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


Our readers know that we’ve been big fans of various media companies, especially those that tackle leverage, find new avenues for growth, and explore ways to reward shareholders. Whether it is a traditional diversified media company, a local television owner or terrestrial radio, if the story is good and the management keeps its promises, we want to be involved. With the tailwind of political spending this year, and the potential for an early start and big spending in 2024, as well as advertisers returning to the airwaves now that supply chains are correcting, we believe any economic downturn will be blunted somewhat as these revenues find their way into the advertising ecosystem.

One of the names we’ve found the most intriguing in recent years is Cumulus Media (NASDAQ: CMLS), which published its results this morning. We were looking forward to this report because we thought the company would report on a particular item that we noticed in the last couple of months that we see as a potential change in the company’s story, and we don’t. were not disappointed.

Data by YCharts

So how were the winnings?

“Boring” might be the best word to describe the current quarter results – and that’s not a bad thing. While many ad-based businesses reported weak demand and customers redirected purchases, Cumulus was able to maintain relatively stable revenue with a decline of just 2%; news that was offset by the fact that the company was able to increase EBITDA by 2% thanks to the expansion of margins. The rest of the news, of a high level, is exactly what you expect from this management team, and the results are also what we expect from the execution.

Two things that we found a little troubling, but to be expected in this economic climate, were the slow (and we mean very slow) return of car dealerships to the airwaves and the company adjusted EBITDA guidance for the full year compared to the previous range of $175 million. to $200 million to a new range of $160-170 million. The automotive segment is still down 40% year over year, compared to a 50% year over year decline, but with the ads we see on TV and online , we thought this bounce might be a little more pronounced now (especially considering that lots across our state are also filling up with inventory).

With the decline in EBITDA guidance, management also indicated that it would miss its net leverage target of 3.5x for the end of the year. They will come in slightly above, but reiterated that their target of being below 3.5x remains unchanged for now.

Bright spots?

Cumulus continues its transition to a modern entertainment company, with digital revenues continuing to grow. For the quarter, digital revenue (which consists of streaming, podcasting and digital marketing services) increased 5%, with podcasting revenue down 4%, streaming revenue growing 11% and digital marketing up 12%, even as advertising was under pressure overall. Digital revenue now accounts for 15% of total company revenue.

Cumulus also repurchased $3.9 million of shares through its stock buyback program and withdrew $2.7 million of its senior bonds at a discount. Paying down debt so far this year, which totals more than $65 million year-to-date, will save Cumulus about $3.5 million a year in interest costs.

What to look for moving forward

While it’s easy to say looking for a dividend to implement, M&A activity, debt repayment, or any number of other things, we’re very excited about Cumulus’ new product, Cumulus Boost. , which launched earlier this year. We have heard adverts for this locally and are really excited about the potential here as this is an extension that could see significant revenue growth which also offers high margins. Cumulus Boost is essentially the same product offering that Townsquare Media (TSQ) has been selling to customers for years, and part of the reason they can justify purchasing some of the smaller market stations in their portfolio.

Cumulus Boost should be able to grow quickly through Cumulus’ current customer list and, in the future, retain those customers as Cumulus will manage their web presence. More importantly, it will diversify the parent company’s revenue streams, generating relatively stable and predictable subscription revenue that will further help stabilize the business during an economic downturn. Another added benefit is that margins are expected to be as good as, or better than, the terrestrial radio business, which could benefit the business in two ways; first, high-margin organic growth will be back on the table for investors and second, as the historic terrestrial radio business shrinks, Cumulus Boost growth will be able to make up for that almost dollar for dollar.

Cumulus Digital Revenue

This chart is from Townsquare’s last quarter, and Cumulus is now at 15% of total revenue being digital. Cumulus lags its peers, but they have plenty of room for growth with future growth generating higher margins. (Townsquare Media)

We’ll dig a little deeper into the Cumulus Boost news for an upcoming article, but our early thoughts are that it could generate $100-300 million in revenue in a few years. For perspective, Townsquare Media’s equivalent offering generates approximately $87 million in revenue and generates approximately $25 million in adjusted operating profit. Townsquare is in much smaller markets, so one would think that Cumulus would have the ability to add a lot more revenue per market (even with more competition) at startup.

Finally, we think the total addressable market could be several times larger than management initially indicated (depending on where they take the business and how they market and target customers).

Our takeaway meals

We were a little concerned about advertising sales this quarter and the potential impact of the current economic environment on the business, but we were pleasantly surprised by the results, although some elements were worse than expected. We believe management’s focus on expense reduction, balance sheet deleveraging and capital allocation has put the company in pole position for any industry consolidation on the horizon, but we believe this quarter could mark a major turning point in their strategy.

In short, our main takeaway from the conference call, although it wasn’t said or mentioned, was that the management team shifts from acting on financial levers to drive the current business forward to focusing on adding new lines of business to drive the business forward. . This is good news for shareholders because it could allow significant value creation.

We continue to believe that the stocks are undervalued and that management has opened the door for growth (revenue and earnings) and has potentially created a scenario where the market places a higher multiple on Cumulus stocks due to the news avenue of growth.

About Dora Kohler

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