Townsquare Media, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Townsquare operates radio, local websites and digital marketing services, live events, and national music and entertainment websites. At quarter-end it reported 312 radio stations and more than 325 local websites across 66 U.S. markets, plus a digital marketing business serving approximately 11,200 SMBs. Its two reportable segments are Local Marketing Solutions and Entertainment.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2017 |
|---|---|---|
| Net revenue | $94.4 million | $88.4 million |
| Operating income | $5.8 million | $3.3 million |
| Operating margin | 6.1% | 3.7% |
| Net loss | $1.4 million | $3.0 million |
| Basic and diluted loss per share | $0.08 | $0.16 |
| Cash provided by operations | $3.9 million | $4.0 million |
| Capital expenditures | $6.5 million | $5.7 million |
| Cash flow after capital expenditures | $(2.6) million | $(1.7) million |
Q1 2017 net revenue declined 6.4% year over year. Local Marketing Solutions revenue grew 1.2% to $76.1 million; Entertainment revenue fell 35.8% to $12.3 million. The company attributed the Entertainment decline largely to live-event timing. Direct operating costs declined 5.1%, less than revenue, and operating income fell 43.3%. Interest expense was $8.3 million, down 3.6%. The income tax benefit was $2.0 million; the effective tax rate was approximately 39.9%.
At March 31, 2017, cash was $40.6 million, total assets were $1.07 billion, and stockholders’ equity was $388.0 million. Debt before deferred financing costs was $572.0 million; reported debt, net of financing costs, was $564.1 million. The $50 million revolver was undrawn. Management estimated approximately $30.2 million of debt service over the next 12 months and stated that cash, operating cash flow and available revolver capacity should meet funding needs for at least one year. The company was in compliance with debt covenants.
Changes, outlook and risks
- Local Marketing Solutions revenue excluding political revenue increased 2.5%; total segment revenue rose despite lower political revenue than the 2016 election-year quarter. Segment operating income was $17.5 million versus $17.9 million.
- Entertainment segment operating loss widened to $7.4 million from $5.7 million, alongside lower revenue and costs associated with live-event timing.
- On February 8, 2017, the company repriced its term loan, reducing the applicable margin by 25 basis points and the stated current rate from 4.25% to 4.00%. A $6.7 million required excess-cash-flow payment was made March 20. The notes bear 6.5% interest and mature in 2023; term loans mature in 2022.
- The company paid $1.8 million, net of cash received, for a joint-venture acquisition and issued 48,035 Class A shares as part of the consideration. It also recorded $2.3 million of goodwill from the acquisition.
- No formal financial guidance was provided. Management expects Q1 to be the year’s lowest-revenue quarter; revenue is generally higher in Q2 and Q3, with live events and NAME activity concentrated in Q3. Political advertising is typically strongest in Q4 of even-numbered years.
- Key exposures include advertising demand and economic conditions, competition and shifts to digital advertising, event cancellations or weather, leverage and floating-rate debt, and acquisition financing and integration. A 1-percentage-point increase in LIBOR was estimated to add about $3.0 million to annual interest expense. Management noted potential future impairment risk if market conditions or operating performance deteriorate.
- The filing reports ordinary-course legal and regulatory matters, but management did not believe their resolution would materially adversely affect financial position or results. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Entertainment revenue recovers as event timing normalizes, and the scale and profitability of the upcoming event seasons.
- Whether Local Marketing Solutions growth continues and covers higher personnel and sales-related costs.
- Cash generation relative to capital spending, debt service, and future mandatory term-loan payments.
- Floating-rate exposure, covenant compliance, and the availability and terms of revolving credit.
- Potential goodwill or intangible-asset impairment, given the large balance of FCC licenses and goodwill.