Saga Communications Inc Q2 FY2023 Earnings Call

Good morning, everyone, and welcome to the Saga Communications Inc. Second Quarter Earnings Release and Conference Call. It is now my pleasure to turn the floor over to your host, Mr. Chris Forgy of Saga Communications. Chris, the floor is yours.

Thank you, Jenny. And thanks to all of you on the call for your continued interest in Saga Communications. Welcome to the 2023 Second Quarter Conference Call. And I'm immediately going to turn it over to my partner in crime, Mr. Sam Bush.

Thank you, Chris. I'll start with the obligatory. This call will contain certain forward-looking statements, performance, and results of operations that involve risks and uncertainties that are described in the Risk Factors section of our most recent Form 10-K. This call will also contain a discussion of certain non-GAAP financial measures. Reconciliation for all the non-GAAP financial measures to the most directly comparable GAAP measure is attached in the selected financial data tables. For the quarter ended June 30, 2023, net revenue decreased 2.2% to $29.2 million compared to $29.8 million last year. It should be noted that political impact the performance this year. As for the quarter, we had $108,000 in gross political revenue this year compared to $787,000 for the same period last year. Without political, our overall revenue for the quarter would have been flat with last year. Station operating expense increased 2.9% or $621,000 to $22.4 million for the 3-month period. As discussed in the first quarter conference call, after a number of years of giving our employees little to no compensation increases, we made the strategic decision to give our employees pay increases in recognition of the tremendous work they do. These pay increases and related payroll taxes amounted to an estimated $446,000 in the first quarter, as previously reported, and $444,000 in the second quarter of this year. Similar to the first quarter, other smaller but still meaningful increases in our station operating expenses included increased utility expenses, music licensing fees, office maintenance and repairs, sales costs, including commissions and sales surveys. For the 6-month period ended June 30, 2023, net revenue was down 0.6% to $54.5 million compared to $54.8 million last year. Adjusting for political for the 6-month period, gross revenue increased 0.7% for the 6-month period. Gross political revenue year-to-date was $301,000 for the 6 months this year compared to $907,000 for the same period last year. Capital expenditures for the quarter ended June 30, 2023, were $1.3 million compared to $2.6 million for the same period last year. For the 6-month period, capital expenditures were $2.6 million this year compared to $3.6 million last year. And last year's capital expenditures for the 6-month period included approximately $770,000 for the completion of the new studio building we built in Ocala, Florida. We continue to expect to spend between $5 million and $5.5 million for capital expenditures during 2023. We continue to see nice growth in national, interactive, and nontraditional revenue with them being up 12.1%, 17.3%, and 10.4%, respectively, for the quarter. And 9.7%, 14.1%, and 13.5% for the 6-month period ended June 30, 2023. Chris will talk more about that in a little bit as well. We intend to continue to utilize our financial strength to strategically invest in our operations, both at a market and corporate level as we work to grow revenue types, including local, national, interactive, e-commerce, and NTR. And as I said, Chris will talk more about some of these early successes in a few minutes. Due to the SEC's renewed focus on the reporting of non-GAAP financial measures and the review of our filings, we've adjusted this quarter's press release to include a complete statement of cash flows as opposed to the abbreviated statement we historically have included on our Form 10-Q. We continue to include the reconciliation of GAAP operating income to station operating income, which is a non-GAAP measure, but now also include another financial data table, which allows the users of our press release and of filings to make direct comparisons to data reported in previous press releases and filings. The company paid a $0.25 per share quarterly cash dividend on June 16, 2023. We've now returned dividends of over $100 million to our shareholders since the first special dividend was paid in 2012. All said, we believe Saga is in a strong financial position to continue to return value to our shareholders through our quarterly special and ongoing dividends. The special dividends declared in 2022 were in line with the goal of maintaining our ongoing cash and short-term investment balances to between $30 million and $35 million prior to future cash flows being recognized. The board continues to have discussions relative to the right level of cash to maintain on our balance sheet, and this may change based on global, national, and local economic conditions, changes in the radio industry, and potential for strategic acquisitions. The company's balance sheet reflects $34.4 million in cash and short-term investments as of June 30, 2023, and $38.3 million as of August 7, 2023. Pacing for the third quarter continues to be variable, and I probably could say volatile as well because it seems like we look at it one week and it's doing better, one week it's doing worse, and it just keeps bouncing back and forth. For the quarter, we are currently pacing down low to mid-single digits. However, you have to keep in mind that we are comparing in the third quarter and fourth quarter to last year's political revenue of $3.6 million for the entire year, and in particular, $900,000 in third quarter political revenue and $1.8 million in fourth quarter political revenue last year. Also, the market continues to be an unsettled advertising market given the uncertain economy, the Fed's interest rate policy, and the ongoing inflationary environment. We currently expect that our station operating expense will increase by approximately 3.5% to 4.5% for the year as compared to 2022. In addition to the inflationary environment, this is significantly driven by our investments in our staff, sales training, and ongoing interactive development. Corporate, general, and administrative expense will decrease significantly from 2022, primarily because of expenses incurred as the result of Ed Christian's passing. This reduction will be somewhat offset by an increase in directors' fees and by investments we are making in corporate personnel that will be directly involved in growing specific revenue types, as previously mentioned. We anticipate that the annual corporate general and administrative expense will be approximately $10.5 million to $11 million for 2023. Our tax rate is expected to be 27% to 30% with a deferred tax of 5% to 8% going forward. And with that, I'll turn it back over to Chris.

Thank you, Sam, and thank you all for joining the call today. If I sound a bit enthusiastic, it's because we've just finalized the formation of what I believe is the best leadership team I've ever been part of. It begins with you, Sam, and extends to our team of outstanding leaders at the corporate office, including Cathy Bobinski, our Senior Vice President and Controller; Wayne Leland, our Senior Vice President of Operations; Tom Atkins, our Vice President of Engineering; Eric Christian, our CMO; Tracy Cleeton, our CTO; Angela Parks, our Vice President of Facilities; and Annette Calcaterra, our VP of HR, along with a dedicated group of corporate staff and market employees who are committed to our mission. This is genuinely exciting. We've shared a specific saying with our leadership team over the years, one that's gained even more relevance recently: 'finis origine pendet,' or 'the end hangs on the beginning.' Essentially, today's actions will shape our future results. For about the past eight months, we've focused on three areas of growth: people, products, and perceptions—not on cost-cutting or consolidating, but on strategically investing in those areas. Navigating through current economic challenges, we believe we’ll emerge stronger and better prepared for the future. As Sam mentioned, Saga saw significant growth in the second quarter, particularly in areas not typically seen as growth drivers right now. We experienced a 12.1% increase in national revenue, a 10.4% rise in nontraditional revenue, and a 17.3% boost in interactive revenue. The growth trend is consistent for the first six months ending June 30, 2023. The positive results discussed during this earnings call stem from the initiatives we implemented well before these earnings were announced. National revenue, often viewed as a transactional aspect with minimal support, has become a core focus for us. Previously, there wasn’t much engagement from management in this area due to a lack of understanding of its benefits. However, treating national business as a market has been transformative, making it our third-largest revenue source. We reported double-digit growth in national revenue for the quarter, translating to a year-over-year increase of $450,000, thanks to a local approach to selling and servicing. In the interactive space, our revenue has also grown significantly, translating to a year-over-year increase of $535,000. Nontraditional revenue is similarly up, contributing an additional $435,000 year-over-year. E-commerce, under the leadership of Andrew Schultz, has shown extraordinary growth, with monthly figures in certificate sales reflecting a year-over-year increase that reached 179% in July. Moreover, we engaged Mario Christino to enhance our storytelling and campaign efforts; his contributions have already generated $420,000 directly attributable to his work. We’ve also begun exploring remnant radio ad sales cautiously, a long-term initiative that we will discuss further later. With Pat Paxton now as our Senior Vice President of Content, our content becomes more localized and refined, and the coaching he provides is yielding beneficial results. Our commitment to enhancing our financial markets presence has also been a priority, with both Sam and I actively engaged in showcasing the Saga story to potential investors. These growth strategies have collectively added $2.7 million in revenue for the first half of 2023, especially during a period when local revenue dropped by $1 million and political revenue saw declines as well. Initially implemented in mid-Q1 2023, our efforts have been swift and effective. While the radio sector faced significant declines, Saga's net revenue for the quarter only decreased by 2.2% and remained flat year-to-date, excluding political revenue. This would have been markedly worse if not for our concentration on people, products, and perceptions. Looking ahead, I'm not sure where we would be without these initiatives, and I don’t want to find out. We're not done yet; our digital growth ramp-up continues. I’m pleased to announce the addition of Matt Burgoyne as our Director of Innovation and Growth. He has already been instrumental as a consultant and will now work with our teams to enhance our customers' effectiveness through tailored digital solutions, encouraging engagement through clicks, visits, calls, and searches. Moreover, we are excited about our online local news service, Clarksville Now, created by Katie Gambill, who is now on our corporate team as the Director of Online News Brands. This service is seeing demand, and we are eager to expand it into other markets. With much happening and our pace quickening, we are focused on our mission and committed to achieving our goals effectively. Sam, I'll turn it back to you.

Thank you, Chris. And as you said, it's all in a fast and furious mode. Everything is there. We did have a few questions come in today. The first one is about our HD stations as we call our translators and our metro signals and so forth. But the question comes in that the company has a lot of HD-only stations, HD2, HD3. Most of them, not in the question, but most of them associated with translators that we also have, which basically translators are miniature FM radio stations that cover the local market very well in the markets we use them in. But the question is, they were wondering what the economics of these stations are compared to our AM, FM stations, the type of information that they're looking for was, are these stations increasing listeners and engagement for us? Does the company promote these stations in a different way? And what is the overall value of these stations to Saga?

Sam, we could double team on this question, if you like. The revenue really varies by market. Some of the HDs and translators will do more revenue than others. But we did create 3 in-house formats: Outlaw, EZ Favorites, and Pure Oldies, and they're used strategically to complement our existing full signal formats in those markets and are also used to bolster our AM stations primarily with our news talk format. So those are a couple of things that might be helpful to the person posing the question. Sam, if you have anything else you want to add, please go ahead.

Yes. I want to mention that interest in translators and AM, FM HD stations began in Asheville, North Carolina, with The River. We were limited in the number of signals we could have in the market, so we established a signal that effectively covers the area and has performed well for us over the years. This initiative led to the development of the EZ Favorites, Pure Oldies, and Outlaw formats, which we have implemented in many markets across the country where we operate. As Chris noted, the financial dynamics vary. In some instances, we simulcast to enhance our reach. In others, we extend a signal into a neighboring market. Additionally, there are opportunities to convert successful AM news talk stations into FM brands, helping to address concerns regarding AM radio's future. The most significant point Chris made, which I want to emphasize, is that it enables us to broaden our coverage in markets to attract listeners who may not have engaged with our stations previously. It also allows us to provide complementary options for listeners who may want to switch between traditional country, Outlaw country, or new country. This strategy not only increases choices for our audience but also maintains our commitment to being live and local.

One thing I considered, Sam, is the size of the markets we operate in. A 250-watt translator provides a full market signal in many areas. Therefore, listeners cannot easily distinguish between a full market signal and a 250-watt translator due to the size of the markets and the coverage area we can achieve.

Absolutely. We received a question from a long-term Saga stockholder regarding a breakdown of our digital revenues. I believe we've addressed this with the growth metrics we're achieving and the advancements made in Q2 digital revenues. As Chris mentioned, we're witnessing significant improvements in this area. However, we feel that we are just beginning our journey, with more progress to be made ahead. We expect to share more updates as we move forward. There was also a question about Q3 performance compared to Q2. Currently, Q3 pacing appears to be in the low to mid-single digits. It’s important to consider the impact of political advertising as well. Additionally, it’s worth noting that revenue recognition has shifted to occur later, making it challenging to predict what September will look like as we approach the end of the quarter. Our past experiences in Q2 showed that while some months started strong, they didn't always hold that momentum by the quarter's end. This reality differs significantly from traditional broadcasting practices of a decade ago, where one could confidently project quarter-end performance ahead of time. However, there are some promising developments as we near the end of this quarter.

Yes, we would normally say we need to enter a month at about 90% of our goal to have a chance, and the percentages have decreased from there. Additionally, the further you look ahead, the less reliable the pacing becomes. So you are absolutely correct.

Well, I think that wraps it up. As we've always encouraged and Chris and I welcome if you have additional questions, if you have, I would like to get some more information on the questions we've answered or what we presented. We're here, feel free to give us a call. And Jenny, I think we'll turn it back over to you and let you wrap up the session today.

Thank you so much, and thank you, everybody. This does conclude today's conference. You may disconnect at this time. Thank you for your participation.