Cumulus Media Just Unveiled A Potential $300 Million Opportunity (CMLS)

Our readers know that we’ve got been massive followers of varied media corporations, particularly these that are addressing leverage, discovering new avenues for development and exploring methods to reward shareholders. Whether or not it’s a legacy diversified media firm, native tv proprietor or terrestrial radio, if the story is sweet and administration is delivering on guarantees, we need to be concerned. With the tailwind of political spending this 12 months, and the potential for an early begin and huge spend in 2024, together with advertisers returning to the airwaves now that provide chains are correcting, we expect that any financial slowdown might be considerably blunted as these revenues discover their approach into the promoting ecosystem.

One of many names that we’ve got discovered most intriguing over the previous few years has been Cumulus Media (NASDAQ:CMLS), which reported earnings this morning. We now have been ready anxiously for this report as a result of we thought that the corporate would report on a selected merchandise we’ve got seen during the last month or two which we view as a possible game-changer to the corporate’s story, and we weren’t disenchanted.

So How Have been Earnings?

‘Boring’ may be one of the best phrase to explain the present quarter’s outcomes – and that isn’t a nasty factor. Whereas many ad-based companies have reported mushy demand and prospects shifting purchases, Cumulus was capable of maintain revenues comparatively secure with a decline of solely 2%; information which was offset by the truth that the corporate was capable of enhance EBITDA by 2% on account of increasing margins. The remainder of the information, from a high-level, is strictly what you’d count on to listen to from this administration crew, and the outcomes are what we’ve got come to count on on execution as nicely.

Two gadgets we discovered a bit troubling, however to be anticipated on this financial local weather, had been the gradual (and we imply actually gradual) return of auto sellers to the airwaves and the corporate adjusting full-year EBITDA steering from the earlier vary of $175 million to $200 million to a brand new vary of $160 million to $170 million. The auto phase remains to be down 40% year-over-year, which is up from being down 50% year-over-year, however with the adverts we’re seeing on tv and on-line, we thought that this rebound may be a bit extra pronounced by now (particularly contemplating that the heaps throughout our state are additionally filling up with stock).

With EBITDA steering falling, administration additionally indicated that they might miss their internet leverage goal of three.5x for year-end. They are going to are available barely above it, however reiterated that their goal of being under 3.5x stays unchanged proper now.

Any Vibrant Spots?

Cumulus continues its transition into a contemporary leisure firm, with digital revenues persevering with to develop. For the quarter, digital revenues (which encompass streaming, podcasting and digital advertising and marketing providers) grew 5%, with podcasting income down 4%, streaming income rising 11% and digital advertising and marketing rising 12%, at the same time as promoting general was below stress. Digital revenues now make up 15% of the corporate’s whole revenues.

Cumulus additionally repurchased $3.9 million of shares through their share repurchase program and retired $2.7 million of their senior notes at a reduction. The retirement of debt to this point this 12 months, which totals over $65 million year-to-date, will save Cumulus roughly $3.5 million per 12 months in curiosity expense.

What To Watch Transferring Ahead

Whereas it could be simple to say search for a dividend to be carried out, M&A exercise, debt paydown, or any variety of different gadgets, we’re most enthusiastic about Cumulus’s new product, Cumulus Increase, which was launched earlier this 12 months. We now have been listening to commercials for it domestically and are actually excited in regards to the potential right here as it’s an extension that would see important income development that delivers excessive margins as nicely. Cumulus Increase is actually the identical product providing that Townsquare Media (TSQ) has been promoting to prospects for years, and a part of the explanations they’ll justify shopping for a few of the small market stations of their portfolio.

Cumulus Increase ought to be capable to develop shortly through Cumulus’s present buyer record, and sooner or later make these purchasers extra loyal as Cumulus might be working their internet presence. Most significantly, it would diversify the mum or dad firm’s income streams, delivering comparatively secure, predictable subscription income that can additional assist to stabilize the enterprise throughout financial downturns. One other additional advantage is that the margins needs to be pretty much as good, or higher, than the terrestrial radio enterprise which may gain advantage the corporate in two methods; first, excessive margin natural development might be again on the desk for buyers and second, because the historic terrestrial radio enterprise shrinks the expansion from Cumulus Increase will be capable to fill that nearly on a dollar-for-dollar foundation.

We’re going to do some extra digging on the Cumulus Increase information for a future article, however our preliminary ideas are that this might be a $100 million to $300 million income enterprise in just a few years’ time. For perspective, Townsquare Media’s equal providing does roughly $87 million in revenues and generates about $25 million in adjusted working revenue. Townsquare is in a lot smaller markets, so one would suppose that Cumulus would have a possibility so as to add considerably extra income per market (even with extra competitors) when beginning out.

Lastly, we expect that the whole addressable market may be a number of occasions bigger than administration has initially indicated (relying on the path during which they take the enterprise and the way they market and goal prospects).

Our Takeaways

We had been a bit apprehensive about this quarter’s advert gross sales and the way a lot of successful the enterprise may take from the present financial surroundings, however got here away pleasantly shocked by the outcomes though some gadgets got here in worse than we anticipated. We predict that administration’s concentrate on chopping bills, deleveraging the steadiness sheet and capital allocation have positioned the corporate within the pole place for any business consolidation on the horizon, however we do imagine that this quarter may mark a serious pivot of their technique.

Briefly, our main takeaway from the convention name, though it was not stated or alluded to, was that the administration crew is shifting from pulling monetary levers to maneuver the present enterprise ahead, to specializing in including new enterprise strains to maneuver the corporate ahead. That’s excellent news for shareholders because it might allow for severe worth creation.

We proceed to imagine that the shares are undervalued and that administration has opened the door for development (income and revenue) and probably created a situation the place the market locations a better a number of on Cumulus shares because of the new avenue for development.