Townsquare Media, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results; dollar amounts below are in millions unless stated otherwise. Townsquare operates local radio, digital marketing, live events, and music and lifestyle websites, primarily in small and mid-sized U.S. markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $137.2 | $117.5 | $231.6 | $198.6 |
| Operating income | $17.8 | $23.5 | $23.6 | $34.3 |
| Operating margin | 13.0% | 20.0% | 10.2% | 17.3% |
| Net income (loss) | $5.6 | $(8.7) | $4.2 | $(8.6) |
| Basic EPS | $0.31 | $(0.50) | $0.23 | $(0.50) |
| Diluted EPS | $0.20 | $(0.50) | $0.15 | $(0.50) |
Q2 revenue rose 16.7%, but operating income fell 24.2% as operating costs grew faster than revenue. For the first half, revenue rose 16.6% while operating income declined 31.3%. Reported net income improved substantially year over year, in part because the 2015 comparison included a $30.0 million loss on debt extinguishment.
- Revenue mix: Q2 Local Marketing Solutions revenue was $86.7 million, up 3.0%; Entertainment revenue was $50.5 million, up 51.2%. First-half revenue increased 5.3% in Local Marketing Solutions and 55.5% in Entertainment.
- Acquisition and comparable growth: NAME, acquired in September 2015, contributed $18.0 million of Q2 and $24.4 million of first-half year-over-year reported revenue growth. On a pro forma basis including NAME and the tower sale, revenue increased 2.1% in Q2 and 3.9% in the first half. Excluding political advertising, pro forma growth was 1.7% and 3.2%, respectively; management attributed non-political growth primarily to digital products and solutions.
- Segment profitability: Q2 Local Marketing Solutions operating income was $29.0 million versus $27.9 million. Entertainment reported an operating loss of $2.4 million versus income of $3.0 million, with NAME-related costs and a decline in the existing business affecting results. First-half Entertainment operating loss was $8.1 million.
- Cash flow: First-half operating cash flow was $13.4 million, compared with cash used of $14.4 million in 2015. The prior period included a one-time $27.7 million debt-redemption payment; excluding it, management said operating cash flow was roughly flat year over year. Investing cash use was $11.2 million, including $12.4 million of capital expenditures. Financing cash use was $17.6 million, mainly reflecting debt repurchases. Cash declined $15.7 million to $17.6 million.
- Liquidity and debt: At June 30, cash was $17.6 million, current assets $96.0 million, and current liabilities $65.2 million. Debt before deferred financing costs was $581.3 million, including $282.1 million of 6.5% senior notes and $298.5 million of term loans; the balance-sheet carrying amount, net of financing costs, was $572.5 million. The $50.0 million revolver was undrawn. Management estimated next-12-month debt service at approximately $31.6 million and stated it expected available cash, operating cash flow, and revolver capacity to meet requirements for at least 12 months. The company reported compliance with debt covenants.
Changes, outlook, and risks
- In Q2, the company repurchased and canceled $17.2 million of its 2023 notes below par; first-half repurchases totaled $17.9 million and produced a reported gain of approximately $0.5 million. The company also recorded a $0.7 million first-half net loss on asset sales, mainly a $1.0 million loss on certain live events partly offset by a tower-sale earnout gain.
- The company reorganized its reportable segments in Q2 to align with management’s current view: locally focused broadcast and digital operations are reported in Local Marketing Solutions, while live events and national digital assets are reported in Entertainment. Prior segment data was recast; consolidated results were unaffected.
- No specific revenue or earnings guidance was provided. Results are seasonal: management expects the first quarter to be weakest and the second and third quarters generally strongest; entertainment and NAME activity is concentrated in the third quarter. Political advertising can lift even-year revenue, typically most in Q4.
- Key stated risks include economic and advertising-spending conditions, competition and changes in radio’s appeal, event cancellations or bad weather, acquisition integration and financing, regulation, and foreign currency exposure from NAME’s Canadian operations. A 1% increase in LIBOR was estimated to raise annual interest expense by about $1.4 million. The company does not hedge this currency exposure historically.
- Management reported effective disclosure controls as of June 30, 2016, and no material change in internal control over financial reporting. Ordinary-course legal matters were not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether underlying revenue growth, particularly digital and local-market growth, continues apart from NAME and election-related advertising.
- Whether Entertainment margins improve after the acquisition-related cost increases and whether event seasonality or weather affects performance.
- Cash generation, capital spending, and liquidity against the $31.6 million estimated next-12-month debt service and substantial debt balance.
- Exposure to floating interest rates, debt covenants, and the company’s capacity to refinance or service debt if advertising or event results weaken.
- Potential dilution: the filing reports 8,977,676 outstanding warrants and substantial outstanding stock options; diluted EPS differs materially from basic EPS.