Townsquare Media, Inc.

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.

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.

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.