Yahoo Finance Entercom Communications (ETM) Q2 2019 Earnings Call Transcript
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Entercom Communications (NYSE: ETM)
Q2 2019 Earnings Call
Aug 07, 2019, 10:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to Entercom's second-quarter 2019 earnings release conference call. [Operator instructions] This conference is being recorded. I would like to introduce you first speaker for today's call, Mr. Rich Schmaeling, CFO and executive vice president. Sir, you may begin.
Rich Schmaeling -- Chief Financial Officer and Executive Vice President
Thank you, Amber, and good morning, and welcome to Entercom's second-quarter earnings conference call. This call is being recorded. A replay will be available on our company website shortly after the conclusion of today's call and available by telephone at the replay number noted in our release. Should the company make any forward-looking statements, such statements are based upon current expectations and involve risks and uncertainties.
The company's actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially are described in the company's SEC filings on Forms 10-Q, 10-K and 8-K. We assume no obligation to update any forward-looking statements. During this call, we may make reference to certain non-GAAP financial measures, we refer you to our website at entercom.com for a reconciliation of such measures and other pro forma financial information. I'll now turn the call over to David Field, president and CEO.
David Field -- President and Chief Executive Officer
Thanks, Rich. Good morning. Thanks, everybody, for joining us for our second-quarter earnings call. This morning, we announced a major expansion of our podcasting business with the acquisition of Pineapple Street Media, one of the top creators of leading podcasts and branded podcasts in the country, as well as an agreement in principle to complete the -- of the acquisition of Cadence13 by acquiring the remaining shares in that company that we don't own.
We also announced the launch of our new Radio.com sports digital network. As you know, we are one of the country's two largest radio broadcasters, with over 235 of the nation's top radio brands, the unrivaled leader in news and sports radio, the home of Radio.com and the Entercom Audio network, and the No. 1 creator of original live local audio content, reaching over 170 million Americans each month. And now by virtue of the moves we're announcing this morning, we are poised to become one of the three largest podcast enterprises in the United States and believe we are extremely well positioned for sustainable success in the fastest-growing area of the audio market. We are also making great progress in a number of other key areas in our transformative scale-driven growth initiatives, which we will share later on the call. But let's begin with our second-quarter financial results. Second-quarter revenues and EBITDA were up 2.3% and 7%, respectively, driven by strong growth in national network and digital partially offset by declines in political and events. Excluding political, revenues were up 3% for the quarter. As you may recall, our revenues were pacing up better than 4% at the time of our Q1 earnings call.
They declined over the remainder of the quarter due to a combination of slowing local sales and weaker-than-expected ticket sales at some of our largest events, and some -- to some degree, attributable to weather issues. April was the strongest month of the quarter, with revenues up high single digits. May was down low single digits, and June was up low single digits. During the second quarter, our best-performing markets were Denver, Orlando, Philadelphia, Sacramento, St. Louis, Seattle and Washington, D.C. Our strongest advertising categories included consumer products, which continued to surge, along with telecom, TV cable, entertainment, convenience stores, home furnishings and education and e-commerce.
Our second-quarter expenses were up 1% and are down slightly June year to date. In the third quarter, we expect our expenses will be flat to down low single digits. And for the full year, we expect that our expenses will be down around 2% as we complete executing our integration program and are also implementing other cost-saving actions as we capitalize on new technologies and other best practices, while at the same time, fueling our investments across a number of growth initiatives. As I mentioned this morning, we announced the acquisition of leading podcast creator Pineapple Street media and also announced that we have an agreement in principle to acquire the remaining equity in Cadence13 that we don't already own. As a reminder, we acquired a roughly 45% interest in Cadence13 on July 25, 2017, but have not recorded any financial contribution from this investment to date. Together, these two acquisitions will propel Entercom into a leading position in the podcast space with a stellar content lineup, strong monetization capabilities and excellent distribution and discovery platforms across the company's radio stations and Radio.com. Combining Entercom, Cadence13 and Pineapple creates a business which develops or exclusively sells podcast that currently generate more than 150 million monthly downloads. As a point of reference, Podtrac-listed NPR is the No.
1 publisher with 144 million monthly downloads. Entercom will operate a best-in-class portfolio of top-rated podcasts, including Pineapple Street Media's, The Clearing, which recently launched as the No. 1 podcast on the Apple charts. The network will also include over half of the titles named to Apples 10 best so far podcast list in 2019 with notable titles, such as Root Of Evils, Against The Rules, To Live and Die in LA, Running from COPS, Billy Balls among many others. In addition, our lineup will include top shows as Malcom Gladwell's Revisionist History, Michael Lewis's Breaking the Rules, Crooked Media's Pod Save America, and Preet Bharara's Stay Tuned with Preet and much more. Entercom is ideally suited to compete effectively in this space due to the symbiotic cross-platform opportunities enabled by our position as the country's No.
1 creator of local premium word spoken word radio, including news, sports talk and other highly rated local personalities with an audience of 170 million Americans monthly across our various platforms. In addition, this morning, we announced the launch of the Radio.com Sports Digital Network, which will debut later this month with a compelling lineup of daily live and weekly podcasts that will augment our existing status as the country's unrivaled leader in local audio sports. Among our new live daily shows will be You Better You Bet, which will be hosted by a top-notch group of sports gambling experts, providing insights to interested fans across the country and creating new inventory for us to serve the rapidly growing sports gambling advertising category. Together, these moves will make Entercom a powerful, leading player in this rapidly growing segment of the audio market. We also are continuing to make good progress in our other areas of strategic focus. Radio.com remains the fastest-growing digital audio app in the U.S., total platform monthly active users are up 82% over prior year, and our digital audio ad revenues are growing strongly. That said, we are still a very small participant in this space, but believe we are well positioned to become a more meaningful player in the fast-growing roughly $3 billion digital audio market. Today's podcasting announcements, along with other enhancements to the Radio.com platform that will be implemented during the second half of 2019, should further enhance our Radio.com growth. On a related note, in June, Apple and Entercom announced a strategic integration which will bring all of Entercom stations to the Apple Music platform and enable a number of significant collaborative features that will bolster listening levels to our brands and provide a number of other benefits. Apple's selection of Entercom as one of its partners for the launch of the expanded radio experience in its enhanced Apple Music platform is a telling reflection of the strategic significance of our leading platform of outstanding local brands, personality and content. I'd also like to very briefly touch on a few important areas of development across the company.
We are continuing to roll out new analytics and attribution products for our customers under the Entercom advanced audio banner, as a result of the significant investment we are making in our data-driven capabilities. For example, we now offer an attribution product that enables us to demonstrate the impact of over-the-air radio advertising on foot traffic, web traffic, app downloads, brand awareness and more. Our national client partnership team continues to make progress in our work to elevate our relationships with many of the country's largest blue-chip national advertisers. Radio remains a highly undervalued component of the media mix, and more and more advertisers are recognizing that they are under-invested in radio, the nation's No. 1 reach medium, offering superior ROI, outstanding local activation and more. Advertisers are increasingly receptive to rethinking their media mix to increase the radio spending, although the time line of the annual planning cycle and the work of changing perceptions in mindsets and media means that these types of changes take time. We expect these efforts to become an increasingly significant growth driver in 2020 and beyond. Our Entercom Audio Network launch continues to perform well.
As you may recall, we launched this new business on July 1 of last year and have been very happy with our progress. In the most recent quarter, we added a number of new clients, including Clorox, Fidelity, GlaxoSmithKline and Sketchers. Our balance sheet was in -- balance sheet is in good shape. And during the second quarter, it was enhanced by two important moves we made to capitalize on attractive market conditions. Rich will elaborate on that a bit further. Turning to an update on performance, our practice has been to provide pacing information, but not to provide guidance.
Frankly, that approach has made us vulnerable to deceleration, such as occurred during second quarter. Starting now, we will begin to provide revenue guidance, so we can provide better information to our investors by incorporating our market insights rather than just passing along a data point. Third-quarter comps will be more challenging as we had significant traffic-related revenue recoveries during third-quarter 2018 plus healthy political spending. Currently, third quarter is pacing up low single digits, and we expect to finish the quarter up low single digits as well. We are continuing to see local sales improving sequentially with national digital and network revenues each up significantly. In fact, our spot radio business overall is having its healthiest quarter in some time. However, events and political, as mentioned a moment ago, are both down in third quarter versus last year. A few closing summary thoughts before turning it over to Rich. This morning's announcements headlined a series of strategic initiatives and investments that we have been making to position Entercom to capitalize broadly on the exciting growth opportunities in the audio space, fueled by new catalysts such as podcasting, smart speakers and audio search, at the same time as advertisers are becoming more receptive to increasing radio share of the media mix in light of radio's compelling and growing relative value proposition.
Entercom stands today as a unique leader in the audio universe with one of the two leading broadcast radio station groups, the best collection of premium, original local audio content. And now a top 3 player in podcasting, what is -- with what is arguably the best national broadcast content. The country's fastest-growing digital audio app with Radio.com and Entercom advanced audio, bringing to market a virgining set of data analytics and attribution capabilities. We are growing, and audio is in the midst of an emerging renaissance, and we are well positioned to participate in that opportunity.
Frankly, it is remarkable that in the light of all this, our stock continues to trade where it does. Obviously, we don't control that. But for whatever it is worth, we see our stock valuation as a complete disconnect with where we see the business and the strength of our platforms and assets and capabilities and the opportunities for growth and value creation that we believe lie in front of us. Thanks.
With that, I'll turn it over to Rich.
Rich Schmaeling -- Chief Financial Officer and Executive Vice President
Thanks, David. Our first-quarter net revenues were up 2.3% and were up about 3% ex political. As discussed by David, pace has softened over the last two months of the second quarter and national plus local spot revenues ended close to flat for the quarter, and our digital revenue growth came in at 19%. For 3Q, we expect revenues will be up low single digits, and ex political, we will be up 1 percentage point more. Traffic advertising revenues are expected to be about a push versus prior year in 3Q, and thus, the USTN matter is now officially behind us.
Turning to our integration program, we had a very productive second quarter. The last couple of miles of this program took somewhat longer to complete than we expected, but we have completed or are near completing all of our integration program initiatives. And we're on track to achieve total cost synergies that are in excess of $170 million and net cost synergies after ongoing operating expense investments in our growth initiatives of $125 million or $15 million greater than our previously stated target. We have a number of further integration cost reduction actions that are scheduled to occur in the third quarter and a few more that will wrap things up in the fourth quarter. As a result, you will continue to see restructuring and integration charges in the third and fourth quarter.
And the full-year total for such costs are expected to be less than $12 million, the upper end of our guidance range. For the second quarter, after excluding onetime costs and adjusting out noncash items, like D&A and miscellaneous income, our total cash operating expenses came in at $293.1 million or up 1% versus $290 million in the second quarter of 2018, and our total cash operating expenses are down slightly June year to date. For the third quarter, we expect that our total cash operating expenses will be flat to down low single digits. And we continue to expect that for the full year, our total cash operating expenses will be down around 2%. We now expect that net cost synergies for the full year will range between $40 million and $45 million, and that we will realize another $25 million or so of net cost synergies in 2020. Looking at our financial position, our net debt at quarter-end was about $1.67 billion and calculated in accordance with our amended credit agreement, our first lien leverage was 2.6 times and our total net leverage was 4.6 times. As previously reported, on April 30, we issued $325 million of second-lien eight non-call three secured notes at 6.5% and used the proceeds, cash on hand and a draw against our revolver to pay down $425 million of our term loan B. We also amended our financial covenant to make it a first-lien test. As a result of this transaction, our first-lien leverage declined by over three-quarters of a turn, and the ratings on our first-lien debt were notched up by both Moody's and S&P.
In order to further mitigate our floated weight exposure in June, we executed a $516 million amortizing interest rate collar at caps LIBOR at 2.75% and has a floor of 0.4% and results in a fixed or cap rate for 76% of our outstanding debt at quarter-end. This collar allows us to enjoy the floating rate benefit of an over 80% decrease from the current one-month LIBOR rate, while initially capping our Term loan B floating rate exposure for $560 million of principal at 5.5%. This notional amount amortizes over the five-year life of this instrument based on our projected debt repayments. Our net capital expenditures for the second quarter were $16.9 million. And for the full year, we now expect that our capital expenditures, net of tenant installation allowances, will be about $70 million. This is up from our prior guidance range of between $55 million and $60 million due to added expenditures related to our acquisition of NASH from Cumulus in New York City and a few overruns on several facilities projects, which will be fully completed by the end of this year. With that, we'll now go to your questions. Amber?
Questions & Answers:
Operator
Thank you. [Operator instructions] Our first question comes from Marci Ryvicker. Your line is now open.
Eric Katz -- Marci Ryvicker -- Analyst
This is actually Eric Katz in for Marci this morning. So she wanted to know if you could maybe walk through some of the puts and takes a bit more on what caused you revenue to come in a bit lighter than the guided pacing? I know you mentioned the local sales, ticket sales, particularly toward the end of the quarter. But if there's anything else, you can elaborate on a bit more, it would be helpful.
David Field -- President and Chief Executive Officer
Yes. We did our call in early May. We were pacing up mid force at that point in time. We presented that data point, business slowed down a bit after that. And obviously, we were disappointed with that.
The events in question, we had terrible weather at one or two of them, and that didn't help. But overall, ticket sales slowdown and events cost us about 1 point for the quarter and the remainder due to local slowing down.
Eric Katz -- Marci Ryvicker -- Analyst
Is there any way to cut between maybe the ETM-related station or CBS-related stations on maybe what performed better or performed a little bit softer?
David Field -- President and Chief Executive Officer
Yes, sure. Our legacy CBS stations actually grew a little faster than legacy Entercom during the quarter. Our team's been doing great work around that. We don't -- again, internally, we don't look at there being any difference.
We're all wearing one uniform and have been wearing one uniform for some period of time. But I know there's interest in that. And so at CBS stations -- legacy CBS stations actually outperformed in Q2.
Eric Katz -- Marci Ryvicker -- Analyst
OK. And then just looking ahead to Q3, do you have any line of sight into maybe the back end of the quarter? Just kind of seeing what happened in Q2. What gives you confidence in the Q3 hanging in there at that pacing?
David Field -- President and Chief Executive Officer
Well, I mean we're certainly sobered by the slowdown in Q2. Obviously, our eyes are wide open to that. We were disappointed in that. We take a look at our business. And obviously, our people report what they're seeing in the marketplace. And as I mentioned, we are currently up low single digits and believe we will finish up low single digits.
Eric Katz -- Marci Ryvicker -- Analyst
OK. And just one more if you don't mind. The podcast space goes a little crowded. How do you differentiate yourselves with your recent purchases?
David Field -- President and Chief Executive Officer
Yes, look, we believe it's a great fit and a logical adjacency. If you look at who is leading right now and how things are shaking out, it looks like NPR, iHeart, Entercom, we think there's a huge natural advantage from being an existing broadcaster. If you look at the pieces we've put together here for what is a relatively small investment, we have great content development and creative abilities to create great shows. We have a great business development and ad sales monetization arm that we're getting through Cadence13. And then the ability to leverage our platforms and the 170 million monthly listeners and the ability to showcase and add to discovery of podcasts across our platform of news and sports and local personalities, we believe gives us a very strong competitive advantage against others who might come into the space without that same footprint. And so we look at this as an area where we'll be able to achieve some significant growth over time and value creation.
Eric Katz -- Marci Ryvicker -- Analyst
Great. Thank you.
David Field -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Aaron Watts with Deutsche Bank. Your line is now open.
Aaron Watts -- Deutsche Bank -- Analyst
OK, guys. Thanks for having me on. One question on the cost side in 2Q and then even thinking ahead, I feel like costs came in a little higher than we were expecting and that you had talked about coming into the quarter. Was there anything material you call out there? Again, not a drastic difference, but just anything in particular you'd point out that caused cost to be a little more elevated?
Rich Schmaeling -- Chief Financial Officer and Executive Vice President
Yes. Well, what I said, Aaron, was that wrapping up the program definitely took longer than expected. A number of significant actions that were enacted during the course of the second quarter. We'll start seeing the benefit of those actions in the third quarter.
We have a few things that are scheduled to be enacted in the third quarter and the fourth quarter. But for the full year, we do expect to get to our previous guidance of about down 2% for the full year. So it's timing. And we do anticipate catching up rest of year.
Aaron Watts -- Deutsche Bank -- Analyst
OK, got it. And then secondly, Rich, just given how 2Q shook out, what you're seeing in 3Q, can you give us your updated thoughts on kind of your leverage targets? Where you'd like to see leverage maybe at the end of the year and maybe even also at the end of next year?
Rich Schmaeling -- Chief Financial Officer and Executive Vice President
Yes. Look, I think that by the end of next year, we hope to be at our target of about four times. We'll make some progress rest of year but not much. And in the next year, we'll hope for -- we are anticipating, of course, a strong political year. We have further cost savings actions in the gas tank, more, frankly, going into 2020 than we previously anticipated.
I said earlier that we have about $25 million of added net cost synergies that we expect to realize in 2020. So we do see our leverage remains a top priority for the company, and we're focused on reducing it and hope to get to around four by the end of next year.
Aaron Watts -- Deutsche Bank -- Analyst
OK. Got it. And if I could add one last one here, and I appreciate the time. Just, David, maybe your view on the M&A environment and how active it might be for stations as you look ahead in the next 12 months? And how likely you think it is that Entercom can participate?
David Field -- President and Chief Executive Officer
Well, I think as we've said consistently, we're not -- we have no strategic need to make further acquisitions within the radio space and feel very good about the power of the platform we have and the markets we want to play in. So for us, it's all about being opportunistic and where we could create significant value and not harm our balance sheet. And so will those opportunities present themselves over the next year? I mean, it's possible, but I wouldn't look at it as a material part of our focus here in the near future.
Aaron Watts -- Deutsche Bank -- Analyst
Great. Thanks for the time.
David Field -- President and Chief Executive Officer
Thanks.
Operator
And next we'll go to John Ellis with Palmer Square Capital Management. Your line is now open.
John Ellis -- Palmer Square Capital Management -- Analyst
Hey, guys. Congrats on a good quarter. I just have a -- one quick question to follow-up. Recently, in the past couple of quarters, you've talked about the $2 billion sports gambling market opportunity.
How has that segment grown for Entercom in this past quarter?
David Field -- President and Chief Executive Officer
So it's growing, and it's growing nicely. At this point in time, as you know, sports gambling has only been authorized in a handful of states. And so we expect that as more states legalize gambling, we'll be able to participate in that more broadly. You may have also heard, in our remarks, I noted that this radio.com Sports Network that we're -- digital network that we're rolling out, will include a gambling-specific show.
And we expect that show, and perhaps other content that we'll be adding over time, to enable us to also add new opportunities to participate with new inventory in the sports gambling space.
John Ellis -- Palmer Square Capital Management -- Analyst
OK. Awesome. So my quick follow-up. In that gambling space, do you expect there to be a more lumpy revenues dependent on the season, like the NFL season versus the NBA season or something like that?
David Field -- President and Chief Executive Officer
Yes. So I mean, again, I don't think sports gambling as a category will be a material component of our revenue to the point where you would see it having a significant impact on our quarterly or seasonal growth. But that said, you're absolutely correct. The football season will be the -- it is and I think will continue to be the primary season for sports gambling. And so yes, in the fall, and then to a lesser extent with some of the -- or the other leagues.
John Ellis -- Palmer Square Capital Management -- Analyst
OK. Perfect. Thanks.
Operator
We have no other questions at this time.
Rich Schmaeling -- Chief Financial Officer and Executive Vice President
Thank you, Amber, and thank you, everyone, for joining our third -- our second-quarter call.
David Field -- President and Chief Executive Officer
Thank you all.
Rich Schmaeling -- Chief Financial Officer and Executive Vice President
Bye-bye.
Operator
[Operator signoff]
Duration: 27 minutes
Call participants:
Rich Schmaeling -- Chief Financial Officer and Executive Vice President
David Field -- President and Chief Executive Officer
Eric Katz -- Marci Ryvicker -- Analyst
Aaron Watts -- Deutsche Bank -- Analyst
John Ellis -- Palmer Square Capital Management -- Analyst
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