Townsquare Media: Pay Attention To Earnings Season (NYSE:TSQ)

As our followers and readers here on Seeking Alpha know, we became bullish on Townsquare Media (NYSE:TSQ) back in July 2022. Townsquare is uniquely positioned within the industry as a big player, yet focuses on the smaller markets outside of the 50 largest MSAs which causes some to ignore the overall size of the company. While that insulates their business somewhat, it has also given them some advantages; namely, they are a large entity going up against much smaller operators in many cases. This is part of the reason the company has been so successful in its rollout of digital products and continues to gain market share and while profitably growing the business; small competitors do not have the expertise or size to compete on digital product offerings, and many of Townsquare’s publicly traded peers have little to no interest in smaller markets.

We have discussed the importance of the digital strategy, most recently after the latest quarterly results conference call. Management has transformed the company from a terrestrial radio broadcaster into a digitally focused company with multiple revenue streams – with the subscription business being key during times of unease for investors.

Earnings – What To Watch For

Last quarter the company announced that digital had grown to the same size as its legacy terrestrial broadcast radio business (on a quarterly basis), meaning that the company now derives half of its revenues and profits from digital. Making those digital revenues and profits all the more intriguing for investors is that nearly 40% of the digital revenues, or roughly 20% of overall revenues, are recurring digital subscriptions. If the economy is to weaken and advertising dollars really do shrink as sharply as some believe, it would seem that the digital business would hold up better and have more predictable cash flows than the legacy radio business – something that we were able to watch in real time during the pandemic.

While Townsquare has not issued an announcement for when they will release Q4 and FY 2022 results, it appears that we are about a month away (estimated report date from some data providers is currently targeting March 10th). We suspect that investors will get more of the same from management with current trends holding; namely strong growth in digital revenues and profits with the legacy business acting more like a ‘cash cow’/cash generator. Importantly, while digital revenues should continue higher, investors should expect management to continue talking about margins marginally shrinking as they ramp up the Phoenix office to grow the digital side of the business. There may be some signs of this in Q4, but it should be small if noticeable at all. The key is moving forward, especially as the company ramps up their operations out West, so pay close attention to the guidance on where management thinks that margins might ultimately dip down to during this process which will start in March 2023. While they have discussed margins falling into the 20s, so far the guide has been in the high 20s with 27.5% and 28% mentioned as a potential bottoming out area.

It is important to remember that you can’t eat margin, so while there is some importance placed on where the digital business is going to end up (lower than its current level in the near future), we want to really focus on any guidance that management provides regarding when revenues and profits will trend higher from these major investments. Last quarter they believed some higher revenues may be realized in Q4 of 2023, but have continued to point to 2024 for when revenues and profits from these efforts will hit in a meaningful way.

Townsquare should report another record year in terms of profit, as well as revenues. We would expect Q4 numbers to be healthy, but we also see headwinds impacting the company (although much less so than peers). We all saw how challenging Q4 was just from living it, and many companies were pulling back on their ad spend as the consumer was dealing with inflationary pressures and higher rates from the Federal Reserve.

Turning to the balance sheet, Townsquare should report net leverage just above 4x. The company’s goal is to reach 4x net leverage for the balance sheet which they feel gives them flexibility for managing the business with their revenue mix. They ended Q3 at 4.54x net leverage, so Q4 should show the strength of the business (ability to generate EBITDA, retain cash and maybe even reduce debt a bit) in order to meet their guidance from Q3.

Digital Assets

We have said it before and we will say it again; the company needs to divest the cryptocurrency that it purchased in Q1 of 2022. While the thinking may have been that they could get some advertising dollars from being the only radio broadcaster to hold cryptocurrency on its balance sheet, we think that the events of the last quarter have done nothing but prove our belief that this has no business use (or business case) and exposes shareholders to unnecessary risks. The company has already seen the value of their digital assets fall by roughly half, so maybe management will finally decide to divest the cryptocurrency exposure and use those funds for something shareholder friendly; further debt reduction, a small dividend or even a share buyback.

The sale of these assets would generate around $2.5 million in proceeds, and that could be used to establish a very small dividend (say $0.01/share per quarter) until the new office in Phoenix begins to pay off. Reducing debt would also be a great use as it would reduce annual interest expense.

The bottom line is that cash yields above 4% in the current market and the cryptocurrency holdings provide no yield (just potential capital gains). With no hopes of getting crypto firms to advertise, there is little reason to hold an asset which is not beneficial to your core business and only complicates your balance sheet (the company recognizes charges when the price goes down, but does not revise when prices rise). Even if prices went back up to where Townsquare originally purchased the crypto, we doubt that the share price would be impacted. This is why we think this capital would be better utilized via one or all of these other avenues we have discussed – which would also provide management with a much clearer narrative to share with the market.

Summary

We think that paying close attention to the release and the conference call will be key this quarter to understanding where Townsquare’s business is and where it’s going. Revenues will most likely be down quarter-over-quarter, and even if the company came in on the high-end, they still might not eclipse 2022’s Q2 revenue. So while that might grab headlines, we think that the real story is how 2023 sets the company up for 2024 and beyond, and how these major investments will benefit the company moving forward.

Ahead of Townsquare, both iHeartMedia (IHRT) and Cumulus Media (CMLS) will report and we think that these results will provide a valuable look-in before Townsquare reports. Both iHeartMedia and Cumulus rely on national ads much more, but they should give a hint about the overall broadcast sales market and how advertisers were behaving in Q4. Cumulus might also provide some insight into the digital business as they are in the process of rolling out their digital product to their markets (they are in much larger markets, but it is still a perspective that will be beneficial). So if these two cause a sell-off for the industry as a whole due to weakness in broadcast, it might provide a buying opportunity ahead of Townsquare’s results as the company is less exposed to broadcast due to their digital business.

Final Thoughts

We do not recommend buying your whole position in Townsquare, even at these levels, as we think that investors are better served investing over time to gain the benefit of further knowledge as it pertains to the digital growth initiative. We still like the story and believe that Townsquare’s shares can benefit in the future from the growing digital business and a rising P/E as the market more accurately values their subscription revenue model which will only continue to grow from the current 20% of total revenue level.