The advertising slowdown that’s affecting media companies in the first quarter is indicative of an uncertain economy. As 2023 progresses, advertisers sitting on the sidelines are likely to return to the marketplace, iHeartMedia Chairman and CEO Bob Pittman said Wednesday.
“I think what we're seeing is symptomatic of people saying, ‘I don't know what this year is going to be, it’s not going to be robust so let's save every penny we can now,’ and the quarter to do it is Q1,” Pittman said at the Morgan Stanley Technology Media and Telecom Conference.
“The advertisers that have to spend are spending, the ones that can hold back are holding back,” he explained, adding that clients that need to get their cash registers ringing remain active while brand advertisers are taking a wait-and-see. “This is just what you would expect, which means people are a little nervous, a little uncertain, but the business underneath is in pretty good shape. And I don't think there's a lot we can do to affect that macro.”
Acceleration Expected Through 2023
On its fourth quarter results call, iHeart forecasted its revenue will be down mid-single digits during the first three months of this year after a one percent revenue drop in January. Q1 is historically the lowest-billing quarter for media companies and Pittman told the investor conference that they expect business to pick up starting next month. “The good news is that Q2 and Q3 are [of] increased importance with people doing sales, especially people selling summertime products. You'll begin to see that money coming in probably in April and May. And then Q4, everybody's got to spend their money. So I think through the year, we should see an acceleration of people coming back in the marketplace.”
The company has not yet offered any color on how business is pacing in the second quarter. However Pittman and President, COO and CFO Rich Bressler said that automotive ad sales are “strong” while some financial categories are “a little slower.” And that compared to other downturns, this one is “sort of moderate.”
The two execs also went into greater depth on adjustments its Digital Audio Group made to sales priorities and commission structures in fourth quarter 2022, which spooked some investors after its quarterly earnings call. In an effort to produce incremental revenue, Pittman told the conference they strategically led with lower margin products with a goal of packaging in higher margin offerings. “Instead, what we found was they shifted from high margin stuff to the lower margin stuff,” Pittman said. “That was probably a symptom that the economy is somewhat slow. In normal times, I actually think it would have been a great sales strategy.” The company has since adjusted commission rates and the packages it offers and expects the situation to right itself in second quarter.
Podcasting Still Top Growth Engine
Despite the misfire, Bressler told investors the Digital Audio Group “continues to be very strong” and remains on track to generate profit margins in the mid 30% range. “Nothing has changed in terms of our view,” he said. And with digital audio and podcasting now a mainstream channel, “it’s not immune from the overall economic environment,” Bressler added.
The biggest growth engine at iHeart remain its podcast network which jumped 17% to $113 million in Q4. Pittman called podcasting “radio on demand” that draws a younger audience than AM/FM. “The sweet spot are Millennials, even Gen Z is into podcast listening,” he said. The company has “the critical mass to drive podcasting,” Pittman added, pointing to its audio expertise, the marketing firepower of 850 radio stations and the ability to promote new shows in other podcasts. “We're able to get this cycle going, which has been very positive.” It’s why iHeart put its 1,500-person sales force and ad tech stack behind podcasting.
As evidence of the engagement and trust podcast hosts engender with their audiences, Pittman and Bressler noted that they don't tune out during the commercials and that 90% of people who start a podcast episode listen all the way through. Said Pittman, “If you look at the performance of podcast, the consumer engages with podcasts on a level we don't see in any other medium.”
Meanwhile, the podcast industry is consolidating around the big players in the space, Pittman said. “It's getting easier and easier to get our scale,” he said adding that small players are struggling with how to “play in a world where you're getting crushed by the number of podcasts out there. If people can't find it, it can’t do much good.”
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