552464

iHeartMedia (NASDAQ:IHRT) Reports Sales Below Analyst Estimates In Q1 Earnings, Stock Drops


Full Report / May 09, 2024

Global media and entertainment company iHeartMedia (NASDAQ:IHRT) fell short of analysts' expectations in Q1 CY2024, with revenue down 1.5% year on year to $799 million.

iHeartMedia (IHRT) Q1 CY2024 Highlights:

  • Revenue: $799 million vs analyst estimates of $805.9 million (small miss)
  • Gross Margin (GAAP): 57.3%, in line with the same quarter last year
  • Free Cash Flow was -$80.86 million, down from $141.9 million in the previous quarter
  • Market Capitalization: $312.9 million

Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ:IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.

iHeartMedia got its start as a single radio station and has since evolved into one of the largest radio and media companies. This growth stemmed from recognizing radio's potential as a personal, engaging medium to deliver varied audio content, from music and news to talk shows.

iHeartMedia offers a diverse range of content, including broadcast and online radio, podcasts, live music events, and syndicated programming. By providing on-demand, versatile audio content, the company caters to a broad spectrum of listener interests and offers advertisers targeted marketing opportunities.

The company generates revenue through advertising, live events, and digital subscriptions. Its extensive network ensures constant content flow, appealing to various tastes.

Broadcasting

Broadcasting companies have been facing secular headwinds in the form of consumers abandoning traditional television and radio in favor of streaming services. As a result, many broadcasting companies have evolved by forming distribution agreements with major streaming platforms so they can get in on part of the action, but will these subscription revenues be as high quality and high margin as their legacy revenues? Only time will tell which of these broadcasters will survive the sea changes of technological advancement and fragmenting consumer attention.

Competitors in the audio and radio broadcasting industry include Sirius XM (NASDAQ:SIRI), Cumulus Media (NASDAQ:CMLS), and Townsquare Media (NYSE:TSQ).

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one may grow for years. iHeartMedia's revenue was flat over the last five years. iHeartMedia Total RevenueWithin consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Just like its five-year revenue trend, iHeartMedia's revenue over the last two years has been flat, suggesting the company is in a slump.

We can dig even further into the company's revenue dynamics by analyzing its three most important segments: Multiplatform, Digital Audio, and Services, which are 61.8%, 29.9%, and 8.7% of revenue. Over the last two years, iHeartMedia's Multiplatform revenue (broadcasting, networks, events) averaged 3.3% year-on-year declines, but its Digital Audio (podcasting) and Services (media representation) revenues averaged 10.8% and 4.4% growth.

This quarter, iHeartMedia missed Wall Street's estimates and reported a rather uninspiring 1.5% year-on-year revenue decline, generating $799 million of revenue. Looking ahead, Wall Street expects sales to grow 5.8% over the next 12 months, an acceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Given the consumer discretionary industry's volatile demand characteristics, unprofitable companies should be scrutinized. Over the last two years, iHeartMedia's high expenses have contributed to an average operating margin of negative 10.3%. iHeartMedia Operating Margin (GAAP)

This quarter, iHeartMedia generated an operating profit margin of negative 4.3%, up 1.7 percentage points year on year.

Over the next 12 months, Wall Street expects iHeartMedia to become profitable. Analysts are expecting the company’s LTM operating margin of negative 20.9% to rise to positive 10%.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, iHeartMedia has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 4.8%, subpar for a consumer discretionary business.

iHeartMedia Free Cash Flow Margin

iHeartMedia burned through $80.86 million of cash in Q1, equivalent to a negative 10.1% margin, increasing its cash burn by 39.3% year on year.

Return on Invested Capital (ROIC)

Growth gives us insight into a company's long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

iHeartMedia's five-year average return on invested capital was negative 5.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

iHeartMedia Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, iHeartMedia's ROIC has stayed the same over the last few years. If the company wants to become an investable business, it will need to increase its returns.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

iHeartMedia's $5.22 billion of debt exceeds the $361.4 million of cash on its balance sheet. Furthermore, its 7x net-debt-to-EBITDA ratio (based on its EBITDA of $707.8 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. iHeartMedia could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope iHeartMedia can improve its balance sheet and remain cautious until it increases its profitability or reduces its debt.

Key Takeaways from iHeartMedia's Q1 Results

We struggled to find many strong positives in these results. Its operating margin missed and its Services revenue fell short of Wall Street's estimates. On top of that, next quarter's revenue guidance fell short. Overall, this was a bad quarter for iHeartMedia. The company is down 7.8% on the results and currently trades at $2 per share.

Is Now The Time?

iHeartMedia may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of iHeartMedia, we'll be cheering from the sidelines. Its revenue growth has been weak over the last five years, but at least growth is expected to increase in the short term. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its relatively low ROIC suggests it has historically struggled to find compelling business opportunities. On top of that, its operating margins reveal poor profitability compared to other consumer discretionary companies.

While we've no doubt one can find things to like about iHeartMedia, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $2.78 per share right before these results (compared to the current share price of $2).

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.