have the de minimis impact to EBITDA. Cash flow generation supported our continued capital return and debt reduction strategy. During the quarter, we repurchased $1.5 million of shares and our total share repurchase to-date to $33.3 million. At this point, we have repurchased approximately 14% of the shares that were outstanding when we initiated the buyback program with $16.7 million remaining of our Board authorized repurchase authorization. Additionally, we retired $6.3 million face value of debt at a discount split between $3.8 million of our term loan and $2.5 million of notes bringing total debt reduction since the beginning of 2020 to approximately $300 million or 30%. As Mary said, given our successful track record operating through challenging times and our strong balance sheet and liquidity position, we are confident that we will optimally navigate through this difficult ad environment. With that, we can now open the line for questions. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Jim Goss with Barrington Research. Mr. Goss, you may proceed.
Operator: Thank you for your question. Our next question comes from the line of Dan Day with B. Riley Securities. Dan, your line is now open.
Operator: Thank you for your question. Our next question comes from the line of Michael Kupinski with NOBLE Capital Markets. Michael, your line is now open.
Operator: Thank you for your question. Our final question comes from the line of Avi Steiner with JPMorgan. Avi, your line is now open.
Operator: Thank you for your question. That concludes our Q&A session for today. I will now turn it back over to the company for any closing remarks. Thank you.
Collin Jones: Thanks everyone for your time today and we look forward to speaking you again – to you again next quarter. Thanks.
Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect your line.
