Opportunity: March 2024
Successful Business Transformation Overlooked by Investors
Introduction
This month we’re profiling a Company that was once an old media/broadcast business but whose revenues and profitability now come mostly from digital sources. Even though higher-growth, higher-margin business lines now account for more than half its top line, investors still ascribe it a traditional broadcast-type multiple instead of a valuation that reflects its digital businesses and their long runway for growth. Its shareholder-friendly management has a history of opportunistically repurchasing shares en masse and it’s returning a good chunk of excess capital to shareholders through a very attractive dividend yield. In view of this Company’s strong cash flow profile and meaningful growth opportunities, we believe that its shares have the potential to become a multibagger over the next few years.
So, without further ado, let’s tune in to Townsquare Media:
Townsquare Media, Inc.
NYSE: TSQ
Key Highlights
Once primarily a traditional broadcast radio business, Townsquare has undergone a successful transformation and now derives the majority of its revenues (51%) and profitability (precorporate adjusted EBITDA: 55%) from higher-growth (and higher-margin) digital sources, with nearly 20% of total revenues generated from a recurring revenue subscription business.
The Company’s digital businesses have experienced strong growth, increasing at a 15% CAGR between 2016 and 2023.
TSQ has significant tax attributes (federal NOLs and other tax shields that reduce cash taxes on profits) and is not expected to be a meaningful cash taxpayer until 2026.
Management has opportunistically repurchased a meaningful amount of shares in recent years, including 1.5 million shares for ~$15 million in June 2023 at $9.70 a share, a ~9% discount to the then prevailing share price and a 10% discount to the current share price.
Townsquare recently increased its dividend by 5%, with shares offering an attractive 7.3% yield at the current quotation.
In addition to returning capital via dividends and share buybacks, TSQ has been reducing its leverage, most recently by repurchasing $27 million of its bonds in 2023 at a discount to par value.
TSQ’s current net leverage of 4.4x is at the lower end of its historical range.
The Company’s mature broadcast business (~47% of revenues) is a cash cow that is enabling TSQ to continue to invest in higher-growth initiatives and return value to shareholders.
A Digital Media Company That Has Undergone a Successful Transformation
Townsquare is a community-focused digital media and marketing solutions company with market-leading local radio stations, principally focused outside the top 50 markets in the U.S. Key businesses include the following:
Townsquare Interactive (18% of revenues; 19% of precorporate EBITDA): A subscription-based digital market solutions business that provides website design, creation and hosting, search engine optimization, social platforms, and online reputation management as well as other monthly digital services for approximately 24,000 small to medium-sized businesses.
Townsquare Ignite (33%; 37%): A digital advertising business that leverages an owned and operated portfolio of more than 400 local news and entertainment websites and mobile apps along with a network of leading national music and entertainment brands (XXLmag.com, TasteofCountry.com, UltimateClassicRock.com, and Loudwire.com) that helps it collect valuable first-party data. Townsquare Ignite also includes a proprietary digital programmatic advertising technology stack with an in-house demand and data platform.
Broadcast Advertising (47%; 45%): A traditional broadcast radio business that includes local regional and national advertising products and solutions delivered via terrestrial radio broadcast and other miscellaneous revenue associated with its broadcast advertising platform.
Other (2%; <1%): Includes the Company’s owned and operated live events, such as WYRK’s Taste of Country, the Boise Music Festival, the Red Dirt BBQ & Music Festival, and Taste of Fort Collins. TSQ’s live events generate revenue primarily via ticket sales but also through the sale of sponsorship, food and other concessions, merchandise, and other ancillary products and services.
Townsquare Revenue and Adjusted Operating Income (EBITDA) Summary*
Townsquare has successfully transformed itself from a predominantly radio-focused business to a digital media company. Notably, the Company’s digital businesses now represent the majority of its revenue (~51% in 2023 vs. just ~15%-20% in 2016), thanks to a 15% CAGR between 2016 and 2023. TSQ’s digital business commands strong profitability, generating 30% precorporate adjusted EBITDA margins in 2023 relative to the 26% posted by the broadcast radio business.
TSQ’s Industry-Leading Digital Revenue Generation as a % of Total Revenue
Video (Like Streaming and Satellite) Hasn’t Killed This Radio Star
Although broadcast radio still constitutes a large proportion of Townsquare Media’s revenue, it remains a highly strategic and profitable business that generates meaningful cash flow for the Company. Radio’s share of the overall advertising pie continues to shrink, but it is declining less quickly than other traditional media formats, including TV and print. In fact, radio stations in Townsquare’s markets have benefited from the fallout in the newspaper industry, with 1,800 newspapers having closed in the U.S. since 2004 (including more than 100 local newsrooms during the pandemic). The Company’s on-air DJs are digital content creators and local social influencers who create ~20,000 pieces of local content each month, making TSQ one of the largest producers of local content in the U.S. What’s more, the Company’s traditional AM/FM stations reach, on average, one of every two adults in markets where it operates radio stations. Townsquare radio stations typically operate in markets outside the top 50 cities in the U.S., such as Binghamton, NY, and Cheyenne, WY, where radio won’t be going away anytime soon. To the contrary, consumers in these markets rely on radio stations (and their local websites) for high-quality local content.
The Company’s broadcast radio business serves as an important connection to its faster-growing digital businesses (more on this later). Both of the digital units (Townsquare Ignite and Townsquare Interactive) were built organically via the cash flow generated by the broadcast business, which will continue to be a source of funding for Townsquare’s investment in modern digital businesses, allowing the Company to capitalize on future growth opportunities.
Owned and Operated Stations Ignite Advertising Growth
“Our Digital Advertising platform provides precision customer targeting solutions to our clients, giving them the ability to reach a high percentage of their online audience across desktop, mobile, connected TV, email, paid search and social media platforms utilizing display, video and native executions.”
– Townsquare Media CEO Bill Wilson, 2023 shareholder letter
Townsquare Ignite is poised to benefit from a large and growing digital advertising market. Although radio advertising represents just ~5% of advertising spend in the U.S., digital advertising solutions currently account for a whopping 69%. With strong growth expected in the years ahead, it is forecast to account for 76% of all U.S. ad spend in 2028. The Company’s owned and operated platform (station websites and apps, etc.) is a competitive advantage when it comes to digital advertising. Thanks to its portfolio of 400 local news and entertainment websites, 400 mobile apps, and 10 leading national music entertainment websites, TSQ has unique first-party data on an audience of 75 million monthly unique visitors (up from 1 million in 2011). Townsquare’s detailed and unique insights into consumer behaviors, audience interest, and purchase intent are able to drive strong return on investment for its advertising clients, giving the Company a meaningful advantage over its local competition.
TSQ’s digital advertising business experienced 7% growth in revenues in 2023, significantly outpacing the overall advertising industry, which was believed to be in a recession. A key driver of this growth was the Company’s proprietary digital programmatic advertising platform (essentially the ability to buy advertising using technology rather than through a real-life advertising agent), which is integrated with 15+ digital advertising buying platforms, enabling access to all major advertising exchanges and mobile apps and offering more than 250 billion impressions per day. One of the largest future growth opportunities for TSQ’s digital advertising business is expected to come from selling advertising for streaming or connected TVs. Despite the strong digital growth, TSQ is believed to be capturing only ~14% of the total obtainable digital revenue in its local markets, presenting meaningful upside for this revenue source.
Townsquare Interactive: An Attractive Recurring Revenue Subscription Business
Townsquare Interactive (TSI), the Company’s other digital business, offers many attractive attributes, including recurring revenues from a subscription model under which Townsquare receives monthly fees from its customers to the tune of ~$300 per month. Until the beginning of 2023, the segment was growing rapidly, with revenues increasing at a 16% CAGR between 2016 and 2022 and subscribers reaching 30,650 in 2022, well up from ~15,000 in 2018. However, through a combination of a self-inflicted issue (TSQ’s return-to-work mandates increased churn of its customer-facing employees and, in turn, of its own customers) and economic effects of rising interest rates on TSI’s targeted small business customers, segment revenues were down 9% in 2023, with subscriber counts lower by ~6,500 to ~24,000. However, the Company is taking several actions to return the business to growth, with net subscriber additions expected to be up in 2Q 2024, followed by a resumption in revenue and profit growth later in the year. A key component of the Company’s renewed growth is a second headquarters that opened on the West Coast in 2023 (complementing its current headquarters building in Charlotte, on the East Coast), which should go a long way toward capitalizing on its massive addressable market of 8.8 million potential customers and $32 billion in customer spend.
Townsquare Interactive’s Addressable Market
Despite the current headwinds, the business has been able to maintain outsized profitability, with margins declining by only 50 bps (28.2% vs. 28.7%) in 2023 on the 9% revenue decrease. Management recently stated that it still believes in the growth opportunities at TSI “without a doubt,” and, encouragingly, churn appears to have peaked in 2Q 2023.
Opportunistic Buybacks, Outsiders Style
“At bottom, these CEOs thought more like investors than managers. Fundamentally they had confidence in their own analytical skills and on the rare occasion when they saw compelling discrepancies between value and price, they were prepared to act boldly. When their stock was cheap, they bought it, (often in large quantities), and when it was expensive, they used to buy other companies or to raise inexpensive capital to fund future growth. If they couldn’t identify compelling projects, they were comfortable waiting, sometimes for very long periods of time (an entire decade in the case of General Cinema’s Dick Smith). Over the long term, this systematic, methodical blend of low buying and high selling produced exceptional returns for shareholders.”
– William Thorndike, The Outsiders
While it is premature to nominate TSQ CEO Bill Wilson as a candidate for a potential Outsiders sequel, we note that he has overseen some Outsiders-like capital allocation initiatives at TSQ:
In March 2021, the Company deployed ~$80 million to repurchase 100% of Oaktree’s equity interest in TSQ (~45% of TSQ’s outstanding equity) at $6.40 a share, representing a 19% discount to the prevailing share price at the time of the announcement and whopping 39% and 41% discounts to the TSQ share price on the transaction closing date and current price, respectively.
In June 2023, the Company deployed $15 million to repurchase nearly half (1.5 million shares) of Sphere Entertainment’s stake in TSQ at $9.70 a share, representing a nearly 9% discount to TSQ’s then prevailing share price. The 1.5 million shares repurchased represented ~9% of TSQ’s then outstanding shares.
Balance Sheet and Free Cash Flow
As of December 31, 2023, TSQ had net debt of $443 million, including $504 million in debt and $61 million in cash. Its net leverage stood at 4.43x, at the lower end of its historical level. The Company’s debt comes due in 2026, but management expects to refinance the debt in 2025, prior to maturity.
TSQ Net Leverage (Net Debt to EBITDA)
Although the current leverage level appears elevated, TSQ generates strong and consistent cash flow, thanks in part to favorable tax attributes (federal NOLs, tax shields, etc.). During the Company’s 4Q 2023 earnings call, it stated that it will not be a material cash taxpayer until 2026 (and we note that it hasn’t been a material taxpayer for many years). Thanks to these tax assets, TSQ has generated an average of ~$56 million in adjusted free cash flow (the Company’s proxy for free cash flow deducts cash taxes, capex, and cash interest from adjusted EBITDA) over the past 3 years, representing a FCF yield of a whopping 31%. Even as a full-cash taxpayer, the Company’s free cash flow yield (FCF/market capitalization) should come in at a robust level of ~21%, which is nothing to sneeze at. In addition to deploying excess cash flow for opportunistic buybacks, TSQ has opportunistically retired debt, including by repurchasing $27 million of debt in 2023 below par. The Company also offers investors a generous dividend, which currently yields 7.3% following a 5% increase in 2024. It should also be noted that in May 2022, the Company disclosed a $5 million investment in Bitcoin, which looks favorable at the current price. Although the Bitcoin investment is currently showing a nice unrealized gain, we would much rather the Company deploy its excess capital via dividends or share buybacks.
A Note on the Dividend
Following the recent 5% quarterly dividend increase, Townsquare will pay out ~$13 million annually in dividend payments. The dividend is well covered by the Company’s free cash flow, which as we noted has averaged $56 million over the past 3 years, aided by significant tax assets. At some point TSQ may become a full taxpayer as it utilizes all its favorable tax attributes. Even as a full cash taxpayer, we estimate that TSQ’s free cash flow will be in the ~$40 million range on an annual basis, comfortably above the Company’s current annual dividend requirements, letting it maintain its healthy dividend if it chooses to return value to shareholders in that way.
Valuation
At current levels, TSQ trades at just 6.0x its estimate for 2024 EBITDA. Utilizing a sum-of-the-parts valuation and applying a 12.0x multiple to the Company’s 2023 digital-related EBITDA and a more modest 5.0x multiple to its current broadcast profitability, and adjusting for its current net debt and corporate expenses (at 8x), we derive an intrinsic value of $25.30 a share, or 135% upside from current levels. We believe that there are multiple items that could help unlock this value, including ongoing shareholder-friendly initiatives, continued digital advertising growth, and a return to growth in the subscription business. The Company’s outsized dividend (7.3% yield) offers a way for investors to get paid as they await catalysts to emerge that can help unlock the value between our intrinsic value estimate and the Company’s public market value.
Boyar’s Final Word
We believe that investors have underappreciated Townsquare Media’s businesses. The Company has successfully transformed itself from a business that relied on broadcast advertising to one that generates the majority of its revenues from faster-growing and more profitable digital sources. In our view, management is taking the right steps to unlock value by continuing to invest in TSQ’s high-growth businesses while simultaneously pursuing shareholder-friendly initiatives. If the large gap between the Company’s public and private market value persists, we would not be surprised if Townsquare were to become an acquisition candidate, whether for all of its businesses or for a portion of them.
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