Townsquare Media, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Revenue Performance: Third quarter net revenue was $115.3 million, up slightly year-over-year, meeting guidance. There was sequential improvement in revenue growth across segments.
• Digital Momentum: Digital revenue contributed 52% of total net revenue in Q3. Programmatic advertising grew 10% year-over-year in Q3 and is expected to drive Q4 Digital Advertising growth to ~15%.
• Townsquare Interactive Recovery: Sequential revenue growth accelerated in Q3, expected to return to year-over-year growth in Q4. A new SaaS business management platform is expected to drive long-term growth.
• Broadcast Market Share: Outperformed the industry, gaining broadcast market share according to Miller Kaplan estimates.
• Cash Flow and Balance Sheet: Strong cash flow generation, with $24 million of shares repurchased and $36 million of bonds bought back year-to-date. Net leverage was 4.86 times at the end of Q3.

Segment Performance

• Broadcast Advertising: Third quarter net revenue increased slightly year-over-year. Excluding political, it declined. National Broadcast Advertising was a headwind in Q3 and expected to decline over 20% in Q4. Political revenue was $3.7 million in Q3, with full-year expected to be just north of $13 million, less than initial estimates of $14 million to $16 million.
• Digital Advertising (Townsquare Ignite): Third quarter net revenue increased 4.7% year-over-year, driven by programmatic advertising up 10% year-over-year. Programmatic makes up about 60% of this segment. Expected to accelerate to ~15% growth in Q4.
• Townsquare Interactive: Third quarter net revenue declined 5.8% year-over-year but improved from Q2. Profit margin was 27% in Q3, slightly down from 28% in 2023. Expected to return to year-over-year growth in Q4.

Guidance

• 2024 Full Year: Reaffirming full-year results within original guidance ranges for net revenue and adjusted EBITDA.
• Q4 Guidance: Net revenue expected to be between $114.8 million and $118.8 million (flat to 3.5% year-over-year growth). Adjusted EBITDA expected to be between $30.8 million and $31.8 million.
• Digital Advertising Q4: Expected to approach 15% growth, triple Q3's 5% growth.
• Townsquare Interactive: Expected to return to year-over-year revenue growth in Q4.

Risks

• Political Revenue Uncertainty: Political revenue fell short of initial expectations, expected to be just north of $13 million for the full year instead of $14 million to $16 million.
• National Broadcast Decline: National Broadcast Advertising expected to decline over 20% in Q4, impacting overall results.
• Refinancing Risks: Uncertainty around interest rate changes and timing of refinancing.

Question and Answer

• **Q: Couple of questions here. Bill, you indicated that National Digital was strong, but that national broadcast spot deteriorated. And I’m wondering do you think that there’s a shift in national to digital, first of all, and I was just wondering in terms of the national broadcast spot, what do you think that ever comes back?

A: Hey, good morning, Michael. Thank you for the initial question, and I’ll throw it back to you for your additional questions. So in terms of National Digital, actually in Q3, it still was – I think as Stu noted, it was down over $1 million. So what we noted is National Digital, thankfully is plateauing in Q4 based on our current forecast. So in Q4, we expect flat to slight growth in National Digital, which has been a major drive of decline year-to-date through Q3. We did share in terms of broadcast that national was performing much better in Q2 through the first half of the year was down, call it, mid-single-digits that continued in Q3. And we were quite surprised that in Q4, as I noted, national is currently pacing over 20% down. So that obviously is an unwelcome development. And that is obviously baked into our guide and one of the reasons still within the initial guidance range for EBITDA, but between being under our political expectations by $3 million and that national pressure on broadcast we tighten the range to $100 million to $101 million. I think your major question is, do you think national is, advertisers are switching from broadcast to digital. What I would say is, clearly, I’m sure you heard this from others as well, is there was a lot of uncertainty going into the election. We definitely saw broadcasters, I’d say, slow to commit starting after Labor Day right through the election. Now, obviously with the election behind us and certainty moving forward we expect our overall broadcast business to improve. Obviously, there was so much clutter, radio is the number one reach medium, so it’s tremendous asset for brand awareness, but with all the clutter of political people were holding back, which is understandable. So, overall, I do expect there is some switch in general from broadcast to digital. As you know, we’re one of the local first media company focused on digital. We believe that broadcast, although an incredibly valuable asset with tremendous cash flow properties and connections to the community, and we believe we wouldn’t have the success that we’ve had over the last 10-plus-years in our digital efforts without that community connection that radio provides. But for many years we’ve said, “Hey, this is a traditional cash cow business and we expect it to decline.” And if you even go back to the beginning of the year when we started the year we said, “Hey, we believe our broadcast business will be a slow decliner and that’ll continue for the out years.” And that’s exactly what’s transpired this year right in line with our expectations. So your last question there was does national ever recover and grow again from a broadcast perspective, that’s not our expectation. Is it possible? Clearly, that’s possible. But we believe broadcast is a traditional cash cow and will continue to a slow decline and not return to growth.

• **Q: On the core of broadcasting side ex-political there was a sequential decline. Can you maybe add some color on what you’re seeing and maybe the tone of advertising local, you talked about national, but just talk a little bit maybe about local and maybe as we go into December getting outside of the political noise, what you’re seeing?

A: Yeah. Perfect. You’re exactly right. So in the first half of the year, ex-political was a slow decliner. And that was obviously driven by some of that national being down negative mid-single-digit. With national now, as we just described, broadcasting going down even further in Q4, ex-political in Q3 was down about 5% for broadcast. And as we look at the rest of the year, I expect that softness to continue partially because of that national decline that I just me mentioned of over 20% broadcast decline in Q4 currently forecasted. And then as I just noted, locals definitely a little suppressed. Our expectation is that was really driven by the election and the clutter, and that’s why – from, in essence, October through yesterday, we saw some additional softness in core. But, we expect now with the election behind us to see that uptick not only through the rest of this year, but into next year. But, overall, I still expect ex-political to be declining probably a little bit more than Q3, because national was down in Q3, but no way it was mid-single-digits. So national going from mid-single-digits to over 20% decline in Q4 is putting a lot of pressure on that core broadcast ex-political in Q4. Does that answer your question, Michael, as it relates to core broadcasting and political?

• **Q: The SummitMedia partnership is really exciting and Ignite is really, obviously, one of your bright spots is just really growing well. Were there any contributions from Summit in Q3? I know it’s ramping you said until next year. And then, when do you anticipate meaningful revenue contributions from Summit to start to kick in? And I was wondering in terms of the cost, are there costs associated with this agreement and when do those ramp. And then, if you could just finally talk a little bit about the margin profile for the white label business and how that affects the overall margins for the Ignite business?

A: No, great questions, Michael, and thank you as always for all of your questions. We’re quite pleased, tremendously pleased with our digital programmatic advertising as well as our Digital Advertising overall. As we noted, first half Digital Advertising growth was plus 1% that accelerated to plus 5% in Q3, and now we expect approaching plus 15%. So triple Q3’s growth rate in Q4, and that’s being driven by two things. One, that National Digital business that we described we believe now will be flat to slightly up in Q4 and our digital programmatic business is simply on fire. I couldn’t be more proud of Todd and his team, Kelly, Matt, Erin, Elyse, Justin, Billy, Tony, J.C., Kate, Kathy, just so many people driving this differentiation. And we’ve been talking about it for years, as you know, on this call as well as in other meetings about our differentiation of our tech stack, our first-party data. And, I think, we’re starting to see that flywheel and that momentum really pick up in Digital Advertising, which is nice to see. And that, in essence, has caused others in the broadcast space, be it TV and radio broadcasters. And quite honestly, since our last call, a lot more local agencies, including local digital agencies approaching us and saying, “Hey, is there a way for us to benefit from this expertise and differentiation that you’ve built in your Digital Advertising business?” And as I shared in the beginning of the year, we created the media partnership business. We started with one broadcaster in one market, tested that as a trial. That’s gone tremendously well and gave us the confidence to then partner with SummitMedia, and Carl Palmer is just a tremendous partner in this endeavor. And as it relates to your specific questions, no material revenue in Q3. There is a few hundred thousand dollars expected in Q4, but we would still be growing or approaching plus 15% even without that few hundred thousand dollars of media partnership revenue. In terms of the cost, it’s really our personnel. We’re partnering with them. We’re treating them almost like they were part of our company. So our buying team, our creative team, our digital campaign managers, our optimization, our reporting. We are doing all of that in conjunction for Summit sales teams and their clients, so the cost is really our personnel and our expertise. And that’s one of the reasons I think so many – we’re getting now dozens of inbound calls and partnership opportunities that is quite exciting. The good news for us is Digital Advertising for many years has been the fastest growing part of our company. Programmatic is the main driver of that, yet our O&O is very healthy, because of the first-party data. As I noted on in the prepared remarks, 60% of our Digital Advertising is now programmatic. So now you factor in this potential really significant media partnership opportunity, where we can really become the chosen provider of digital programmatic advertising to broadcasters and local agencies, and it’s quite exciting. Again, we need to prove success and then continue on. So the margin profile, which was your last question about this exciting media partnership division is slightly compressed from our overall margin. So our Digital Advertising margins have been quite strong. I would put this down maybe in the high-teens in terms of margin, because we obviously have other variables to support that and make sure that Summit is benefiting from the partnership just as we are. And most importantly, the campaigns and the advertising we’re running is working for the clients. That is our North Star regardless if that’s broadcast advertising, regardless if that’s digital advertising or Townsquare Interactive. So we’re quite pleased with Digital Advertising, as you noted. We’re also quite pleased that we had sequential improvement across all three of our business segments. But I’ll toss it back to you, Michael, in case you have any follow-ups, otherwise, we’ll continue on.

• **Q: Hi, good morning. I just had a question about maybe the debt refinancing. I was just wondering if the recent shift in interest rates changes how you are looking at approaching that.

A: Thank you, Patrick. Good to hear from you this morning and good morning as well. Our current expectation is that we will do a variable instrument. So, we’ll be doing a bank loan instead of our current bonds and that we would be doing that in the beginning of 2025. Obviously, the Fed will be announcing their decision later today based on our partners in the banking industry, and I think the world at large, they expect another 25 basis point cut and then determine based on future data if there’s a cut in December or there’ll be a pause until Q1 of 2025. So the interest rates, our expectation is between now and a year from now, they continue to come down. Obviously, the 10-year has gone up with the Trump trade and really spiked to where we were last August. But in terms of the short-term and the 1-month, 3-month SOFR, that’s come down quite nicely, which lends itself to our refinancing in Q1 before our bonds become current in February. Stu, I’ll just pause there in case you want to add anything else for Patrick.

• **Q: And then maybe on the Digital Advertising side, you just mentioned in answering Mike’s question about the National Digital websites being a part of that improvement. I was just wondering if there was like any specific like ad formats or different like inventory that you’re helping your local advertisers to access that were helping support that growth rate?

A: Yeah. No, great question. So, there’s definitely been a lot of change in just digital media in terms of the algorithms and what Meta has done and what Google has done. Some people have speculated that, that was leading up to the election, and you’re probably very familiar with if you go into a search engine, you’re getting a lot more Reddit content up the top versus other things in the past. So very pleased that our National Digital business as we go into Q4 is no longer suffering those losses that we’ve experienced from a revenue as well as a profit perspective through the first 3 quarters. And that, to your point, is driven really by a few factors. One is social. Our social footprint on our national is quite strong in terms of our brands like Taste of Country and XXL and Loudwire and so forth. We’re also seeing video advertising improvement. Our video, we have an amazing multichannel platform through YouTube, and that audience continues to grow across our national brands. And so we’re seeing an increase in social advertising, video advertising as well as a nice, at least, plateau, if not growth in core display ads on the websites as well as the mobile apps. And we’re also seeing the great news as we talked about this before, couldn’t be more proud of our content contributors locally who are not only driving that connection through our broadcast business, but for our O&O on our local websites. And particularly with the demise of the newspaper industry, we are really serving a community function, but it’s a very healthy business, gives us great consumer insights. I believe we have more data on our consumers in our 74 markets than anyone else because of that digital audience that we have. And, we’re now starting to get recover on the national side. And, hopefully, that answers your question in terms of why and some of the incremental formats of social and video growing more so than they have in the past, Patrick.