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Among the finest performing shares in our portfolios this yr is Townsquare Media (NYSE:TSQ), which has completely flipped its narrative and grow to be a really intriguing story…and possibly even a number of tales. As those that learn our articles know, the corporate has spent the previous couple of years specializing in markets exterior the highest 50 metro markets within the U.S. and shifting to a digital first technique. Earlier this yr, after rising annoyed with different makes an attempt to spice up the share worth over time (by way of share repurchases and debt paydown), the corporate introduced a brand new annual dividend of $0.75/share – to be paid quarterly at a charge of $0.1875/share.
The dividend story is good, however Townsquare Media continues to rework itself and really has a number of drivers behind its enterprise now. Whereas digital is the driving power for bringing the corporate into the longer term and rising the highest and backside traces, administration has been good to develop a multi-pronged strategy to this technique which paid off within the newest quarter.
As we coated in our final article on Townsquare Media, 2023 goes to be a yr of rising pains and setting the corporate up for its subsequent section of progress. With that mentioned, let’s take a look at latest outcomes:
The Key Takeaway(s)
Townsquare’s digital transformation continues, and this quarter it was helped by the slowdown on the published aspect of the enterprise (broadcast revenues declined in the course of the quarter whereas digital elevated, thus rising digital’s share of the corporate’s complete revenues). It is very important first be aware that Townsquare Media truly noticed year-over-year (or YoY) top-line progress in Q1 2023 of two.9%. At a time when most friends are seeing each revenues and EBITDA decline, Townsquare was in a position to experience the power of its digital companies to have the ability to report progress in a troublesome time for the advert market. Resulting from broadcast seeing internet revenues decline 4.8%, and a few points with Townsquare Interactive on the digital aspect, the corporate did report EBITDA which was down 11.9% YoY.
It was not all excellent news for the corporate. As talked about earlier than, Townsquare Interactive bumped into some headwinds in Q1 and noticed internet revenues fall 1.3% with income falling 12.1% YoY. Whereas this was greater than offset by the Townsquare Ignite aspect of the digital enterprise, which noticed internet revenues improve 15.4% and income up 22.9% YoY, it’s nonetheless troubling because it was by no means a part of the plan to see the Interactive division have shrinking revenues. Sure, the expectation was that margins and income can be compressed as a result of opening of the Phoenix location which is able to assist open new markets, however the headwinds the enterprise was speculated to be dealing with have been on the margin and profitability aspect of the enterprise, not on the income aspect.
Analysts seen this and when requested, administration famous that that they had points with retaining some purchasers within the quarter. That they had given some worth changes to clients who have been dealing with rising prices (and thus hardships), however the reality of the matter is that the corporate shouldn’t be dealing with new rivals or threats that are siphoning off clients, however relatively a few of their small enterprise purchasers are going out of enterprise. Administration talked about that that is their primary trigger for shedding clients.
So whereas Townsquare’s broadcast promoting income comes beneath strain like their friends (though not almost as unhealthy because of their giant native shopper base (90%) v nationwide (10%)), the digital aspect additionally faces headwinds of its personal. It seems that Townsquare Ignite will carry the banner for now, however we do count on that the Interactive section will decide again up later this yr, particularly on the income aspect as Phoenix ramps up operations.
Stability Sheet Changes
Townsquare Media’s administration has finished so much within the final 12 months which we actually like. Though the repurchase of bonds at costs beneath par was an excellent transfer in our opinion, and positively one of many shiny spots this quarter, we predict the administration group’s finest transfer was simplifying the steadiness sheet and getting again to fundamentals. What are we speaking about precisely?
Properly it appears to be like like the corporate has determined to maneuver on from the choice to carry digital belongings (crypto) on the steadiness sheet and take the losses now to redeploy the money again into the core enterprise segments. Certain, the corporate misplaced over half of the funding worth (initially $5 million) however this money can now get put again to work instantly and assist additional optimize the steadiness sheet. Townsquare has so much going for it proper now, and shifting on from the crypto funding shouldn’t be solely the appropriate transfer, however reveals a administration group and board keen to maneuver on from distractions that don’t transfer the needle for the corporate total. We now have said earlier than our perception that the corporate ought to transfer on from this funding, so we wished to applaud this transfer now that Townsquare has the truth is moved on.
The repurchase of $12.2 million of the corporate’s bonds beneath par will save the corporate virtually $850,000 per yr in curiosity expense and helped maintain internet leverage at 4.29x (the bottom degree ever for the corporate), whilst EBITDA declined on a trailing 12-month foundation. With administration explaining that they’d be comfy working the corporate with $20 to $25 million money readily available, and the corporate at present having $42 million, we predict that buyers may see the corporate shopping for again extra of their debt within the coming quarters. Sure, the advert market is weak, however with 90% of the corporate’s advert {dollars} derived domestically, and with the digital enterprise nonetheless rising, we suspect that the corporate will proceed to generate sturdy money flows which is able to enable administration (and the board) to proceed to repay debt, reward shareholders by way of the sturdy dividend coverage, and proceed to put money into the general enterprise whereas some friends could also be pulling again.
Shifting Ahead
We nonetheless assume that Townsquare’s inventory has room to maneuver increased. Is it nonetheless essentially the most compelling identify within the trade that we comply with? Most likely not after the huge run, however it does have much less threat in our opinion. We predict that the market has already began to revalue the identify, however that the valuation remains to be low-cost based mostly solely on the companies they’ve at this time. Nonetheless, we predict that Barrington Analysis’s Jim Goss requested the query (on the quarterly convention name) that would lead many to start to debate whether or not Townsquare Media ought to be valued extra like a tech firm and fewer like a terrestrial radio broadcast firm.
Mr. Goss requested about the potential of the Ignite enterprise being marketed to smaller rivals exterior of Townsquare’s markets. Townsquare’s CEO, Invoice Wilson, defined that proper now they don’t seem to be centered on that, however will proceed to judge it. We suspect that Ignite is definitely the crown jewel of Townsquare and will sooner or later make this a $1 billion+ market cap firm. The one drawback may be that Townsquare’s first occasion information part shouldn’t be giant sufficient to ship upon this, wherein case the corporate might need to amass different media belongings or enter joint ventures with among the bigger gamers with a purpose to create the advert stock wanted to scale up and construct a platform giant sufficient to draw important advert {dollars}.
The corporate’s steering additionally appears to be like sturdy, particularly contemplating the pullback from promoting everyone seems to be seeing from the nationwide class. Adjusted EBITDA for the yr is predicted to be $100-$110 million, with internet income within the vary of $450-$470 million. So whereas EBITDA can be down YoY, internet income might truly finish the yr increased – which might be as a result of progress on the digital aspect. So if administration’s steering holds up over the subsequent few quarters, then Townsquare will as soon as once more have confirmed to buyers how resilient its enterprise is.
Our Take
We proceed to carry our Townsquare Media shares and add from time-to-time as new cash is available in. We’re much less aggressive consumers at these ranges, however acknowledge that getting paid a dividend which yields 7-8% (the yield in latest weeks) is sort of rewarding and highlights how undervalued the shares are. If administration and the board proceed to ship on their plans we do assume that this inventory might rise as much as $20/share on enhancing outcomes and the market assigning the corporate a better a number of based mostly upon the truth that about 20% of the corporate’s revenues are subscription based mostly and 30% are really tech/advert associated. The moon shot is that if the administration group can work out easy methods to optimize the Ignite enterprise and monetize it utilizing others’ properties – which could decrease margins for the enterprise total however would offer important leverage to revenues and earnings going ahead – provided that they’ll scale the providing.
We stay bullish on this identify, however assume buyers may need to purchase on dips relatively than shopping for their total place directly. This inventory doesn’t commerce on lots of quantity and even small orders can transfer the value in the course of the day.
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