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spk01: Good morning and welcome to Town Square Media's second quarter 2023 conference call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief 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. With that, I would like to introduce the first speaker for today's call, Claire Yenike, Executive Vice President.
spk00: Thank you, Operator, and good morning to everyone. Thank you for joining us today for Town Square's second quarter financial update. With me on the call today are Bill Wilson, our CEO, and Stuart Rosenstein, our CFO and Executive Vice President. Please note that during this call, we may make statements that provide information other than historical information, including statements relating to the company's future expectations, plans, and prospects. These statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These statements reflect the company's beliefs based on current conditions but are subject to certain risks and uncertainties, including those that are detailed in the company's annual report on Form 10-K filed with the SEC. We may also discuss certain non-GAAP financial measures, including adjusted EBITDA, and adjusted operating income, which we may refer to as profit in our remarks. Such non-GAAP financial measures should be used in conjunction with all the information contained in the quarterly, year-end, and current reports available on our website. I would also encourage all participants to go to our corporate website and download our investor presentation, as Bill will reference some of those slides during our discussion this morning. At this time, I would like to turn the call over to Bill Wilson.
spk04: Thank you, Claire, and thank you all for joining us this morning. We are very pleased to share our second quarter results with you today. In a challenging national advertising macro environment, our performance through the first half of this year has helped Town Square to separate and differentiate us from others in local media, and in particular broadcast radio. Our year-to-date performance highlights the strength of our digital advertising platform and solutions. and validates our digital first local media strategy with a focus exclusively on local markets outside of the top 50. I'm glad to share with you this morning that Town Square's second quarter net revenue and adjusted EBITDA delivered on our previously issued guidance. Our digital growth engine drove our second quarter results, growing plus 4% year over year, fueled by plus 11% year over year growth in digital advertising revenue. In the first six months of 2023, we derived approximately 52% of total net revenue from digital solutions. We've seen even stronger growth in profitability, with second quarter digital profit increasing plus 15% year over year due to impressive plus 30% year over year profit growth in digital advertising. I'll say that again. In the second quarter, our digital advertising segment's revenue increased plus 11%, and our digital advertising profit increased plus 30%, delivering a 35 percent profit margin. Townsquare's digital platform continues to set us apart from local media peers. Our digital advertising profit growth and margin expansion has resulted in 60 percent of our total company's adjusted operating income now coming from our differentiated digital solutions. And as highlighted on slide 11, with 52 percent of our total revenue being digital revenue in the first half of 2023, we are more than two times the industry average. As anticipated, second quarter revenue for Town Square Interactive, our subscription digital marketing solutions offering outlined on slide 13, declined negative 7% year over year. As I previously shared with you, 2023 is a reset year at Town Square Interactive. Town Square Interactive's target clients generally the smallest of the SMBs with less than 20 employees and less than $5 million in annual revenue, have struggled with inflationary and wage pressures, labor shortages, and higher interest rates. According to Goldman Sachs' 10,000 Small Business Voice survey reported in May, a vast majority, 77%, of small business owners say they're concerned about their ability to access capital. Only one year ago, 77% of SMBs conversely said they were confident in their ability to access capital. The Wall Street Journal recently reported that smaller companies are accounting for an increasing share of layoffs. For example, companies with fewer than 250 employees accounted for over 80% of all layoffs and discharges in March of 2023. All of these factors have contributed to elevated churn rates among our client subscriber base and moderately slower sales velocity. In addition, and as we previously discussed, we also faced issues related to employee turnover and our customer service operations at Town Square Interactive due to our return to work mandate. This has largely been addressed, but did contribute to an increase in client attrition year to date. If we were to look for the silver lining, this growth challenge, the first that Town Square Interactive has faced, presented us with an opportunity to step back and truly examine our operations, attack ourselves, and evaluate all processes and procedures. Since the start of the year and continuing currently, we have made a number of important changes to optimize and improve our customer service platform. For example, we restructured the customer service team so it is now a pooled model versus a one-to-one model, and we implemented an interactive voice response system as the initial point of contact on a customer inbound call. This has led to a meaningful increase in call answer rates, enhanced visibility to customer requests and concerns, and improved response times. We believe this new customer service model will be very beneficial to our clients and thus client retention in the long term, and importantly, allow us to scale more efficiently going forward. However, as I noted on our last earnings call in May, These changes will contribute to a muted financial performance for Town Square Interactive in 2023. And thus, we view 2023 as a reset year for Town Square Interactive with growth returning in 2024. Although revenue at Town Square Interactive declined negative 7% in the second quarter, through careful expense management and thoughtful investment, we are very pleased to share that we were able to maintain a very strong 28% profit margin in Q2. Despite the short-term pressure on Town Square Interactive's top line, which we expect to be down low double digits in the third quarter, we are still incredibly confident in the long-term growth prospects of this business, and as such, continue to invest in its long-term future. The second Town Square Interactive office in Phoenix is now open. And so far in 2023, we have grown that team by 28 employees, given hiring opportunities have been very favorable. And as a result, We have nearly 50 people working for us in Phoenix today. With an addressable market of nearly 9 million target customers as outlined on slide 14, a superior product offering, a customer service team and model built for future growth, and a significant market opportunity, I am very confident that Town Square Interactive is geared for long-term profitable growth and success. Although 2023 will be a reset year for us at Town Square Interactive, We expect to return to top line growth and bottom line growth in 2024. Our digital advertising solutions segment, Ignite, is outlined on slide 12 and was once again our largest growth driver with second quarter revenue increasing plus 11% year over year. Our impressive growth in this segment is due to our differentiated digital solutions, which are often the best and most sophisticated digital advertising products and solutions available in our size markets. as well as our focus on local advertisers. From our perspective, it appears that the current slowdown in digital advertising industry overall is primarily limited to national digital advertising, and therefore, we have been minimally impacted as demonstrated by our industry-leading performance and strong double-digit revenue growth for the first half of 2023. We expect this performance to continue as Q3 digital advertising revenue is currently pacing up high single digits, Once again, second quarter digital advertising profit growth significantly outpaced revenue growth and was up 30% year over year, with second quarter profit margins expanding to 35%. We are experiencing growth in both our programmatic digital advertising solutions as well as our owned and operated digital advertising solutions, supported by our growing online audience. which once again increased plus 15% year over year to 82 million average unique visitors per month in the first six months of the year. And we also had higher engagement from our digital audience. Our focus on markets outside of the top 50 cities in the United States is a significant differentiator, not only for our digital advertising business, but also our broadcast advertising business. Because we are not in large top 50 markets, We face significantly less competition from large media players, large broadcasters, digital marketing solutions players, and digital programmatic providers. And the majority of our advertising, over 90%, is local advertising, which historically is less volatile than national advertising, particularly during an economic downturn. For example, national broadcast advertising revenue continued to be extremely weak for us in the second quarter. with national advertising revenue down 21% compared to prior year. No doubt that hurts, but that decline doesn't hurt us as much as others because national broadcast advertising now only accounts for approximately 7% of our total company revenue. In contrast, our local broadcast advertising performed much better in Q2 and year to date. Due to this dynamic, Our second quarter total broadcast advertising revenue declined negative 6% year over year, or negative 4% expletive. And we expect local broadcast advertising to continue to meaningfully outperform national in the back half of the year. The bottom line is this. Operating in small to mid-sized markets and avoiding top 50 markets helps to insulate Town Square from the national advertising downturn that has had a greater impact on other companies in the local media space. Most of our business comes directly from local clients, not from agencies, giving us much greater control of the outcome. Combine that dynamic with the fact that more than 50% of our revenue and profits are generated by our differentiated digital platform, and you can see why we continue to outperform our competition in the local media space. One very important characteristic of our business model that we like to highlight as often as possible is our significant cash flow generation. In the first six months of 2023, we have generated $31 million of cash flow from operations, ending the second quarter with $50 million of cash on hand, which is up $7 million from year end, And this is even after repurchasing $13 million of our bonds on the open market at a price below par and executing $16 million of share repurchases and making a $19 million interest payment. We repurchased and retired 1.5 million of Madison Square Garden's Class C shares in June, nearly half of their interest in Town Square at $9.70. representing an 8.5% discount to the pre-announcement share price. This share buyback was immediately accretive to our existing shareholders, and we were able to use cash on hand to satisfy the $15 million purchase price. In addition, we repurchased approximately 90,000 shares in the open market during the second quarter. I'm also glad to share that our Board of Directors also approved our next dividend of 18.75 cents per share payable on November 1st, which equates to 75 cents per share on an annual basis, which today would be over a 6% yield. We remain very confident with our current capitalization strength of our balance sheet. With $50 million of cash on hand at quarter end, a fixed interest rate of 6.875%, no maturities until 2026, and net leverage of 4.36 times at the end of the second quarter. And we are pleased that we can deliver attractive current cash returns for our equity shareholders. And now, I'd like to turn the call over to Stu, who will go through our results in even more detail, and as well as provide you our third quarter guidance. Stu, take it away.
spk05: Thank you, Bill, and good morning, everyone. It's great to speak to you today. We're pleased to report that our second quarter results met our guidance, supported by strong growth in local advertising revenue, and in particular, digital advertising revenue. We're also very pleased that we continue to deliver strong shareholder returns, executing an accretive share buyback and announcing our next dividend. Second quarter net revenue was roughly flat at $121.2 million, down 0.6% year-over-year, and up 0.3% year-over-year, excluding political, which was within our guidance of $121 million to $122 million. Second quarter adjusted EBITDA, as forecasted, declined 11.6% year over year to $28.6 million, just above the midpoint of our guidance range of $28 to $29 million. Second quarter broadcast advertising net revenue decreased exactly in line with our expectations and what we shared with you on our last call with a decline of 5.8% year over year and 4.1% excluding political. Second quarter broadcast profit margins were approximately 27%, a significant and material improvement from first quarter profit margins. As we expected and noted on our last call, national broadcast revenue declines were significant in the second quarter with revenue down as compared to the prior year by 21%. Looking at current pacing, National continues to be very weak in Q3, down approximately 18%. As Bill noted, while this hurts, the impact is limited, given that national is only 7% of our total company net revenue. Local broadcast has proven to be much more resilient, as has historically been the case, and thus second quarter local broadcast growth was able to partially offset the national broadcast decline. We expect a similar outcome in the third quarter, with local broadcasts meaningfully outperforming national broadcasts. As Bill shared on our last earnings call, 2023 is a reset year for Town Square Interactive, our subscription digital marketing solution segment, as we expect top-line and bottom-line growth to return in 2024. In the second quarter, net revenue decreased 7.5% as compared to the prior year, and profit decreased 9.9% year-over-year. Margins were strong at approximately 28% in the second quarter. As we have shared previously, we expect margins at Town Square Interactive to be suppressed in the second half of this year as we continue to invest for future growth, given our confidence in our long-term growth prospects and while we ramp up the newly opened Phoenix location. Town Square Ignite, our digital advertising segment, was again the largest driver of growth for the company. with net revenue increasing 10.6% year-over-year in the second quarter. Our digital advertising profit growth has outpaced revenue growth, increasing 29.6% year-over-year in the second quarter. This segment's profit margin expands to 35% in Q2 as compared to 30% in the prior year period. We expect our digital advertising segment will continue to be the biggest driver of our revenue and profit growth in 2023 and beyond. Our other category, which is comprised of live event activity, generated $5.1 million of revenue in the second quarter, an increase of 7.3% year-over-year, and profit of approximately $500,000, a decrease of approximately $400,000 year-over-year. In the first six months of the year, other revenue increased 23.1% year-over-year to $7 million, and other profit increased 2.2% to $1 million, at a 14% profit margin. This increase was due to hosting more events in the first half of 2023 than in 2022. In the second quarter of 2023, we had non-cash impairment charges of $26.2 million of which $16.6 million were related to our FCC licenses. As I covered on previous calls, given the way these non-cash impairments are mathematically determined, We expect the value of our FTC licenses to continue to be written down regularly over time. The second quarter impairment was caused by rising interest rates, which caused the discount rate in our calculations to increase by approximately 130 basis points from Q1. This write-down of decade-old purchase price calculations has no bearing on our cash position, our operating revenue, operating expenses, our profitability, or the company's future prospects. There are nothing more than the non-cash accounting charges affecting only the historically booked purchase price allocations made when we bought our radio station assets roughly a decade or more ago. Our second quarter net income declined $7.6 million to a net loss of $2.7 million, or 19 tenths per share. This decline was largely due in part to these non-cash impairment charges. As Bill highlighted, And I would again like to emphasize we consistently have strong cash flow generation. We generated $31 million of cash flow from operations in the first half of 2023, up 37% year over year, and ended the quarter with $49.6 million of cash. At the end of the second quarter, our net leverage was 4.36 times and excluding the MSG share buyback, which was a great transaction and immediately accretive to all shareholders. net leverage would have declined to 4.23 times, which would have been the lowest net leverage in our company's history. In addition to the MSG share repurchase, we also brought back approximately 90,000 shares in the open market during the second quarter. In total, we paid an average of $9.79 per share for these repurchases in the second quarter. We repurchased approximately $1 million of bonds at prices below par during the second quarter, bringing our year-to-date total bond repurchases to $12.9 million. As always, our number one priority is to invest in our local business through organic, internal investments that support our revenue and profit growth, particularly in our digital growth engine. We plan to continue to invest on our digital product technology, sales, content, and support teams, specifically in our Town Square Interactive and Town Square Ignite businesses in order to maintain our strong competitive advantage in the markets we operate in outside the top 50 cities. As Bill mentioned earlier, our board has approved a dividend payable on November 1st to shareholders of record as of October 2nd. The dividend of 18.75 cents per share, which equates to 75 cents per share on an annualized basis, implies an annual payment of approximately $12 million based on our reduced share count and a dividend yield of over 6% based on our current share price. We believe our strong cash flow characteristics will allow us to continue to invest in our business, support the new dividend, and give us flexibility to pursue debt and share repurchases in the open market. We'd like to remind you that any benefit or provision for income taxes on the face of our income statement is for GAAP financial statement purposes only. We maintain significant tax attributes, including more than $100 million of federal and state NOL carry forwards and other substantial tax shields related to the tax amortization of our intangible assets. We continue to believe that we will not be a material cash taxpayer until the year approximately 2026. Now, turning to our third quarter outlook, we expect third quarter net revenue to be between $115 million and $117 million. We expect our third quarter adjusted EBITDA to be between $27 million and $28 million. For the full year, We are again reaffirming our expectation that revenue will be between $450 million and $470 million. We're also reaffirming our expectation that 2023 adjusted EBITDA will be between $100 million and $110 million. With that, I will now turn the call back over to Bill.
spk04: Thank you, Stu, and thank you to everyone who joined us this morning. We greatly appreciate it. I want to close today's call by highlighting just a few of our successes in Q2 and year to date. Our differentiated digital advertising platform has proven its strength and resiliency, delivering double-digit revenue and profit growth so far in 2023. Our mature cash cow broadcast advertising platform continues to generate solid profit, contributing to our strong cash generation through the first half of the year. Our net leverage remains below prior year levels, and we have efficiently repurchased both debt and equity this year while maintaining a high-yielding dividend, delivering attractive current returns to our shareholders. Our performance this year has reinforced our confidence in our digital-first local media strategy, our deliberate focus on markets outside of the top 50, and the long-term profitable growth potential of our digital platform. As always, we wouldn't have the confidence in our long-term success without the TownSquare team's effort passion, and commitment that is directly driving our growth and innovation each day. I could not be more appreciative of our team and their tremendous work. And again, thanks to each of you for taking the time to be updated on Town Square's Q2 results this morning. We greatly appreciate it. Now, operator, at this time, please open the line for any and all questions.
spk01: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one. If you would like to withdraw your request, please press star followed by the number two. Your first question comes from the line of Michael Kopinski from Noble Capital Markets. Please go ahead.
spk06: Thank you and good morning, everyone. The 35% margins in your digital advertising segment are pretty impressive. And I was just wondering what are sustainable margins for that segment?
spk04: Good morning, Michael. Thank you for taking the time this morning. They are strong and they've increased quite nicely along with our revenue growth in the quarter, as well as our pacing for the back half of the year. We've always said we'd operate this business around a 30% profit margin. And that's where I would expect it to be. For the rest of the year, it could be in the low 30s. Part of the reason we are able to have such significant profit margins in our digital advertising business is the fact that we have a huge at-scale digital audience. As I noted on the call, an all-time high in digital audience of 84 million average unique visitors on a monthly basis. So as we've talked about on previous calls, the power of having owned and operated digital in combination with a programmatic platform stack is really, you know, I call it unparalleled, particularly in our size markets that have that first party data, that digital audience size, and then combine that with being integrated with literally every exchange out there. So we see for all intents and purposes, all inventory on the internet. So we can highly target our customers and their target customers and deliver this business in terms of a huge ROI. So, The fact that we've got this full funnel, we see competition in the digital advertising space, no doubt about it. What we don't see is somebody who has the full-scale solutions, the full funnel, in combination with having their own audience at scale. So I think for the rest of the year, we'll be in the low to mid-30 profit percent. I'd call it low 30s. And I think for the next few years, we'll be right around that 30%. We're highly focused on increasing our investment, as Stu just mentioned. We're pretty much running out as fast as we can in terms of hiring and training. So try to be conservative. We usually have said high 20s, but I think it'll probably be in the low 30s for the foreseeable future.
spk06: Thanks, Bill. And turning to Town Square Interactive, how many subscribers did you have in Q2 versus Q1? And you indicated in the last quarter call that you gave some temporary price breaks to your Town Square Interactive customers. Have those been extended? And then you indicated that Town Square Interactive revenue is patient download double digits. If you can kind of give us a flavor of what is happening in terms of the number of customers in Q3.
spk04: Yes, definitely. Thank you, Michael. So as I've said previously on the last couple calls, 2023 is definitely a reset year for Town Square Interactive. I think we've tried to provide as much color on these calls in terms of the challenges for small SMBs, which we've always stated in our investor deck for the last few years, that's who our target customers, people with less than 20 employees, less than $5 million in annual revenue. And these companies are clearly struggling to pay their bills. They're increasing in terms of businesses closing. We see, you know, we have a credit card on file for all these customers. So we actually see credit card declines. Uh, and we see that increasing quite significantly in Q2 versus even end of last year. Um, As it relates to your specific question, we had 27,400 clients approximately at the end of the quarter. You know, as we look ahead, as I said, we expect low double-digit declines in Q3, and that probably would continue in Q4. And as we've stated before, we're quite confident that we will return to growth top line and bottom line in 2024. We did, as we noted on the call, have strong profit margins in the business improving from Q1 to Q2. That said, we are so confident in this business. We couldn't be more confident. We hired 28 additional team members in Phoenix year to date, very favorable hiring conditions for us in this new location, which has been great. And that's really where we're at in terms of, you know, We have a very highly differentiated product offering with Town Square Interactive, particularly in our size markets. Roughly 60% of our client base today is outside of our markets. Roughly 40% are in our markets. And we're really taking this macro environment that's challenging these smaller businesses. And as I shared on the last call in May and again this morning, really treating it as a blessing in disguise as it relates to taking the opportunity to take a step back to challenge and attack ourselves and say, okay, What can we be doing better? And I think we've outlined it a couple times today as well as back in May in terms of changing our customer service model from a pooled model to a from it was a one-to-one model to a pooled model that's dramatically increased answer rates as well as other customer concerns are handled more quickly. We have a survey that people do at any time they call into Townsville Interactive. We see customer satisfaction increasing. from where we are today, from where we were a year ago. So we know we're doing all the right things. We know we have the right strategy. We have the right products and solutions, and we have an incredible team and culture. But we're battling this environment where these small SMDs are definitely struggling to pay their bills. Your other question was around discounting. We had done that, and we continue to do that, but I would say at a much smaller scale. The difference now versus, say, 2020 or even 2021, with the COVID struggles that these businesses face is back then in 2020 and 2021, there was such an enormous amount of support from the government with the PPE and other subsidies. So they were getting money coming in. But today that doesn't exist, obviously. And with high inflation, higher labor costs, higher interest rates, These smaller SMBs are clearly struggling. So we are definitely still discounting, but at a much, much lower scale. And I think that's reflective in our current pacing in the low double digits. But still, we will continue to invest heavily in this business, not only in the back half of this year, but as I said, going into 24, we know that we'll return to top line and bottom line growth in 2024.
spk06: My final question is just the tone of the advertising environment. National, you said it's down in 2% pace in Q3, which is... appears to be moderating a little bit from what you saw in Q2. I was just wondering, are we starting to see some light at the end of the tunnel, aside from Q3? Your guidance would just kind of give us a sense of the tone of the advertising environment.
spk04: Yeah, right. So to your point on national, for us at Town Square, it was down 28% in Q1, down 21% in Q2. And as I shared on the call, we're currently pacing down negative 18%. you know, local's been relatively flat, which has been obviously what we focus on and control, as I noted. I don't see it getting better as I sit here today on August 9th. I don't see it getting worse by any means, but I don't see it getting better. You know, one of the things we didn't state on the call, but, you know, we have Miller Kaplan data for a number of our markets, not all of our markets, but for a good subsample that gives us a good sense of things. So, When you look at our markets that are rated by Miller Kaplan in Q2, total spot broadcast revenue, we were down 4.8%, which is pretty much in line with what our whole company was as we just disclosed. The industry was down negative 8.6 in total spots. So we were down 4.8. The industry was down negative 8.6. Yet in total revenue for these Miller Kaplan markets, we were up 2.8 and the industry was down 2.6. So Going back to your point, Broadcast, I believe, we treat it as a traditional cash cow. We're going to moderate our expenses based on the revenue performance. We truly believe that local will clearly outperform national and smaller markets outside the top 50 will significantly outperform markets in the top 50. And as we just demonstrated, we're able to manage our margins. As Sue said, in Q1, our Broadcast margins were 19%. This quarter they were 27%, and we plan to, on a full-year basis, keep that in the high 20s. So I don't see the current broadcast advertising market getting better. I don't see it getting worse. Based on our guide, you can imply that we're seeing, in essence, Q3 generally the same as Q2 in terms of broadcast overall. So, Michael, I'm happy for any follow-up, but hopefully that gives you a sense of where broadcast is. Auto for us. continues to be significantly down. It's down 35% in Q2 versus 2019, down 3% from 2022. Q3 for us continues to pace down in auto. And we've heard larger markets, bigger television and broadcast companies have noted that auto is coming back for them. And I think that's because there's more inventory in the larger markets. But that's still a headwind. And at some point, as inventory makes it to R-sized markets, we know it'll be a tailwind. But it really is the same environment today as we were seeing three months ago, Michael.
spk06: Well, you seem to be managing this environment very well. That's all I have. Thank you.
spk04: Thank you, Michael. Appreciate it. Have a great day.
spk01: Thank you. Your next question comes from the line of Jim Goss from Barrington Research. Please go ahead.
spk02: Thank you, and good morning. I have a couple of questions. First, I was interested in the comments you made about employee turnover and churn and your reaction by, I think you were, the pooling model versus one-on-one relationships, as well as maybe dealing with probably pairing some of the people who didn't want to come back full-time to the office. I'm wondering a couple of things. First, have you had any customer reaction to the good or bad about the pooling rather than a one-on-one relationship? And maybe this is less important in the very smallest markets, but maybe it's better to have the pooling. But maybe some more comments about that. And also, I think in the past you talked about maybe earning their stripes in terms of the best employees having more flexibility in in working away from the office on occasion, are you also creating incentives to hit certain marks and then they get that greater flexibility as long as they maintain that productivity? Maybe talk about that issue a little bit if you could.
spk04: Yes, Jim. Good morning. Thank you for taking the time this morning. I'll answer those questions and throw it back to you if you have any others. So let me hit the customer reaction first. So there are clearly some customers of our 27,400 who preferred the one-to-one model. I would call it 80% like the pooled model, and we're seeing the benefits of the pooled model with things as answer rates and turn times on requests. for things like for SEO changes or website edits and things like that. But that, truth be told, 20% really liked knowing that they had an individual to talk to and now it's a pooled model and they won't necessarily speak to that individual. So that was a trade-off we made. We felt like the one-to-one model was the best way to get from our beginning at zero customers to over 27,000 customers today. But as we evaluated this, For us to go from 27,000 customers to 50,000 to 100,000 customers, we really felt it was best for the customer satisfaction in the long run to have this pooled model. But that said, there is a subset of our client base that preferred the one-to-one model. And that probably contributed and definitely did contribute to some of the decline in revenue in Q2 and as we're seeing in Q3. But we're very confident that that's the right model moving forward and We are doing many other things in the customer service platform based on AI and other improvements that we can make. As I said earlier, we instituted an IVR interactive voice line coming in, which has been highly efficient and rated well by our customer base. But to your specific question, there was a subset of clients that definitely preferred the one-to-one model, and they don't have that now. As it relates to your second question in terms of employees returning to work, listen, in my view, our Townsville Interactive team is second to none. They're world class. They're passionate about helping small businesses achieve their goals. They get great pride in seeing the businesses that we work with grow and increase their revenue, increase their employee count. And that is incredibly proud and satisfying to us. So to your point, we have allowed our best employees who are tenured to still be in a hybrid environment. And then to your second point, somebody who maybe is new to the company, as they generate performance and hit certain key performance indicators and they develop tenure, call it over 18 months, they then are able to also be in a hybrid model. So that has worked quite well. And as you noted, we have incentives and things along there. And that's why we have an incredible culture at Town Square Interactive. And quite honestly, I believe that Town Square overall. But that definitely, you know, impacted our performance year to date. And I think it's impacting us now because we did lose some employees because they didn't want to return back to the office. And that was disruptive, particularly in a one-to-one model. Because if you were used to talking to Bobby or Susie and Bobby and Susie didn't want to return to work and they weren't the highest performing employees, that causes disruption. And again, that's why we look at, for TSI, 2023 being a reset year with return to top line and bottom line growth in 24. But I'll turn it back to you. I think I covered your two questions in terms of customer reaction as well as employee base at Town Square Interactive.
spk02: No, those covered a lot of it very well. And thank you. The guidance you provided in terms of revenue and profitability for the third quarter in the year I was thinking of these in terms of your suggested gain in 24 after this reset year, as you're referring to it. It seems like the third quarter is still softer, but the fourth quarter is beginning that acceleration into the gains in 24. Am I reading this correctly? So that the cadence of the reset will... sort of work through mostly in the current quarter and the improvement will begin toward the end of the year to hit those four-year guidance numbers. And what are the dynamics and considerations? Is it maybe major recession concerns fading or interest rate hikes flattening or, you know, what's going into your confidence in making those sort of projections?
spk04: Yeah, thank you, Jim. Yeah, so to your point, reaffirming our full-year guide, and as Stu outlined, our Q3 guide in terms of net revenue, pretty close to in line to where we were this quarter, down negative two to negative four, ex-political at 115 million to 117 million. And the components of that for Q3 are digital advertising pacing up strong, high single digits, TSI pacing low double digits, And then broadcast, as we said, nationals pacing down 18%. And probably in broadcast overall expected to be down about, I call it a couple points in Q3 versus Q2. As it relates specifically to your question, yes, clearly I believe the environment, at least from a macroeconomic standpoint, the number of what I would call experts predicting a recession have clearly receded from our last call in May to now. But obviously, interest rates have increased quite a bit from then. And the question everybody has now is, is it higher for longer? Because when we were talking in May, many were projecting that interest rates would actually start to be cut in Q4. And I think that expectation has come down. So our guide bakes in all of that. You know, the one thing, particularly for TSI, so going back to your point about TSI, I am not expecting a material improvement in Q4 for TSI. I expect a material improvement, and I'm confident we will have one in 2024 with top-line growth and bottom-line growth returning. The one thing we've actually heard from our client base in this sector, because, you know, many of them have – we target less than 20 employees, but many have less than half a dozen employees – Some of these are entrepreneurial type of businesses, sole proprietors. And as you're probably aware, Jim, I think it was last month, if not over the last few weeks, the student loan program, which has been forgiven since 2020, is now back and people will start to need to make student loan repayments in October. And that is definitely a concern for these SMBs who are already facing higher inflation, already facing higher wage costs, have this higher interest rate if they want to access capital. So there's a lot of negatives for these TSI target customers. And now adding in student repayments, which is going to affect clearly a subset of our business, we're not expecting Q4, therefore, to see a material improvement from Q3. But our guide takes that all into account. I think we take a step back and, again, We couldn't be more confident in the long-term prospects of Townsport Interactive. We're going to manage our broadcast business as a traditional cash cow business, as we have been doing, and I think quite successfully. And I think the fact that we're outside of top 50 markets, I think by this point, over the last decade, we've demonstrated we're outperforming others in the broadcast space. And hopefully my comments about Miller Kaplan to Michael demonstrate that, and that's been consistent year in and year out. And then obviously our growth engine today, and quite honestly has been for the last three years at this point, Ben Ignite, and the fact that we've got our owned and operated huge ad-scaled audience combined with first-party data and a sophisticated programmatic stack in our size markets, I cannot stress often enough how differentiated that is for us and how confident we are in long-term growth in that. And TSI will return to long-term growth, no doubt about it, but our expectation for Q4 is roughly in line with Q3, but that's baked into our full year guide as well as our Q3 guide. So, Tim, I'll turn it back to you. Hopefully that answered the question.
spk02: It did. Just one last little nip, I guess. I know live events at this stage are just sort of a one-off type situation. You were a little better in the third quarter or second quarter rather than we were looking for, although not far off from last year. What happened in that category?
spk04: Yeah, we had a, so thank you. As you know, like we, we treat, you know, live events was a significant part of the company a while back. And when I was fortunate enough to move into this role, we obviously took a strategic step back and said, is this the business we wanted to be in? And we, in essence, for all intents and purposes, exited the live event business. And now we treat it as a marketing arm that's profitable with their company. And we only do live events in our, in our, in our, in our markets that we operated in. We're quite pleased with the performance, but again, as it relates to the overall financial contribution to the company, it's not significant. As it relates to the contribution to our audiences and our clients, it's quite significant, and that's why we continue to do it, and we love it. In terms of your question, Q2 live event revenue, I believe, was just over $5 million in the quarter, which was up about 7% versus prior year revenue. Our profit was suppressed because a couple events in Q2 are very large music-oriented events. One of our largest events in the company is in one of our largest markets, Buffalo. As you know, we have the number one country station, number one station in the market as well as W, YRK, and W, BLK 1 and 2. And they put on a large music festival. And as you're probably aware, with live events doing so well post-COVID, Artists are commanding a higher fee. Therefore, there's more expense going into that. So our profit for live events in Q2 was suppressed as a result of that. But again, it's not material to the company. We've always said we're going to operate this live event business at roughly a mid-teens margin. And I believe in Q2... I think we were, you know, I think slightly below that, maybe 12%. It depends if you call 12% mid-teens or low-teens. I would call it low-teens. But that's what we're seeing in live events. And for Q3, you know, our expectation, again, is an uptick in revenue versus prior year. But it's a very, very small part of our company and a very defined number of events that have been heritage events in our markets for a long time. The communities look forward to them. The clients love them. And it contributes to our full-fledged marketing solutions, which help our broadcast business and help, as we see with the Miller Kaplan results, and help our digital advertising business. But I'll flip it back to you, Jim, in case anything else on live events or any other questions you may have.
spk02: No, no, that's it. Thanks very much for all your time.
spk04: Thank you, Jim. I appreciate you dialing in. And thank you, everybody, for dialing in. Operator, any other questions?
spk01: Yeah, so we do have another question from Ken Dashimojo from Wellington. Please go ahead.
spk03: Hi, good morning, and thanks for taking my questions. The first one I had was with respect to TSI, is there anything notable within the customer trends if you split it out by in-market versus out-of-market?
spk04: Hey, nice to have you on the call this morning, Ken. Thanks for asking the question. No, and actually, I think it was Michael who may have asked this question last time. We really don't see a difference in vertical in terms of type of business. We don't see a difference in market, out of market in terms of our current performance. We don't see it in a geography. It's really size of business. and how much wherewithal do they have at this point in time to be able to battle the inflationary expenses to see the higher labor costs and if they need capital at the highest interest rates. But there is no discernible difference between in-market, out-of-market, or what I just described in terms of geography or vertical.
spk03: Great. Thank you. And also on TSI, just recognizing that the expansion is probably sopping up most of your team's bandwidth. I'm just curious if there's any updates forthcoming on the product side, whether it's pursuing that CRM opportunity that you alluded to several calls ago, or maybe just kind of redesigning the aesthetics of the landing pages.
spk04: Great question. Yeah, couldn't be more excited about the expansion in the office in Phoenix. And as I noted on the call, it's going quite well from a culture standpoint, as well as from a hiring standpoint with roughly 50 employees there. Yeah, I think I'm glad you've been listening to the calls, Ken, because I think we've highlighted in the past, in our view, and one of the greatest assets in the company has been our engineering and product development team who have been with us. The core have been with us from day one in 2010, and we continue to add to them. And I view them as incredibly gifted, and they spend a lot of time with our customers, which is amazing. quite unique at times, just sitting down, understanding their businesses, their struggles, and they sit down with our salespeople as well to get a sense of both sides. So yes, we continually develop our Town Square Interactive solutions and that quite honestly, the same development team also works on our digital advertising platform from an O&O standpoint. They built our CMS and they built our programmatic stack for our programmatic offering as well. But to your specific question about TSI, yes, we continually and you can see and will see improvements in things like the website designs and aesthetic as well as continued improvement in our search engine optimization. That is one of our greatest values is we sit down with a customer and we say, not only are you getting a great website for on average $300 a month and we're handling your social, but you're also doing driving new customers organically through search engines. So when somebody looking for a plumber in Tyler, Texas, or a lawyer in Buffalo, you're not necessarily having to pay for search engine marketing. We're getting highly ranked in those keywords that people are searching on and driving them to your website and you're converting them to customers. So you will see continued product solutions, either incremental product add-ons, which we've been doing like email marketing, appointment bookings, which weren't part of the platform, say, four years ago, as well as improving just the core products we have in terms of aesthetics of design. So, Ken, hopefully that answers your question, but I'll throw it back to you.
spk03: That's great. Thank you so much. Last one for me, and I appreciate your time. I'm just curious, you know, in a scenario in which TV political spend next year turns out to be a blowout, would you, in your radio markets, anticipate any kind of spillover core ad demands
spk04: Definitely. And we've seen that in past elections. So, you know, 2022 is an off year for Town Square in terms of political revenue, just based on where we mapped out. And we talked about that, I think, on our earnings call at the end of the year. But 2020 was an all-time high, I think, close to $16 million, if not $16 million. And a lot of that was spillover from TV into radio. That is a dynamic we see quite often. If there's not that sellout on TV, we definitely don't get as much political. But as that happens, we do. So a very astute question. And we expect if TV does have a blowout in political in 2024, we will greatly benefit in 2024. Great.
spk03: Thank you so much for your time.
spk04: Thank you, Ken. Appreciate you asking the questions this morning on the call. Operator, any other calls?
spk01: No further questions at this time. I'd now like to turn the call back over to Mr. Wilson for any closing remarks.
spk04: Thank you, Operator. Appreciate your help this morning. Thank you all for dialing in. As I noted, we couldn't be more proud of the Town Square team and their passion and commitment and really driving, I'd say, outsized performance from others in the local media space and Hopefully our results continue to demonstrate that being a digital-first local media company in markets outside the top 50 is highly differentiated. And we appreciate you taking the time this morning and look forward to our next call in three months. Everybody have a great day.
spk01: Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line. Have a lovely day.
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