Cumulus Media Inc. (NASDAQ:CMLS) Q2 2023 Earnings Call Transcript

Cumulus Media Inc. (NASDAQ:CMLS) Q2 2023 Earnings Call Transcript July 28, 2023

Cumulus Media Inc. beats earnings expectations. Reported EPS is $0.36, expectations were $-0.37.

Operator: Good morning, ladies and gentlemen. Welcome to the Cumulus Media Quarterly Earnings Conference Call. I will now turn it over to Collin Jones, Executive Vice President of Strategy and development. Sir, you may proceed.

Collin Jones: Thank you, operator. Welcome, everyone to our second quarter 2023 earnings conference call. I’m 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 as discussed in our filings with the SEC. 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 today’s call will be available for about a month via link in our website. With that, I will now turn it over to our President and CEO, Mary Berner. Mary?

Mary Berner: Thanks, Collin and good morning everyone. In the second quarter, we generated revenue in line with expectations while EBITDA exceeded expectations. While continued softness primarily in the national advertising market drove an overall revenue decline. We continue to deliver strong digit growth in our digital marketing services business with digital revenue comprising 18% of total revenue. We also executed additional cost reductions, which benefited EBITDA and improved our balance sheet through free cash flow generation and additional debt buybacks. Simultaneously, we retired approximately 10% of our shares outstanding through a tender offer. More specifically during the quarter, we drove significant growth in our digital marketing services businesses, increasing revenue 21% year-on-year, while also investing further in the business to help fuel its future growth.

We executed an additional $5 million of annualized non-revenue impacting fixed cost reductions, bringing the total to $15 million this year and $105 million since 2019. And we continue to support and benefit from our best among peers liquidity position and balance sheet, generating $12 million of cash from operations, signing a highly accretive $10 million asset sale, retiring over $32 million face value of debt at a discount, bringing our net debt down to its lowest level in over a decade and completing an equity tender offer for $5.7 million. These actions once again demonstrate our ability to maximize performance during difficult times by aggressively and relentlessly leveraging our platform to optimize areas that we can control and mitigate downside where we cannot.

This proven skill set is serving as well as we make the best of the current tough ad environment. And we’ll derive, what we believe will be a strong rebound in performance when the – environment improves. Along the way, we continue to have the financial flexibility and net leverage and liquidity profile to remain optimistic – and opportunistic in deploying capital for the benefit of our shareholders. On our last call, we described our business mix in some detail to help you to understand, how the current softness in the national market in particular affects us. To reiterate, our national businesses primarily consisting of the Westwood One network, national spot, national podcasting, and national streaming make up approximately 45% of our total 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. We continue to see macro driven challenges across all our national ad – channels, with many national advertisers experiencing inflationary pressure and uncertainty in their own end markets that cause them to either reduce their spending or stay on the sidelines completely. While weakness among national advertisers has been broad based, we did see some differentiation with categories such as retail and financial particularly hard hit in the quarter, while others such as telecom and consumer packaged goods showed improvement year-on-year. This trend for the consumer packaged goods category is encouraging as we found success in leveraging Westwood One’s unique position as the largest radio broadcast network to drive increased spending with top advertisers and not just in Q2, but on a forward-looking basis as well.

Similar to our national broadcast business – broadcasting business, in the second quarter in the national podcasting business also experienced revenue weakness, impacted by the decrease in spending for direct response advertisers. That said, our podcast audience growth continues to be robust, up 19% in Q2, and in fact, not only are we a top five podcast network, but we represent what were six of the top 30 news talk shows on Apple in the quarter, dominating the category. With these audience trends, we are seeing a substantial increase in impressions that we will be able to monetize more fully when the national – when the net national podcast revenue environment ultimately improves. Our local businesses continue to perform relatively better than national led by our strong growth in our digital marketing services business, which as I noted was up 21% for the quarter.

Local spot, which makes up approximately 80% of our total stock revenue was down 7% in Q2 consistent with our pacing guidance from last quarters call. Local revenue came in 5%, lower year-on-year, with local advertising while we saw some downward pressure among most categories, auto remains an area of growth with the pace of that growth increasing each month during the quarter, April was up 2%, May was up 10% and June was up 14%. Our local sales force is exceedingly well positioned to capitalize on automotive advertising. Given our deep and longstanding relationships with audit decision makers, as well as their ancillary digital products, including our digital marketing services capabilities that we are now also bringing to bear in those discussions.

Local digital marketing services was the brightest spot for us this quarter. As I’ve mentioned previously, this business is one that we continue to lean into heavily, as we believe represents a tremendous market opportunity with strong incremental contribution margins. Specifically, we have leveraged our differentiated go-to-market strategy, which centers on a versatile and well-connected beat on the street sales team, offering a full suite of integrated audio and digital marketing solutions to drive significant growth in this $15 billion market, which is growing 5% to 10% a year. This sales approach not only leads to higher sales conversion given the high touch nature of the sales process, but it also allows us to bring in new clients and add and rollout new products as advertiser needs evolve.

To that last point, we’ve been very successful with our suite of digital presence products we call that Cumulus Boost, which rolled out last year. We now have well over 500 active clients and nearly half of those new Cumulus Boost clients are altogether new to Cumulus, meaning they didn’t previously by radio or digital from us. And of those nearly half is expanded from their initial order to also buy additional Cumulus products. Thus far, our growth in digital marketing services has been generated on a completely organic basis with limited investment. However, as I mentioned, given our success so far, and the size of the opportunity, we are making investments to further drive growth, increasing the size of our digital marketing services sales organization with pure play digital sellers is one of our top priorities.

As we have found, we can generate very quick returns from our refined and well executed sales strategy. For example, initial testing has resulted in a tripling of monthly run rate digital revenue. So to that end, we have already hired or in the process of hiring new sellers, which will triple our digital sales force by the end of third quarter. Additionally, because of our unrelenting focus on enhancing both the efficiency and margins of the digital services and products that we offer, we have built a team, we have built a team to take over certain responsibilities, which are formally outsourced to our white label partners. All in all, we’re very optimistic about the growth trajectory that we expect for our digital marketing services business, particularly as we continue to ramp up our investments in this area.

Meanwhile, we continue to aggressively reduce costs. During the third quarter, we execute an additional $5 million of annualized cost reductions, adding to the $100 million of reductions that we’ve already made since 2019. And finally, we remained laser focused on maintaining our best among peers balance sheet and liquidity positions, through strong working capital management and disciplined capital allocation. In the second quarter, we bolstered our cash balance by generating $12 million of cash flow from operations and announced the $10 million sale of WDRQ in Detroit, which we expect to close shortly. Between this sale and the sale of WFAS-FM earlier this year, we generated over $17 million of gross sale proceeds this year alone with the disposal of assets – with negligible EBITDA.

We also completed an equity tender offer for $5.7 million during the quarter, bringing us to a total of $39 million of shares repurchased out of our $50 million authorization, equivalent to approximately 22% of the total shares outstanding at year end 2021. In parallel, we were able to complete discounted debt buybacks retiring $32.3 million face value of debt for $23.8 million of cash. Since announcing this capital allocation strategy in Q2 of last year, and combined with our last excess cash flow suite of $12.5 million, we have retired $125 million in face value of debt. Before I turn the call over to Frank who will give you more color on the quarter, and our current Q3 pacing, I wanted to close by reiterating a couple of points. Prepandemic, our management teams successfully executed an operational turnaround while right sizing an inherited over extended balance sheet through restructuring.

And since the pandemic, this team has driven best among peers performance, on cost, takeout, EBITDA, margin recovery, free cash flow conversion, net leverage reduction and cash generation. And in this particular cycle, we’re intently focused on positioning the company to take advantage of the eventual recovery of high margin national advertising, investing in our digital marketing services business to develop a market leading position in that space, reducing fixed costs to further enhance operating leverage, and generating substantial long-term value – shareholder value from opportunistic deployment of capital. And with that, I’ll turn it over to Frank.

Frank Lopez-Balboa: Thank you, Mary. Second quarter revenue was down 11% in line with the pacing commentary that we gave in our last earnings call, while EBITDA came in at approximately $31 million. The weakness in the national advertising environment remained the main factor driving a decline in total revenue. On a relative basis, our businesses generating revenue from local advertisers continue to outperform those dependent on national advertisers. Regarding EBITDA, our results benefited from continued cost reductions. From a category perspective, telecom and consumer packaged goods were our top performing national categories while our weakest were professional services and retail. General services and auto were our top performing major local spot categories while financial, sports betting and travel were some of our weakest.

Our local digital businesses consisting of digital marketing services, local streaming and local podcasting were up in the mid-teens. Turning to expenses, some expenses in the quarter decreased by approximately $12 million year-on-year, driven by fixed cost reductions as well as our lower variable costs and lower revenue. As Mary mentioned, the impact of the fixed cost reduction that we executed in the quarter is approximately $5 million on an annualized basis, adding to the $100 million of reductions that we mentioned on the last earnings call. We do want to point out a couple of one-time items impacting the income statement this quarter. First, content cost reductions, including a one-time $2 million reduction from an acquisition related earn-outs.

Additionally, we recorded a $9.1 million noncash impairment charge related to real estate, which is reflected at the year-on-year bearings within the corporate expense line. As always, we will continue to be aggressive in pursuing cost reductions to mitigate the top line impacts of the current environment. Moving to the balance sheet, we generated approximately $12 million of cash from operations this quarter. In addition, we announced a highly accretive asset sale, which – for $10 million, which will have a de minimis impact in EBITDA and which we expect to close shortly. We remain – optimistic on non-core asset sales. Our consistently strong cash flow reserves have allowed us to support the continued execution from a capital return and debt reduction strategy.

During the quarter, we repurchased $5.7 million of shares, bringing our total share repurchase to-date to $39 million. At this point, we have repurchased approximately 22% of the shares that were outstanding when we initiated the buyback program. Additionally, we retired approximately $32 million face value bonds at an average price of 74%, bringing total debt reduction since the beginning of the year to $39 million and $125 million since the beginning of last year. This reduction of debt has largely offset the approximately 500 basis point increase in short-term rates increase since last year. As a reminder, we have reduced net debt by over $420 million or 42% since 2019. Looking ahead, we continue to see weakness in the national advertising market.

As a reminder, we are facing a difficult political comp in the second half. As last year, we generated $4.5 million and $8.3 minor of political revenue in the third and fourth quarters respectively. As a result on a total company basis, we are currently pacing down in the low double-digits for the third quarter. But in that pacing, the general trends we’ve been experiencing remains with our local businesses significantly outperforming our national businesses. As Mary said, we remain focused on leveraging the ultimate recovery of national advertising, investing in growth areas, reducing costs, and opportunistically deploying capital. With that, we can now open the line for questions. Operator?

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Q&A Session

Operator: Absolutely. [Operator Instructions] The first question comes from the line of Dan Day with B. Riley Securities. You may proceed.

Dan Day: Thank you for taking the questions. So just looking at your experience over the last couple of quarters really over the last year with national advertising, especially on the Westwood One Network, clearly where a lot of the challenges are concentrated right now. I think a big reason for that is the relatively short-term nature campaign commitments, how easily, again sort to be dialed up and down. And just wondering if you think it makes sense, as we get to a point of recovery to try and lock in campaigns longer term, maybe, you know, more of like, upfront process you see on the TV side or do you think that would just be a nonstarter with advertiser and agency clients?

Mary Berner: Hi Dan. Thanks for the question. We do have an upfront process for the network. It’s a little bit of a soft process. But generally locks in, maybe two-thirds of the business. But unlike TV, there’s an out clause within a month when the product runs. And what we’re seeing as advertisers are either pulling out at the last minute, or are sitting on the sidelines and waiting to advertise later. So, we put everything, we give everything we’ve got to get people to commit upfront. But I think we’re seeing, the fact that – the networking particularly is well positioned. It’s the biggest Audio Network in the country, top reach vehicle, great brand building reach vehicle, and we don’t see, we don’t see any reason that doesn’t bounce back, eventually. But we are seeing that we are seeing that, everyone else like us, everyone, keeping an eye on interest rates and inflation and banking issues and recession talking if that, dies down, we think it will get better.

Dan Day: A follow-up on retail being relatively soft in the quarter. I think that’s in contrast to kind of what a lot of the digital advertising players have seen in terms of retail being fairly strong so far. Just you maybe retail media being sort of one of the hotter digital media. Maybe just talk through why you don’t think that sort of the – sort of permanent shift over from kind of linear to digital. And why you think those retailers will come back to the linear, radio and television longer term?

Frank Lopez-Balboa: Hi, Dan. It’s Frank, I’ll take that question. Look as Mary discussed, there are a lot of factors impacting the national advertising market. And I think one of the things that we’re definitely seeing is that as interest rates go up, we’re seeing companies, particularly a larger companies trying to protect their EPS performance, and they’re allocating. They’re allocating their dollars very judiciously in certain areas. So from our perspective, when we think not only about retail, its broader national advertising, thinking about the reach that we have broadly through our local businesses, as well as our network business, it’s really a question of time for that money to come back from the discussions we’re having with our clients broadly.

We’re not hearing anything about a permanent reallocation of advertising dollars to other medium. It’s clearly a competitive market. We are taking advantage of some of that – for our digital businesses, as well. But as far as we can tell, right now, it’s really a timing issue as opposed to permanently reallocation of dollars.

Dan Day: And just – you sold two stations this year for a decent number. You view as of kind of unique one-off situations or whether that’s, strategic that the stations being a lever you more actively pursue moving forward?