Fair Value, Lower Leverage: Schmaeling’s Look At Entercom


Entercom Communications President/CEO David Field appears to be very pleased with his company’s Q4 earnings results. Adjusted net income grew significantly. But, that is the result of an impairment loss totaling close to a half-billion dollars.

There’s a good reason why this loss was taken, CFO Rich Schmaeling tells RBR+TVBR in an exclusive conversation that also touches on Entercom’s debt, leverage, and expense control plans.

Schmaeling first discussed a $465 million impairment loss in Q4. To the layman, the company’s final three months of 2018, financially speaking, may appear to be tremendously negative: Entercom swung to a net loss of $386.96 million (-$2.80 per share), compared to Q4 2017 income of $232.4 million (+$2.62 per share).

But, that’s largely impacted by the impairment loss. Once adjusted, net income grew to $48.8 million (35 cents per diluted share) from $14.7 million (16 cents).

This is what Wall Street is looking at.

And, about that non-cash impairment charge? “They really don’t think that is meaningful,” says of Wall Street investors who have signaled their approval toward Entercom’s final quarter of 2018.

In midday trading, Entercom was up 7 cents to $7.98 on slightly lower than average trading.

That’s the best performance for Entercom seen since the final week of September, and largely explains why the company opted to take the impairment charge — not wholly out of the ordinary for a media operation.

As shown in the table, at right, Entercom shares suffered from poor performance across October, November and, in particular, December.

Like many radio and TV companies, Entercom’s stock withered in the days leading up to Christmas Eve, when a $5.42 closing price was seen.

While broadcast TV companies that saw similar stock erosion have not taken an impairment charge, Entercom did.

Don’t be alarmed.

“Everybody does, periodically, impairment testing, so we took a charge of $1.45 million for Springfield, Ill.,” Saga Communications CFO Sam Bush explained in March 2018, when that company’s Q4 2017 earnings were released.

Schmaeling explains that Entercom’s six-month performance is what triggered the company to reevaluate the value of its assets.

“May 2018 is when this stock decline started, and it has been recovering since January 1,” he says. Indeed, ETM was at $10.40 on the final day of April 2018.

Then, Entercom shares plunged. By May 9, a new five-year low was logged. A $12 million ding in Q1 due to problems at US Traffic Network (USTN) was a big reason for the stock swoon. But, ad revenue was challenged, and Field did not mention the status of his New York, Los Angeles or Chicago properties in his company’s Q1 2018 earnings call.

Those markets continue to lag others in terms of sales performance.

The impairment charge allows Entercom to synchronize its balance sheet to an active market, Schmaeling says. “It implies our fair value. It is just accounting catching up to where the market has marked the company.”

Schmaeling pointed to the repeal of the Professional and Amateur Sports Protection Act, which is poised to open the floodgates on sports wagering, as a long-term positive given Entercom’s significant investment in all-Sports radio.

He also noted that investing back into initiatives such as Entercom’s growing Radio.com app and its national client partnership team are ongoing.

Schmaeling also addressed RBR+TVBR‘s questions regarding real estate sales, and its bulging expenses.

Regarding the land transactions, Schmaeling confirms that there was redundancy thanks to the merger with CBS Radio, with seven overlap markets requiring the combination of studio space and distribution activities. In Miami, construction delays unrelated to Entercom’s early 2017 lease agreement have pushed the consolidation of its stations — formerly clusters operated by Beasley Media Group and Lincoln Financial Media, respectively — to late June.

This will have some impact on expenses that mushroomed beyond $1 billion in fiscal 2018.

However, Schmaeling notes that Entercom’s ongoing integration program is expected to conclude by the start of Q3, with net cost synergies of $110 million.

Lastly, astute investors may wonder about the $1.47 billion in debt Entercom has.

About that, Schmaeling explains, “Our leverage is lower than both CMLS and IHRT when they exited bankruptcy. We paid down $160 million in debt earlier this month. Our leverage will improve meaningfully by the end of Q1 while simultaneously creating expense capacity to increase investment and fuel growth.”