CCO - Clear Channel Outdoor: Outlook Is Not Clear Enough Yet

2023-03-14 03:27:58 ET

Summary

• CCO reported in-line 4Q22 results with revenue at $709.2 million, down 4.5% y/y. The decline was driven by weakness in the static billboard market due to declines in certain verticals.
• CCO expects $540-565 million in revenue for 1Q23.
• Positive advertiser sentiment for OOH is expected to drive growth for CCO throughout the year, with the company's emphasis on improving operational capabilities and enhancing sales efforts contributing to growth.

Recommendation

The results for the 4Q22 for Clear Channel Outdoor ( CCO ) were reported and in line with expectations. Airports and digital advertising contributed to the 0.8% y/y growth in Americas revenue, which totaled $374.2 million. However, declines in the auto insurance, media, and retail industries had an effect on the static billboard market. Management has guided growth in 2023 thanks to airports and digital advertising, with a range of $540 million to $565 million representing a 0.2% to 4.8% y/y for 1Q23. It is also significant that the negotiations conducted by the management to determine the price of permanent billboards have been constructive, and the company's focus on improving its operational capabilities and sales endeavors is expected to support growth throughout the year. That said, my immediate concern is the high leverage and the challenging interest rate environment, which could swing bottom-line if things turn for the worse. As such, I would sit out in the meantime and observe how they perform in 2023.

Latest earnings highlights

CCO reported in-line 4Q22 results, with revenue at $709.2million, down 4.5% y/y. Airport and digital revenue managed to cover the weakness in static billboards, keeping Americas revenue steady at $374.2 million, up 0.8% y/y. The percentage of Americas' revenue generated from digital channels came up to 38%, growing 2.8% y/y during the quarter, while the percentage generated from non-digital channels decreased 1.9%. The airport segment contributed $77 million of the total $80 million in Americas transit revenue, an increase of 5.2% year over year. The billboard segment is still suffering from the slump in the auto insurance, media, and retail industries, but management is only noticing slumps in those particular sectors.

Revenue for the company as a whole came in just a tad higher than expected (by about 1 percent), while the adjusted total EBITDA margin of 28.9% far exceeded expectations of 27.3%. Growth in Europe and rent reductions in North America both contributed to a higher EBITDA margin. Due to less severe year-over-year comparisons, Europe is expected to outperform the Americas in 1Q22, according to management.

Guidance

CCO expects $540-565 million in revenue for 1Q23, which represents a y/y change of 0.2%-4.8%. Given that Out-of-Home [OOH] media typically has earlier visibility into bookings than other media, this range seems reasonable for CCO, barring any major unforeseen events. Even with this expansion, margin guide seems to remain flat, and will likely be due to the growth of lower margin airport revenue, the recent major contract renegotiation and writing off the one-off items of rent abatements in the Americas segment. On the flipside, drags on margin comes from the tapering of rent abatements in the Americas segment, growth of lower margin airport revenue, and a recent major contract renegotiation.

In light of the recently announced sale of the Switzerland business to Goldbach Group, it seems likely that the operating results of the business will be included in the guidance for FY23. Assuming a 3Q23 sale close, the estimated revenue should be in the middle of the range if one were to adjust 2H23 Europe revenue and adj. EBITDA to account for the sale.

Positive Advertiser Sentiment for OOH

In spite of a temporary slowdown in activity, CCO mentioned that they are not experiencing any significant effects from the general slowdown. The softness was instead more specific to industries (such as crypto or sports betting) or particular advertisers. National advertising was weak (down 2.7% y/y) due to tough comps and some pull back late in 4Q, mirroring the performance of its competitors. Increases in local advertising of 3.4% are not surprising given that local advertisers' budgets are less likely to fluctuate dramatically from quarter to quarter. Based on the results of 4Q22, I believe that OOH will see increased spending from the advertising sector.

I see the implied guidance as positive for better growth for the rest of the year in the static billboard business, despite a sluggish start to the year. Management also did mention that price negotiations for the permanent billboards have been positive and that the upfront cycle has been very strong. Additionally, CCO focus on enhancing operational capabilities and sales efforts is expected to aid management in achieving its long-term goals, in addition to leveraging RADAR and programmatic opportunities. However, this may have an adverse effect on the non-digital billboard business's performance. In my opinion, revenue in the Americas is likely to grow in the low single digits for 2023, with growth picking up in the second half.

Conclusion

CCO, in my opinion, is trying to monetize its European assets with lower margins, digitize Americas assets, and strengthen its balance sheet. The sale process should benefit from continued growth in Europe, but the weak macro environment could be detrimental. While I am hopeful for the Americas segment and the company's commitment to digital transformation around the world, the company's International division, which has a lower margin, has me concerned that it will drag down overall results. Although the company has weathered the COVID storm, there are still economic, financial, and geopolitical uncertainties that could derail any recovery. The capital structure of the company is also a problem for me because it restricts the company's ability to expand through mergers and acquisitions and to reinvest in the business. I will not add to my position if I currently have any, and instead continue to monitor their performance in 2023.

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