RE:RE:RE:Underlying Free Cash Flow Euro Pacific
Mood Media Corporation Disciplined Execution. Positive Undercurrents to Surface.
Event: Q215 results were in line with expectations demonstrating consistent, disciplined progress building prospective revenue traction through improved customer growth and improving ARPU trends while efficiency waves build and new phases are added. These efforts have been critical in the face of FX declines and ahead of stronger KPIs. It should be noted that Q215 represented the sixth consecutive quarter of revenue and EBITDA growth.
Thesis: The quarter provided positive undercurrents that we expect to surface over the next 6-12 months with increasing revenue traction as y/y customer growth resumes and ARPU turns positive. An improving top line layered against further efficiency gains support building EBITDA growth where we have 2016/17 EBITDA ahead 9.5%/10% driving FCF of $16.1M/$27.4M or $0.09/$0.14 per share and deleveraging the company as 2015 net debt:EBITDA declines from 6.4:1 for 2015 to 4.8:1 against 2017. We see the potential for strategic partnerships to strengthen distribution and content capabilities and in turn enhance shareholder returns. We are optimistic that with further evidence of its turnaround and more attractive currency that the Company can consider the potential to purchase affiliates. Such a program would likely be strategic and accretive. With the proceeds from the US$50M in unsecured debentures available for the maturing convertibles, Mood’s nearest maturity is 2019.
We continue to believe management will successfully position the core business to deliver revenue/EBITDA CAGRS at 3.9%/8.8% across 2015-19. We forecast 2016/17 FCF at $16.1/$27.4M or $0.09/$0.14 per share with FCF yields of 18.3%/28.4% that should provide valuation support. For value investors, we highlight that four-year cumulative FCF from 2015-2019 is forecast at $0.65 against the current equity share price of $0.45.
Q215 Results: Revenue declined 1.8% y/y to $117.7M above our forecast of $113.0M while EBITDA gained 2.0% y/y to $24.5M in line with our forecast of $24.9M (we are the only quarterly forecast within the Capital IQ consensus). The EBITDA margins expanded 0.8 percentage points y/y to 20.8%. Reported EPS was -$0.01, up from -$0.11 in Q214 and above our estimate of -$0.04. Management indicated that excluding FX and divestitures, the underlying revenue and EBITDA growth was 6% and 10%, respectively. Revenues and EBITDA were negatively impacted by $8.8/$1.5M and $1.1/$0.5M from FX and divestitures.
All business units recorded y/y EBITDA growth due in large part to the ongoing rationalization efforts. Management is now guiding to 2015/16 cost efficiency savings of greater than $7M. Mood Media ended the quarter with a cash balance of $20.8M, down from $34.3M in Q214.
2015 Guidance, Forecasts, Revisions: Management indicated that its "EBITDA is expected to rise moderately relative to 2014 while free cash flow generation in 2015 is anticipated to be slightly less than break even, with further FCF improvements expected in 2016". Our pre-quarter on track to deliver 2015 EBITDA and FCF forecasts were $106.1M and $5.9M. With 2014 EBITDA at $102.6M, our forecast for 2015 is likely to be relatively close to implied guidance. However, our pre-quarter FCF of $5.9M looks aggressive against guidance. Management attributed the FCF modification in part to the timing on certain large account revenues shifting to 2016, financing charges associated with the debt raised and timing on efficiency costs/gains. We revised our 2015 and 2016 FCF. We moved our 2015 revenue/EBITDA/EPS from $471.0M/$106.1M/-$0.23 to $475.5M/$104.5M/-$0.19 against the consensus at $469.8M/$104.6M/-$0.22. We moved our 2016 revenue/EBITDA/EPS from $482.6M/$114.8M/-$0.03 to $485.6M/$114.4M/-$0.03 against the consensus at $470.8M/$111.9M/-$0.07.
Debt Re-Financing: Mood Media completed its US$50M Private Placement on May 12, 2015 (10% Senior Unsecured Notes due September 18, 2023), which will be used to repay its Convertible Debentures at maturity (October 2015). Mood now has four years before considering any refinancing needs.
Valuation Perspectives: The successful financial restructuring and operational turnaround should leave Mood positioned as an advantaged competitor attacking a much larger, higher growth market driven by visual and wireless services. Our DCF supports one- and two-year DCF valuations of $1.26 and $1.82 based on what could be argued are pretty tough DCF valuation parameters with a 16% discount. We believe successful execution to plan, together with potential strategic initiatives/partnerships over the next 12-24 months, should support positive forecast and revaluation considerations. We find downside support in the FCF yield of 18.3%/28.4% against our 2016/2017 forecasts.
Subscriber metrics: We look for encouraging sub-currents within the subscriber or key performance indicators (KPIs) to fully emerge over the next 6-12 months in the form of positive subscriber adds and y/y ARPU gains. The Company indicated that its US local salesforce is currently at 118 on trend for 140 by year end (remember the low of 70 in 2013) with gaining sales traction measured by the 17% higher y/y sales from the unit within the quarter. Stable pricing trends were evidenced by major client recontracting with stable pricing. The actual y/y ARPU trending will weigh the dilutive impact of growth in new lower ARPU services against the higher ARPU associated with visual wins. However, the underlying trend of stable pricing marks a significant recovery from the depths of 2013 where recontracting terms saw price declines pushing double digits.
Q215 ARPU declined by 7.4% y/y to $42.96. On a constant currency basis, ARPU declined by 1.8% with the audio ARPU down 2.6% and visual ARPU ahead 13.2%. Within the audio ARPU decline, 0.6% was attributed to a shifting mix. Audio/Visual gross additions in Q215 reflecting building sales traction with additions of 10.1K/0.7K against 7.0K/1.0K for Q214. The growth in audio gross adds y/y was attributed to increasing local sales traction as Q115 gross audio additions were 8.6K, down from 10.1K in Q114. Mood lost 1,262 audio sites on the quarter, significantly better than the 5,283 decline experienced in Q214. Net visual site adds at 178 were below the 824 recorded for Q214. Average churn on the quarter was 1.0% against 0.9% for Q214 with audio churn lower at 0.9% versus 1.0% and visual churn higher at 1.3% against 0.4%. We look for further declines in the visual churn