Townsquare Media, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Townsquare operates radio, digital advertising and marketing services, and live events, principally in small and mid-sized U.S. markets. The company reported 321 radio stations in 67 markets, more than 330 local websites, and approximately 14,500 Townsquare Interactive customers.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $114.1 million | $111.9 million | $321.6 million | $314.1 million |
| Operating income | $22.2 million | $20.9 million | $56.9 million | $51.5 million |
| Income from continuing operations | $9.8 million | $7.1 million | $22.7 million | $15.5 million |
| Net income (loss), including discontinued operations | $9.7 million | $14.3 million | $(15.3) million | $16.8 million |
| Operating margin | 19.5% | 18.6% | 17.7% | 16.4% |
Revenue increased 1.9% in Q3 and 2.4% year to date; excluding political revenue, management said Q3 revenue was essentially unchanged and nine-month revenue grew 1.4%. Q3 basic EPS from continuing operations was $0.52, versus $0.38; nine-month basic EPS was $1.21, versus $0.84. Nine-month basic EPS including discontinued operations was a loss of $0.82 per share.
- Revenue mix: Q3 advertising revenue was $88.5 million, live events $13.0 million, and Townsquare Interactive $12.6 million. Nine-month amounts were $246.3 million, $40.3 million, and $35.1 million, respectively. Digital programmatic and digital marketing gains and political advertising supported revenue; planned live-events declines offset some growth.
- Cash flow: Nine-month operating cash flow was $12.0 million, down from $25.1 million. Continuing-operations operating cash flow was $22.5 million, versus $30.1 million, while discontinued operations used $10.4 million. Investing activities used $9.3 million, including acquisition spending and offsetting proceeds from divestitures; financing activities used $14.2 million, including debt repayments and $4.1 million in dividends.
- Balance sheet and liquidity: September 30 cash and restricted cash was $49.6 million; accounts receivable was $68.4 million; current assets were $127.1 million and current liabilities $55.9 million. Total debt before deferred financing costs was $562.4 million; reported debt net of those costs was $556.9 million. The $50 million revolving facility was undrawn. Management estimated about $33.7 million of debt service over the next 12 months and stated liquidity was expected to cover requirements for at least one year.
- Debt and interest: Term loans of $282.3 million bore a 5.29% rate at quarter-end; $280.1 million of 6.5% senior notes mature in 2023, and term loans mature in 2022. The company was in compliance with debt covenants. A 1 percentage point increase in LIBOR would increase annual interest expense by approximately $2.8 million.
- Dividends: Three quarterly dividends of $0.075 per share were approved during 2018. A further $0.075 dividend was approved November 5, payable February 15, 2019.
Material changes, outlook, and risks
- The company sold North American Midway Entertainment (NAME) for $23.5 million in May and transferred its Mountain Jam interest in June. These businesses were presented as discontinued operations, reflecting a strategic shift toward an integrated local marketing business. The NAME sale resulted in a reported loss of approximately $1.9 million; the Mountain Jam transaction generated a reported gain of approximately $1.2 million.
- A $38.0 million impairment charge on discontinued-operation assets drove the nine-month discontinued-operations loss. The charge comprised $25.6 million for property and equipment and $12.4 million for intangible assets. Consequently, the nine-month consolidated net loss does not reflect the improvement in continuing-operations income.
- The July acquisition of three Princeton-area radio stations cost approximately $17.4 million, paid from cash on hand. The preliminary allocation included $9.9 million of goodwill; valuation work was not final.
- Management provided no specific revenue or earnings guidance. It cited typical seasonality: first-quarter revenue is generally lowest; second and third quarters are generally strongest; political advertising is typically highest in the fourth quarter of even-numbered years. Live-events revenue is also seasonal, especially around festivals.
- Risks highlighted include advertising demand and economic conditions, competition and shifts in media consumption, weather effects on live events, execution and integration of acquisitions, leverage and floating-rate exposure, and the ability to access financing. Management noted that online/mobile advertising rates are currently lower than terrestrial radio rates and that a sudden shift in demand could adversely affect results if rates cannot rise accordingly.
- The company adopted revenue-recognition standard ASC 606 in January 2018. It recorded a $2.3 million increase to opening retained earnings and said the ongoing income impact was expected to be immaterial; nine-month adoption increased net income by approximately $0.5 million through deferred commission amortization. It was assessing the impact of the new lease standard, effective in 2019.
- Management reported disclosure controls and procedures were effective at September 30, 2018. It said ordinary-course legal matters were not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Investor verification points
- Confirm continuing-operations performance and cash generation separately from discontinued operations, particularly the $38.0 million impairment and divestiture effects.
- Review the sustainability of revenue growth in digital services and political advertising, and the planned decline in live-events revenue.
- Monitor cash flow, working-capital timing, dividends, and the company’s ability to fund debt service and capital needs while maintaining covenant compliance.
- Assess floating-rate exposure and refinancing needs ahead of the 2022 term-loan and 2023 notes maturities.
- Check the final purchase-price allocation for the Princeton acquisition and any subsequent impairment testing for goodwill and broadcast licenses.