Beasley Broadcast Group Inc Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Beasley Broadcast Group's Second Quarter 2022 Conference Call. Before proceeding, I would like to emphasize that today's conference call and webcast will contain forward-looking statements about our future performance and results of operations that involve risks and uncertainties described in the Risk Factors section of our most recent Annual Report on Form 10-K as supplemented by our quarterly reports on Form 10-Q. Today's webcast will also contain a discussion of certain non-GAAP financial measures within the meaning of Item 10 of Regulation S-K. A reconciliation of these non-GAAP measures with their most directly comparable financial measures calculated, presented in accordance with GAAP can be found in this morning's news announcement and on the company's website. I would also remind listeners to the following: In its completion, a replay of today's call can be accessed for 5 days on the company's website. You can also find a copy of today's press release on the Investors or Press Room sections of this site. At this time, I'd like to turn the conference over to your host, Beasley Broadcast Group's CEO, Caroline Beasley. Please go ahead.

Thank you very much. And good morning, everyone. Thank you for joining us to review our second quarter results. Marie Tedesco, our CFO, is with me this morning. I'm pleased to report that our growth momentum continued through the second quarter. Net revenue increased 8.8% year-over-year, exceeding the guidance when we reported Q1 of a projected 7% increase in revenue. On a pro forma basis that excludes our divested Boca Raton station, which closed on April 1st, our revenues grew 9.2% for the quarter. Second quarter digital revenue grew an impressive 34.3%, while audio revenue increased 4.3% year-over-year. Similar to previous quarters, new business initiatives, sports betting, political engagements, and the year-over-year increase in digital revenue were the primary drivers of our quarter. Our new business performance was robust this quarter, as we recorded $7.8 million in revenue, up 60% from Q1 and up 16% from the second quarter of 2021. Given the declining economic backdrop, we remain watchful of every market, every expense, and all of our content creation and other initiatives as we move into the back half of the year. Now breaking down the second quarter, as I mentioned before, revenue increased 8.8%. Over-the-air local revenue increased 10.5% or by $3.5 million, while national revenue decreased. This trend aligns with the past several quarters where declines in national revenue have been offset by increased local performance. Given the growth we have had in digital, digital now accounts for a larger share of revenue than national, and we expect this gap to increase going forward, net of political impacts. Our overall gains were again evident with 11 of our 13 markets delivering year-over-year revenue increases. Now looking closer at the quarter, April was up 7.4%, May was up 11.1%, and then June was up 5% year-over-year as we started to see the economy slowing. Finally, our enclosed range to second quarter 2019 revenue levels with the current quarter being less than $500,000 off second quarter 2019 on a pro forma basis. We continue to exceed our internal goals of growing our total audience and reflecting our strategy of talent-created content. We generated a 24% year-over-year increase in unique visitors, which directly converts to impressions. In addition, on June 23, we completed a small acquisition of a white-labeled digital agency that will accelerate our digital revenue growth and provide meaningful synergies within our digital platform. Overall, our digital revenue accounted for 16.5% of our total Q2 revenue. That's up from 14% in the prior quarter and 13.4% in the year-ago comparable quarter. Our goal remains for digital revenues to account for 20% of total revenue by the end of 2022. Now touching on sports betting, we recorded $3.1 million in revenue or 5% of total revenue in this category during the quarter. This was driven by Detroit, Philadelphia, and New Jersey. I do have breaking news: sports betting legislation was tentatively approved in the early hours of this morning in Massachusetts. That's moving closer to generating additional revenue in this category from our Boston cluster. Second quarter SOI increased slightly compared to last year to $11.2 million. Operating expenses increased 10.6% year-over-year or $5.1 million, with increased cost of sales directly related to revenue. We also saw increased event costs associated with NTR revenue. We have a reinvestment in station marketing and non-cash expenses related to the new Boston Studios, which we will be moving into within the next month or so. Notably, digital SOI grew by $1.5 million compared to the second quarter of 2021, with margins now at 14%. When comparing the second quarter of 2022 to the first quarter of 2022, digital SOI increased $2.1 million, negative $593,000. This further highlights the progress we are making with our digital business. Similar to Q1, we were able to take advantage of our bonds trading below par, and we repurchased an additional $2 million at 75% of par, and that will settle in the third quarter. I'm going to hand it over to Marie now, and she's going to give you a deep dive into the quarter. Marie?

Thanks, Caroline. And good morning, everyone. I will start with our review of the second quarter results and follow up with a review of our balance sheet. Second quarter net revenue increased 8.8% or $5.2 million to $64.8 million, which includes $673,000 from our two esports teams, the Outlaws and AXLR-R8. We grew revenue year-over-year in 11 of our markets, including our Boston, Charlotte, Detroit, New Jersey, Philadelphia, and Tampa clusters. For comparison, we generated approximately $600,000 in net political revenue in the second quarter compared to $85,000 last year, as we were a higher spend than initially expected, including more spending on campaign-related initiatives. Digital revenue for the quarter increased 34.4% to $10.7 million and now represents 16.5% of total revenue, also up 14% from the previous quarter. As we continue to manage our digital assets, we expect to grow our digital margin from 14.4% this quarter to a margin closer to pre-pandemic over-the-air margins. Largely reflecting the revenue growth, station operating expenses for the quarter increased 10.6% to result in second quarter SOI of $11.2 million, a year-over-year increase of approximately $100,000. Breaking down the increase in operating expenses, the main drivers of the increase were cost of sales of approximately $1.5 million year-over-year, including third-party costs related to the revenue increase, as well as concert and event expenses of $1.6 million, inflation-related wage increases, investments in station marketing, and a bad debt variance of approximately $1 million stemming from the prior year period. Reflected in these variances is approximately $2.5 million, which is directly related to the investments in our digital agency, which has been the driver of the ongoing success and growth of our digital revenue. Now looking at our revenue categories for the second quarter, consumer service remains our largest revenue category at 30.5% of our total revenue, and we drove a 7.4% year-over-year revenue increase in this category for the quarter. Our second largest category is retail, which accounted for 28.5% of total revenues and saw year-over-year increases. We saw double-digit growth in all but two markets. Entertainment moved down a notch to the third spot and represented about 27% of second quarter total revenues, with an increase of 5% year-over-year. This increase was partly driven by sports betting, which added $3.1 million or $100,000 more in the quarter year-over-year. Auto, our fourth largest category, saw revenues down 5.8% year-over-year and accounted for 8.3% of total revenue. We saw double-digit increases in auto in Detroit and New Jersey clusters and low single digits increases in Fayetteville. The year-over-year decline in this category was less than anticipated. We believe this revenue category can show improvements by the latter part of the year, provided that supply chain issues have normalized. Consumer products were down 20%, representing 5.6% of total revenue. Financial services rose 17%, representing 5.3% of revenues. Moving to second quarter market performance, according to Miller Kaplan, of our seven clusters that report to Miller Kaplan, Boston, Detroit, and Philadelphia outperform their markets. On a combined basis, these three market clusters increased 8.3% for the quarter compared to our combined market up 10%. However, while the national bucket decreased and now represents less than 15%, we grew our local revenue by 12.3% compared to our combined markets. Our clusters outperformed their markets in local revenue in all but one of our markets, with Boston, Charlotte, Detroit, Fayetteville, Philadelphia, and Tampa all growing their respective markets. Our clusters also exceeded the markets on a combined basis in digital and NTR, as we continue to see hyper focus on digital revenue. Digital revenue grew year-over-year compared to the combined markets, up 38.6%. With the ongoing success of our new business initiatives and the growth of our digital businesses, we expect this to offset continued national revenue decline. Corporate G&A expenses for the quarter increased 15.4% or by $610,000 compared to the second quarter a year ago to $4.6 million. The year-over-year increase in corporate G&A is related to increased wages, non-cash stock-based compensation, corporate and employee insurance expenses and T&E expenses. Non-cash stock-based compensation decreased by $25,000 to around $380,000 in the quarter, and we had an income tax expense for the quarter of $3.6 million, offsetting a previous quarter tax benefit of $5.8 million, resulting in a year-to-date tax benefit of $2.6 million. Second quarter 2022 operating income declined to negative $10.2 million, compared to $5.8 million in the year-ago quarter, solely due to an impairment of $8.6 million related to the increase in interest rates and a $1.5 million insurance proceeds received in the prior year quarter. Total second quarter interest expense decreased by $42,000 year-over-year to $6.8 million, related to our previous $5 million repurchase of our bonds completed in early April. We don't have any scheduled debt payments during the quarter, leaving us with total debt manageable. As previously mentioned, we repurchased an additional $2 million of our bonds, which settled on July 1st. Our second annual interest payment of approximately $12.6 million is going to be made this quarter. We ended the quarter with cash on hand of $45.9 million net of cash used in the bond purchase. Our strong cash position allows us continued flexibility to reduce debt and/or pursue additional acquisitions or investments in the digital space as investment opportunities arise that could further accelerate our digital growth and provide significant synergies and free cash flow. Our capital expenditures for the quarter were $5.1 million, mostly related to the relocation and buildup of our Boston Studios and office. We have received $2.6 million in a build-out allowance from the landlord, which nets our second quarter CapEx cash spend to $2.5 million compared to the prior year of $1.5 million. And with that, I'll turn it back to Caroline.

Okay. Thank you, Marie. Beasley brands continue to grow, driven by the highest quality multi-platform local content in the industry. In the second quarter, as mentioned before, our digital owned and operated audience grew 24% compared to the second quarter of 2021, with unique users now at 20.3 million. More importantly, this expanded audience spent more time and consumed content on our digital platforms, resulting in higher sellable digital impressions. Our O&O impressions were up over 95% from Q2 2021 to Q2 2022. We are in the very early innings of capitalizing on our ability to leverage these growing impressions, and we're laser-focused on this aspect of our business. In addition to the incredible growth on the digital platform, our radio stations continue to maintain dominant positions in Nielsen ratings, where we currently have the highest cluster share compared to every other major broadcaster in PPM. In fact, we have the number one station in most of our largest markets, including Boston, Philadelphia, Detroit, and Charlotte among adults 25-54 during this spring rating period. Moving on to esports, the Overwatch season is well underway, and we're presently rated 6th in the world. We are expanding our overall presence with the introduction of an academy team in partnership with the University of St. Thomas in Houston. We'll have more to report on this in the coming quarters. Now looking ahead to the third quarter and the back half of 2022, as we stay focused on driving further revenue diversification and growing our audience, especially on the digital platform with our new strategic initiatives, we are seeing a slowdown in July and August related to inflation, labor shortages, interest rate increases, continuing chip shortages, and just an overall downturn in the economy. Third quarter revenue as of today is flat to prior year, and breaking that down, July was down 4%, August is now pacing down 2%, and September is pacing up 8%. Breaking that down further, national is pacing down 16% and local is pacing up. We are mindful of our expenses and we initiated cost reductions in the second quarter through the end of the year. Lastly, before going to Q&A, I'd like to once again acknowledge our team members across the company for everything they have done and are doing to help us move past these economic challenges. Thank you very much for being on the call today. Should you have any further questions after we address the questions you sent in, please feel free to reach out to us. Marie, I'm going to hand it over to you at this point.

Thanks, Caroline. So there are a couple of questions in addition to our prepared script that weren't covered. The first question was asking us to provide more information on the small acquisition of this digital agency. If we could touch both on the price and the revenue impact of such?

Yes. So we paid $2 million for the agency, and the incremental revenue on a pro forma basis for the full year should be about $4 million. As mentioned in the script, we are expecting synergies as a result of this acquisition, and we're expecting those to be probably between $1 million and $1.5 million in synergies. Thank you.

And the second question is can you break down the increase in operating expenses and how much is related to digital as well as the agency build-out? So, in addition to what we reviewed in our script, digital expenses for the quarter totaled approximately $9.2 million or 17% of total expenses. Our digital agency accounted for approximately $2.5 million of that. And also for some additional clarity, our total third-party expenses for the quarter was $5.7 million. And that concludes our questions.

All right, again, thank you so much for attending the call today. Should you have any follow-up questions, please feel free to reach out. Have a good week.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.