Townsquare Media, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Townsquare operates local radio and digital advertising businesses and live events and entertainment properties. Its assets included 317 radio stations, more than 325 local websites, and operations in 67 U.S. markets.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $164.1m | $165.8m | $393.2m | $397.3m |
| Operating income | $32.8m | $38.9m | $53.4m | $62.5m |
| Net income | $14.3m | $15.9m | $16.8m | $20.1m |
| Diluted earnings per share | $0.51 | $0.58 | $0.60 | $0.74 |
| Operating margin | 20.0% | 23.5% | 13.6% | 15.7% |
Operating margin is calculated as operating income divided by net revenue. The filing does not provide a reported EBITDA figure or formal numerical guidance.
- Revenue mix: Q3 Local Marketing Solutions revenue rose 1.7% to $90.5m; Entertainment revenue fell 4.1% to $73.6m. For nine months, Local Marketing Solutions rose 2.4% to $257.0m while Entertainment declined 7.0% to $136.2m.
- Profit and costs: Q3 operating income declined 15.8%, as direct operating expenses rose 2.9% and depreciation and amortization rose 15.2%. Nine-month operating income fell 14.5%; lower revenue and higher operating costs and D&A outweighed reduced interest expense and the absence of the prior-year investment impairment.
- Cash flow: Nine-month operating cash flow was $33.8m, down from $40.2m. Investing used $24.3m, including $18.2m of capital expenditures and $5.5m of acquisition payments. Financing used $7.7m. Cash and restricted cash increased $1.8m to $53.3m.
- Debt and liquidity: September 30 debt was $564.8m net of deferred financing costs (debt before those costs: $571.9m). Cash and restricted cash was $53.3m; the $50m revolver was undrawn. Management estimated approximately $30.8m of debt service over the next 12 months and said available cash, operating cash flow, and revolver capacity should meet funding needs for at least one year. The company reported compliance with debt covenants.
- Margins and interest exposure: Term Loans totaled $291.9m at a 4.27% rate based on LIBOR of 1.27% plus a 3.00% margin. Management estimated a 1-percentage-point LIBOR increase would raise annual interest expense by about $2.9m.
Material changes, outlook and risks
- Management attributed Local Marketing Solutions growth to non-political revenue, partly offset by lower political revenue versus the 2016 election year. Excluding political revenue, Q3 Local Marketing Solutions revenue increased 3.0%; consolidated revenue decreased 0.3%.
- Entertainment revenue weakness reflected declines in national digital business and certain live events; nine-month results also reflected the prior-year sale of certain events. Costs in Local Marketing Solutions increased to support digital-business growth, while Entertainment expenses fell year over year for the nine-month period.
- Results are seasonal: Entertainment revenue is typically highest in Q3, supported by summer festivals and NAME operations. Advertising revenue may also be affected by political spending, economic conditions and shifts in advertising demand. Weather can adversely affect live events; NAME also exposes the company to Canadian-dollar currency movements, which it has not historically hedged.
- Management cited competition, radio’s appeal as an advertising medium, customer and market conditions, acquisition execution, capital needs, leverage and interest-rate changes as risks. No specific forward-looking revenue or earnings guidance is stated.
- On October 16, 2017, after quarter-end, Bill Wilson and Dhruv Prasad were appointed co-CEOs; former CEO Steven Price became Executive Chairman. The company also filed an amendment to its credit agreement dated October 20; the supplied filing text does not state the amendment’s financial terms.
- The company recorded no investment impairment in 2017, compared with a $4.2m charge in Q3 2016. Management said the prior annual impairment tests found intangible-asset fair values above carrying amounts, but future deterioration could require impairment.
- Management assessed disclosure controls as effective at September 30. The WideOrbit billing and traffic system had been implemented in 56 of 67 markets. The company said ordinary-course legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether Entertainment and national digital revenue stabilize, and whether Local Marketing Solutions growth offsets continued weakness.
- Whether cash generation can support capital spending, acquisitions and scheduled debt service while maintaining covenant compliance.
- The terms and potential effects of the October 20, 2017 credit-agreement amendment.
- Execution and financial implications of the co-CEO transition, and the impact of seasonality and political-advertising comparisons on upcoming results.
- Exposure to floating-rate debt, live-event weather risks, and potential impairment of FCC licenses, goodwill and other intangible assets.