Townsquare Media - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to Townsquare Media's third 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 Yenicay, Executive Vice President.

Claire Yenicay (EVP)

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, 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 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.

Bill Wilson (CEO)

Thank you, Claire, and thank you all for joining us this morning. It's great to reconnect with everyone today. We're very pleased to share with you that our third quarter results met our previously issued revenue and profit guidance, despite the challenging macro environment. After July's promising start to the third quarter, as you are aware, the U.S. advertising industry experienced a slowdown. According to Standard Media Index's U.S. Ad Tracker, the U.S. ad market rose +6.3% in July. However, in August, that growth slowed to +1.2%, and in September was up only +0.1%, in essence, flat in September. Our performance through the first nine months of this year has helped to demonstrate the efficacy of our digital-first local media strategy and validated our focus on local markets outside of the top 50 U.S. cities.

Of particular note is how our business model allowed for industry-leading digital advertising revenue and profit growth through the first nine months of the year, while also generating consistent, meaningful cash flow. Townsquare's digital platform sets us apart from others in local media. As highlighted on slide 11, 52% of our total revenue was digital revenue in the first nine months of 2023, more than 2x the industry average. Even more impressive is that 57% of our total profit was digital profit in the same period, which represents a healthy 30% profit margin. As anticipated, third quarter revenue for Townsquare Interactive, our subscription digital marketing solutions offering outlined on slide 13, declined negative 13% year-over-year. As I previously shared with you, 2023 is a reset year at Townsquare Interactive.

Townsquare Interactive's target clients, generally the smallest of the SMBs, with less than 20 employees and less than $5 million in annual revenue, continue to struggle with inflationary and wage pressures, labor shortages, and higher interest rates. All of these factors have contributed to elevated churn rates among our client subscriber base and moderately slower sales velocity. While there is no clear end in sight for these hurdles, we are confident that Townsquare Interactive will return to growth in 2024. We have already begun to see churn begin to moderate from its peak in Q2, and that's why you will note less subscribers lost in Q3 versus Q2, which we expect will translate to improved revenue and subscriber metrics in 2024.

At Townsquare, we always look for the silver lining when faced with challenges in our quest to achieve our internal company motto, "How high is high?" 2023 represents the first growth challenge we have encountered at Townsquare Interactive, and as such, it presented us with an opportunity to step back and truly examine our operations, attack ourselves, and evaluate all of our processes and procedures. As we mentioned on our last call, we made a number of important changes to optimize and improve our customer service platform, including moving from a one-to-one customer service model to a pooled model and implementing an interactive voice response system as the initial point of contact on customer inbound calls. These changes led to a meaningful increase in call answer rates, enhanced visibility to customer requests and concerns, and improved response times.

Those changes, as well as other improvements we have made recently, resulted in Townsquare Interactive's Google Business Review ranking increasing to over four stars. We believe we have positioned Townsquare Interactive to efficiently scale in 2024 and beyond, and we remain incredibly excited about the growth potential for this business. 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 Townsquare Interactive is geared for long-term profitable growth and success.

Although revenue at Townsquare Interactive, as expected, declined -13% in the third quarter, and we expect a similar rate of decline in the fourth 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 Q3, in line with Q2's profit margin, as well as Q3 2022's profit margin. Our digital advertising solutions segment, Ignite, is outlined on slide 12, and has been a key driver of growth. In the third quarter, digital advertising revenue increased approximately +5.5% year-over-year, and through the first nine months of the year, revenue increased +10%.

Our growth in this segment has been 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. Although year-over-year growth rates have slowed from the start of the year, we believe our performance in this segment has held up better than many of our peers because of our limited reliance on national advertising, which has been particularly weak during the advertising slowdown. Third quarter digital advertising profit growth increased in line with revenue growth, up +6% year-over-year, with third quarter profit margins in line with prior year margins at approximately 30%.

As radio share of ad spend in the United States continues to decline, along with that of other traditional media such as TV and print, as noted by S&P Global Research, it highlights our need to maximize our broadcast share while simultaneously driving digital advertising growth through both share gain and share shift. And that's exactly what we're doing. Through the first nine months of the year, our broadcast revenue declined -5% year-over-year, excluding political. Yet, according to Miller Kaplan, our total broadcast share in the markets in which we are measured by Miller Kaplan increased by 50 basis points over the same period, driven by gains in our local broadcast share. Our local broadcast revenue once again meaningfully outperformed our national broadcast revenue in the third quarter, as national broadcast radio advertising was down an anticipated -19% year-over-year.

Due to our focus on local, with only 8% of our total company revenue comprised of national advertising, and therefore, the national advertising steep decline has had less of an impact on our total results. At the same time that we are gaining broadcast share, we are also experiencing market share gains in our digital business. Of course, what truly matters is gaining total market share from our local media competition, including television and cable, and we are keenly focused on that. In fact, one of the largest areas of growth in the digital advertising industry today is streaming or Connected TV, which also happens to be a strong growth driver of our digital programmatic revenue stream. What is perhaps most encouraging is that we still have a long way to go.

According to Borrell Associates, although Townsquare is steadily increasing our digital market share each year, we are still only capturing roughly 14% of the total obtainable digital revenue in our local markets, signifying meaningful upside that we are very confident we can capture. Although in the back half of 2023, advertising overall in the U.S. has slowed down compared to the start of the year, while early, it does appear that advertisers are gearing up for a stronger and better 2024. Our annual customer appreciation sale, which we hold in October and which largely involves placing advertising buys for the year ahead, set an all-time record, with orders increasing by +10% over 2022 sale.

That, combined with our confidence that Townsquare Interactive will return to growth in 2024 and the current outlook on strong political spending, solidifies our belief that the pressure to our top and bottom line will be temporary and thus short-term in nature. One very important characteristic of our business model that we like to highlight as often as possible is our significant cash flow generation. Although we have experienced revenue and Adjusted EBITDA declines in the first nine months of 2023, we have generated $39 million of cash flow from operations, up an impressive +21% year-over-year.

We ended the third quarter with $38 million of cash on hand, having utilized our cash in the third quarter to repurchase and retire $14 million of bonds at a price below par, repurchase an additional 94,000 shares, as well as make an $18 million interest payment and pay $3 million of dividends to our shareholders. I'm glad to share that our board of directors approved our next dividend of 18.75 cents per share, payable on February first, which equates to 75 cents per share on an annual basis, which today would be approximately an 8% yield.

We remain very confident with our current capitalization and the strength of our balance sheet, with $38 million of cash on hand at quarter end, a fixed interest rate of 6.875%, no maturities until 2026, and net leverage of 4.5x at the end of the third quarter. We are pleased that we can deliver attractive current cash returns for our equity shareholders. Now I'd like to turn the call over to Stu, who'll go over our results in even more detail, as well as provide you our fourth quarter guidance. Stu, take it away.

Stuart Rosenstein (CFO and EVP)

Thank you, Bill, and good morning, everyone. It's great to speak to you today. We are pleased to report that our third quarter results met our revenue and profit guidance, supported by the continued growth in our digital advertising revenue. We're also very pleased that we continued to effectively deploy capital in the third quarter by repurchasing shares and debt in the open market and announcing our next dividend payment. Third quarter net revenue declined 4.6% year-over-year to $115.1 million, which was within our guidance range of $115-$117 million. Excluding political, third quarter net revenue declined 3.8%. Third quarter Adjusted EBITDA declined 12.1% year-over-year to $27.2 million, which was within our guidance range of $27-$28 million.

Third quarter broadcast advertising net revenue decreased in line with expectations, with a decline of 8.6% year-over-year and 7.2% excluding political.... Third quarter broadcast profit margins sequentially improved to 31% as compared to 27% in the second quarter. As Bill shared, 2023 is a reset year for Townsquare Interactive, our subscription digital marketing solution segment, and we expect top line and bottom line growth to return in 2024. In the third quarter, net revenue decreased 12.6% as compared to the prior year, and profit decreased 10.6% year-over-year. Margins were strong at approximately 28% in the third quarter and in line with the third quarter 2022 margins.

As we have shared previously, we expect margins at Townsquare Interactive to be suppressed in the second half of 2023 as we continue to invest for future growth, given our confidence in our long-term growth prospects and while we ramp the newly opened Phoenix location. Townsquare Ignite, our digital advertising segment, was again a growth driver for the company, with net revenue increasing 5.5% year-over-year in the third quarter, and digital advertising profit increasing 6.3% year-over-year. The segment's profit margin was approximately 30% in the third quarter.

Our other category, which is comprised of live events activity, generated $1.7 million of revenue in the third quarter, an increase of 42.4% year-over-year, and at a small loss of approximately $400,000, a decrease of approximately $150,000 year-over-year. As a reminder, our live events activity should not be viewed as a growth driver or revenue center for Townsquare, but rather a marketing arm for the company. In the third quarter of 2023, we had non-cash impairment charges of $31 million, of which $23.6 million were related to our FCC licenses. As I covered on previous calls, given the way that these non-cash impairment charges are mathematically calculated, we expect the value of our FCC licenses to continue to be written down regularly over time.

The third quarter impairment charge was caused by rising interest rates, which caused the discount rate in our calculations to increase by approximately 60 basis points from Q2, as well as decreases in the third-party broadcast revenue forecasts and higher initial capital costs due to rising prices, all of which are inputs in these valuations. These write-downs of a decade-old purchase price calculations have no bearing on our company's cash position, our operating revenue, our operating expenses, our profitability, or the company's future prospects. They're nothing more than non-cash accounting charges affecting only the historically recorded purchase price allocations made when we bought our radio station assets roughly 10 years ago.

Our third quarter net income declined from $2.8 million in 2022 to a net loss of $36.5 million, or $2.27 per share. The decline was largely due to the non-cash impairment charges and a meaningful increase in the income tax provision related to the non-cash impairment charges and their impact on the valuation of our deferred tax assets, as well as our calculated effective tax rate. Third quarter adjusted net income, which adds back certain items, including the non-cash impairments and adjusts for a normalized tax rate, was approximately flat year-over-year.

We'd like to remind you that any benefit or provision for income taxes included on the face of our income statement is for GAAP financial statement purposes only. We maintain significant tax attributes, including more than $100 million of federal NOL carryforwards and other substantial tax shields related to the tax amortization of our intangible assets. We continue to believe that we will not be a material cash taxpayer until approximately 2026. As Bill highlighted, and I would again like to emphasize, we consistently have strong cash flow generation. We generated $39 million of cash flow from operations in the first nine months of 2023. That's up 21% year-over-year, or $7 million, and we ended the quarter with $38 million of cash.

At the end of the third quarter, our net leverage was 4.5x, down slightly year-over-year. We repurchased $14.2 million of bonds below par during the third quarter at an average price of 96, bringing our year-to-date total bond repurchases to $27.1 million. In addition, we repurchased approximately 94,000 shares in the open market during the third quarter, bringing our year-to-date total share repurchases to 1.7 million shares, or $16.6 million, at an average price of $9.88 per share. As always, our number one priority is to invest in our local businesses through organic internal investments that support our revenue and profit growth, particularly in our digital growth engine.

We plan to continue to invest in our digital product technology, sales, content, and support teams, specifically in our Townsquare Interactive and Townsquare Ignite businesses, in order to maintain our strong competitive advantage in markets outside the top 50 cities. In addition, we are focused on our balance sheet as we begin to prepare for a likely refinancing in late 2024 or early 2025. As Bill mentioned earlier, our board has approved a dividend payable on February 1 to shareholders of record as of January 2.

The dividend of $0.1875 per share, which equates to $0.75 per share on an annualized basis, implies an annual payment of approximately $12 million based on our current share count and a dividend yield of approximately 8% based on our current share price. We believe our strong cash flow characteristics will allow us to continue to invest in our businesses, support our new dividend, and give us flexibility to opportunistically pursue debt and share repurchases in the open market. Turning to our fourth quarter outlook, we expect fourth quarter net revenue to be between $110.6 million and $112.6 million. We expect fourth quarter Adjusted EBITDA to be between $24.8 million and $25.8 million.

This implies that Townsquare's 2023 full year revenue will be between $450 million and $452 million, and our Adjusted EBITDA will be between $100 million and $101 million, both within our original guidance ranges we issued in the beginning of the year. With that, I will now turn the call back over to Bill.

Bill Wilson (CEO)

Thank you, Stu, and thank you to everyone who joined us this morning. We greatly appreciate it. I want to close today's call by highlighting what our business model has delivered this year. Despite a challenging backdrop of rising interest rates and inflation and extreme and persistent national advertising weakness, I am proud that despite these challenges, our differentiated digital advertising platform delivered double-digit revenue and profit growth through the first nine months of 2023. Our mature cash cow broadcast advertising platform has and continues to generate a solid profit, contributing to our strong cash generation. Our net leverage remains below prior year levels, and we have efficiently repurchased both debt and equity this year while maintaining a high-yielding dividend, delivering attractive current returns to our shareholders.

Our performance this year has reinforced our confidence in our digital-first local media strategy and our deliberate focus on markets outside the top 50 cities in the United States and the long-term profitable growth potential of our digital platforms. Again, thanks to each of you for taking the time to be updated on Townsquare's Q3 results this morning. We greatly appreciate it. Operator, at this time, please open the line for any and all questions.

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad now, and you will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star one on your phone now. And our first question comes from Michael Kupinski from Noble Capital Markets. Please go ahead, Michael.

Michael Kupinski (Director of Research and Managing Director of Media and Entertainment)

Thank you, and good morning. I'm sorry for this, if there was any background noise. A couple of questions. Can you talk about the tone of the market for your interactive services in Q4? Just wondering, are you still discounting at this point?

Bill Wilson (CEO)

Hey, good morning, Michael. Great to hear from you. I'd say the tone of the market in Q4 for Townsquare Interactive, our digital marketing solutions business, is very consistent with Q3. As we shared on the call as well as previous calls, 2023 is definitely a reset year for Townsquare Interactive. We've made a tremendous amount of improvements, I think, to our processes and procedures, as well as added some incremental tools that we believe and are confident will return us to growth in 2024. But as it relates to Q4, I don't see any difference. Quite honestly, from an overall company perspective, when you look at the guidance that Stu provided, Q4 net revenue down ex political -5%-6%. Q3 was -4%.

We expect pretty much the same type of results in Q4 as an overall tone in marketplace as we experienced in Q3.

Michael Kupinski (Director of Research and Managing Director of Media and Entertainment)

Are you still discounting in Interactive at this point? Because I know that you were earlier in the year.

Bill Wilson (CEO)

We are. We've really cut that back dramatically. So to your point, particularly in 2020, 2021, when these businesses, under different scenarios, were suffering, we did discount, and part of the logic there was to bridge them to success. They were also receiving PPP money from the government, multiple times throughout that two-year period. Right now, the environment is much different. I think we touched on it on the last call. You know, our interest rates overall in Q3 were actually higher than Q2. So I think the risk of a recession from the experts has come down. But in terms of the operating environment for these small businesses, as you know, Michael, we target businesses for Townsquare Interactive with less than 20 employees, less than $5 million in revenue. So they are the smallest of the small SMBs.

We also mentioned that we didn't know what the impact of the student loan payback coming back online after being suspended for so long, and we have definitely heard that, particularly in the last five to six weeks from our client base, some of the people who are coming, calling us with concerns, as it relates to their cash flow. So going back to your original question, definitely discounting less now because the businesses that are suffering are, quite honestly, going out of business. So it's not like giving them a discount is gonna bridge the gap for them. Given the inflationary pressures, the wage pressures, the higher interest rates, the impact on capital, their business are really suffering. That's why we're seeing an, you know, an elevation in churn historically.

I think, as I mentioned on the prepared remarks, thankfully, I believe Q2 hit the peak of our churn. We see it started to recede in Q3. You know, we cut our subscriber loss, which was 3,000 in Q2 to 1,650 in Q3, which I expect will be roughly the same in Q4, going back to your point about tone in the market. But discounting has really been suspended. We do some one-offs where we believe it's the right thing, but I think you'll see our average price point creep up over the next several quarters as a result of that.

Michael Kupinski (Director of Research and Managing Director of Media and Entertainment)

And just one more question, and I'll get back in the queue. In terms of Phoenix, can you just kind of give us where you are in terms of staffing there? Is it fully staffed now? Are you up and running? In terms of the business on the West Coast that you were anticipating, is that prospect still seem in line with what you were expecting? Just add a little color on what's going on in Phoenix.

Bill Wilson (CEO)

Yeah, no, really pleased with Phoenix. I think last time we talked about that, we were approaching 25-30 employees. We're now over 30 employees. We're onboarding new salespeople out there. The, you know, the talent pool was one of the major reasons that we opened the second location, was we felt the ability to recruit and hire while we continue to do that in Charlotte, but to add the Phoenix location would be beneficial. So it's still a small team, you know, call it roughly 30, low 30s.

But in terms of why we opened the market, our prospects for the market are all proving out to be very beneficial, and we think that is one of the reasons that the business will return to growth later in 2024, and really set us up for not only 2024, but 2025, 2026, and 2027. So very pleased with Phoenix, Michael.

Michael Kupinski (Director of Research and Managing Director of Media and Entertainment)

Great. I'll get back in queue. Thank you.

Bill Wilson (CEO)

Thank you, Michael.

Operator (participant)

Our next question comes from Jim Goss from Barrington Research. Please go ahead, Jim.

Jim Goss (VP and Senior Research Analyst of Media, and Entertainment)

Hi, I might tag on a couple of things, along the lines Mike was asking. One, with regard to Phoenix, is it providing an offset right now to some of the issues that the, that TSI is facing? Or are there startup costs that cause it to sort of delay the beneficial impact?

Bill Wilson (CEO)

Hey, Jim, good to hear from you this morning. As it relates to financials, as we've always shared, it takes a new salesperson around a year, 12 months, to actually break even. So given the ramp of hiring, and we're primarily right now been hiring salespeople out there, there are some incremental other people on the service side, but primarily, it is sales-focused. It is not really. It's actually suppressing our profit margins, and we said that would happen when we announced the rollout of Phoenix at the beginning of the year. I expect that probably to roll off sometime in the back half of next year because we did some hiring in the first half. We did a good bunch of hiring in Q3.

So I think we'll be hitting that twelve-month break-even point, and you'll see the benefit in the back half of 2024 for that. As in general, sales velocity is suppressed in Townsquare Interactive because of the environment that I just talked Michael through, including student loans coming back and the higher interest rates and all of those things. So that's kind of where Phoenix sits, and as I shared with Michael, just really pleased with the team there and the prospects as we go forward.

Jim Goss (VP and Senior Research Analyst of Media, and Entertainment)

When you're talking about a return to growth in 2024, I know it's not gonna flip a switch, but what sort of things do you think need to happen, aside from a couple of items you've just mentioned, that to create that better environment and to sort of relaunch the, like, the new business establishment or, you know, the sort of things that are gonna drive creation of the market you can reach out to with TSI?

Bill Wilson (CEO)

Yeah. No, no, great, great question, Jim. You know, I expect us to return to growth from a subscriber basis, from a revenue and profits basis in the back half of 2024. I'm not sure if that's Q3 or Q4, but that's my general timeframe and my perspective right now. As you know, Jim, with the subscription business, a lot of what transpires over the next six months is predicated on what's happened over the last three to six months. I think the timeframe is Q3, Q4. I think there's a number of things that we've done internally that I've outlined on this call as well as previous calls. We've also increased some product features in terms of like we're now offering a CRM, we're now offering things like invoicing for our clients. Email marketing is enhanced.

So we continue to make product improvements. Most importantly, I think our service model is being improved and continues to be improved. We're building certain tools. Some of those are helping us leveraging AI to be smarter when people are calling in, we have more information at our fingertips to handle their needs, things like that. So, you know, my hope is that obviously, we're not in a recession next year, and that interest rates start to come down in the back half of next year, but at a minimum, don't continue to increase at the pace they did so far this year. I think outside of one other time in the last 50 years interest rates raised the most in the last 12-month period than any other period.

The good news, I think, is inflation looks like it's starting to come down, and if that continues and that is correct, I think that has a dramatic impact on these smaller businesses that have been so hurt in this environment. I'll turn it back to you, Jim.

Jim Goss (VP and Senior Research Analyst of Media, and Entertainment)

Okay, just a couple of other things. One is, political is a small but important and meaningful category for you. But I'm wondering if you think the extent there are more options, especially along digital lines, if that potentially eats away at some of the political revenues we're used to having you generate. You know, which has been enough to, you know, tilt the balance a little bit in your revenue line, especially in the third and fourth quarters.

Bill Wilson (CEO)

You're exactly right. Great, great question, and we're obviously very much looking forward to next year in political. You know, I think we shared in 2020, the last presidential election, it was an all-time high in terms of political revenue. There was obviously a lot of competition from digital and other things out there for any media like there is every day, but it set an all-time high. So I think in particular, you know, obviously, TV benefits tremendously, but when you look at radio's reach, and we don't talk a lot about this on these calls because for us, we treat radio as a mature cash cow business, but we love radio, and it is the number one reach medium in the United States, reaching 93% of Americans on a weekly basis.

When I tell people, more people listen to AM/FM radio today than 10 years ago and 20 years ago, they can't believe it. So I think as it relates to the reach and impact for political candidates, they know, and political issues. So I expect, if not matching the $16 million, our expectation is $14-$16 million of political next year, and that's coming off of this year being under $3 million. So going back to your main point, Jim, you know, next year, I think, is a great opportunity for us in terms of political revenue, the Townsquare rebuild coming back on and growing in the back half of the year. And then, obviously, our digital advertising has and continues to be differentiated in driving and propelling our growth for the last several years.

Jim Goss (VP and Senior Research Analyst of Media, and Entertainment)

Okay, one last one, just sort of a general thought. The FCC now has the chair and a full complement. Is there anything on the docket that might have any impact for Townsquare?

Bill Wilson (CEO)

Yeah. Look, A, I'm very glad that's transpired. As you know, there was also a ruling recently where they have to do the Quadrennial Review, which they didn't do. So in general, I think people on this call know from prior times, I believe we should be deregulating, and the fact that we're capped in general to four FMs and two AMs in our size markets when we're facing competition that's uncapped, you know, be it a Spotify or be it others in the zone, I just don't think is appropriate and fair. So my expectation is, I don't know when, but I think it's a when question, not an if question, when the FCC starts to recognize the media landscape has tremendously changed in the last 20 years, and it's changing dramatically every few years.

To keep the same archaic rules that were in place 20 years ago, I personally believe, does not make sense. I'm glad the FCC is now at a full quorum, and I expect as they review this over time, things will benefit Townsquare, like deregulation. I don't know when that will happen, but I believe it will happen, Jim.

Jim Goss (VP and Senior Research Analyst of Media, and Entertainment)

All right. Well, thank you very much for taking my questions.

Bill Wilson (CEO)

As always, thank you, Jim.

Operator (participant)

We do have a follow-up question from Michael Kupinski from Noble Capital Markets. Please go ahead, Michael.

Michael Kupinski (Director of Research and Managing Director of Media and Entertainment)

Thank you. Just a couple of quick ones. You mentioned connected TV as one of the key categories in Ignite, and I was just wondering if you can just talk a little bit about what's driving that performance? And then also, is it just more fast channels, more connected TVs, or just that we're seeing more support, more volume? And then also, how much is connected TV-related advertising as a % of total Ignite advertising?

Bill Wilson (CEO)

Thank you, Michael. Yeah, we're tremendously excited. You know, for the first time, really, in our company's history, we're able to compete head-to-head with television. You know, we couldn't do that even five, six years ago. And today, getting to your, you know, second part of your question, too, is like it's the fastest growing part of our programmatic offering. Obviously, we're competing with great local television providers in our markets who have owned and operated and as well as programmatic. And we see a great advantage because we're not favoring anything. We're focused on the audience and the results, and we don't need to look at, okay, how do we, how are we managing our own cable inventory or TV spots? Because we don't have it. So I think it's been very beneficial for us.

A big part of Ignite, but in particular, Michael, Connected TV and now creating commercial spots, television spots for our clients, we've really beefed up our creative service offering, because obviously, historically, we didn't need to create television spots, and now we do. We're starting to use artificial intelligence in that creation as well. Obviously, creative is tremendously important in any marketing and advertising that we do. But for us, the Connected TV and producing these TV spots is somewhat new. I think, as you noted, for us, Ignite is so differentiated. You know, we've got this full funnel from reach with radio all the way now down to activation.

The fact that we can marry this programmatic side of our Ignite, our digital advertising, with a huge, large at scale, owned and operated websites and mobile apps that give us incredibly valuable first-party data, which gives us audience insights and allows us to audience target, I think, more effectively than anybody in our size markets, really is the reason I think that our digital advertising, not only in Q3 year to date, but for the last several years, has outperformed the industry. That's why when you look at digital overall being 52% of our revenue, which is two times the average in the industry, and 57% of our profits, we're tremendously excited. I think connected TV will continue to grow and grow. You see more and more ad-supported.

You've seen Netflix, you see, I don't, you may have heard that Amazon Prime is talking about, introducing advertising into their video platform. So particularly in our size markets, as more and more people cord cut and more and more streaming inventory opens up, I cannot emphasize what a tremendous tailwind and opportunity for us at Townsquare with connected TV. But that said, we're having tremendous success with social and, other targeting vehicles, including just standard display. So we're excited by connected TV. It is the fastest growing part of programmatic currently. It is for us as well, but tremendously excited about our digital advertising business overall, Michael. So I'll turn it back to you.

Michael Kupinski (Director of Research and Managing Director of Media and Entertainment)

Yeah, just one last question. On the broadcast side, I know that national is a small component, but you mentioned that national has been down and it's been affecting you. And I was just wondering, some broadcasters have indicated that national advertising seems to be improving, especially as they look into 2024. I was just wondering if you can kind of give us a tone of what you're seeing in terms of national in the fourth quarter, and then are you seeing pacings for national improve as you go into the first quarter?

Bill Wilson (CEO)

Great question, Michael, and again, I appreciate you being with us this morning. So just as a recap for everyone on the call, as Michael's asking about national, Q1 national broadcast advertising was down 28%. Q2 moderated to 21%. Moderated is generous. That's obviously down quite a bit. Q3 was still down -19%. It actually got a little bit worse in the quarter. Part of that is the ad tracking that we shared, where the U.S. ad tracking was +6 in July, +1 in August, and flat in September. So we saw the quarter, we saw that activity throughout the quarter. To your question, Michael, about Q4, we definitely see national getting better. We see national getting better, we see local getting better.

Probably most importantly, we mentioned our customer appreciation sale, which the team did a tremendous job on, you know, 10% more orders that I mentioned in the prepared remarks. As it relates to Q1 pacing, we don't spend a lot of time usually talking about our pacing because we'd rather talk about, you know, the results versus what we expect to come, because it can change quite a bit. So I'm a little hesitant to share this, but since you asked, I will tell you that at this point last year for Q1, as it relates specifically to broadcast, we've got about 2% more business booked for Q1, specifically for broadcast, than this time last year. And when you look at the broadcast decline we've experienced in Q3, that's a material change.

So hopefully, that holds, but in our view, that is a very, very, very positive sign for Q1. We're seeing also an uptick in Q1, on the digital advertising side, too, and you've probably heard from others, which you alluded to, that to be pacing better for, I think, the industry at large, broadcast as well as digital advertising, and we're seeing the same thing. For Q4, as I shared earlier, you know, we gave the guide, which I think is net revenue, pretty much in line with where we ended, Q3 ex political. So maybe a point or two below that, but in general, in line.

But obviously excited for 2024 for all the reasons we just talked about: improved pacings in broadcast, digital advertising, jump back year in the back half of the year for TSI, and what I just mentioned with broadcast, having more in the books for Q1 at this point than last year, which is, you know, if that holds, that's a very positive development. So Michael, hopefully that gives you some color for 2024 as we enter the holidays here.

Michael Kupinski (Director of Research and Managing Director of Media and Entertainment)

Yep. Thanks, Bill. That was perfect. That's all I have. Thank you.

Bill Wilson (CEO)

Thank you again for dialing in, Michael.

Operator (participant)

At this time, there are no further questions. I'd like to turn the call back over to Bill for closing remarks.

Bill Wilson (CEO)

Thank you, operator. I appreciate your help this morning. I just want to give a shout-out to the Townsquare team. I, you know, the results we talk about, the differentiation, the transformation, the culture, is all the results of their hard work, their passion and commitment, not only for Townsquare, but quite honestly, their communities and their clients and their audiences. So can't thank them enough, and I appreciate everybody dialing this morning. We obviously look forward to updating you on our year-end results, in 2024, but we're also excited to share how Q1 is shaping up when we report, in the beginning of March. So wishing everybody a great Thanksgiving, and thank you again for dialing in this morning. Take care.

Operator (participant)

This concludes today's conference call. Thank you for attending.