iHeartMedia, Inc. (NASDAQ:IHRT) Q1 2023 Earnings Call Transcript

iHeartMedia, Inc. (NASDAQ:IHRT) Q1 2023 Earnings Call Transcript May 2, 2023

iHeartMedia, Inc. misses on earnings expectations. Reported EPS is $-1.5 EPS, expectations were $-0.75.

Operator: Hello and thank you for standing by. Welcome to the iHeartMedia Q1 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session and instructions will be provided at that time. I will now turn the conference over to Mike McGuinness, Head of Investor Relations. Please go ahead.

Mike McGuinness: Good morning, everyone, and thank you for taking the time to join us for our first quarter 2023 earnings call. Joining me for today’s discussion are Bob Pittman, our Chairman and CEO; and Rich Bressler, our President, COO and CFO. At the conclusion of our prepared remarks, management will take your questions. In addition to our press release, we have an earnings presentation available on our website that you can use to follow along with our remarks. Please note that this call may include forward-looking statements regarding our financial performance and operating results. These statements are based on management’s current expectations, and actual results could differ from what is stated as a result of certain factors identified on today’s call and in the company’s SEC filings.

Additionally, during this call, we will refer to certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release, earnings presentation and our SEC filings, which are available in the Investor Relations section of our website. And now I’ll turn the call over to Bob.

Bob Pittman: Thanks, Mike, and good morning everyone. We’re pleased to report that our first quarter 2023 results were little above the high-end of our adjusted EBITDA and revenue guidance ranges. More importantly, while both the macroeconomic climate and the advertising marketplace remain uncertain, the advertising market was a bit stronger in the quarter than we had initially anticipated. Additionally, we expect that our second quarter adjusted EBITDA, while still below 2022 levels, will be approximately double what we generated in the first quarter. The second quarter outlook in combination with our first quarter performance relative to guidance gives us confidence that our adjusted EBITDA results will continue to improve throughout 2023.

And if this advertising market recovery trend continues in 2024, we expect to resume our growth trajectory that was interrupted by this period of advertising softness. Rich will provide additional thoughts on our forward-looking estimates during his remarks. With that backdrop, let me take you through some of the key financial results of the quarter. In the first quarter, we generated adjusted EBITDA of $93 million, slightly exceeding the guidance range we provided of $80 million to $90 million. Our consolidated revenues for the quarter were down 3.8% compared to the prior year quarter, a little better than the guidance we provided of down in the mid single digits. Our free cash flow for the quarter was negative $133 million. As a reminder, Q1 is seasonally our lowest free cash flow quarter of the year, and we will generate positive free cash flow in each of the remaining quarters in 2023.

Finally, operating expenses remain a strong focus of ours, and we continue to adjust our operating structure to drive additional efficiencies, and you’ll see even more of that in Q2. And we’re also continuing to explore using AI to substantially transform our operating structure in cost base over time. Turning now to our individual operating segments. In the first quarter, our Digital Audio Group revenues were $223 million up 4.3%, versus the prior year quarter, adjusted EBITDA was $54 million up 3.1% versus prior year, and our Digital Audio Group adjusted EBITDA margins were 24.2%. As we said on our last call in 2022, we have made changes to certain sales initiatives and commission structures, which had a negative impact on our Digital Audio Group margins in Q4.

Those changes were reversed at the end of 2022. And while we saw some of those negative effects continuing through our first quarter results as we anticipated on our last earnings call, we are confident that our second quarter flow through will be back on track. Within the Digital Audio Group, our podcast revenues, even in this slow ad market grew 12% versus prior year, and our digital ex-podcast revenues grew approximately 1% versus prior year. In terms of audience reach, in March, iHeart was again ranked the number one podcast publisher in the U.S. with more monthly downloads than the next two largest podcast publishers combined according to Podtrac. Three data points further illustrate the tremendous opportunity we have in podcasting. First, over 60% of Americans have now listened to a podcast according to Edison, making it one of the fastest growing mediums ever.

Second, podcasting now reaches more consumers every month than the biggest streaming music service. And third, there are now more weekly podcast listeners in the U.S. than Netflix subscribers. In the investor deck, we’ve included some new slides that show the growth in daily reach and time spent among podcast users since 2015. Additionally, you’ll see a slide that shows where podcasting is drawing its listening from spoiler alert of those surveyed, 70% said they replaced time spent with social media platforms, 50% said they replaced time spent with YouTube, and 46% said they replaced time spent with streaming music services. And most important, not much podcast listening was drawn from broadcast radio listening, illustrating the truly complementary nature of broadcast radio and podcasting.

These trends are significant because advertisers and their marketing dollars follow consumer usage. Indeed, according to a recent advertising perception poll, 60% of marketers, who invest in audio, plan to increase their podcast spending in 2023, a reflection of podcasting strong performance and upside potential with advertisers. Also, as we mentioned last quarter, we continue to see positive changes in the podcasting industry specifically as it relates to content cost. While some podcast publishers had chased uneconomic deals that drove up content cost across the podcasting marketplace, we’re now seeing a reversal of this trend. We think this return to rational economic behavior across the marketplace is good news for iHeart and good news for the podcasting industry as a whole.

And finally, I remind you that at its core, podcasting is an adjacent and truly complementary business, the iHeart’s broadcast radio assets, which gives us a natural advantage in podcast content creation, promotion, marketing and advertising sales as you can see in our consumer engagement revenue and profitability metrics. We’ve included a new slide in the investor presentation that shows that 68% of broadcast radio listening happens out of the home and that 69% of podcast listening occurs in home, clearly illustrating that broadcast radio and podcasting are complementary and mutually additive businesses in terms of consumer usage. In addition to our industry-leading podcast business, we also have the number one streaming radio service, which is 5x larger than our closest competitor.

We have the largest social footprint of any audio service by a factor of seven, and we operate 3,000 national and local websites that reach almost 150 million people in the United States alone, all of which represent additional opportunities for our marketing partners to interact with our highly engaged consumer base. Let’s turn now to our Multiplatform Group, which includes our broadcast radio, networks and events businesses. In the first quarter, revenues were $529 million, down 7.4% versus prior year, adjusted at EBITDA was $87 million, down 35% versus prior year, and our Multiplatform Group adjusted EBITDA margins were 16.5%. The Multiplatform Group was impacted more than the Digital Audio Group by some of the advertising softness we saw in the first quarter.

However, we see this softness as being directly tied to the uncertain macro environment, and we have great confidence in radio’s continued importance to both consumers and advertisers. To give that some context, in this period of softness, broadcast radio’s performance relative to the performance of the large digital companies has been significantly better than it was during the 2020 advertising downturn. We think that is validation of our technology and data investments to make our broadcast radio assets more like digital for our advertisers leading to stronger revenue growth potential. And as we look at overall advertising revenue potential, today our broadcast radio assets reach over 90% of Americans every month and actually reach more people than Facebook and Google in the United States.

That strength with consumers also supports our conviction that broadcast radio will continue to have long-term sustainable revenue growth. Remember, advertising follows the consumer and consumers are on the radio and are staying on radio unlike the substantial consumer declines experience by newspapers, magazines, and linear TV. For example, the CBS Television Network, which is currently the largest linear TV network, according to the latest Nielsen ratings, has seen its consumer reach cut in half since the early 2000s. While over that same 20-year time period, iHeart’s broadcast radio consumer reach has actually grown slightly and now reaches more than twice as many people as CBS. Before I turn it over to Rich, I want to leave you with this final thought.

Rich and I and our entire management team remained laser focused on identifying and targeting revenue growth opportunities while aggressively managing our expense base. And with the actions we’ve taken over the past few months and a presidential election year ahead, we believe we’ll see a ramp up in our performance throughout 2023, leading to a strong 2024 and beyond for iHeart in terms of revenue growth, profitability, and free cash flow generation. And now I’ll turn it over to Rich.

Rich Bressler: Thanks, Bob. As I take it through our results, you’ll notice that as Bob mentioned, we slightly exceed our previously provided guidance for the quarter. Our Q1 2023 consolidated revenues were down 3.8% year-over-year, compared to the guidance range we provided of down in the mid-single digits. Our consolidated direct operating expenses increased 4.3% for the quarter, driven primarily by the increase in digital revenue, which drives higher content and profit sharing expenses, increased third-party digital costs due to the short-term concentration of lower margin revenues we discussed earlier, as well as additional cost incurred in connection with the execution of some additional cost reductions we made in Q1.

To look ahead for a moment, we expect our second quarter direct operating cost to be down slightly year-over-year, excluding the impact of restructuring costs. Our consolidated SG&A expenses increased 4.8% for the quarter, primarily driven by investments in key growth areas like podcasting, certain credits which benefited the prior year quarter, as well as additional cost incurred in connection with the execution of some additional cost reductions we made in Q1. We generated first quarter GAAP operating loss of $49 million, compared to operating income of $12 million in the prior year quarter. Our first quarter adjusted EBITDA was $93 million, compared to $145 million in the prior year quarter, and a little above the high end of the guidance range we provided of $80 million to $90 million.

Turning now to the performance of our operating segments. And as a reminder, there are slides in the earnings presentation on our segment performances. In the first quarter, Digital Audio Group revenues were $223 million, up 4.3% year-over-year, and they comprised approximately 28% of our first quarter consolidated revenues. Digital Audio Group adjusted EBITDA was $54 million, up 3.1% year-over-year, and our Q1 margins were 24.2%. Within the Digital Audio Group, our podcasting revenues grew 12% year-over-year, and our non-podcasting digital revenues grew approximately 1% year-over-year. As we mentioned in our last earnings call, in Q4, we had increased our emphasis on certain incremental revenue streams through sales initiatives and commission structures, which resulted an unintended negative impact on our digital adjusted EBITDA margins in Q4.

We have corrected the issue. And although there were some lingering impacts on Q1 margins, it will not be an issue by the second quarter. We expect our digital business to get back to our normal EBITDA flow through starting in Q2, and we continue to believe our Digital Audio Group will be a 35% adjusted EBITDA margin business. Multiplatform Group revenues were $529 million, down 7.4% year-over-year. Adjusted EBITDA was $87 million, down 35% year-over-year, and adjusted EBITDA margins were 16.5%. These margins reflect a high operating leverage nature of the Multiplatform Group revenues with the vast majority of the revenue declines dropping directly to EBITDA. In addition to certain credits which benefited the prior year quarter, and impacted the year-over-year EBITDA decline.

We expect our normal flow through to resume in Q2. Audio & Media Services Group revenues were $61 million, up approximately 1% year-over-year, and adjusted EBITDA a was $15 million, down from $16 million in the prior year. At quarter end, we had approximately $5.2 billion of net debt outstanding, and our total liquidity was $601 million, which includes a cash balance of $188 million. Our quarter ending net debt to adjusted EBITDA ratio is 5.8 times. Although we can’t predict when the advertising marketplace will fully recover from this period of softness, we remain committed to our long-term goal of net debt to adjusted EBITDA ratio of approximately four times. As highlighted on past calls, we have no material maintenance covenants and no debt maturities until 2026.

In the current macro environment, this type of debt profile positions us to be both resilient and opportunistic in responding to debt market development. In Q1, we proactively repurchased $20 million of the principal balance of our 8.375% [ph] senior unsecured notes, which brings our repurchase total to $350 million and results in an aggregate annualized interest savings of approximately $30 million. We were able to repurchase these notes in the market at a meaningful discount to their par value generating both earnings and free cash flow accretion. We will continually monitor market conditions and we’ll look to further improve and optimize our capital structure as opportunities arise. In the first quarter, we generated negative $133 million of free cash flow.

As a reminder, the first quarter is always our lowest free cash flow quarter in part because the first quarter is our smallest revenue and adjusted EBITDA quarter for the year as is for most media companies. As Bob mentioned earlier, we expect to generate positive free cash flow for each subsequent quarter in 2023. I want to turn now to our outlook for Q2 as well as some thoughts on the full year. We expect our Q2 2023 revenues to be down mid-single digits year-over-year and down low single digits, excluding the impact of political revenue. Looking at our segment revenues individually, we expect the Multiplatform Group to be down high single digits, the Digital Audio Group to be up mid-single digits and Audio & Media Services to be down high single digits or down low single digits, excluding the impact of political.

In the month of April, our consolidated revenues were down approximately 5% year-over-year. Turning to adjusted EBITDA, the Q2 2023, we expected generated adjusted EBITDA in the range of $180 million to $200 million. Let me provide some updated assumptions regarding cash. While we initially expected to be a full cash taxpayer in 2023, we have since implemented tax planning initiatives that we expect will reduce our 2023 annual cash tax payments and now expect to pay between $25 million to $30 million of cash taxes in 2023. We now expect our full year 2023 capital expenditures to be approximately $90 million below our previously provided guidance of between a $100 million and $120 million, which was already a significant year-over-year reduction from $161 million in 2022.

We expect our cash restructuring expenses to be down dramatically year-over-year. We continue to be impacted by the current interest rate environment as approximately 40% of our debt is floating. But we remain committed to further opportunistically improving our capital structure and reducing our interest expense as the market allows. I just want to reiterate Bob’s comment on our outlook for the company as we move forward. Assuming a continued improvement in the advertising marketplace, we believe that our Multiplatform revenues will continue to recover and that our Digital Audio Group revenues will continue to grow throughout 2023. This second quarter outlook in combination with our first quarter performance relative to guidance gives us confidence that our adjusted EBITDA results will continue to improve throughout 2023.

And if this advertising market recovery continues, in 2024, we expect to resume our growth trajectory that was interrupted by this period of advertising softness. I hope this extended guidance helps to paint a clear picture of the company’s future as we see it. We remain committed to driving shareholder value through our rigorous allocation of capital, identifying additional cost savings opportunities, utilizing new technologies to expand our product offerings and improving our operational efficiency. And finally, on behalf of our entire senior management team, Bob and I want to thank our team members, who work to deliver for their communities and for iHeart every day. They’re the engine that drives our company. Now we’ll turn it over to the operator to take your questions.

Thank you.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jessica Reif Ehrlich with Bank of America Securities. Please go ahead.

Operator: Your next question comes from the line of Steven Cahall with Wells Fargo. Please go ahead.

Operator: Your next question comes from the line of Dan Day from B. Riley Securities. Please go ahead.

Operator: Your next question comes from the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Operator: Your next question comes from the line of Sebastiano Petti with JPMorgan. Please go ahead.

Operator: Your next question comes from the line of Jim Goss with Barrington Research. Please go ahead.

Operator: Your next question comes from the line of Stephen Laszczyk with Goldman Sachs. Please go ahead.

Rich Bressler: Bob and I and the rest of the team would like to thank everybody and we are here and available for more questions. But thank you all.

Operator: This concludes today’s conference call. You may now disconnect your lines.