Three Big Questions For iHeartMedia's First Quarter Earnings Report

Courtesy of iHeartMedia

There's a chance that viewing iHeartMedia's first quarter earnings for 2020, due out this afternoon (May 7), will be like driving past an auto accident: a twisted, ugly mess from which you can't look away.

But if you're in the music business, you shouldn't look away no matter the results. The largest radio station in the U.S. demands your attention, simply due to its importance in breaking artists, showcasing stars and playing favorite oldies.

Things were looking up for iHeartRadio after last year's bankruptcy reorganization gave it financial breathing room and an improved balance sheet. Originally, iHeartMedia's 2020 guidance was mid-single-digit revenue growth and high-single-digit EBITDA growth and a margin improvement from 27.2% in 2019 to 28%-29% in 2020. The company also expected free cash flow of $300 million-$330 million.

But the radio business was an early casualty of the coronavirus pandemic's grasp on American businesses. When the scale of the problem became apparent in March, brands anticipated lower consumer spending and pulled their advertising accordingly -- not just at radio, but digital and print, too. Given the uncertainty of the pandemic's economic shock and impact on advertiser spending, iHeartMedia pulled its guidance on March 26. Belt-tightening ensued, as iHeartMedia enacted a plan on April 14 to save $250 million this year through senior management pay cuts and furloughs of "non-essential" staff.

The pandemic has drawn a bright line between legacy media and newer technologies. Perhaps the pandemic-led recession will speed adoption of subscription services, as Spotify CEO Daniel Ek predicted last week during Spotify's first-quarter earnings call. On-demand listening is the natural progression from linear broadcasting, Ek said repeatedly. So far in 2020, on-demand clearly is the better business model of the two.

But to count out linear broadcasting would be to ignore the influence radio stations have within the music business. The health of the radio business should be a concern to artists and songwriters. Away from the chatter of Internet services, record labels and publishers know radio still makes and breaks music.

Here are three questions ahead of Thursday's earnings release.

What's happening in the second quarter?

Earnings releases are backward-facing by nature, but what happens after Q1 2020 is more important. Now, Q1 earnings won't reveal the state of radio on May 7; March 31 was an eternity ago during a fast-moving global crisis. Saga Communications admitted as much. Its revenue dropped only 6.3% in the first quarter, but in a press release the company warned Q1 results "are not reflective of current market conditions" because advertising revenue "has declined significantly" and will continue trending down through May and June.

How much did iHeartMedia's liquidity decline in April?

All sorts of ad-supported businesses spent April securing lines of credit, selling notes and taking on new investors. In other words, companies need enough capital to get through a pandemic-caused economic slowdown of unknown size and duration. iHeartMedia has the liquidity to survive 2020: $401.9 million available and $350 million drawn from a $450 million credit agreement from May 2019, plus $400 million cash as of Dec. 31. April was a horrible month for the radio business. So where does cash and credit stand on May 7?

Since companies that lack liquidity go out of business, or face filing for bankruptcy reorganization, the pandemic will create distressed assets prized by some opportunistic investors. Enter Liberty Media. After its initial offer to buy iHeartMedia was rebuffed, the entertainment giant is believed to be patiently waiting to add iHeartMedia to a full-stack portfolio that includes Ticketmaster, concert promoter Live Nation, music streaming company Pandora and satellite radio provider SiriusXM. (The Department of Justice is said to be examining a Liberty-iHeartMedia combination's effect on media competitiveness. "We'll see if there are things where they can touch each other," Liberty CEO Greg Maffei told Billboard in January.

How much will radio advertising decline in 2020?

iHeartMedia isn't offering a forecast of its 2020 revenue -- it pulled its annual guidance once the pandemic created too much uncertainty. S&P Global Ratings forecasts a 16.5% drop in U.S. radio advertising in 2020; the March revision, from a scant -1.5% in January, might need to be updated. If radio advertising follows many economists' expectations for a "V-shaped" recovery -- a sharp decline followed by a sharp return to normal -- radio stations might not suffer mortal wounds. Hopefully iHeartMedia shares some insights about brands' appetite for ad spending and the effect low demand is having on ad rates. But with so many unknown factors -- such as federal economic support, business bankruptcies, unemployment and consumer spending -- all bets are off in 2020.