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spk00: Greetings. Welcome to Odyssey, Inc. Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Richard Schmelling, Chief Financial Officer. Thank you. You may begin.
spk06: Thank you operator and welcome to our third quarter call. As mentioned, this call is being recorded. A replay will be available shortly after the conclusion of today's call at the replay link or number noted in our release. During this call, the company may make forward-looking statements which are based upon the company's current expectations and involve risks and uncertainties. The company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially are described in the risk factor section of the company's annual report on Form 10-K, as such risk uncertainties may be updated from time to time in the company's SEC filings. We assume no obligation to update any forward-looking statements, except as may be required by law. During this call, we may make reference to certain non-GAAP financial measures. We refer you to the investors page of our website, at odysseyinc.com for reconciliations of such measures and other pro forma financial information. With that, I'll turn it over to David Fields.
spk05: Thanks, Rich, and good morning, everybody. Needless to say, this is a challenging time for our company as we navigate through macroeconomic pressures and advertising headwinds. After a very strong start to the year, which had us on an accelerated path toward pre-pandemic numbers, we have, of course, seen a substantial deterioration in market conditions. And this has obviously taken a toll on our EBITDA and leverage and has raised concerns. As we present our third quarter earnings results and an update on the business, I want to address a few key questions that weigh on investors' minds. Will Odyssey successfully navigate the economic turbulence? How well positioned is Odyssey competitively? And what is the earnings capacity and value proposition of Odyssey once business conditions normalize? Notwithstanding a difficult third quarter as we look forward, we believe that Odyssey has been fundamentally enhanced and is today a much stronger company with substantially elevated products and capabilities to serve listeners and customers than the one that generated $341 million in EBITDA in 2019. At that time, we were one of the industry's two strongest radio broadcasting groups, with a terrific scaled local station lineup across the country's largest markets and an unrivaled leadership position in news and sports. But we had no podcasting business, essentially no ad tech, a skeletal streaming platform, and no meaningful national business development capacity. Since then, we have transformed into a leading multi-platform audio content and entertainment company that now also includes premium podcast publishing, emerging ad tech capabilities, a reimagined innovative competitive streaming platform, and a strong national enterprise sales team driving elevated partnerships with key national agencies and clients. And in a world in which there are multiple quality providers of music, including ourselves, being the news and or sports leader in most of the country's largest markets, coupled with our deep roster of exclusive, compelling local personalities and national award-winning podcasts, makes us, we believe, the number one creator of original premium audio content. But the timing of the current marketplace challenges has been poor, and it hit us at a time when we are in transition, building significant new capabilities and products to drive revenue and EBITDA growth, and bearing the investment and operating expenses of our transformation, but not yet reaping a large portion of the revenue benefits. There are a number of positive developments across our various businesses that point to stronger performance ahead, a few of which I will touch on momentarily. Furthermore, we have made good progress in executing our action plan to generate additional financial cushion to navigate forward successfully. But before providing additional color in those areas, let's turn to our third quarter results. Q3 was a challenging quarter with market conditions worse than our expectations, impacting performance across our various channels. Excuse me. Revenues were down 3.8%. Radio revenues were down 6%, including network, with network revenues up 1% and total spot down 7% with local outperforming national. Looking at the three components of our digital business, we had solid double-digit growth across streaming, up 14%, and digital marketing solutions, also up 14%. However, our podcasting business had a rough quarter and was down 23%. Podcasting results were impacted by the departure of Crooked Media, which moved off of our platform in May, and the timing of licensing revenue last year. Ex-Crooked and licensing, our podcasting revenues were down 2%. Fourth quarter podcasting pacings have improved significantly. I would add that our podcast listenership continues to grow, with third quarter downloads up 29%. During the quarter, we launched a number of new shows, including No Mercy with Stephen A. Smith, Project Univon in partnership with Apple TV+, and Sunshine Place, which hit number one on the Apple chart. And finally, on podcasting, we are seeing strong growth in listenership on our 2,400 sports podcasting studios, with 50 new shows launched in the past four months and downloads up over five times since Q2. Some additional color on Q3 results. Our radio revenues were highly impacted by our market mix. Our smaller markets, defined as markets 50 and smaller, grew 8% faster than the largest markets, 1 to 25, according to Miller Kaplan. And to be clear, I'm speaking of total market revenues, not just Odyssey's results. Given that our company is significantly more concentrated in the largest markets relative to our peers, that caused a big relative performance challenge. We don't believe that the market growth differential is permanent, although the gap has persisted for a while. Turning to categories, we are encouraged by an uptick in auto, our largest category, which was up 6% in the third quarter, albeit still down 39% under 2019. A Wall Street Journal story last week noted that the number of cars and trucks on lots or in retail stores at the end of September was up 46.9% versus the same month a year ago per awards intelligence. Rich will share some additional thoughts on our business categories. On our last call, I noted that we are deeply focused on executing our action plan to navigate the storm and emerge healthy and strong with compelling profitability and shareholder returns. I'm pleased to report that since then, we have executed $56 million of non-strategic real estate asset sales to provide additional liquidity. We have a number of other real estate assets that we plan to monetize and will continue to pursue other tools at our disposal to weather the storm. As a reminder, we have no maturities until 2024, and all of our junior debt isn't due until 2027 and 2029. In addition, we have made substantial fixed cost cuts across the business to reduce expenses. As a result, third quarter expenses were flat versus plus 8% in Q1 and plus 6% in Q2. Turning to the fourth quarter, ad market headwinds continue, but there has been some small sequential improvement across the business. Fourth quarter revenues are currently pacing flat, and we expect to finish flat to down low single digits versus prior year. Local, national, and digital businesses have improved slightly, and podcasting more so, while network is a bit worse. On our last earnings call, we noted our primary strategic focus areas, which we see as the key drivers of significant additional revenues and profitability. and they are ad tech, digital, national enterprise business development, auto and other disrupted category recovery, expenses, and the launch of our reimagined streaming platform. We continue to make progress on each of these fronts. Ad tech has been an area of weakness for us historically, as we have been entirely relying on third parties, limiting both our participation in important pools of demand, like the programmatic guarantee market, and our ad product capabilities. With our acquisition of AmpliWave a year ago, we have established our own ad tech capacity and are actively pursuing our product roadmap. We remain on track to roll out new ad tech to unlock these pools during 2023, enabling us to increase our sell-through rates and improve yield and develop new ad products that tap into our 200 million person audience. We've launched the next generation of our Odyssey direct-to-consumer streaming platform in late July, featuring a completely rebuilt backend as well as an improved user experience with innovative features such as enhancements to our patented Rewind technology, now including chapter descriptions for each segment of live radio shows so listeners can opt to listen to the specific content that interests them. New features and capabilities will continue to roll out over the next few months. We continue to bolster the content offerings on the platform, including a new partnership with Disney to expand our listener choices. In addition, we continue to add additional new Odyssey-created content, including new specialty shows and exclusive Odyssey artist check-ins with artists like Ed Sheeran, Muse, Lizzo, Billy Idol, and more. Since launch, we have seen a 25% increase in our digital listeners and a 15% increase in registrations. And our national enterprise business development team is making solid progress in reintroducing the transformed Odyssey brand and our enhanced products and capabilities to key national agencies and customers. Our national agency and client engagement has accelerated significantly, and based on what we are seeing, we believe we are well positioned for a greater share of national ad spending in 2023 and beyond. Before I turn it over to Rich, a couple of additional thoughts. In these turbulent times, we recognize it is difficult for many to look beyond the current challenges. But we don't want to lose sight of the broader perspective on Odyssey's competitive position and our opportunity set. The macroeconomic disruptions at a time of transformational change across our company has certainly made a great impact on our EBITDA. But that should not obfuscate the underlying fact that Odyssey has emerged as a fundamentally enhanced, scaled, multi-platform leader positioned to compete for significant growth in the dynamic audio market. And we see significant revenue headroom as we capitalize on our enhancements and the holistic value of our platforms. Putting all the pieces together takes time and we have work ahead of us, but we continue to make solid progress and are truly excited about our prospects going forward. We remain intensely focused on executing our plan to successfully navigate the storm and emerge healthy and strong and believe that in a normalized economy, the earnings potential of today's enhanced odyssey should exceed where we were in 2019. And with that, I'll turn it over to Rich.
spk06: Thanks, David, and good morning. Our total net revenues for the third quarter came in at $317 million, down 3.8% year over year. Our spot revenues were down 7%. National spot is weaker than local, and political revenues came at $7 million for the quarter, which is $2 million in the prior year. Looking at our top spot advertising categories, auto dealers, our largest category, was up 7% year-over-year in the third quarter, and auto in total, including dealer associations, was up 6%. This is a significant improvement from earlier this year. Auto in total was down mid-single digits in one queue and was about flat in two queue. Our second largest category, hospitals and clinics, was up 22% in the third quarter. And our 12 get-out-and-go categories, including concerts, sporting events, and movie theaters, were up 18%. And in the third quarter, banks and mortgage lenders, our third largest category, is down close to 40% year-over-year. We continue to believe that spot radio has significant headroom for further recovery after this economic slowdown is behind us and any remaining supply chain issues are fully resolved. Our digital revenues in the third quarter were up 2%, led by double-digit growth in streaming and in our digital marketing solutions product line. As David stated, our podcast revenues were down for the quarter. Turning to the fourth quarter, we projected our net revenues will come in about flat to down low single digits year over year. Political is tracking to come in around $12 million in the fourth quarter, or about consistent with where it came in during the last midterm election cycle in 4Q18. For the full year, we expect that political advertising revenues will be about $25 million or up around 16% versus 2018. Moving to our expense performance, our cash operating expenses for the third quarter came in at $280.5 million, and we're about flat year over year. The company is continuing to work to further reduce its operating expenses, and we are making good progress. but we still have more work to do. We will provide guidance on the outlook for our 2023 expenses during our fourth quarter earnings call. In the fourth quarter, we expect our operating expenses will be up low to mid single digits driven primarily by costs associated with return of some holiday events and other variable selling expenses. And we expect our EBITDA margin in the fourth quarter to improve sequentially to about mid-teens. Turning to our financial position, our compliance basis first net leverage was 3.8 at the end of the third quarter compared to our maintenance covenants, covenant of four times. And our liquidity was $115 million down from $206 million at the end of last year. We used cash during the first nine months of this year primarily as a result of the unexpected and fairly rapid deterioration in advertising demand and due to an increase in our CapEx investment, elevated working capital, and the impact of rising interest rates. We expect to see improvement in our free cash flow performance in the fourth quarter and we expect that our liquidity will improve slightly by year end after deducting the maturity of $22.7 million of our revolver in November. There are no other debt maturities until 2024, and we believe it is important to note that our upcoming 2024 maturities are all first liens and that the company's second lien bonds don't begin to mature until 2027. Digging deeper into the key drivers of our financial position, it took us some time to realign our operating expenses given the rapid drop off in advertising demand and as noted, our expenses got to about flat in the third quarter and we have more to do. Our capital expenditures totaled $72.5 million September year-to-date versus $39 million for the same period last year. This planned increase was driven by the investment to build our new innovative streaming platform, which was released earlier in the third quarter. You will see a significant drop-off in our CapEx in the fourth quarter to about $7.5 million versus an average of $24 million per quarter September year-to-date. We will provide guidance on the outlook for our 2023 capital expenditures during our fourth quarter earnings call. Our CapEx in 2023 will be significantly less than it was in 2022. In addition to working to significantly reduce our CapEx and our operating expenses, The company is working, as discussed by David, to bolster its liquidity through the sale of a number of non-strategic assets. Over the last 90 days, we have sold two real estate properties for total proceeds of $56 million, and we are working on a pipeline of additional sales. We expected to provide more specificity about the expected added proceeds from these sales during our fourth quarter earnings call. As a result of the actions we have already taken and the actions we plan to take, we continue to believe, assuming that the severity and duration of any recession we encounter in 2023 is more akin to the 2001 recession and not like the Great Recession, that we should be able to maintain compliance with the requirements of our credit agreements and avoid repricing our floating rate debt to market in the near term. We also believe that our projected liquidity ought to be sufficient to weather the slowdown in advertising demand, and we are working to position ourselves to refinance our 2024 maturities well in advance of their due dates.
spk04: With that, we'll go to your questions, operator.
spk00: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment as we poll for questions. Our first question is from Dan Day with B Reilly. Please proceed.
spk02: Yeah, morning, guys. Appreciate you taking the questions. I've got one and then a follow-up. So just over the last couple of years, we talked a lot about this large versus small market issue. A lot of it was the large cities taking a lot longer to reopen than the smaller markets. I mean, it feels like at this point, we're kind of 100% open everywhere, yet the large markets are still lagging behind the smaller markets as far as the recovery and radio ads then go. Maybe just if you could talk a little bit more about why you think that is and why at this point you're confident that these large markets will get back to where we were pre-COVID. Thanks.
spk05: I think there is still a difference, right, between recovery in large markets and small to medium-sized markets in terms of people returning to offices and so forth. There is still some differential there. And as we continue to talk to advertisers in these markets and continue to work forward, we don't see any sort of discernible pattern that would lead us to believe that there's anything fundamentally different. That said, we do scratch our heads, right, Dan, because it is something which is something that we don't necessarily fully understand. We don't see any substantive reason why it should be a long-term point of differentiation when you analyze it.
spk04: And, you know, that's really our best answer at this time.
spk03: Got it. Thanks, David.
spk05: And just to be clear, the data we're referring to is not our performance in large markets versus, you know, small to medium-sized markets. It's the market-wide data. So this incorporates all the other competitors in the market as well. I just want to make sure folks understand that's the data we're comparing.
spk03: Did we lose you?
spk05: I think we lost Dan, operator, so we'll get Dan back in the queue. Maybe we should move to the next question.
spk00: Yes. Our next question is from Steven Cahill with Wells Fargo. Please proceed.
spk07: Yeah, thanks. A few for me. Maybe first just, Rich, you talked about the 2024 maturities and you're working to potentially finance those. Could you give us some more color on how those talks are going? Is there an opportunity to bring leverage down? Can you push out those maturities and what's the willingness of the counterparties to re-extend those into something that's a little less of like the wall that you currently face in 2024?
spk06: So we've had a number of conversations with groups representing our first lien lenders and the group representing our second lien lenders. I'd say those conversations are in early stages and they've been quite constructive. So there's ongoing conversations, there's outlines of the goal that could accomplish extending our maturities and perhaps other benefits. But it's early stages yet And I do think those conversations will continue for a number of added months until we finally get to a point where we have an agreed solution to refinance our 2024 maturities. and perhaps other benefits. So I think the great news is that the lenders are well-organized and well-represented. We've had very constructive conversations, and it's going to take some time, I think, for those conversations to come to fruition.
spk07: great and then um i was wondering if you could give a little more color around uh podcasting being down in the quarter is that just the timing of you know the studio business and it can be a little bit lumpy quarter to quarter was there anything related to pricing there that you saw on the market would love that yeah as i noted um it was largely the absence of crooked media which was the largest uh component of our podcasting business
spk05: and the lumpiness, as you noted, of licensing fees coming out of Pineapple Street Studios. for the period. You know, beyond that, we did take some cancellations during the quarter. But as I noted, the underlying health of the business is strong. The downloads were great. Our fourth quarter looks substantially better. So it looks to us more like a hiccup in the third quarter than anything sustainable beyond the obvious point that the macro headwinds did impact podcasting marketplace in the third quarter to some extent.
spk07: Great. And then maybe lastly, just when we think about digital margins versus broadcast radio margins, I know you've invested a lot in digital over the last few years. You've redone the digital experience a few times. And because you may face this position, you know, where you're really looking at liquidity hard, as evidenced by some of the asset sales that are maybe going on at the moment, do you have the capacity to, if need be, sort of slow down or temporarily pull back on some of the digital OPEX that would provide a boost to EBITDA? Because I'm guessing those broadcast radio margins are a lot higher than the reported margins. So maybe you could just kind of give us a sense of how those two different parts interact at the EBITDA line. Thank you.
spk06: Yep, so we are working to further reduce our operating expenses and slow a number of investments. I think it's important to know that our streaming growth has been constrained over the last several years by the growth in our supply. And our new platform has already seen some benefits in terms of accelerated audience growth. We do think that we hope and believe that's going to lead to accelerated growth over time as we roll out new innovative features that are targeted to launch over the next four to six months. And so we believe, longer term, that platform is going to be a very important driver of our growth. And I think it's really important to note that I think you're well aware that a marginal spot radio dollar flows through at just about 90 cents on the dollar. It's a very attractive platform. flow-through rate. The flow-through rate for a digital audio advertising dollar, a streaming dollar, is less, but it's upper 70s. And Odyssey may be in a somewhat different position than others, given that 40% of our revenue is tied to our own proprietary content, news, talk, and sports. So we see accelerated streaming growth as a very attractive source of accretion to the overall operating margin of Odyssey over time. We also believe that we've taken it, our podcast business has been rough because we've had a number of large clients that we acquired as part of Cadence 13 that have exited over the years because we really couldn't meet their expectations for added revenue share, and we suffered the loss of those revenues. But I think, unfortunately, the pruning has positioned us for a healthier future. And so it's all happening, Steve, and I think that you will see us pare back our operating expenses. We've dropped a lot of wood over the last 90 days. There's more to go, and we'll talk about that more fully on our fourth quarter call.
spk03: Great. Thank you.
spk00: Our next question is from Avi Steiner with J.P. Morgan. Please proceed.
spk08: Good morning. Thanks for taking the questions. I've got a couple here. One, I think you mentioned your 3.8 times versus the four times test on the maintenance covenant. I'm curious, Rich, where do you expect that to be at your end? Are you in discussions on amending that? And did I hear you say in a moderate session you expect to remain in compliance? And then I have a couple more. Thank you.
spk06: So we expect our first lean covenant at end of year to be about 3.8, 3.9. And we expect to remain compliant with our first lien covenant out over at least the next 12-month period of time. So when we look at what we're doing, all as permitted by our credit agreement to manage and sustain our compliance with our first lien covenant, we feel reasonably confident that we will be able to sustain that compliance out over time. And that's what we're working hard to do.
spk08: Okay. And then maybe beyond the real estate sales you've already announced, there's some press reports on potentially monetizing some other non-core assets. I'm curious. how we should think about that, particularly in the podcasting space, and maybe any progress on this front.
spk05: Yeah, so as you might expect, Avi, we're not going to speculate on market rumors with regards to M&A. What I can tell you is that we are very committed to the growth of our podcasting business going forward. We believe it is an integral portion of our business. listener and customer value proposition and if you look at what we've done uh with the business over time uh starting with cadence 13 and pineapple street studios giving us we think perhaps the best uh studio in the business um we've launched 2400 sports which is our own in-house uh a separate studio focusing just in the sports space we've ramped up our local our local podcast business, and then, of course, Podcorn, the acquisition of the podcast native marketplace with, you know, well in excess of 60,000 sort of medium to long-tail podcasters on there. So we feel very good about the all-in podcast business, and as our ad tech continues to improve, we see greater monetization opportunities on that going forward.
spk06: Yeah, I think we should say out loud that our podcast audience growth has been really strong. We've not kept pace fully monetizing that audience for a number of reasons, ad tech being near the top of that list.
spk08: Appreciate that. And very last question, if I can, and thank you for the time. If I zoom out here a big picture... As you kind of think through the evolution of the business model over the next couple of years and where you want to take the platform, and I think you guys made comments in the beginning of the call that the platform is stronger as you see it than where it was in 2019. Do you think the company will need more cash and liquidity to invest in the business, I guess, to get through this near term to get to where you want to go? And is that one of the benefits perhaps you might be looking for in your conversations with bondholders? Appreciate the time and thank you.
spk06: Yeah, so there's no doubt that we are focused on bolstering our liquidity. And we believe that if the severity and duration of any recession that we encounter next year is not severe, that we're going to be just fine. And look, I think that the... The largest chunk of the investment with regard to building our new personalized interactive streaming platform is behind us. There is absolutely more work to be done on our development roadmap, but we've really made a very significant investment over the last 24 months that we believe positions us for accelerated growth in the rapidly growing digital audio advertising market. And so, look, I think when we get to better economic conditions, that we're going to see sustained recovery in spot radio. We believe we're positioned to participate more fully in the digital audio advertising marketplace And that's going to show up in revenue growth. It's going to show up in our expanding EBITDA margin and improved free cash flow. So, you know, look, it's a lot of uncertainty right now, for sure. But, you know, based on the parameters that we outlined, based on those assumptions, we think that we have a good shot of making it through and emerging stronger. and ready to more fully participate in what we see as great secular tailwinds in the audio advertising space.
spk03: Appreciate the time. Thank you.
spk00: Our next question is from Craig Huber with Huber Research Partners. Please proceed.
spk01: Great. Thank you. I joined late. I apologize if you covered this. Rich, when you think about your spot advertising for the fourth quarter and how the pay scenes look right now, the bookings look right now versus a year ago, what do you sort of think your spot ad revenue will do versus a year ago? The fourth quarter.
spk06: Yeah, we didn't provide that detail, Craig. What we provided was we did say that we expect our total revenues for the fourth quarter to be flat to down low single digits. We did say currently we're pacing about flat. And we did give further specificity, Craig, on the outlook for political, which we see at about 12%. million dollars in the fourth quarter or about consistent with 4-2-2018. And we didn't provide any other further detail.
spk01: Okay. And then I did hear a comment in there about there's small markets versus large markets. Large markets performing worse. Maybe you could go a little bit more in depth why you think that is. What's your perspective on that?
spk05: I'm going to respectfully, we did touch on that at length in a prior question. So rather than torture everybody, I'm going to just ask you to refer to the transcripts. I think we've covered that extensively. So thank you.
spk01: Okay. My other question, if I could ask, your real estate sales, I think you said 56 million. If you're going to do any other real estate sales, are they going to be anywhere near that sort of magnitude? Just can you sort of size it for us what's left?
spk06: So, look, I think there's a pretty good pipeline of additional sales. And I don't want to speculate at this point about the ultimate proceeds for those sales. By the time we talk to you 90 days from now, I think we're going to be in a position to give you better guidance about one, hopefully, you know, perhaps one or two sales that have been completed and the outlook for what's left to do. And so at this point in time, we're not going to speculate, but, you know, more to come.
spk03: Okay. Thank you.
spk00: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
spk05: We appreciate everybody being with us here this morning, and we look forward to reporting back to you after our fourth quarter. Thanks so much.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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