iHeartMedia, Inc.

Good afternoon. My name is Rob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the iHeartMedia third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. I will now turn the call over to Mike McGinnis, Deputy CFO and Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for taking the time to join us for our third quarter 2022 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 investor 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, investor presentations, 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.

Thanks, Mike, and good afternoon, everyone. Thank you for joining our third quarter 2022 earnings conference call. We're pleased to report another quarter of solid operating results for iHeart in consumer usage, revenue, and earnings growth. Before I take you through our results, I want to thank our team members who made this performance possible, and in particular, the inspiring local teams who worked tirelessly through Hurricane Ian, and in some cases, even put their well-being on the line to ensure that listeners could find critically important updates, safety information, resources, and above all, a vital personal connection when they needed it the most. Radio is often the only media platform that is consistently available during natural disasters, and we're proud of this critical role we play in our communities. This strong community connection and dedication to serve, especially in times of crisis and need, is what sets radio, and indeed our company, apart from all other media. Now let me take you through some of the highlights of our performance. In the third quarter, consolidated revenues grew 7% compared to prior year at the high end of the guidance range we provided of approximately 3% to 7%. We generated adjusted EBITDA of $252 million for the quarter, also at the high end of the guidance range we provided of $240 to $255 million, and our Q3 adjusted EBITDA margins were 25.5%, a 70 basis point improvement versus prior year. We believe the company performed well in an uncertain macroeconomic environment, growing adjusted EBITDA by 10% compared to prior year. Our performance in this environment is a strong indication of the successful transformation this company has undergone, where our high-growth digital revenues comprise 26% of total company revenues. It's clear that our digital business is now significant enough to meaningfully impact our overall financial performance. Turning to our individual operating segments, the Digital Audio Group continues to deliver industry-leading growth, according to Magna, with revenue for the quarter increasing 23% versus prior year, adjusted EBITDA increasing 17% versus prior year, and adjusted EBITDA margins of 31%. Within the digital audio group are our podcast revenues, which grew 42% versus prior year, outperforming the overall podcast industry growth of 22% year-over-year, according to Magna, and our digital X podcast revenues, which were up 15% versus prior year, also outperforming the industry growth of 10% year-over-year, according to Magna. As a reminder, included in our digital X podcasting business are our streaming products, third-party extension products, social, OTT, display advertising, and our ad tech businesses. This range of products allows us to offer holistic advertising solutions, leveraging our deep relationships with our consumers to our tens of thousands of advertisers. All of this is powered by our sales strategy of any seller, anywhere, can sell anything. A unique iHeart capability that is executed by the largest ad sales force in audio and with the unparalleled ad tech solutions, we now offer our advertising partners across our multiple industry-leading platforms. In September, according to PodTrack, iHeartRadio is again ranked the number one podcast publisher in the U.S. with more monthly downloads than the next two largest podcast publishers combined. As we've noted before, publishing is by far the most profitable segment of the podcasting industry, and it remains our focus. We continue to be the largest podcast publisher in the U.S. with the widest range of and highest ranked content as measured by PodTrack, and we're the only publisher with ranked content in all 19 categories. We believe our experience and capabilities as audio content creators, combined with our unique ability to promote and build audiences for our podcast through our broadcast radio assets, which reach 90% of U.S. consumers every month, gives us an important edge. With that leadership position and with those assets, we believe we will continue to take user and revenue share in the expanding podcast marketplace forward. while maintaining our strong podcast EBITDA margin. Turning to our multi-platform group, which includes our broadcast radio, networks, and events business, in the third quarter, both revenues and adjusted EBITDA were essentially flat compared to the prior year, and our adjusted EBITDA margins were 31.4%. Our multi-platform group has again demonstrated its resiliency during this economic period, generating adjusted EBITDA margins in the low 30s, which we expect to expand as revenue recovers over the long haul. The multi-platform group will also benefit from this year's political ad spend due to our unique speed to market, scale, reach, and data capabilities. I also want to remind you that each month our radio assets reach more than twice as many people as the largest TV network, five times more than the largest ad-enabled streaming audio service, and slightly more than even Facebook and Google in the U.S., This unparalleled consumer reach gives us the unique ability to create new products and platforms from the iHeartRadio app to events, podcasting, and now to even the metaverse, as well as providing a truly unique asset to our advertising partners. That unparalleled reach, along with radio pricing per user lower than most other major media, combined with our ad tech platforms and the unified buying platforms emerging at agencies and clients, gives us confidence in the long-term growth potential of this segment of our business. Before I turn it over to Rich, let me share a couple of additional thoughts with you. Although advertising has certainly softened since the robust performance we saw at the beginning of the year, we don't think advertising has been as hard hit by an economic downturn as it would have been in past times. Let me tell you why we think that is. The people controlling advertising decisions today are in most cases the same people who controlled advertising decisions during the last economic and advertising downturn. According to analytic partners, advertisers that cut their advertising budgets during the last recession saw their sales decline by approximately 18%, while those who maintained or increased their advertising spend over that same period saw their sales increase by approximately 17%. We think advertisers learned a stark lesson, which we suspect is causing many of them to moderate advertising cutbacks. In looking at our data year over year, we also see a revenue growth rate differential between large advertisers and the long-tail small business advertisers. and the fact that our advertising partners skew toward the larger companies relative to the skew of the big digital advertising companies is probably a slight advantage during this period of uncertainty. As a final thought, I'd like to give you some insight into how we think about investing in our business. We believe that the focus of any new products always needs to be profitability, even in their earliest stages. This belief guided us as we built the iHeartRadio app, as we built our tentpole events like the iHeartRadio Jingle Ball Tour, the iHeartRadio Music Festival, the iHeartRadio Music Awards, and more, and most recently, as we built out our podcast business. Now, as we look at our next new platform, the Metaverse, we remain committed to building for profitability as well as users, even though we're in the very early stages of development. In the third quarter, we launched in the metaverse, building iHeartland in both Fortnite and Roblox, partnering with State Farm, Intel, and others as sponsors, and reaching millions of users immediately. Among all the games available in Roblox, iHeartland is among the top 1% based on daily active players and total daily playtime. And on Fortnite, among our competitive set, iHeartland is in the top 1% of maps based on player counts and playtime. These metaverse launches were hits with consumers, but more importantly, they were done profitably. We have also used the flywheel effect of the unparalleled consumer scale of our radio business and leadership position across audio, our rigorous cost discipline, and our strong monetization engine to build platform after platform for future growth. And we've done it while making sure that each platform is a profitable one. we can assure you that as a management team that we will build new adjacent businesses and more importantly as we do so that we will continue to focus on profitability and free cash flow as we look ahead we continue to transform the company and we're also proactively preparing should a prolonged economic downturn occur we believe the strong positions of our digital audio multi-platform groups with both consumers and advertisers give us the ability to navigate through this period of economic uncertainty and position us for continued growth through the recovery and beyond. And now, I'll turn it over to Rich.

Thanks, Bob. As I take you through our results, you'll notice that, as Bob mentioned, we performed well despite the uncertain macroeconomic environment. During the slide 19 of our investor deck, our consolidated revenues were up approximately 7% year-over-year at the high end of the guidance range we provided of up approximately 3% to 7%. Excluding the impact of political, our consolidated revenues were up approximately 4% year over year. Our direct operating expenses increased 14% for the quarter, driven primarily by the increase in revenue, which drives higher content and profit sharing expenses, third party digital costs, and expenses related to the return of local and national events. Our SG&A expenses increased 3% for the quarter, primarily driven by one-time charges related to our cost reduction initiatives we began in Q3 and higher sales commissions due to higher revenue, partially offset by a lower bonus expense compared to our over-target bonus performance in prior years. Our third quarter gap operating loss was $211 million compared to an operating income of $80 million in the prior year quarter. As a result of a non-cash impairment, of $302 million on our FCC licenses. Prior to this impairment, we had approximately $1.8 billion in intangible assets in our balance sheet related to FCC licenses. And each year, we are required to test these intangible assets for impairment. The fair value analysis is highly sensitive to changes in weighted average cost of capital, and the significant increase in interest rates since March has triggered a non-cash impairment on those intangible assets. Our third quarter adjusted EBITDA was $252 million compared to $230 million in the prior year quarter at the high end of the guidance range we provided of $240 to $255 million. If you turn back to slide four, I'll provide additional color on the performance of our operating segments. And as a note, there are additional slides in the investor presentation on our segment revenue performance. Digital audio group revenues were up 23% year over year, and adjusted EBITDA was up 17% year over year. Within the digital audio group are our podcasting revenues, which grew 42% year over year, and our non-podcasting digital revenues, which grew 15% year over year. As a point of reference, slides 7 through 12 in our investor deck show in detail the podcast ecosystem dynamics, and our leadership position in this high-value segment of publishing. Looking at the digital audio group as a whole, margins declined slightly in the third quarter to 30.8%, down from 32.6% in the prior year. This decline is due to the timing of certain expenses related to content launches in this quarter, and we feel confident that the adjusted EBITDA margin for Q4 will be back in the 35% range. Multi-platform group revenues and adjusted EBITDA were both essentially flat year over year. excluding the impact of political multi-platform group revenues would have been down two percent year-over-year multi-platform group adjusted evita margins with 31.4 percent of 70 basis points sequentially from 30.7% in Q2 2022, and down 20 basis points from 31.6% in Q3 2021. And as a reminder, slightly over half of our political spend occurs in the fourth quarter. Audio and media services group revenues were up 18% year-over-year, and adjusted EBITDA was up 33% year-over-year. These increases were primarily attributable to expense management, as well as radio and TV political revenues within our CATS business. Turning to slide 23, there is a summary of our debt. At quarter end, we had approximately $5.3 billion of net debt outstanding, which includes a cash balance of $295 million. Within each quarter's performance, we also continue to improve our net debt to adjusted EBITDA ratio. We have now moved that ratio into the mid fives and we expect to continue to make progress towards our goal of moving that ratio to approximately four times through expanding adjusted EBITDA as well as to efficiently converting these earnings into free cash flow and using that free cash flow to reduce our overall debt. As highlighted on our past calls, we have no material maintenance covenant 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 developments. In Q3, we proactively repurchased $75 million of the principal of our eight and three eighths senior unsecured notes, adding to the $114 million principal repurchases we completed in Q2. As of September 30th, we have repurchased a total of $189 million of our eight and three eighths senior unsecured notes, resulting in annualized interest savings of approximately $16 million. We have been 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 look to further improve and optimize our capital structure as opportunities arise. In the third quarter, we generated $63 million of free cash flow. When including the proceeds from real estate sales, our adjusted free cash flow was $70 million. Our cash balance is $295 million. and our total available liquidity is $718 million. As Bob highlighted, we remain focused on free cash flow generation and are committed to utilizing that cash in an amount that creates the most value for our shareholders. Despite this uncertain environment we've been discussing, Our business has continued to achieve year-over-year growth in both revenues, adjusted EBITDA, and free cash flow. Now let me provide you with some specific guidance for Q4. We expect our Q4 2022 revenues to be up approximately 2% to 6% year-over-year. We're still closing the month of October, but our preliminary October consolidated revenues were up approximately 8% year over year, much of it based on the strength of political. We also expect to generate Q4 adjusted EBITDA in the range of $305 to $325 million, which implies a full year 2022 adjusted EBITDA guidance range of 940 to 960 million dollars, which would yield the second highest full year EBITDA in the company's history. Further, for the full year, we expect to generate in the range of 325 to 350 million dollars of free cash flow. As we think ahead, I want to remind you all that in 2020, the worst year we have ever the company still generated positive free cash flow and we expect those strong free cash flow generating characteristics to persist. We also expect political advertising to be a record for a midterm political year. We anticipate full year political advertising to be at the midpoint between the last midterm year in 2018 and the last presidential election in 2020. We expect our full year capital expenditures to be between 150 and 160 million dollars and finally we will continue to make significant progress towards our previously announced net leverage target of approximately four times i want to leave you with this we are committed to ensuring that we have the right organizational structure and core space in place to support our growing businesses today and into the future we continue to maintain a rigorous allocation of capital and to work on identifying additional cost savings opportunities, utilizing new technologies to increase our efficiency, and reducing our lower ROI discretionary spending. This focus enabled us to execute a savings program of approximately $250 million from 2020 to 2021, which represented a reduction to our historical annualized cost base of approximately 10%. And with that context in mind, we have targeted an additional $75 million of annual savings, some of which was executed at the end of the third quarter, the remainder to be executed on in the fourth quarter, and we will see the full benefit of these actions in our 2023 results. There remains significant macro uncertainty in the marketplace. But we believe we have taken all appropriate actions to further bolster our financial position today in order to remain resilient and outperform during any potential economic downturn. We appreciate you joining our third quarter earnings call. And again, I'd like to thank the entire iHeart team who continue to deliver for our communities, advertisers, and shareholders. Now, we'll turn it over to the operator to take your questions. Thank you.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from a line of Stephen Cahill from Wells Fargo. Your line is open.

Thank you, and thanks for the guidance detail. It doesn't sound like you're seeing much of a slowdown in the ad marketplace. Now that we're into November and most of the election political bookings are kind of behind you, could you help us kind of just unpack the strength on an ex-political basis? Maybe you can talk a little bit about how digital and multi-platform are performing. I think we're all trying to get a handle as to what the trends look like as we get into next year. And so, again, as a real positive outlier here, maybe you can just help us unpack a little bit of what you see for the rest of the year once that political tailwind ends next week. And then I'll have a quick follow-up.

Sure. I'll let Rich add some specifics. But I think overall, I mean, certainly this advertising year is not what we thought it was going to be the way it began. And so we are I don't think it has the robustness that we expected. However, I think you see in our business that we've not had a degradation of audience. And I think that if you've seen people falling off, some of it's been associated with audience erosion. I think the other piece is that, you know, we are a business that is concentrated more toward the larger advertisers. We've run an analysis recently in Q3, and our largest advertisers substantially outperformed our smaller advertisers. And I think that goes to, you know, we ask ourselves, okay, what's behind that? And I think, you know, a large advertiser has the ability to spend even in slower economic times. And I think the 2020 experience, which we highlighted in the earnings call, where there was this sharp difference between the people who spent through the downturn and the people who did not, I think most of those people, that's lessons recent. And they're thinking about it. I think when you get to the long tail advertiser, those are really small businesses. And if their business turns down, they just don't have the money to spend on advertising. So what has been sort of one of our areas we were looking for for growth, which was how do we get into that super long tail, turns out to be probably a positive in these days.

Steve, let me just add a couple things to what Bob said, which may, not knowing your follow-up question, but just maybe a little deeper. You know, one of the things we've said all year, and again, operating in this challenging environment, I think, of uncertainty that we've seen is that we've got an incredibly resilient business. And, again, to Bob's point, not exactly the year we thought we were going to have. It's still the second-best year on an inhibitor basis and probably the best year we've ever had. First and second best year we've ever had as a company on a free cash flow basis. And, again, just as an aside, based on the guidance we've just given, that guidance would tell you this will be the best revenue inhibitor quarter that iHeart has ever had as a company going forward. And to your point, which was, you know, in terms of being an outlier, I think what you're just seeing is a combination of, you know, as Bob pointed out, our reach, the resiliency of the medium, the efficiency of the medium, as we continue to point it out, the diversity of our advertising base. Just as a reminder, we have no category in our company that's more than 5% of our revenues. We have no individual advertiser that's more than 2%. And again, you know, when you've got a challenging period of time, which none of us would like to operate in if we didn't have to, but at the same time, it allows us, you know, some things to, you know, come through that don't come through in other companies. And then with respect to political, really no change to what we said in the past, and I think Bob highlighted his comments, this will be the best non-presidential political year that we've had. And just as a regard, I think the previous number was approximately $110 million as a company. The best political year we've ever had is, I'm sorry, the best political year or presidential year we've had was approximately $160 million as a company. And I think we said it'll be somewhere between kind of those two numbers, and that hasn't changed. Yep. And by the way, one last thing, I'd add to your number, a majority of political advertising does come in Q4, just to give you some sense of completeness for your models.

Great. And then just as a follow-up, I know it's too early to guide to 2023. You announced some of the incremental cost reduction, which is certainly going to support it. And again, it sounds like you have some real revenue strength as we head into the year. So should we just, if nothing else, think that you'll be able to continue to deleverage between either free cash flow or EBITDA generation in 2023 versus where you might end 2022 at? I know deleveraging is a consistent target, so curious your thoughts there. Thank you.

Well, I think your first statement will be the guiding one to my answer here that we haven't provided. Any 2023 guidance, and we're not going to provide that now. I think you see, as we highlight in the earnings release, we came down into the mid fives. We said 325 to 350, I'm sorry, mid fives in terms of leverage ratio. We talked about free cash flow number for the year 325 to 350, which if you look at the conversion of EBITDA to free cash flow, And I think if you put us up against other companies in our industry, we feel good about that conversion, as Bob and I, along with Mike, always articulate. We're free cash flow people, free cash flow management team, and that will continue to be our focus. And this is an industry, and particularly a business, that just generates free cash flow, which I think generates a lot of equity value for our shareholders.

Great. Thank you.

And your next question comes from a line of Dan day from B Riley securities. Your line is open.

Yeah. After you guys appreciate you taking the questions here. So, um, you ended the quarter with a little under 300 million of cash that the guidance for free cashflow implies, you know, well over 200 million of free cashflow in the fourth quarter. So just maybe if you could talk about what you think is a good cash balance level here, um, in an admittedly uncertain economic environment, and how much you'd be willing to sort of just let that cash build versus be as aggressive as you possibly can buying the debt back given it's being at a discounted part.

Well, Rich, look, I think the facts to themselves, we gave you the guidance. As you know, you know, we're a fixed cost business, and Q4 is our biggest revenue quarter of the year, always has been, and this year will be no different. So it's no surprise that just when you look at the numbers and do the math, that free cash flow will be the, will and always has been the biggest free cash flow quarter. And, you know, the general comment we've made, and I think you've seen it executed in Q2 and Q3, is that we're always looking to be optimistic, I'm sorry, opportunistic, and optimistic, but opportunistic on our capital structure and improve our cost of capital. And I think we highlight in our opening remarks that we bought back approximately $180 million, a little bit more, of the eight and three-eighths note, which resulted in an annual cash savings of $16 million. When you look at any type of yield analysis, I think that's a pretty good return on our cash. And we'll continue. That's been our focus since Bob and I have been in to run the company, and it continues to be our focus today with Mike.

And let me add on your point about what kind of cash balance we need. 2020 was probably the swiftest and worst downturn I've ever lived through. And even in that year, we had positive free cash flow. So I think we feel confident that we will, we will have plenty of cash, plenty of liquidity, uh, regardless of what we see.

Great. Appreciate it. And one more, if I could, um, just if you could provide some color on what you're seeing specifically on the digital side, like after quarter ends, um, into, into fourth quarter here, especially on podcasting, I think it would be, um, you know, obviously the revenue growth decelerates, lapping the tougher comps and the macro stuff, just, um, Anything you could point to as far as podcast revenue growth in the fourth quarter?

Yeah, look, I mean, you saw, I think, you know, I'm not going to talk about in terms of everything after quarter end, we indicated that we closed out, I think, October, preliminary closes were up over 8%. If you look at our, you know, quarters year over year, and look at how we perform against the industry, you specifically asked about digital. And we have this highlight in our investor debt, you know, the digital, excluding podcasting, according to Magda, the industry was up 10% and we were up 15%, I believe. And the podcasting industry, again, also according to Magda, was up 22% and we were up 42% overall. So, you know, if you look at our digital business, it continues to be very strong. We don't really see any changes to that. And we talked about that we expect to be back to 35% EBITDA margins in the digital audio group in Q4.

All right, that's appreciated. Best of luck. Thanks. Thank you.

Your next question comes from a line of Jim Goss from Barrington Research. Your line is open.

All right, thank you. The write-down, I was wondering about that a little bit. Certainly it's non-cash, but aside from discount rates, it does seem to have implications about revenue expectations for the industry and maybe station values. or maybe you think it doesn't. I just wonder if you can comment on whatever implications you feel it has.

No, I don't think. I think it's significantly reflective of the interest rate environment. that we're in, you know, a majority of it, if not almost entirely, is that, again, this is a, just to be clear, non-cash, as you highlight, so thank you for that. And it's just a very mathematical exercise, which is incredibly sensitive to the interest rate environment. I don't think it has any indication in terms of the future value of our assets, either the value or the revenue generation capability whatsoever.

Okay. But also we are, well, I'm wondering what your economic expectations are. And if we were to move into a deeper recession, if we aren't in one now, is this round two, but hopefully not as severe as what you experienced during the COVID situation? How would you think you would fare if there was a step lower in the economy?

I can't imagine things get much worse than what we saw in 2020 because businesses just shut down and consumers were locked in their houses, consumer spending turned into savings, et cetera. But I think what's interesting here is normally between downturns, there's what, seven, eight, 10 years, and people sort of forget and they do the same mistake again. I can't remember one where two years later we've got one. So I think no matter how severe, I mean, I'm guessing, but no matter how severe this gets, I think the fact that those people who made advertising decisions in 2020, and then when they came out, realized how much they had lost and how much more expensive it was to restart. We'll remember that, and I think it will moderate any effect on advertising downturn, which obviously for us is the source of our revenue. So no matter what happens in the economy, what we're watching is, okay, and how does that impact ad revenue? Okay.

Yeah, and the other thing I'd add to that is Is I just think you look at our results in this quarter and I gave you a number stats compared to the industry. You look at married at the box point, how we perform during the pandemic period of time. So, again, you'll all run your own models on the phone and we don't have. any better visibility to what's going to happen to the economy than you do um and we can't control that but you know there are things we can control um and our ability to operate through that and make sure we watch our costs and watch our free cash flow and understand what creates value for our shareholders so thank you so with that um we want to thank uh everybody for listening to the iheart story the iheart call um we are all available for follow-up questions and appreciate everybody's support

This concludes today's conference call. Thank you for your participation. You may now disconnect.