Four Takeaways From iHeartMedia's Not-All-Bad Quarterly Earnings

Courtesy of iHeartMedia

iHeartMedia's first quarter 2020 earnings release was mainly a preview for what could be a painful second quarter. Overall, Q1 wasn't bad: Old-school broadcast radio revenues barely fell and digital revenues improved on the strength of podcasts. But the advertising slowdown became "more pronounced" in April and suffered "a sharp decline" in broadcast, digital and other segments, CEO Bob Pittman said.

Starting at the top, Q1 revenue fell 1.9% from $795.8 million to $780.6 million. Exclude political advertising -- it's not an annual occurrence -- and the deficit widens to $755 million to $793 million. Broadcast revenue dropped 5.2% to $461.7 million while digital revenue jumped 22.2% to $92.8 million.

The net loss of $1.65 billion, compared to $135.6 million a year earlier, is shocking but misleading. If non-cash expenses are removed from net income, earnings (before interest, taxes, depreciation and amortization) are a more palatable $157 million compared to $140.4 million in Q1 2019. iHeartMedia recorded a $1.73 million impairment charge because the COVID-19 pandemic spurred the company to reduce estimates originally made when it emerged from bankruptcy. "Fresh start" accounting rules, used when a company comes out of bankruptcy, require a change in estimated value be recorded as an operating expense that lowers net income.

The coronavirus pandemic's impact on radio advertising created enough uncertainty that iHeartMedia decided in March to withdraw its forecasts for 2020 results. So without hard numbers for reference, Pittman called the first-quarter downturn "more pronounced in April" with a "sharp decline" in almost all segments. The 10-Q filing offers a more thorough assessment, attributing the impairment charge to "the decrease in forecasted future cash flows driven by the expected significant economic slowdown resulting from the COVID-19 pandemic." No matter the description, Q2 advertising revenues won't be pretty.

On Wednesday (May 6), the iHeartMedia board passed a shareholder rights plan, a poison pill to prevent any single investor from acquiring 10% or more without the board's approval. According to the plan, unless a person who takes a 10% or larger stake gains the board's approval, the poison pill kicks in and existing shareholders will be given preferred shares that can be converted into common shares (the company has not revealed the specifics). As a result, the acquiring person's stake would become diluted, lowering the stake and effectively adding a premium to the price.

iHeartMedia has liquidity to get through 2020
Fortunately for iHeartMedia, its current liquidity should be enough to last through 2020. As of March 31 it had $646.8 million of cash and cash equivalents available after drawing $350 million from a $450 million credit agreement dating to May 2019. And iHeartMedia has time to pay its debt: the $350 million comes due in 2023 and the majority of its debt, $2.9 billion, doesn't mature until 2026.

Running a nationwide radio company doesn't come cheap. Operating costs were $685.7 million in Q1. But iHeart is taking steps to lower expenses and reduce cash outflows. In Q2, selling expenses will be lower -- since ad sales will be lower -- and general and administrative expenses will be lower than the $344.1 million posted in Q1. The company expects to save about $250 million in direct operating costs in 2020. And cash outlays will be lower -- $100 million in cash-related payments from the CARES Act and $80 million less of capital expenditures.

Listeners are turning to the web and listening at home
Because stay-at-home orders kept most Americans home in March, iHeartMedia experienced a spike in at-home listening: from February to March, listening increased 43% on the web, 35% on smart TVs, 28% on game consoles and 18% on Apple's Siri. Those trends follow the in-home gains Spotify experienced in Q1.

Podcasts are a strong growth story
Podcast revenue growth is over twice the rate of listening growth -- and will be three times as large in Q2. In Q1, podcast revenue rose 80% year over year while unique listeners grew 35%. Q2 revenue is pacing at over 100% year-over-year growth. Not only does iHeartMedia have a strong stable of podcasts -- from Stuff You Should Know to Disgraceland -- it has a fantastic distribution strategy: promote to over 90 million people each week on broadcast radio and stream everywhere -- iHeartRadio, Spotify, Apple's podcast app or wherever people get their podcasts.

Advertising interest is returning in cities that are opening from lockdowns
Pittman put a positive spin on potential ad sales in markets, such as Oklahoma and Georgia, that are opening retail and easing stay-at-home restrictions. "The sales activity has gone up dramatically in the markets that are opening up," he said, drawing a distinction between booked ads and mere sales activity. He did not say if sales volume will return to pre-pandemic levels.

Fortunately for all media companies, many state governors have started to open their businesses. Governments have put restrictions on businesses, such as minimum distances between customers or a certain number of patrons allowed in a store at once. Consumer spending will start to increase as businesses open and advertising spending will follow. But, again, iHeartMedia doesn't know when advertising spending will return to pre-pandemic levels.