Entercom took another revenue hit from financial problems at its former traffic partner in the second quarter, this time to the tune of $12 million. CFO Rich Schmaeling walked investors through the blow-by-blow of the deal gone bad during Entercom’s second quarter earnings call Wednesday.
The issue with United States Traffic Network (USTN) “first reared its ugly head” in November 2017, when Entercom closed its merger with CBS Radio and discovered the traffic services provider had stopped paying CBS Radio and then immediately cut off payments to Entercom. Both companies relied on USTN to resell their short-form traffic ad inventory. By the end of March, USTN owed Entercom $23 million. After considering its options – including doing a deal with iHeartMedia’s Total Traffic & Weather Network or launching its own traffic network – Entercom decided to restructure its deal with USTN “to give them some breathing room to fix their financial problems," Schmaeling said. That involved converting the tab USTN owed Entercom at the end of March into an equity position in USTN and a $12 million senior secured note. Entercom also took back one third of its traffic inventory from USTN and combined it with other traffic inventory it was already selling through an internal Entercom sales organization called the Traffic, Weather and Information Network (TWIN) in its local markets.
Making matters worse, since closing the CBS Radio merger, Entercom hasn’t been able to recognize revenue from USTN “even if they paid us," Schmaeling said, under the recently enacted revenue recognition accounting standards due to concerns about USTN’s financial viability. Entercom will be able to recognize the $3 million that USTN has forked over since the end of June in the third quarter, now that its contact with USTN has been terminated.
So what are the losses? For full year 2018, Entercom projects its traffic revenue from the inventory that was formerly part of the USTN contract to be about $15 million – or just one third of the amount it originally expected under its contact with the struggling traffic services vendor. “USTN currently owes Entercom about $14.5 million and we will recognize additional revenue if they make further payments to us or if we realize a recovery through a legal process,” Schmaeling said. Last week USTN filed suit in a U.S. District Court in Texas, claiming that Entercom was in talks to buy the traffic services company but bailed on the deal, severed its relationship with the company and used trade secrets it gained from USTN to develop a competing service to launch in fourth quarter. Entercom CEO David Field has called the suit “entirely baseless, frivolous and frankly insulting.”
As for 2019, Entercom projects it will more than double the $15 million in “disrupted” traffic revenue it expects to put on the books this year. “We are happy to have this situation largely behind us and to be in control of our own inventory," Schmaeling said.
While Entercom had to swallow a $12 million Q2 loss from what Field called an “unfortunate distraction” inherited from CBS Radio, it will have “a diminished impact on third quarter revenues of roughly $6 million and no expected impact in fourth quarter as Entercom’s internal sales efforts take root,” Field said Wednesday. While USTN claims in its suit that Entercom plans to launch its own traffic service in Q4, Field stopped short of saying that. “We are pleased to be in control of our destiny as we pursue opportunities in this attractive market segment,” he said. “We are very happy to be moving on and putting this matter behind us.”