Business context and reporting period
MediaCo Holding Inc.’s unaudited Form 10-Q reports the carved-out operations of WQHT-FM and WBLS-FM, two New York City radio stations whose revenue is primarily advertising, with additional event and digital revenue. The statements compare the one month and seven months ended September 30, 2019, with the corresponding 2018 periods; the seven-month period reflects the company’s former February fiscal year-end. MediaCo changed to a December 31 year-end and expected to file a ten-month transition report for 2019.
At September 30, 2019, MediaCo was wholly owned by Emmis and had not operated as a separate company. The station results are presented historically as a carve-out from Emmis, including allocated corporate costs that may not reflect standalone expenses. The transaction transferring the stations to MediaCo closed November 25, 2019, after the reporting date.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. The seven-month results are the most informative comparison in this filing.
| Metric | Seven months ended Sep. 30, 2018 | Seven months ended Sep. 30, 2019 | Change |
|---|---|---|---|
| Net revenue | $27.916 | $30.454 | +9.1% |
| Operating expenses, including depreciation and amortization | $23.000 | $24.152 | +5.0% |
| Operating income | $4.916 | $6.302 | +28.2% |
| Net income | $3.311 | $4.303 | +30.0% |
| Cash from operating activities | $2.012 | $5.825 | +$3.813 |
Operating margin increased from approximately 17.6% to 20.7%; net margin increased from approximately 11.9% to 14.1%. The effective tax rate was 32% in 2019 versus 33% in 2018. No interest expense or Emmis third-party debt was allocated to the historical station results.
For September 2019 alone, revenue was $4.302 million versus $4.405 million, operating income was $0.297 million versus $0.626 million, and net income was $0.200 million versus $0.434 million. The filing attributes the revenue decline mainly to prior-year political revenue that did not recur and lower Circle of Sisters sponsorship revenue.
At September 30, 2019, total assets were $94.233 million and total liabilities were $18.039 million. Current assets were $11.358 million and current liabilities $6.694 million, producing reported net working capital of $4.7 million. The company reported no cash or cash equivalents: Emmis centrally managed and swept cash, including cash generated by station operations. Seven-month capital expenditures were $0.056 million.
FCC licenses were carried at $63.3 million, approximately 67% of total assets. Adoption of lease accounting resulted in $13.581 million of recorded operating lease liabilities at September 30, 2019, including $2.312 million current; lease expense for the seven months was $1.511 million.
Material changes and management commentary
- Seven-month revenue growth was driven substantially by record ticket sales for the June 2019 Summer Jam concert. Management said station gross revenue reported to Miller Kaplan rose 8.2%, compared with 1.4% growth in the New York radio market.
- By revenue source, seven-month nontraditional revenue increased to $7.868 million from $6.474 million, and digital revenue rose to $2.119 million from $1.700 million. Political revenue was zero in 2019 versus $0.421 million in the comparable seven-month period.
- Station operating expenses excluding depreciation and amortization increased 5.2% to $23.454 million. Management cited higher employee healthcare costs, spending supporting digital sales, and sales personnel additions.
- Operating cash flow increased to $5.825 million from $2.012 million, reflecting higher net income and improved working-capital management. Cash was swept to and retained by Emmis.
- Management described radio as a mature industry facing competition for audiences and advertising from internet media, streaming, satellite radio and podcasts. Results are seasonal, and management stated revenue and operating income are usually lowest in the first calendar quarter.
Outlook, transaction financing and risks
The filing provides no quantified operating guidance. Management expected post-transaction cash needs to be met through operating cash flow and stated that SG Broadcasting was expected to fund a portion of any shortfall. It also anticipated standalone public-company costs and ongoing payments to Emmis for management and employee-related services.
After quarter-end, the November 25 transaction involved a $91.5 million cash purchase price to Emmis, financed in part by $50.0 million of senior secured borrowing and SG Broadcasting’s $41.5 million equity investment; MediaCo also issued $5.0 million and $6.25 million convertible notes to Emmis and SG Broadcasting, respectively. The senior facility has a five-year term, bears interest at LIBOR plus 7.5%, and includes financial and other covenants. The notes are convertible under specified terms. MediaCo also reported approximately $2.1 million of transaction costs expected in fourth-quarter results.
On December 13, 2019, MediaCo completed the acquisition of two outdoor advertising businesses for a stated purchase price of $43.1 million, subject to working-capital adjustments. Funding included $23.4 million of additional senior-facility borrowing and $22.0 million of SG Broadcasting convertible preferred stock. These post-quarter transactions materially changed the company’s business, financing and risk profile from the historical radio-station carve-out.
Other risks include dependence on advertising and audience ratings, competition and digital-media shifts, FCC license compliance and renewal, impairment risk for the substantial FCC-license asset balance, reliance on Emmis services, potential conflicts involving controlling stockholder SG Broadcasting, and the ability to operate as a standalone public company. Management reported no pending legal proceedings believed likely to have a material adverse effect. The filing states that annual FCC-license impairment testing was planned for October 1 following the fiscal-year change; no new impairment indicators arose in the quarter and no interim test was considered necessary.
Important facts for investors to verify
- Confirm the post-quarter financing terms, outstanding borrowings, covenant headroom and liquidity after the station transaction and outdoor-advertising acquisition.
- Assess the sustainability of Summer Jam-driven revenue growth and the relative contribution and profitability of advertising, events and digital revenue.
- Review actual standalone operating costs, including Emmis management and employee arrangements, transaction costs and public-company expenses, against the allocated historical carve-out costs.
- Monitor FCC-license impairment assumptions and the value of licenses, which represented about 67% of September 30 assets.
- Verify the effects of the convertible notes and preferred stock, ownership and voting control, and the acquired outdoor-advertising businesses on future results and share dilution.