Key performance metrics are valuable tools for analyzing one’s own company with the goal to improve performance, or for appraising future growth of a competing company to determine the overall value of a possible merger or acquisition. Key performance metrics for the media industry cover a lot of territory, including assessments related to a company’s income statement, cash flow statement, balance sheet, operational market data, and several other reports that overlap in different areas. Most of the metrics regularly reviewed are based on financial statements, and depend on a company’s own financial records because competitors financial statements are seldom available. This restriction is not always absolute, in that public media companies are required to periodically release overall performance numbers. Although not as good as market-specific performance numbers, these public disclosures often can provide the ability to do high level comparisons among companies in the same industry.
Tools and Resources
Several outside resources provide industry and market-performance information. These include the Broadcast Cable Financial Management Association (BCFM); BIA Financial Network (BIAfn); SNL Kagan; Miller, Kaplan, Arse & Co., LLP; the National Association of Broadcasters (NAB); the various state broadcasters associations; the
National Cable & Telecommunications Association (NCTA); the Cable and Telecommunications Human Resources Association (CTHRA); Veronis Suhler Stevenson (VSS); various Wall Street investment banking firms; and many industry-specific publications. Data available include ownership and contact information, pending and completed transactions, estimated revenues, growth statistics and trends, market demographic information, technical data, benchmarks, projections, and historic salary information, along with a supply of other information helpful in evaluating and comparing media properties. Links for most of these (and other) sources can be found on the BCFM web site (www.bcfm.com). A quick look at the individual web sites will give the reader an understanding of the specific information available.
Key Performance Metrics General
Cash Flow Margins
The various forms of cash flow margins are designed to measure the business’s operating performance by expressing income as a percentage of revenue. This can serve as a great indicator of change over time, and allow the analyst to focus on the reasons for this change. Once the reasons have been identified, a manager can make an informed decision about correcting a problem or capitalizing on an opportunity. Two forms of cash flow measurement are EBITDA (earnings before interest, taxes, depreciation, and amortization) and free cash flow (FCF). Broadcast Cash Flow (BCF) is covered later in this chapter. This margin is relevant only to radio and television operations.
EBITDA is calculated as Net Income + Interest Expense + Tax Expense + Depreciation and Amortization. EBITDA is useful in making comparisons about overall company performance within the industry as well as outside the industry.
Free cash flow (FCF) generally approximates cash generated or expected to be generated over and above operating and financing needs. FCF takes into consideration both the income statement and balance sheet in comparing how much actual cash a company has available for potential acquisitions, to pay dividends (or other forms of equity compensation), to make nonscheduled payments on outstanding debt, to buy back stock from existing shareholders (generally applies only to public companies), and for return of capital to owners of privately held companies. The calculation of FCF is Net Income + Depreciation and Amortization + Deferred Taxes (taxes owed but not paid in the current period) +/— Other Income or Expense + Noncash Compensation — Capital Expenditures. In other words, FCF is simply EBITDA minus capital expenditures, minus cash interest (interest payments made “in cash” during the period), minus debt-service payments (payments of borrowed principal) plus or minus other income/expense.
Liquidity ratios provide a measure of a company’s capacity to handle its short-term obligations as they mature. The most common is the current ratio, which is calculated by dividing current assets by current liabilities. A current ratio equal to 1 means that a company’s current assets are exactly equal to its current liabilities; this tells management that if the company is to continue to meet its short-term obligations in a timely manner, there is no margin of error in the current asset accounts. The greater the margin above 1, the better a company’s “cushion” to protect itself from the unexpected. Take, for instance, the case in which a client experiences financial difficulties and begins to slow down payment on invoices. This results in a deterioration of the company’s accounts receivable collection—and ultimately, this means less cash to pay current liabilities on time. A current ratio below 1 is a warning sign that the company is experiencing current asset or current liability problems that could impair its ongoing ability to operate.
Another liquidity ratio is days sales outstanding (DSO). The DSO ratio is calculated by dividing a company’s total accounts receivable by the average net sales per day. This gives management the average number of days of sales remaining unpaid from advertisers. For instance, a company that on average sells $10,000 worth of advertising per day, and has total accounts receivable outstanding of $642,000, has a DSO of 64.2 days. This means that on average, it takes 64.2 days for the company to collect its receivables. (Some firms figure DSO by eliminating cash-in-advance sales from the calculation in order to measure the overall effectiveness of the Collections Department.) What is an acceptable DSO? This depends on a number of factors, including the segment of the industry one is in, the markets in which a station or system operates, and the company’s credit policies, as well as a host of other factors. To use this liquidity ratio effectively, first determine the norm for the station, market, company, or segment of the industry. Once this benchmark is established, management can use the DSO ratio to evaluate whether station, market, or company performance is above the norm and thus puts it at risk for a higher level of bad debt if appropriate actions are not taken. BCFM provides participating members with periodic DSO information. For more information contact the association.
Return on Assets
Business analysts often want to know how well a company takes advantage of its assets. Return on assets (ROA) is calculated by dividing net income by total assets (or, more strictly, net income plus interest expense — net of income tax savings -by total assets). Investors often look at this measurement when evaluating the companies in which they are considering making investments. It is only common sense that an investor wants to see his or her money used in the most cost effective and profitable manner. Internally, management can use this same concept to help determine where within the organization to invest funds to maximize return on the investment. For instance, a company may have divisions that operate in some or all of the following areas:
• Radio stations
• Television stations
• Cable systems
• Television networks
• Cable programming
On the other hand, a company may operate in only one of these areas, but in markets that vary dramatically in size. By using an ROA calculation for each “operating” segment, management can determine where available funds should be invested in order to obtain the maximum return.
A similar but slightly different measurement that reveals how well a company uses its assets is return on investment (ROI). The concept is the same as ROA, but is calculated by dividing the net return or expected net return (gain from the investment minus the cost of the investment) by the cost of the investment. In this case, the company can tell which investments are worthwhile and deserving of continued support, and conversely, which investments are disappointing in their productivity.
In addition to the key performance metrics described above, there are a number of measurements specific to either broadcasting or cable.
Segment-Specific Metrics Broadcast
Although used more often in radio, this ratio can also be applied to television and cable as a means of determining how efficiently a station or cable network converts ratings into revenue. More specifically, this ratio measures the company’s share of audience compared to its share of advertising revenue spent in the market. The ratio can be calculated only when ratings and revenue data relative to market competitors are available, and is most often used in radio to evaluate the relationship between a station’s share of revenue and its share of the 12-and-over population of radio listeners in that market. Audience information is reported by a ratings service, such as Arbitron. Power ratios can also be calculated using different demographic groups, such as adults ages 25 to 54.
The power ratio is calculated in two steps. The first step is to obtain the total revenue in a market and multiply it by the specific audience share (either 12+ or 25-54) for that station, which yields a revenue amount based on audience share (”audience share revenue”). Then divide the actual revenue for the station by the “audience share revenue” calculated in step one. The result is a number either greater or less than 1. If the station’s actual revenue is less than the “audience share revenue,” then the power ratio is less than 1. If the station’s actual revenue is greater than the “audience share revenue,” then the power ratio is greater than 1.
Take, for example, a situation in which total market revenue is $10 million, and a specific station has a 12+ audience share of 15 percent. On a 1:1 basis, the station should expect $1.5 million in revenue ($10 million x 15 percent). Now assume that the station’s actual annual revenue is $1.2 million. In this example, the station is actually converting less than 1:1, and thus is not converting revenues based on all of the audience ($1.2 million divided 4- $1.5 million = 80 percent, or a power ratio of 0.8) against total market revenue. This would indicate that another station in the market probably has a power ratio greater than 1.0 to make up the difference.
A station’s power ratio can be influenced by a number of factors, including the station’s programming format. In radio, it is generally accepted that a news/talk station will have a higher power ratio than a CHR (contemporary hits radio) station because advertisers generally believe that reaching the listeners of a news/talk station is a better consumer target than CHR listeners. The news/talk audience is perceived to be older, more affluent, and in control of more disposable income. In general, the higher the power ratio, the better a station’s sales staff is performing. Although a higher power ratio is good, this could present some problems in the future. As other stations improve their sales performance, the station with the initial high power ratio will likely begin to perform more in line with its audience share. In this case, its revenue growth could be lower than that of the market in general, and may even result in revenue declines as the station’s power ratio declines.
Broadcast Cash Flow Margin
Historically, the most common cash flow margin used in the broadcasting industry was referred to as broadcast cash flow (BCF). Broadcast cash flow is simply revenue minus operating expenses. (BCF is sometimes referred to as station operating income.) The BCF margin is very simple, and is calculated by dividing an individual station’s or station group’s operating income by the same station’s or group’s gross or net revenue. This margin focuses totally on the operating performance at a station level, and ignores any corporate overhead, interest, amortization, depreciation, and taxes. It can be used to compare individual station performance against overall industry norms, or against specific station competitors. In addition, a company that has radio (or television) operations in several markets might use this ratio as one way to determine how well the management team in one particular market is performing versus its peers in other markets. Any analysis like this, however, must also take into consideration the differences between markets, including economic base (service, industrial, military, educational, etc.), population size, geography, and ethnicity (among others).
What are some of the things we can learn from a BCF comparison? First, one can compare the relative percentage of net revenue a station is spending in each major expense category in the various markets. For instance, technical expense is only 1.4 percent of net revenue in Market C, whereas it is more than double that in Market A (4.2 percent) and Market B (3.3 percent). What could this mean? It could be as simple as a situation in which the company operates only one station in Market C, whereas it operates two or more in each of the other markets. It could mean that in an attempt to increase BCF, the manager in Market C is putting off routine maintenance and creating a situation that may cost the company more in the long run. One other quick example: The programming in Market B is 10.6 percent of net revenue. At the same time, Markets A and C are relatively similar to each other, at 19.6 and 18.6 percent, respectively. This would certainly be a situation worth investigating. Larger markets might require more investments in programming and promotion. Typically, markets of similar size will have comparable ratios.
Segment-Specific Metrics Cable
Cable system analysis has become increasingly complicated as cable operators have expanded services beyond providing traditional analog video channels. Cable companies now can offer customers a combination of on-demand services, data services (Internet), telephone, wireless, and commercial packages and they continue to explore new ways to use their relationship with their subscribers. Let’s first look at some general metrics used for the entire system operations.
Homes Passed Is a measure of the number of unique residences (homes, apartments, etc.) within the scope of a cable system’s franchise that are technically “passed” by cable wires, and thus have the opportunity to subscribe to some or all of the system’s products. More specifically, “passed” means that the cable system actually has cable running either underground or aboveground adjacent to the residence, and thus the residence can easily be connected to the cable system’s headend once a subscription is obtained. Homes passed is an interesting statistic because it reveals a number of things about a cable system’s future opportunities. For instance, if the total number of unique residences in a cable system’s franchise area is 75,000, and the cable system has “passed” only 40,000 of them, one would expect that the system could grow its potential customer base by installing more infrastructure, thus giving the additional “homes passed” the opportunity to subscribe. This may not be as easy as it sounds. For one thing, the system may be in a rural area that has only a small nucleus of population (for instance, in the town center), with the remaining franchise population spread out over hundreds of square miles of countryside. It is easy to understand that if a cable system can “pass” 100 unique residences for every mile of cable it installs, the potential profitability is significantly greater than in the more rural area, where the system “passes” only 5 (or fewer) unique residences per mile.
Annual OCF or OFCF per Home Passed Allows a comparison of the operating cash flow (OCF, similar to BCF in broadcasting) or operating free cash flow (OFCF actual cash available after capital expenditures, taxes, interest, corporate overhead, and all other expenses are deducted) per the number of homes passed. Basically, this is a measure of a cable operator’s efficiency in using its capital to build out a single system or multiple systems. OCF is defined as the total revenue minus the total direct costs and total operating expenses. OFCF, on the other hand, includes the additional subtraction of the capital expenditures from total revenue.
Bundle Discount Percentage of Monthly Recurring Revenue Allows the system to evaluate how effective its packaging of all of its services is in generating additional revenues. Most cable operators discount individual services (video, data, and telephone) when they are bought as part of a bundled package. This can be an important metric because a system prices its services on an individual basis as well as on a packaged basis in order to maximize profitability.
Now let’s look at a few of the metrics used to measure performance of the traditional video-service product. These measurements can also be applied to the data and telephone service products by simply changing the measurement definitions. This will be explained further after the video metrics are described in some detail.
Basic and/or Digital Net Gain Measures the net new subscribers that a cable system has acquired for either its basic cable service or for its digital cable service. This calculation simply takes the number of subscribers that the cable system has for either basic or digital service at the end of a given time period (usually monthly, quarterly, or annually), and subtracts the number of subscribers for the same service that the system had at the beginning of the time period. If a cable system is growing its subscriber base, this calculation should result in a positive number, but it can vary widely by the system’s location (for example, areas with transient populations, including students or so-called snowbirds, can cause cable systems to lose subscribers at specific times of the year), as well as by how long the system has been in operation. If the calculation is negative, the cable system has lost more subscribers than it has signed up during the measurement period. This could be one sign of customer service-related issues that need to be addressed. The system operator may also want to look carefully at the specific gains (or losses) of the basic customers versus the digital customers. This can help management determine the success of specific marketing efforts aimed at increasing the number of digital customers versus the number of basic customers. Historically, digital subscribers generate substantially more revenue than do basic subscribers.
Basic and/or Digital Churn Rate Measures the percentage of customers who disconnect during a specific time period. It is calculated by dividing the number of customers who disconnected video services during a specific time period by the number of customers who subscribed to the service at the beginning of the time period (usually a month). This is a very important measurement because of the significant costs in acquiring and setting up a new customer. These costs include marketing (advertising and special promotions aimed at getting potential customers to sign up for service), customer service (actual process of signing up the customer, including getting the relevant information as to where the service is to be provided and how it is going to be paid for), and the cost of sending a technician with all the necessary equipment out to the service site to install the new service. A reduction in churn rate can greatly enhance a system’s profitability.
Analog and/or Digital CMPU (contribution margin per unit) Is calculated by adding either the complete basic service or digital service revenue to the equipment rental revenue and then subtracting the service costs the fees the system incurs to obtain programming service from networks (e.g., the fee per subscriber that a system pays to carry ESPN or the Discovery Channel) and dividing the result by the total number of subscribers to the level of service being measured. This measurement is exactly what it says. It is the contribution margin per unit, in other words, the amount of financial contribution that each unit of service purchased by a subscriber makes toward the system’s total revenue. Additionally, the system would look at the breakout of “tiers” of services within both the analog and digital subscriber categories. For instance, within the digital tier, one might find a “basic” digital subscriber who may or may not subscribe to the HD (high definition) digital service or the DVR (digital video recorder) service. Just as digital subscribers generally mean more revenue to the system than basic analog subscribers do, both HD subscribers and DVR subscribers provide substantially higher revenue opportunities than do the “basic” digital subscribers. Subscriptions to these higher levels of service generate more revenue for the system, and they usually require the rental or purchase of additional equipment, again providing for additional revenues to the system.
Applying the Metrics to Data and Telephone
To apply the net gains or churn metrics to telephone or to other services, simply change the data being measured from basic or digital subscribers to VOD (video on demand) subscribers, HSI (high speed Internet) subscribers, telephone subscribers, and so on. Measurements in the data-service area might also break down the net gains into tiers based on the type of service being provided. Data packages may be priced based on the speed of the connection the faster the speed, the greater the cost to the subscriber. Higher subscription fees generally mean better profitability to the cable operator.
When calculating some or all of these metrics related to the cable industry, it is important to remember that there is some overlap among these measurements. For instance, when calculating total subscribers to the video services of a cable system, be sure to not double count the number of customers. All digital subscribers are generally required to be basic subscribers as well thus, a complete count is not as simple as adding the total number of basic subscribers to the total number of digital subscribers. This issue is also relevant to the consolidated count of a cable operator’s customers. For example, some customers may subscribe to all three (video, data, and telephone) services, whereas others may subscribe to just one or two of the services. Sometimes these separate services purchased by a single subscriber are called revenue generating units (RGUs).
Always keep in mind that metrics are only as good as the manner in which they are used. Many a good operator, analyst, or investor has taken valid data and applied it incorrectly. There are many management questions to which data alone cannot provide the answers. Raw numbers are valuable only when combined with the appropriate analysis and interpretation. One must utilize the multitude of valuable resources that are available within the broadcast and cable universe to get a better understanding of the industry or industry segment that is under review. Combining good data with good analysis and interpretation will provide the necessary information to make good operating and investing decisions.