Arena Group Holdings, Inc. Q1 FY2022 Earnings Call

Good day, everyone, and welcome to The Arena Group's earnings call for the first quarter of 2022. I would now like to hand it over to your host, Rob Fink of FNK IR. The floor is yours, Rob.

Thanks, operator, and thank you all. Hosting the call today are Ross Levinsohn, Chairman and Chief Executive Officer; Doug Smith, Chief Financial Officer; and Andrew Kraft, Chief Operating Officer. Before we begin, I would like to note that some of the comments made during this presentation may include forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking. Forward-looking statements relate to future events or future performance and include, without limitation, statements concerning the company's business strategy, future revenues, market growth, capital requirements, product introduction, expansion plans, and the adequacy of the company's funding. Other statements contained in this presentation that are not historical facts are also forward-looking. The company cautions investors that any forward-looking statements presented in this presentation or that the company may make orally or in writing from time to time are based on beliefs, assumptions made by information currently available to the company. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond the company's control or ability to predict. Although the company believes that its assumptions are reasonable, these assumptions are not guarantees of future performance and some will inevitably be proved to be incorrect. As a result, the company's actual results can be expected to be different from its expectations and those differences may be material. Accordingly, investors should be cautious in relying on forward-looking statements, which are based only on known results and trends at the time they are made to anticipate future results or trends. Certain risks are discussed in the company's filings with the SEC. With that, I'd now like to turn the call over to Ross. Ross, the call is yours.

Thank you, Rob. As many of you may know, we shared some figures last week to emphasize the ongoing rapid growth and expansion of our business. Today, we will provide a more detailed overview of our financial and operational performance. This was a strong quarter for The Arena Group. As we indicated during our Q4 and full-year results at the end of 2021, we began to see the benefits of significant investments made in technology, our platform, social media and audience development initiatives, business intelligence efforts, and our team last year. Our first-quarter performance further validated those investments, showing strong growth in revenue and audience alongside a significant increase in gross profit, even though Q1 is typically our slowest quarter. To highlight a few key results, first-quarter total revenue rose to $48.2 million from $33.6 million in the previous year, a 44% increase. Importantly, first-quarter digital revenue grew by 82% to $31.6 million, now representing over 65% of total revenues. First-quarter gross profit more than tripled to $19.7 million, translating to a 41% gross profit margin compared to $5.4 million or 16% in the first quarter of 2021. This marks our second consecutive quarter with gross margins exceeding 40%, and we believe that this trend will continue. The cost of revenue in Q1 rose by just 1%, reflecting the strong gross profit generated from our growing digital revenues. It’s worth noting that Q1 is usually our weakest quarter, making these improvements particularly significant, and we are observing this momentum carry into Q2 as well. We are on a solid path towards profitability. In the quarter, our adjusted EBITDA loss was $1.1 million, a substantial improvement from a loss of $8.7 million in the first quarter of 2021, which shows an enhancement of $7.6 million. This figure includes some one-time costs related to our NYSE American uplisting in February. To be direct, we are rapidly growing our revenue and audience while tightly managing the costs to generate that revenue and investing in profitable opportunities. Our first-quarter results indicate that we have reached a key inflection point. With the investments made in 2021, we anticipate that our revenue growth this year will continue without significant additional costs. We have completed major investments in our platform, and they are yielding results. Our Q1 gross profit more than tripled, and digital revenue grew by more than 82% year over year. Digital revenue now constitutes 65% of our total revenue, up from 52% last year. A significant portion of each additional dollar in digital revenue is now contributing to our gross profit, putting us on track towards profitability as we continue to increase our revenue. During our last earnings call in March, we discussed our proprietary playbook, which integrates our content strategy, audience development efforts, and social media initiatives to drive traffic to our key properties and publishing partners. This playbook is generating increasing momentum. Our model resembles a flywheel, where effective optimization leads to more traffic, resulting in additional advertising revenue and consumer data, which allows us to circulate traffic further and optimize our audiences. We have successfully executed the playbook in our sports and finance verticals since late 2021, and the results have been very promising. In the first quarter, our sports vertical, led by Sports Illustrated, saw a 248% increase in monthly average page views compared to Q1 of 2021, thanks to our exceptional journalism and storytelling. Our social media efforts across TikTok, Facebook, Instagram, and Snap showed a 265% increase in Q1 social page views compared to the previous period, according to Google Analytics. Sports Illustrated maintained the top share of voice on Facebook link posts among all major sports brands for the second consecutive quarter, according to CrowdTangle. This surge in traffic played a crucial role in the digital revenue growth we experienced in Q1. We signed 14 new FanNation sites and added another publishing partner to our SI Media Group during the quarter, further enhancing our content and audience base with minimal upfront investment. We also launched our new commerce initiatives, SI Shop and SI Showcase, which are two marketplaces for goods, services, and content recommendations. We believe these initiatives will make meaningful contributions to our business this year and next, diversifying our revenue base. In our finance vertical, Q1 saw a significant increase in our audience at TheStreet. When Jim Cramer left last October, TheStreet's online audience was at 9.1 million monthly page views. By Q1, with a new editorial team, the application of our playbook, and an expanded content offering, TheStreet achieved 24.3 million monthly average page views. That’s a 166% increase in just eight months, achieved at a lower cost base than previously. This increased traffic has significantly boosted ad revenue and opened opportunities for new subscribers. In Q1, we introduced our first new paid product in nearly four years, TheStreet Smarts, and we anticipate continued growth in our subscriber base going forward. We began to implement the playbook in our pet brand, Pet Helpful, as well and have seen significant audience engagement growth. Monthly average page views for Pet Helpful in Q1 reached 13.6 million compared to 6.7 million in the prior quarter, a year-over-year increase of 101%. We plan to execute the playbook on more HubPages sites in the upcoming quarter. Our playbook has proven effective not only with well-known media brands like Sports Illustrated and digitally native companies like TheStreet, but also with smaller, less recognized brands. These results further illustrate the scalability of our model. We operate on a unified digital infrastructure that scales without extra costs, akin to SaaS companies. On April 1, we completed the acquisition of AMG/Parade, which will kickstart our lifestyle vertical anchored by Parade and feature brands such as Spry Living and Relish, which had 46 million monthly average page views in Q1 digitally and 233 million monthly print gross impressions according to MRI-Simmons, along with connections to over 1,200 local newspaper partners nationwide. We are actively transitioning these brands onto our platform, integrating our advertising technology, expanding distribution through our ecosystem, and applying our playbook for expected strong audience growth in a short timeframe. All of this momentum in Q1 resulted in a $7.6 million improvement in adjusted EBITDA to a loss of $1.1 million. This occurred despite some significant expenses related to our NYSE American uplisting, which will not be recurring. It's important to highlight that out of our net loss of $18.4 million, $15 million, or 81%, consisted of non-cash expenses. Today, we operate as a dynamic publisher of 40 owned and operated brands and partner with over 200 others. Our award-winning journalism complements partner-generated content, generating additional advertising inventory and attracting more viewers. The essential factor is our scalability. With a robust technology platform, we can grow significantly on our existing infrastructure with little to no added costs. We don't require substantial increases in headcount or additional technology investments. We are set to grow and do so profitably. Our infrastructure is designed to onboard new partners and brands, aiming to achieve revenue at gross margins above 50% moving forward. As I mentioned earlier, this is an excellent start to 2022, and it is just the beginning. I wish to discuss more on this topic this year, but first, I would like to hand over the call to Doug Smith, our CFO, to walk you through the numbers. Doug?

Thank you, Ross. Let me turn to the results. In the first quarter, revenue was approximately $48.2 million, up 44% compared to $33.6 million for the first quarter of last year. Breaking that revenue down, total digital revenue of $31.6 million represented 65% of our total revenue and it grew 82% versus the first quarter of last year. Digital advertising revenue of $21.6 million increased 127% versus the first quarter of last year, which was driven by higher traffic across our owned and operated properties in FanNation as well as an increase in the average page view. Digital subscription revenue was $6.5 million for the first quarter of 2022, down 9% as compared to the $7.1 million for the first quarter of 2021. Other revenue, which is primarily licensing and e-commerce revenue, increased by 364% to $3.5 million during the first quarter of 2022 due to additional revenue for certain licensing agreements related to SI Swim and other Sports Illustrated media businesses. Print revenue increased 3% to $16.7 million for the first quarter of 2022, driven by growth in print subscriptions and newsstand, but partially offset by lower print advertising revenue. Gross profit percentage for the quarter was 41% as compared to 16% in the first quarter of last year. Q1 cost of revenue increased by only 1% despite the 44% growth in revenue, which reflected the high gross profit from our growing digital revenues and a substantial reduction in the rev share at TheStreet. This drove a more than tripling of gross profit, increasing $14.3 million from $5.4 million in the first quarter of 2021 to $19.7 million in the first quarter of this year. Total operating expenses were $35.2 million in the first quarter of 2022 compared to $27 million in the first quarter of 2021. The increase was primarily driven by an increase of $5.2 million related to payroll along with related benefits and stock-based compensation, and an increase of $1.9 million in circulation expenses, which reflected the residual impact of a campaign to increase Sports Illustrated subscribers in the fourth quarter of 2020. As a result, net loss improved to $18.4 million for the first quarter of 2022 as compared to $25.5 million in the prior-year period. The first quarter of 2022 included $15 million of non-cash charges, which represented 81% of our total net loss, as compared to $12.8 million of non-cash charges in the first quarter in the prior year. Adjusted EBITDA for the first quarter of fiscal 2022, which is typically our weakest quarter of the year, was a negative $1.1 million as compared to a loss of $8.7 million for the first quarter of 2021, representing a $7.6 million improvement in adjusted EBITDA. As Ross mentioned, the first quarter of 2022 also included significant professional fees and expenses related to the uplist, which we do not expect to be ongoing. Looking at the balance sheet and looking at liquidity, we ended the quarter at $22.5 million in cash and cash equivalents, which compared to $9.3 million at December 31, 2021. This $22 million balance included receipt of the $30.5 million in net proceeds from our offering of common stock completed during the first quarter of 2022. Subsequent to the end of the first quarter, we paid $10 million net of cash acquired for the acquisition of AMG/Parade at closing.

Thanks, Doug. 2022 has started strongly with rapid growth in our finance vertical, continued expansion in our sports vertical, our uplisting to the NYSE American, the closing and integration of AMG/Parade, and much more. The groundwork we laid in late 2020 and throughout 2021 is now yielding results. Our first-quarter gross profit has more than tripled year-over-year, and we are now allocating over 50% of every additional digital dollar to gross profit. We are well-positioned for profitable growth. The second quarter is already off to a great start with major sporting events like the Masters, the kickoff of baseball, the NBA and NHL playoffs, and of course, the NFL draft. The Spun, which we acquired last June, continues to generate significant audience and revenue figures that exceed our expectations. The volatility in the stock market and the demand for sound investment advice have driven TheStreet to achieve record audience and ad revenue figures. Later this month, we will launch the 2022 edition of SI Swimsuit, which will feature a strong initiative called Pay With Change, a new gender equity initiative aimed at transforming the SI Swimsuit franchise into a platform for change for women worldwide. Finally, while we continue to see organic growth, our M&A pipeline is very active, and you can expect further inorganic growth as our platform and technology have been fully developed. I want to emphasize that any expansion will not incur significant capital or personnel costs due to the work we've accomplished over the past 18 months. This will result in margin expansion and profitability for our business. I'm now happy to answer any questions you may have.

Your first question is coming from Dan Day at B. Riley Securities. Dan, you are now live.

Good afternoon, everyone. Thank you for taking my questions. My first inquiry pertains to the other revenue line. You mentioned some exciting initiatives at Sports Illustrated regarding e-commerce. Please correct me if I'm mistaken, but it seems that AMG/Parade includes some e-commerce affiliate revenue. How should we approach forecasting that revenue line in the future? With $3.5 million recorded in the quarter, should we anticipate significant growth from this point?

Yes, we are not providing specific forecasts, but with AMG/Parade initiating our lifestyle vertical, we see significant commerce initiatives on the horizon. On the SI side, we benefit from our partnership with ABG, one of the largest licensing and commerce companies globally. We are collaborating closely with them to promote and distribute various e-commerce efforts. Additionally, we are launching two-sided marketplaces that focus on branded content, content recommendations, and other commerce initiatives. We anticipate that commerce will be a growing segment for us this year and in the following years. We're also beginning to see an increase in licensing and syndication, which brings multiple advantages, including extending our content beyond our own platforms and lowering our overall content costs through monetization across the Internet. Therefore, we view licensing and syndication as key growth areas, along with commerce. We haven't discussed our gambling initiatives with 888 and the SI Sportsbook in detail, but we expect growth in that area as well this year and in the future as new states come online.

Awesome. Thank you. And then if I could turn to TheStreet for a minute. You started to touch on this in the prepared remarks. Just maybe a little more detail on subscriber recovery following the churn in fourth quarter. And then obviously you've done an incredible job driving traffic and ad revenue. Just curious what's that asset is balanced between subscription revenue versus advertising at this point, and how that's different from maybe it was a year ago.

Sure. I'll let Doug jump in as well. He mentioned some improvements at TheStreet in terms of audience and advertising. We experienced a 9% decline year over year in Q1, which is relatively minimal compared to forecasts for our company. We launched a new product called TheStreet Smarts and are once again focusing on the digital subscriber side, finding our footing. With a significant increase in our audience, both in unique users and page views, we now have more potential customers for these products. I believe we have reached a low point in subscriber numbers following Jim Cramer's departure, and we are witnessing improvements in our audience and advertising revenue. However, subscription revenue still surpasses ad revenue at TheStreet, though ad revenue is growing significantly. Doug, feel free to add anything.

Historically, TheStreet had sort of mid-teens percentage of its revenues in advertising. We saw that number actually decline a bit in 2020 and the beginning of 2021 as we saw a very dramatic ramp-up in the subscriber base. And as we've discussed, we've seen some softening in the subscription level, but now we're seeing the huge growth in the advertising side. So we're anticipating advertising to exceed historical levels into the 20s and perhaps beyond that. Not because we expect advertising subscriptions to climb any further; just because we are experiencing such strong growth in the advertising side.

Awesome. Well, I appreciate you guys taking my questions. I will turn it over and continued best of luck.

Thanks so much.

Your next question is from Mark Argento at Lake Street.

Congratulations on a really strong quarter. I wanted to focus a bit on the significant increase in page views, which I believe rose by 67%. Can you discuss how as you continue to grow your viewership, the potential for direct advertising deals compares to traditional programmatic advertising? Where do you currently stand on that and where do you see it heading?

One of the benefits of having premium brands is that advertisers trust them because they are safe and well-known. When we took over the Sports Illustrated franchise, it had a strong reputation but lacked the audience of some competitors. However, we have significantly grown our audience. By combining trusted brands like Sports Illustrated, TheStreet, and Parade with technology, expertise, excellent journalism, distribution, and marketing while focusing on social media and search, we are creating a momentum that allows our audience to keep expanding. Our content is tailored, unique, and up-to-date. As our audience grows, so do our page views and impressions. Historically, CPMs and RPMs increase throughout the year, with Q1 being the weakest and Q4 the strongest, giving us optimism for continued growth this year. Your point is crucial because direct advertising deals with large Fortune 500 companies typically yield higher CPMs. Additionally, sponsorship deals are often more about brand recognition and expansion rather than just clicks or CPMs. We are increasingly closing more deals; at the start of this year, we have seen a 2.5 times increase in the number of direct agreements with advertisers compared to last year. This is a solid position for us, and it continues to grow this quarter. As I mentioned earlier about Swim, we have secured high-profile Fortune 500 brand sponsorships for the swimsuit edition this year, and we see this growth in our sports and finance categories too. Parade offers a significantly higher proportion of direct advertising compared to programmatic, which is unusual in today's environment. We are excited to integrate them into our platform, broaden their audience, and leverage a strong foundation of direct advertising. As we expand and strengthen our market position, I believe we will secure even more direct deals, which will positively impact our EBITDA and overall profits.

That's super helpful. Just one quick housekeeping. Doug, you had mentioned there were some one-time listing costs and other stuff in the quarter. I don't know if you quantified that or not, but do you have a ballpark number on that?

Yes. I mean, if that had been excluded, we would have had positive EBITDA for the quarter.

Okay. All right, that's great. And then just lastly on the cash, so I think you said you had, what was it, $22 million? And then you had paid out the $10 million for AMG/Parade, or was it the $30 million, you paid out $10 million?

We had $22 million of cash at the end of the quarter at March 31, and then the payment for AMG/Parade was the next day April 1.

Got it. All right. Awesome. All right, guys. Appreciate it. Nice work. Keep it up.

Thanks, Mark.

Thank you. There were no other questions in queue at this time. I would now like to hand the call back to Ross Levinsohn for closing remarks.

Yes, thank you all. We appreciate you dialing in and listening and following us. We are super excited for this year. The momentum we have has really been strong really since the middle of last year and is accelerating. So we're well on our way to a path to profitability and excited to visit with you again at the end of next quarter.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect at this time and have a wonderful day. Thank you for your participation.