Good morning, and welcome to Townsquare Media's Third Quarter 2022 Conference Call. As a reminder, today's call is being recorded. And your participation implies consent to do such recording. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] With that, I would like to introduce the first speaker for today's call, Claire Yenicay, Executive Vice President.

Thank you, operator, and good morning to everyone. Thank you for joining us today for Townsquare's third 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 and 10-K/A filed with the SEC. We may also discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income 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'd 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. Without question, we all continue to live in unprecedented times, from the persistence of COVID-19 and the war in Eastern Europe to continued macroeconomic uncertainty headwinds and resulting challenges to media companies. However, because of our differentiated and unique position as a digital-first local media company focused exclusively on local markets outside of the top 50 cities, Townsquare achieved our Q3 guidance and set an all-time Q3 revenue and Q3 profit record and, in turn, drove strong cash flow growth in the third quarter. And we expect that our strategy will enable us to continue to deliver positive results in the coming quarters. Simply put, our business model allows us to weather economic downturns when they do occur, better than most. Approximately 50% of our revenue and 50% of our profits now come from digital solutions, which historically performed better during an economic downturn than broadcast advertising. Approximately 40% of that digital revenue is recurring digital subscription revenue not tied to advertising trends. Even during the worst of COVID, Townsquare Interactive delivered revenue and profit growth. Additionally, because we are not in the large top 50 markets, the majority, over 90% of our advertising revenue 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 in the third quarter, with revenue down in the mid-teens compared to prior year. That decline doesn't hurt us as much as others because national advertising now only accounts for approximately 5% of our total revenue. Overall, we believe that we are very well positioned to perform during a downturn or a recession, no matter the duration and severity, a belief which is supported by our…

Thank you, Bill, and good morning, everyone. It's great to speak to everyone this morning. Before turning to our Q3 operating results, let me begin by making a note on our FCC licenses and noncash impairments. As I covered on previous calls, given the way that these noncash impairments are determined, we expect the value of our FCC licenses to continue to be written down over time. In 2022, as a result of rising interest rates, the assumptions that we use to evaluate our FCC licenses for impairment were negatively impacted. As a result, we took a noncash impairment charge to our FCC licenses of $10.3 million in the third quarter. This write-down of a decade-old purchase price calculation has no bearing on our cash position, our operating revenue or expenses, our profitability or our future prospects. They are nothing more than noncash accounting charges affecting only the purchase price allocations made when we bought our radio station assets roughly a decade or more ago. Our third quarter noncash impairment charges led to a decrease in net income of approximately $10.1 million in the third quarter to $2.8 million, or $0.13 per diluted share, as compared to $12.9 million, or $0.64 per diluted share in the third quarter of 2021. Adjusted net income, which we believe is a much more valuable measure, as it excludes one-off items such as noncash impairment charges, and is detailed in the schedules to our earnings release, was $8.3 million, or $0.47 per diluted share for the third quarter in 2022. More importantly, let me now turn to our Q3 operating results. We are very pleased to report that the third quarter marked yet another strong quarter of growth at Townsquare, leading us to deliver all-time record-high Q3 revenue and Q3 adjusted EBITDA. And although…

Thank you, Stu, and thank you to everyone who joined us this morning. We greatly appreciate it. Our Q3 results and our expected Q4 performance that Stu and I walked you through in detail today demonstrate the consistency and the strength of Townsquare's transformation into a differentiated digital-first local media company. I am pleased to share a few of the many key takeaways from our performance in Q3. One, net revenue overall was up a very strong plus 8.4%, and our adjusted EBITDA was up a very strong plus 6%. Not only were both well above 2019 levels, but also both net revenue and adjusted EBITDA represent the highest Q3 revenue and the highest Q3 adjusted EBITDA that Townsquare has ever achieved. Two, our digital growth engine in Q3 increased revenue plus 17% year-over-year, and Q3 digital profit increased plus 7% year-over-year, with a Q3 digital profit margin of 29%. In total, 50% of our September year-to-date revenue and 49% of our September year-to-date profit came from our digital businesses. Three, net leverage is at an all-time company low of 4.5 times adjusted EBITDA, on its way to approaching 4 times adjusted EBITDA by the end of 2022. Due to our differentiated digital businesses, our focus on markets outside of the top 50, our competitive strength, our strong cash flow generation and with a strong focus on further deleveraging, we believe Townsquare is extremely well positioned for continued and future growth. As always, I'm extremely proud of our Townsquare team, whose hard work is the backbone of our success. Thanks again to all, and please do not hesitate to reach out if you have any more questions about Townsquare. Operator, at this time, please open the line for any and all questions.

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Thank you. And our first question is from the line of Michael Kupinski with Noble Capital Markets. Please proceed with your question.

Thank you, and thanks for taking the questions. And first of all, congratulations on your quarter. A nice achievement. I was just wondering if you can talk a little bit about your guidance for Q4, particularly on your revenues. You indicated that political is a little softer than expected, and that's understandable. A number of companies are having similar issues. I was just wondering if you could just talk a little bit about maybe some of the individual line items and kind of give us a flavor of what you're seeing in terms of the cadence of the revenue growth in the digital businesses, particularly Interactive. Is that revenue growth continuing at the double-digit rate? And then Ignite would imply to me that there would be some issues in terms of economic sensitivity in that line item. I was just wondering if you're starting to see anything there in terms of impact for what we're seeing in the general economy.

Appreciate that, Michael. Good morning. It's Bill. Thank you for your commentary. A few things. So in terms of Q4, I'll break it down in terms of the guidance. Obviously, on the investor deck and what Stu just walked through on slide 21 in terms of the revenue guide for Q4 is plus 5% to plus 10%, and the profit EBITDA guide is plus 8% to plus 20%. So I'd say both should give a good sense that we're feeling quite good about Q4. And if we achieve this guidance, it will be a record Q4 in terms of net revenue and profit, and it will be the highest net revenue and profit year for the company. So getting back to your specific question about the line items, in terms of broadcast, my expectation is local continues to perform well. As we noted, I think on the call, it was in the mid-single digits in terms of growth, and that is expected to continue in Q4. So Q4 from local looks similar to Q3. National could get a little worse. As we noted on the call, it was down mid-teens in Q3, and that was quite accelerated from actual growth in Q1, a slight decline in Q2, to significant decline in Q3. As we highlighted on the call, thankfully for us, it's less than 10% of our advertising revenue and less than 5% of our total revenue. But we do expect to see that weakness continue into Q4. So what that means for broadcast overall is relatively stable. I'd say similar to this quarter where we were, in essence, broadcast was plus 1% and some change, ex political. I would say broadcast for Q4 is probably flat. Depending where national ends up, it could be low single digits, but I…

And in terms of your Interactive business, I know a number of other companies are trying to move more strongly into the digital, building a presence very similarly to what you've done in the Interactive side of your business. So I was just wondering if you're starting to see a little bit of increased competition. I know that you're in small markets and with limited media presence, but was wondering if you are starting to see a little bit more competition in some of your markets for your Interactive business.

We've always had competition. It's usually been either a digital agency in town, local media companies that primarily white-label third-party solutions as well as self-serve. So for Townsquare Interactive, we've always had competition. As you know, Michael, 60% roughly of our client base is actually outside of our radio footprint; 40%, within. But primarily, we're focusing outside the top 50 markets. So it's always been competitive. I think the fact that we bring this national scale with an average price point of roughly $300 and be able to drive such a significant return on investment, not only from a web presence, but as we've outlined on prior earnings calls, we really drive incremental customers to these businesses for a very small price point. And it's hard to do this in markets if you don't have scale and if you don't own the whole AdTech. So I think one of the key differentiators, as you point out, there's other local media companies who see this as an opportunity. I'd say the moat we have around this is, and we highlight this again in our investor deck, is the engineering team that builds our products, and the fact that we have these products all in-house allows us to serve the customers better and meet their needs. So we don't see any increased competition, but there's always been competition there. And again, the fact that we've got this subscription revenue business that even in the depths of COVID grew every quarter subscribers, revenue and profit, I think also is highly differentiated for us. If there is a downturn, this is another differentiator for Townsquare, that we've got this digital subscription business that continues to grow quite nicely.

You mentioned auto in your presentation. I was just wondering if you could talk a little bit about what is auto in terms of the percent of total revenues for the company. And a number of broadcasters have indicated that auto is kind of coming back for them. I was just wondering if you can kind of give us your thoughts about that category.

So it's interesting. We don't see auto coming back currently. I did hear that from a couple of other people on the broadcast side. Auto is by far the weakest category for us. And that's not only in broadcast. It's actually the only category in digital advertising that is not growing. So I'll speak specifically to broadcast, but I think it speaks to -- in our markets, I don't think the supply has gotten to the smaller markets in America. I did hear some of the larger companies who are in the top 25, top 50 markets note that auto is back, and they also noted that supplies are back on their lots. We're not seeing that. So auto, for us, is actually down in Q3 compared to 2019, 40%, and that's similar to year-to-date. And we don't expect that to recover anytime soon, which is, as you just noted I think, different than what you're hearing from others. So when that does come back, that will be a nice tailwind, but we're not hoping or expect -- well, we're hoping for it, but we're not expecting that probably until the back half of '23 or even 24. So when we're modeling out the next 12 months, we're not expecting auto to come back or even to grow until there's more inventory in our size markets. So definitely different. I think it also speaks to the fact that we're the only local media company focused outside the top 50 markets. So a lot of the commentary you hear from others is quite different than what you hear from us.

Thanks for the color. And last question. Do you have any updates on the new office in Phoenix?

Yes, quite excited. So we've got a few dozen people already hired for Phoenix, and we plan to be opening that in March. The early indications of recruitment, which as we noted on prior calls was the primary reason. There's secondary benefits in terms of time zones and servicing clients out there. But the primary reason we opened the second location was actually for recruitment of talent. And the work we've been doing with the local universities there as well as some local recruiters has been beyond our initial expectations. So it's a year of investment, as we've always said for our Phoenix office for Townsquare Interactive. So we have always guided that we will see increased growth in Townsquare Interactive as we head into 2024 because of the investment we're making in Phoenix. And that office is planned to be opened in March.

Great. Thank you.

Thank you, Michael. Appreciate it.

Our next question is from the line of Jim Goss with Barrington Research. Please proceed with your question.

Okay. Good morning. Just following up a little bit more on the TSI issue, given the stability relative to the advertising side, is there a way to accelerate that growth any greater, any faster than you are even with the Phoenix office and the dozen people you've hired already? Or are you pushing on a string or incurring too many costs to have that happen?

That's exactly our plan. So as you noted, particularly with -- good morning, Jim. The stability for this business vis-a-vis advertising, if there is an advertising downturn in the macro environment this is an area that is quite differentiated for us and, as it did in 2020 and 2021, will stand out. So we are investing aggressively in this business and believe that that investment will generate incremental revenue as well as incremental profit. So that investment, I'd say, has been modestly increasing since our last call as we ramp up Phoenix. For Q3, I think Stu highlighted and it's in the investor deck that we're still operating at a 29% margin with Townsquare Interactive, as is our digital Ignite advertising business, and broadcast is 30%. And as I've noted on prior earnings calls, that we plan to operate our digital businesses in the high-20s percent margins. So as we can accelerate investment in Townsquare Interactive, that could dip down into 27.5%, 28%, but then you'll see that incremental lift in revenue and profit. But I don't think you'll see that just based on the cadence and the hiring plan, which is going to be a lot more aggressive once we actually have the physical space open at the end of March. So as we hire through Q2 and Q3, you may see some slight increase in acceleration of revenue, in particular, in say, Q4 of '23, but you won't see a dramatic difference until '24 in terms of revenue and profit. So we view it the same way you do, Jim, that this is a great business in terms of stability and growth, and it warrants increased investment, because we, particularly in these markets outside the top 50 cities have demonstrated for a decade now that we can outperform others in this space.

Okay. Thanks. This political, turn to that for a minute. You parsed out the change from expectations. Of that roughly $5 million, how much was attributable to the third quarter versus the fourth quarter?

And Stu, you could step in if needed, but I believe political was a couple of million. I'd say $1.5 million to $2 million below in Q3, probably right around $2 million. And then I'd say $4 million -- my expectation was actually a little bit north of $6 million, just given the strength of '20 and all the headlines around how much money has been raised. And I think what you're seeing with other broadcasters is, thankfully for the radio industry as well as TV, it's been a record midterm. It just was the exact opposite for us. So I'd say $2 million in Q3 and $4 million-plus in Q4. I'll just gut-check that with Stu. Is that what you were thinking, Stu?

You are absolutely spot on, Bill.

And since there tends to not be a lot of displacement in radio, is most of that, like, directly going into adjusted EBITDA? Or are there some -- is there's something [indiscernible]?

I don't know if I heard it -- definitely the political [Multiple Speakers].

Yeah. Will the impact on adjusted EBITDA would be pretty similar to the impact on revenues since there is no [Multiple Speakers] placement.

Exactly. I'd say 90% of it, low 90%, would flow right into our adjusted EBITDA. That's exactly right. Thank you, Jim.

[indiscernible] broadcasters. I'm curious, when did you tend to -- when did you sense that this is becoming evident that some of the dollars were shifting out of certain of the markets where you had expected there to be some exposure [Multiple Speakers]?

When we reported -- there may be a little bit of delay. I apologize. When we reported last time, we were, I guess, a month into Q3, and we were being told just based on all the dynamics that I described in terms of the amount of money raised, as well as the amount of money being spent that we were expecting Q3 this year to be higher than Q3 of '18. And obviously, we were 30% down versus '18, 64% down from 20% in Q3. So it's pretty dramatic. And then even when we headed into Q4, obviously, about 40 days ago, we were still being guided based on our rep firm, [Cats] (ph) who is a great partner of ours, that they still anticipated us to make that up. They were, like -- there was an expectation that we could see a lot more money in October to make up for the shortfall of Q3, but that clearly didn't pan out. It was, as I noted on my comments, my prepared comments, incredibly disappointing to end at roughly $7 million, when we were expecting $12 million, $13 million-plus. So kind of realized -- I'd say we recognized each day of October, as that went on, we're, like, this isn't -- we're not seeing a catch-up. And not only are we not seeing a catch-up, Q4 is underperforming our expectations just versus Q4 of '18 and '20. So it really didn't hit us until October that the reality set in.

Okay. Thanks for that. Last thing I'd ask, does your ad sales staff who manages the local and national broadcast ads also have any involvement in the digital ad sales? Or is that entirely the AdTech platform you have talked about?

Great question, Jim, and I appreciate your commentary on the call. So I think one of the differentiators for us, A, we have a world-class local sales team. And importantly, we've been investing in that sales team. We have more employees today than we did in January of 2020, prior to COVID. So we were quite specific that we were going to protect our teams. As you probably recall, even in the depths of COVID, where other broadcasters were doing significant furloughs and RIFs, we did not do that. And it really benefited us coming out of COVID and setting an all-time record profit in '21 and what we expect to be an all-time revenue and profit in 2022. And so our local sales teams are not only the best of the best, but they sell all of our products. So to your specific question, they sell our local broadcast advertising, they can sell across the nation through our technology on a national perspective, and they sell all of our digital advertising and they offer clients a great web presence and ROI for Townsquare Interactive in terms of incremental traffic through search engines and things like that. So we believe one of the core philosophies and recruitment vehicles and training mechanisms for our company, the fact that we can walk into a local business and, in essence, provide them a full suite of solutions from top-of-funnel, broad reach, obviously, radio is number one reach medium in America, all the way down the funnel to conversions and paid search and form-fills and things like that, we believe, and I think our results continue to demonstrate, really differentiate us and provide great return on investment for our clients and local businesses. And I think our core philosophy, one of our mission points is treat customers like you treat a friend, because if you do that you have a lifetime partner. So going back to your question, we think it's really important that our salespeople are trained on and have solutions throughout the marketing ecosystem. So that includes broadcast advertising, digital advertising on our owned and operated networks as well as programmatically. As we've discussed on prior calls, a big growth for us is social from a digital perspective as well as connected TV has been growing extremely nicely as cord-cutting accelerates. We're able to sell into a medium that five, 10 years ago we had no place to be in, and it's part of the fastest growing local advertising ecosystem. So our sales staff locally sells all of those products and is one of the reasons that we're posting such strong results.

All right. Well, thanks very much. Appreciate it very much.

Good to hear from you Jim. Thank you.

Thank you. We have reached the end of the question-and-answer session. I'll turn the call over to Bill Wilson for closing remarks.

Appreciate it. Thank you all for dialing in this morning. We appreciate you taking the time to hear more about our progress and transformation at Townsquare. We look forward to updating you on our full year results in early March. Have a great day.

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.