image
Communication Services - Broadcasting - NASDAQ - US
$ 0.71
-1.39 %
$ 11.8 M
Market Cap
-0.08
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2016 - Q3
image
Executives

Collin Jones - Director of Investor Relations Mary Berner - President and Chief Executive Officer John Abbot - Executive Vice President, Treasurer and Chief Financial Officer.

Analysts:.

Operator

Welcome to the Cumulus Media quarterly earnings conference call. I will now turn it over to Collin Jones, Director of Corporate Strategy, M&A and Investor Relations. Sir, you may proceed..

Collin Jones Executive Vice President of Corporate Strategy & Development and President of Westwood One

Thank you, operator. Welcome to our third quarter 2016 earnings call. I’m joined today by our CEO, Mary Berner, and our CFO, John Abbot. Before we take off, please note, certain statements in today's press release and discussions may constitute forward-looking statements under federal securities laws.

Actual results may differ materially from the results expressed or implied in forward-looking statements. These statements are based on management's current assessments and assumptions and they’re subject to a number of risks and uncertainties.

A full description of these risks as well as financial reconciliations to non-GAAP terms can be found in our SEC filings, including our press release and Form 10-Q, both of which were filed today at 4 o'clock PM Eastern Time and can be accessed through our corporate website.

This call will be accompanied by a slide presentation, which can be accessed through a link in the investor portion of our website, at www.cumulus.com/investors. After this call, the same link can be used for a replay of this webcast and the presentation will also be posted to our website. With that introduction, Mary, the floor is yours..

Mary Berner President, Chief Executive Officer & Director

Thanks, Collin. Good afternoon, everyone. Thanks for joining the call. Last month marks my one year anniversary with Cumulus and one year since we began our turnaround effort. I continue to believe, as I did when I started, that the challenges this company faces are fixable with time.

A year into what will be a multi-year exercise, I’d like to highlight the areas where we’ve made good progress, the headwinds we’ve faced over the last year, including this most recent quarter, and talk briefly about a key strategy we have launched to improve our sales execution, which we believe is the next logical step in our turnaround plan.

When I joined the company a year ago after having led the board’s operational review committee, it was clear that we first had to focus on and address some core weaknesses in the company, and fixing those are table steaks in turning around the business. First, we needed to fix the operational basics.

The blocking and tackling, fundamental to our ability to execute at all, much less at the very high level we aim to achieve. This alone is a large undertaking as poor execution has been a pervasive and long-standing drag on the company's performance.

Second, we needed to address the company’s plastic culture, with its resulting employee turnover, dissatisfaction and lack of engagement, and the barrier it presented to any effort to attract strong new talent. And finally, we had to stem the four consecutive years of ratings decline, a key driver of revenue performance.

My thesis, which was informed by my work on the board and input and feedback from Cumulus employees, listeners and advertisers, was in improving our operational blocking and tackling, aggressively and relentlessly addressing our culture problem, and focusing on and investing in our programming to improve our ratings were the right priorities in this early phase of our turnaround, not simply because of the improvement results that I believe they could generate, but also because once we had addressed those fundamentals, we would then have the organizational capability upon which we could to build the full turnaround and a sustainable business.

Though it is clear, we still have much room for improvement, there is also material evidence of success in each of our initial focus areas. In blocking and tackling, we started with a simple question.

What would we do or not do that gets in the way of our performance? And by prioritizing the answers to that question, we developed a list of discrete near-term initiatives, many of which were geared toward removing roadblocks, which prevented employees from doing the jobs we hired them to do. Some examples.

We quickly took on to clarifying and redefining our organizational structure by focusing on what things get done and by whom.

The result was a logical realignment of authority with accountability, starting with the reorganization of the leadership structure to facilitate faster, more focused, and better prioritized decision-making, and we actually did that at a lower cost than the prior structure.

It also included the recruitment of highly experienced and accomplished executives to fill in some obvious leadership and expertise holes. In Westwood One, HR, a completely new function for Cumulus, marketing, and most recently, finance, and also the consolidation of leadership in both the radio group and across IT, real estate and engineering.

With the senior leadership structure in place, we then aligned the compensation of this group to a single adjusted EBITDA goal, a linkage that is critical if you want top managers to work collaboratively and intelligently to determine the priorities and trade-offs that are a fact of life in resource-constrained companies.

We deliberately moved decision-making in the Station Group to the market manager level, reversing what had been poor corporate command and control to local markets running their own businesses with appropriate check, balances and support. We sped up internal decision-making through the 48-hour response requirement.

We’ve begun to take steps to replace or fix systems, which impede effectiveness, such as the recent replacement of our legacy CRM system, which tied up our sales people in time-consuming administrative effort with little or no benefit in revenue generation. We have lots of other blocking and tackling initiatives in process beyond just these few.

And collectively, they will allow our employees to perform their jobs more efficiently and effectively, save us time and money, and position us better to execute the rest of our game plan. When describing the culture initiative, I’m emphasizing the importance of culture driving performance. And there was really nothing remotely squishy about it.

In our case, the rigorous and systematic implementation of our cultural values framework forced Cumulus, has transformed the company's identity and created renewed enthusiasm and engagement among employees about the company's prospects and their ability to contribute to a brighter future.

Importantly, our cultural improvements have helped propel our ability to recruit new talent and have driven significant declines in employee turnover. The tangible evidence of culture improvement in our workforce remains compelling. 94% of employees believe Cumulus is changing for the better. 92% are proud to work at Cumulus.

And 86% of our employees are excited for the future. Our employees’ confidence in our plan has had a large and direct impact on productivity as reflected in our significantly reduced turnover, with total employee turnover through September 2016 reduced to 25% from 36% in the same period in 2015.

Full-time turnover down from 30% to 20% and voluntary sales turnover also down significantly, almost by half.

These trends are exactly what we needed to mitigate the obvious economic costs associated with the disaffected workforce we had in place a year ago and the strategies we implemented to improve turnover, engagement and morale continue to be essential elements of our plan to build a best-in-class sales and programming organization.

On to ratings, we were staring at four straight years of ratings decline. We diagnosed these ratings declines as a result of a number of systemic issues, which, accordingly, required systemic solutions to fix.

Among the remedies we implemented were, first, doubling down on the belief that local input, authority and accountability for programming would result in better content. Second, we created the office of programming to support our local markets with specialized expertise and to provide logical checks and balances to their increased local autonomy.

And last, we invested directly in the stations to fund discrete opportunities, which we felt presented immediate ratings upside. In the spirit of maximizing the return on these efforts, we have predominantly focused our attention on the PPM markets.

These 17 markets, which generate half of our Station revenue, have outperformed the industry for 12 straight months, with ten straight months of year-over-year double-digit growth of ratings.

Our goal now is to maintain this ratings momentum and, as we now have higher ratings to take to market, aggressively monetize our improved standing in the PPM markets. On the dairy markets, as we highlighted in the last two quarters, by their nature, have ratings that take much longer to affect and ultimately monetize.

As a result, we’re really early in the process of positively influencing their ratings performance.

Although we did see some stabilization in the spring 2016 ratings book in both the for-book and to-book markets, in the summer of 2016 ratings book for the for-book markets, which represent about 25% of our Station Group revenue, we lost approximately 2.6 share points year-over-year.

While this is an obvious setback, given the continuing progress in our PPM markets, we've recently been devoting more attention to diary markets and we believe that our efforts will result in better share performance across the board over time.

Overall, as I look back over the last 12 months, it’s gratifying to see the progress we have made in the operating strategies that were identified last year and that we still believe are the right core focal points for the organization.

However, impeding that progress were a number of unavoidable challenges and, in some cases, continued to serve as a drag on our ability to move forward.

Since I started, we've been faced with a substantial amount of clean-up activity on items related to prior years, including the significant goodwill impairment in the third quarter of 2015, the demise of RDO [ph] and our only large digital initiative along with it in the fourth quarter of 2015, a large out-of-period true-up for music rights fees in the second quarter of 2016 and, in this quarter, a significant cash outlay to resolve multiple historical contract disputes with CBS.

We’ve had to contend with the breadth and depth of the impact of years long underinvestment in the business, which primarily has manifested itself in system implementations that materially obstruct our efforts to improve inventory optimization, sales execution, personnel management, and financial and strategic planning.

And serious underinvestment in people, core functions, operating facilities, studios and towers.

While we’ve made considerable progress in managing down expenses where possible through rigorous focus on cost and disciplined examination of the thinking behind legacy practices, our businesses will continue to be squeezed by contractual cost escalators across the board.

Again, aggressive and relentless cost control can mitigate some of this increase year-to-year year, but we will not be able to offset all of this without indiscriminate reductions that damage the topline potential of the business.

And last, while I continue that radio has unique and enviable advantages vis-à-vis other legacy media and new media, advertisers’ continued underappreciation of these advantages as well as the existence of other factors affecting spending behavior of our consumer base have led to tough market conditions, both in network and local radio.

In this last quarter, even with the significant benefit of political spending, the aggregate spending in the markets where we compete was down by low-single-digits.

Throughout the last year, the market environment has been choppy, unpredictable and even more short cycle than we’ve seen historically, which has made it challenging to predict revenue trends and has been an obvious hindrance to our recovery. So, with this backdrop, I’ll turn to our Q3 results.

For the quarter, revenue finished in line with the pacing information we gave you on our last quarterly call. Total revenue was down approximately 1% from third quarter last year.

The Station Group finished up approximately 1% in the quarter, which was driven by political spending despite it being slightly weaker than we had expected, particularly in the last few weeks of the quarter.

And evidence of some early progress in converting our ratings into revenue, we did gain share in the quarter, driven largely by national spot outperformance, but also by local outperformance in the month of September.

Westwood One finished down approximately 6% for the quarter, still impacted by adverse market conditions, but actually picked up a little bit of share in the quarter. On the expense side, this quarter was impacted meaningfully by the settlement of certain long-standing contract disputes with CBS that I mentioned before.

As many of know, we have several important relationships with CBS, including CBS Sports Radio network, the syndication of CBS news content, the Carson Daly radio show, and several other content and inventory relationships.

In the third quarter, we resolved long-standing contract disputes regarding these various relationships and the aggregate cost of those resolutions increased total expenses in the quarter by $14.4 million.

On the positive side, also in the third quarter, we negotiated multiyear renewals of most of these arrangements, providing continuity of products and inventory for us going forward. Excluding this $14.4 million, third quarter expenses were up approximately 4%, predominantly driven by an increase in music licensees and sports broadcasting rights.

This resulted in EBITDA, excluding the $14.4 million, for the quarter of approximately $58 million, a $12 million decline from the same period a year ago or 18%. Turning to the outlook for fourth quarter, total revenue is currently pacing down low-single-digits.

Breaking it down, the Radio Station Group is pacing up slightly, thanks to the benefit of political, though, as mentioned, political has been weaker-than-originally-expected and that weakness has continued into Q4. Westwood One is pacing down mid-to-high single digits.

Given our concerns about the fragile market environment, the management teams of both the Station Group and network remain focused on the potential for further expense management in the waning months of this year, as well as positioning the network for better results in the 2017 upfronts, which are now underway.

Looking to next year, while we expect the challenges from the cleanup activity will largely subside by the end of this year, the three remaining hurdles – tough industry dynamics, built-in cost increases, and business issues related to historical underinvestment in systems, people, process and hard assets – will continue to be headwinds that we have to offset to generate better financial performance.

As we enter the next phase of our turnaround, our challenge is to hold our ground and make further progress on the successes of our three initial turnaround strategies, absorb the blows from these headwinds, and to relentlessly hone the strategies that will drive better financial performance.

To this last point, over the past couple of months, we’ve now turned significant attention to our next key area of strategic focus – sales execution. While as I noted, we did gain share in the third quarter, given downward pressure on the markets overall and the continued pressure of embedded expense increases, we need to do even better.

With the success we’ve seen in blocking and tackling, culture and ratings, we believe that applying a similar focus to sales execution will enhance our ability to convert ratings to revenues. As I found with my first tour around the company, the ideas often come from those in the trenches.

So, to develop our sales execution improvement plan, I met with almost 70 of our sales staff to hear firsthand about their challenges and their thoughts on where we can do better. Not surprisingly, the opportunities to improve our sales execution are significant and systemic.

Historically, we’ve recruit poorly in sales and have failed to provide the basic training to help our sales employees be effective in their jobs.

Sales marketing, support and collateral were some of the first items gutted in cost reduction efforts during the years past despite their importance to sales productivity and their inadequacy constrained the effectiveness of our sales people.

Lacking the right processes and people, not surprisingly, we've been unable to execute on strategies that embody Cumulus’ unique selling proposition as a local reach and activation vehicle for advertisers. Our sales systems, as mentioned before, had generally inhibited, rather than supported, revenue generation.

Consistent measurements and tracking of sales metrics and performance has been lacking, which means that there's been little visibility into the fundamental drivers of performance and misplaced and inadequate accountability for sales performance and numerous sales process inefficiencies have created competitive disadvantages for our sales teams.

In order to address these areas, we are executing a comprehensive strategy to improve sales execution that’s built on five main elements. First, improved training and recruitment. A rebuilt sales support effort, including a new body of collateral intended to be more digestible, relevant and impactful.

Better processes and systems, like the AMP CRM system we already have launched. A usable sales productivity measurement and accountability system, again, leveraging our AMP CRM system over time. And finally, new products that embody the company's local to national unique selling proposition.

For example, the relaunched NASH Next franchise brought in seven figures of incremental revenue this year. Our sales execution initiative is in its early stages, but we believe it will be absolutely critical to our future success and we’ll keep you updated on our progress in the coming quarters.

Finally, we remain focused on meeting the challenges that we face in regards to the balance sheet. The operational and P&L impact on the business from our over-levered capital structure is real. And until we address the balance sheet, we will be hindered in our ability to fully achieve the potential of this great set of assets.

As such, we continue to be in dialogue with our key stakeholders to explore strategies intended to reduce debt and secure runway. Now, I’d like to turn the call over to John. And after he finishes his comments, we’ll jump into Q&A.

John?.

John Abbot

Great. Thanks, Mary. I'll jump right in. For the quarter, total revenue was $286.1 million versus $289.4 million in Q3 2015, a decline of 1.1%. For the Radio Station Group, revenue increased 0.7%, driven by national spot revenue and political advertising.

This revenue performance represented share gains at the Radio Station Group for the first quarter in several years. Political increased by $2.7 million to $3.4 million in the quarter from $600,000 in Q3 2015 and was slightly weaker than originally expected, particularly at the end of the quarter.

Westwood One revenue declined 5.5%, primarily by continued industry-driven weakness, albeit not to the levels experienced in Q2. The shutdown of the print version of NASH Country Weekly, which was operating at an EBITDA loss, also impacted the top line and will continue to for the next two quarters.

Corporate and other revenue declined approximately $200,000 in the quarter, off a small base. As Mary mentioned earlier, during the quarter, we resolved long-standing contract disputes regarding multiple relationships with CBS, which resulted in an aggregate increase to our expenses in the quarter of $14.4 million.

The largest portion of this increase was the $13.3 million settlement payment itself, but there were certain other expense increases in the quarter and other payments associated with the dispute resolution, such as legal fees that are included in the $14.4 million number.

Given the one-time nature of those costs, I’ll talk about our expenses and EBITDA for the quarter, excluding this $14.4 million. So, total expenses in the quarter increased $9.1 million to $227.9 million from $218.8 million in Q3 of last year and an increase of 4.1%.

The Radio Station Group was responsible for the majority of this increase of $8.3 million year-over-year and this change was driven primarily by an increase in sports rights fees from our new deals in Chicago and Detroit, an increase in music license fees and the high-impact programming investments that we've discussed as part of our strategy to grow ratings.

Excluding the impact of the CBS settlement, Westwood One expenses were actually down slightly for the quarter, with increased rights fees for carrying the Olympics, offset by better management of margin mix and active cost reductions.

Corporate and other expenses increased in the quarter by $1.1 million, somewhat due to timing, but also as a result of personnel costs and professional fees in the quarter.

As a result of these revenue and expense changes, and again excluding the costs related to CBS, adjusted EBITDA came in at $58.2 million versus $70.6 million in Q3 2015, decline of 17.5%. Radio Station Group adjusted EBITDA declined $6.8 million or 10.8% and Westwood One adjusted EBITDA declined $4.4 million or 27.6%.

Moving on to capital expenditures in the third quarter, we incurred CapEx of $5.2 million compared to $1 million of total CapEx in Q3 2015.

These expenditures related to the studio move in Los Angeles, which, of course, was required because of the sale of our property there, the final move costs associated with our studio consolidation project in Chicago and other normal course maintenance CapEx. The variance year-over-year in the quarter is primarily just timing.

CapEx is up only about $900,000 year-to-date versus 2015. Our cash position was improved significantly by the closing of the sale of our Los Angeles during the quarter. We were able to reach an agreement for the buyer to assume all of the litigation risk, in exchange for a discount to the original purchase price that we believe was reasonable.

The final purchase price was $110.6 million. And in the quarter, you'll see a significant non-operating gain on sale of assets related to this. As it relates to the use of proceeds, we’ll be reviewing all our available options under our credit documents including the 12-month reinvestment right.

While we’re on the topic, a brief update with respect to our Washington DC property sale, there's no revision to the timetable for the likely close date since our last earnings call.

The process continues to move along, consistent with our original expectations, and we believe $75 million of gross sale proceeds with a close sometime later in 2017, continues to be a reasonable expectation based on what we know today As a result, predominantly of the LA sale, we finished the quarter with $157.6 million of cash and had no change for our total debt balance of just over $4 billion.

In the quarter, we also completed an eight-for-one reverse stock split of our Class A common stock, with the goal of regaining compliance with NASDAQ’s minimum listing standards by maintaining a stock price above $1 for ten consecutive days.

On October 27, we were notified by NASDAQ that we had regained compliance with the minimum requirements to remain listed on the NASDAQ capital market. Lastly, as you might expect, in the four months that I’ve been with the company, a significant amount of my time has been focused on our balance sheet issue. To put it simply, we have too much debt.

And as Mary said, the operational and P&L impact on the business of our over-leveraged balance sheet is real and must be addressed.

We don’t have anything specific to report on the balance sheet restructuring today, but we do continue to review all available options to address the issue, including strategies that give us the time and the runway needed to turn around the business. With that, I’ll turn the call back over to Collin to moderate the Q&A.

Collin?.

A - Collin Jones

Thanks, John. A lot of great questions from our analysts this quarter along a few somewhat similar themes. So let’s jump in. First on political. Avi Steiner, JP Morgan asked a few questions.

What did we see in political in Q3 and how was it paced through the election in comparison to prior cycles and do we view the political landscape this year as a unique phenomenon or is there a longer-term trend to consider?.

Mary Berner President, Chief Executive Officer & Director

Thanks for the question, Avi. In Q3, we saw political of $3.4 million. And by way of comparison, in Q3 of 2014, we had political of $4.3 million and Q3 of 2012 it was $3.8 million. We were actually pacing ahead all year year-over-year until September when it dried up really quickly.

And we get our pacing a couple of days in arrear, so I don't have exactly where we stand through today, for Q4, at this stage, but it’s going to be down versus prior cycles by a few million. For context, the last cycle, we had $10.7 million in the quarter.

The last couple of weeks, we saw a relative surge, but we were not immune to the overall weakness seen by most broadcasters, both TV and radio alike. And, obviously, it’s a very frustrating trend to us as political is a great, high margin business when it comes in. But, as you know, there's only so much control we have over this.

I do think that this may be somewhat unique, the dynamics of this election, like everything else about this election was unique. But that’s just my opinion..

Collin Jones Executive Vice President of Corporate Strategy & Development and President of Westwood One

Thanks, Mary. Staying on revenue question for a moment, Davis Hebert of Wells Fargo asked on the Westwood One, if there's any update on the 2017 upfronts at this stage..

Mary Berner President, Chief Executive Officer & Director

Well, the team has really zeroed in right now. All hands on deck on the upfront strategy this year and we started planning for this back in June, which is considerably earlier than prior years.

And also, unlike prior years, we are entering the upfronts this year with stability of personnel and products and inventory, which is a first since we’ve owned the business and should inure to the benefit of the business. I think the focus – Westwood One is in the right areas with what I think is better strategy than what we’ve had before.

But at this stage, it’s just is too early to have any meaningful review on where we’ll be, up, down, indifferent versus the 2016 upfronts. And I just want to add that, obviously, the market environment will play a key role as well. Obviously, we think the media makes a ton of sense for national retail advertisers.

So, we hope to see demand at least comparable to we’ve seen in prior years, but it’s just really too early to call..

Collin Jones Executive Vice President of Corporate Strategy & Development and President of Westwood One

And last one here on revenue, and this speaks to our new operational strategy of sales execution. Lance Vitanza of Cowen & Co. asks, to the extent Cumulus ratings continue to improve, can you discuss the lag between better ratings and revenues and the dynamics of how Cumulus is converting ratings share to revenue share..

Mary Berner President, Chief Executive Officer & Director

It’s a good question. It’s the right one to focus on, given the progress we’ve seen in ratings, particularly in the PPM markets. It can take longer than one might think to convert ratings share to revenue share, and it differs by channel actually.

National spot, which is very transactional is the leading indicator of our ability to create ratings to revenue and that’s actually shown significant outperformance even back to Q2, which is encouraging to us.

And in Q3, we've seen some early results on this, in aggregate, with the share gains in the quarter, both at the local station and the – mostly – primarily local station, a little bit of Westwood One.

But in order to really capture and see share growth and revenue commensurate with share growth and ratings, it really emphasizes the importance of our sales execution initiative and why we are focusing on that right now. It’s incredibly important..

Collin Jones Executive Vice President of Corporate Strategy & Development and President of Westwood One

And Aaron Watts of Deutsche Bank asked a question regarding employee retention rates and if we could expand on how that continues to trend after the initial improvement that we discussed a couple of quarters and last quarter as well..

Mary Berner President, Chief Executive Officer & Director

Yeah. As I said, it really continues to trend nicely as the year has progressed. You saw in the earnings presentation, the numbers are down materially year-over-year. And what you don’t see is actually we’re getting close and in some areas we’re already the beating the internal targets that we set on this a year ago. So, we’re quite pleased with that.

When you look at our peers who have performed well recently, the drivers of their performance have all been somewhat similar. Good ratings, mixed with stability of staff, forward-thinking cultures, better systems, executing a lot of blocking and tackling on basic sales execution, and it all makes a difference.

So, we’re getting there and have a few of those on this in place. As I said, there’s still a lot of work left for us to do to get us to the point where we can consistently regain share..

Collin Jones Executive Vice President of Corporate Strategy & Development and President of Westwood One

And last question, maybe we'll go over to John for this one. David Phipps of Citi asks what we plan to do with the approximately $111 million of proceeds from the LA property sale..

John Abbot

Sure. Thanks for the question, David. The loan documents, of course, provide that for land sales like this, we’re required to use the proceeds to pay down first lien term loan at par. That’s subject, though, of course, to a 12-month reinvestment right. And the calculation is a little more complicated than that.

From the gross proceeds we net out the effective federal tax impact on the sale and then net out some cash state taxes, professional fees related to the sale and other small items. Then those net proceeds are subject to the reinvestment right. And then whatever is left over would have to go as a part paydown within a years’ time.

So, we're working through all the options. We don't have any definitive views at this time. And we, obviously, have a little while to reach a decision on that..

Collin Jones Executive Vice President of Corporate Strategy & Development and President of Westwood One

Thanks, John..

Collin Jones Executive Vice President of Corporate Strategy & Development and President of Westwood One

That concludes our call for the quarter. We look forward to speaking with everyone again in 2017. Thanks..

John Abbot

Thanks. .

Operator

This concludes today’s conference call. You may now disconnect..

ALL TRANSCRIPTS
2024 Q-3 Q-2 Q-1
2023 Q-4 Q-3 Q-2 Q-1
2022 Q-4 Q-3 Q-2 Q-1
2021 Q-4 Q-3 Q-2 Q-1
2020 Q-4 Q-3 Q-2 Q-1
2019 Q-4 Q-3 Q-2 Q-1
2018 Q-4 Q-3 Q-2
2017 Q-3 Q-2 Q-1
2016 Q-4 Q-3 Q-2 Q-1
2015 Q-4 Q-3 Q-2 Q-1
2014 Q-4 Q-3 Q-2 Q-1