Townsquare Media, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Figures are unaudited and in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Townsquare is a local-focused digital media and marketing company operating subscription digital marketing services, digital advertising, local radio stations, and live events. At quarter-end it reported 356 radio stations in 74 markets. The Cherry Creek Broadcasting acquisition closed June 17, 2022; the company reported that its results were included from closing and were not material enough to require pro forma information.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $121.9 | $107.3 | $222.2 | $196.1 |
| Operating income | $16.9 | $23.8 | $32.7 | $32.6 |
| Net income | $4.9 | $10.1 | $7.7 | $4.0 |
| Diluted EPS | $0.24 | $0.50 | $0.35 | $0.13 |
| Interest expense, net | $10.0 | $9.8 | $20.1 | $20.0 |
Q2 operating margin was approximately 13.8%, versus 22.2% a year earlier; net margin was approximately 4.0%, versus 9.4%. For the first half, operating margin was approximately 14.7%, versus 16.6%, while net margin was approximately 3.4%, versus 2.0%. Margins are calculated from reported revenue and income.
Q2 revenue grew 13.6%. Digital advertising revenue increased 25.4% to $37.2 million, subscription digital marketing revenue rose 13.7% to $23.0 million, broadcast advertising increased 1.0% to $57.0 million, and Other revenue—primarily live events—increased to $4.8 million from $1.0 million. Management attributed subscriber-service growth partly to approximately 1,150 net additional subscribers in Q2 and approximately 2,200 in the first half.
Q2 operating income fell 29.2%, as operating costs rose 25.8%, faster than revenue. Direct operating expenses increased 17.1%, reflecting growth-related staffing and increased live-event activity; reported impairment charges were $9.4 million. For the first half, operating income was nearly unchanged year over year: revenue growth and lower transaction and realignment costs were largely offset by higher direct expenses and impairment charges.
Cash flow, debt and liquidity
- First-half operating cash flow was $23.0 million, versus $31.1 million in 2021. Capital expenditures were $7.6 million, versus $4.8 million. Operating cash flow less capital expenditures was approximately $15.4 million; this is a simple calculation, not a company-reported non-GAAP measure.
- First-half investing cash outflow was $30.5 million, including $18.4 million for Cherry Creek and $5.0 million invested in digital assets. Financing cash outflow was $20.2 million, principally from repurchasing 2026 Notes.
- Cash and cash equivalents were $22.8 million at June 30, down from $50.5 million at December 31, 2021. The company attributed the decline primarily to the acquisition and $19.2 million of 2026 Notes repurchases. Restricted cash was $0.5 million.
- Outstanding 2026 Notes principal was $530.8 million; reported long-term debt, net of deferred financing costs, was $523.4 million. Notes mature in 2026. The company repurchased $19.2 million principal at or below par and recorded a $0.1 million net gain. It reported compliance with the notes’ covenants at quarter-end.
- Management estimated approximately $36.5 million of debt service over the next 12 months and stated it expected cash and operating cash flows to cover liquidity needs for at least one year. Customer receivables were $63.5 million, with a historical average collection cycle of approximately 55 days.
Material changes, outlook and risks
- Cherry Creek was acquired for $18.4 million cash. The preliminary allocation included $8.4 million goodwill and $8.7 million intangible assets; the allocation remained subject to final valuation. Six Missoula stations were sold for an immaterial amount due to FCC ownership limits; one Tri-Cities station was placed in a divestiture trust and acquired back on July 19.
- Q2 impairments included $5.2 million for FCC licenses in six markets, $2.2 million for digital assets, $1.2 million for an investment, and $0.8 million related to land and a building. Digital assets had a $2.4 million carrying value at June 30 after $2.6 million of first-half impairment losses. The filing warns that declines in digital-asset prices can trigger impairment without later upward write-ups before sale.
- The FCC-license valuation used a 10.9% discount rate at June 30. Management estimated that, all else equal, a 100-basis-point increase in the weighted average cost of capital would reduce estimated license fair value by $59 million and have resulted in a $20 million impairment charge. Further broadcast-revenue declines or adverse valuation assumptions could lead to additional, potentially material impairment.
- The company provided no specific financial guidance in the supplied filing text. Management cited uncertainty from economic conditions, inflation, labor shortages, advertising demand, competition, COVID-19 effects, interest rates and leverage, and its ability to obtain financing and integrate acquisitions. It said 2022 live events were increasing from pandemic-reduced levels but remained below historical levels.
- Disclosure controls and procedures were reported as ineffective at June 30, 2022 because of a material weakness in documentation of testing for a software package and an automation-system log. Management said it found no material misstatement in the financial statements and was working on remediation, with effectiveness evaluation planned for the third and fourth quarters of 2022.
- No material pending litigation was reported. The company said it had no material off-balance-sheet arrangements. It continued to defer certain payroll taxes under the CARES Act, with payment due by December 31, 2022.
Investor verification priorities
- Track whether digital-advertising and subscription growth continues to outpace the associated expense growth, and whether operating margins recover.
- Review subsequent FCC-license valuations, broadcast trends, and any additional impairment charges; assess the stated sensitivity to discount-rate changes.
- Verify liquidity and debt-service coverage as cash levels have declined, including the impact of working capital, capital spending, and any further note repurchases.
- Follow final Cherry Creek purchase-price allocation and integration results, as well as the post-quarter Tri-Cities station acquisition.
- Check whether management remediates the material weakness and demonstrates effective operation of the affected controls in the planned evaluation periods.
- Monitor digital-asset exposure and valuation changes, and the remaining deferred payroll-tax obligations.