Saga Communications Inc Q2 FY2024 Earnings Call

Good morning, everyone, and welcome to the Saga Communications Second Quarter 2024 Earnings Release and Conference Call. It is now my pleasure to turn the floor over to your host, Chris Forgy.

Thank you, Matt, and thank you to everyone who’s taking time to join the Saga Q2 earnings call. We appreciate your continued interest, your questions, your support and your participation in what we believe is the best media company on the planet. It’s been an interesting week this week. Monday marked the largest single day decline in stocks in Japan since 1987. There’s been talks of a recession – the U.S. recession, they continue. Tech stocks are overpriced. There’s political uncertainty and there’s a rising risk of a wider conflict in the Middle East. The speed and depth of this recent global sell-off is compounded by both the aforementioned and thinner than usual volumes in the month of August, which traditionally is a quiet trading period. And the Fed’s delay in lowering interest rates has likely indicated and impacted the media sector more than any of the other previous countervailing forces I mentioned. Interest rates influence two of the main economic indicators in the media sector: housing starts and automotive purchases. Media tends to feel the impact of this going into and coming out of an economic downturn earlier than other businesses. In other words, we saw this coming. But guess what? We don’t control any of it. So we don’t spend a lot of time on it. We focus on the things we can control, which we will share with you shortly. But make no mistake, what we are experiencing is not a Wall Street thing. It’s a Main Street thing. To illustrate, the categories that experienced the largest decline in Saga during Q2 included restaurants, recruitment, automotive, and grocery. Consumers are eating out less and businesses are cutting back on hiring and, in many cases, laying off employees, buying fewer cars, and going to the grocery store less often. Recently, one of Saga’s top-performing leaders shared with me that after 20 months of pristine performance, his market was now starting to experience some economic downturn, particularly in one of Saga’s core revenue verticals being local direct. He said it’s not the big spending local clients who are holding back; it’s the clients who spend that $2,000 to $4,000 per month or in that $36,000 per year range who have taken a pause. He assured us they’ll be back and will return. So it’s not a question of if, but when they will return. That being said, this level of spending makes up the largest percentage of business in our Saga markets, those customers who invest that $2,000 to $4,000 per month in advertising. So in an effort to mitigate some of these types of circumstances over the past 20 months, Saga has been preparing to exit these economic headwinds better trained, better resourced, and better equipped to come out on the other side and super-serve our customers and our communities. This is that transformational change and growth you’ve heard about and have heard us talk about for some time. As you know, Q1 for Saga was a bit of a rough quarter. Q2, as you will hear, is much better. So before Sam gets into the details of Saga’s Q performance, I just wanted to highlight some of the progress we’ve made in those areas in which we have created and we control. Our digital or interactive space is up for the second quarter year-over-year, $822,000 or 33.4%. E-commerce, which feeds into our local direct silo, is up for the second quarter year-over-year, $348,000 or 98.5%. Even national, thanks in part to our new national sales strategy and the Cat Alliance Network, which was up $440,000 and is flat in nationals as a result of flat – slightly up year-over-year for the quarter. Streaming is up for the second quarter, $382,000 or 34%, and our Best Of program, which is a community online voting process that is used to determine the best dentists, the best burgers, the best pizza, etc., in a select market. This vertical is up 15% for Q2 and in just the first six months of ‘24 has surpassed its entire 2023 output. In 2023, we did $1.2 million all of 2023, and in 2024 in the first six months, we’ve already done $1.3 million in that space. And then on a new service, which we will discuss in greater detail following Sam’s remarks, was up $344,000 and 159% for the quarter ending June 30, 2024. As an aside, currently, users of the online news service total 1.15 million. There are currently 3.7 million page views, 50,000 email subscribers, 19,000 app subscribers, and 193 followers on Facebook. And we’re just getting started. So that gives you a little bit of a highlight. Sam is going to get into more of the details. So Sam, the floor is yours.

Thank you, Chris. This call will contain forward-looking statements about our future performance and results of operations that involve risks and uncertainties and 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 are attached in the selected financial data tables. For the quarter ended June 30, 2024, net revenue decreased 1.5% to $28.7 million compared to $29.2 million last year. Political did not have a major impact. For the quarter, we had $288,000 in gross political revenue this year compared to $108,000 for the same period last year. Station operating expense increased 5.1% to $23.5 million for the 3-month period. Station operating income, a non-GAAP financial measure, for the quarter was $6.4 million and net income was $2.5 million or $0.40 per fully diluted share. Also, you should note that we recorded $1.1 million in the second quarter in other income, which was cash received for the redemption of stock that we owned in BMI when the music licensing organization was acquired. With the purchase of the five stations in Lafayette, Indiana, on May 31, 2024, we are now back to reporting on a same-station basis. I’d be remiss if I didn’t add boiler up to my friends in Lafayette there.

Hammer down.

Thank you, Chris. Just to clarify, the same-station basis shows a minor adjustment for this quarter and year-to-date since we only owned Lafayette for one month in the second quarter. For the second quarter of this year, on a same-station basis, net revenue fell by 2.4% to $28.5 million, while station operating expenses rose by 4% to $23.3 million. Over the six-month period ending June 30, 2024, net revenue decreased 2% to $53.4 million compared to $54.5 million last year. Gross political revenue was $598,000 for this period, up from $301,000 during the same time last year. Station operating expenses for the six-month period increased by 5.5% to $46.5 million. The station operating income for the six months was $9.2 million, and net income was $900,000 or $0.15 per fully diluted share. It's important to note that our net income for the six-month period reflects a net loss of $1.6 million in the first quarter, which included a non-cash write-off of $971,000 related to the sale and abandonment of non-productive broadcast assets and licenses in two markets. Additionally, the net income includes $1.1 million in other income that I previously mentioned during my second quarter comments. Over the six-month period this year, on a same-station basis, net revenue decreased 2.5% to $53.1 million, and station operating expenses rose by 4.9% to $46.3 million. Historically, pay increases and related payroll taxes accounted for about $599,000, or roughly 53% of the second quarter's increase in station operating expenses, and $1 million, or around 43%, for the six-month period. Both periods include about $200,000 in severance payments due to management changes in a couple of our markets as we adjust to an evolving economic landscape and seek revenue from a wider range of projects. June started to display signs of normalizing expense growth. We also experienced smaller but still significant increases in operating expenses such as health insurance, sales surveys, bad debt, and interactive. To provide some context, interactive expenses rose by $285,000 for the quarter and $485,000 for the six-month period, which aligned with a gross increase in interactive revenue of $822,000 for the quarter and $1.4 million year-to-date. This also covers some start-up expenses for our online news product. Capital expenditures for the quarter ending June 30, 2024, were $1.5 million, up from $1.3 million for the same period last year. For the six-month period ended June 30, 2024, capital expenditures stood at $2.6 million, nearly matching last year's figures. Of these expenditures, $285,000 related to the acquisition of properties. We expect to spend between $5 million and $5.5 million on capital expenditures in 2024. We continue to leverage our financial strength to strategically invest in our operations at both market and corporate levels, aiming to grow specific revenue types, including local and national interactive, e-commerce, online news products, and NPR. The company's balance sheet shows $24.1 million in cash and short-term investments as of June 30, 2024, increasing to $26.2 million as of August 5, 2024. For the first time in a while, we have outstanding debt after drawing $5 million from our $50 million revolving credit facility to finance the acquisition of Lafayette, Indiana, as part of our broader capital allocation strategy. We paid a quarterly dividend of $0.26 per share, totaling approximately $1.6 million on June 28, 2024, and also issued our first variable dividend of $0.60 per share amounting to around $3.8 million, which was distributed on April 5, 2024, during the first week of the quarter. To date, we've distributed over $132 million in dividends to our shareholders since 2012. The pacing for the third quarter remains soft, currently tracking down in mid-single digits. However, we anticipate this could improve, as our pacing results for the first quarter were similar when we reported those earnings. Today's final results came in better than our initial projections. In the political revenue space, activity remains significantly slower compared to the 2020 presidential election. During that election cycle, we recorded about $1 million in political revenue during the first quarter, $289,000 in the second quarter, $1.8 million in the third quarter, and $3.8 million in the fourth quarter. In 2023, the figures were $193,000 for the first quarter, $106,000 for the second quarter, $234,000 for the third quarter, and $409,000 for the fourth quarter. Specifically, we've registered $598,000 in political revenue through the end of the second quarter and about $394,000 pending for the third and fourth quarters. While we expect political activity to pick up this year, we haven't observed significant increases as of yet. Based on our current projections, we expect station operating expenses on a same-station basis to rise around 4% to 5% for the year compared to 2023. This increase is mostly influenced by inflation and our investments in staff, sales training, and ongoing development in interactive, particularly regarding our online news product. We forecast annual corporate general and administrative expenses to range between $12 million and $12.5 million for 2024, with a tax rate expected to be between 26% and 29% and a deferred tax rate of 3% to 6% moving forward. Chris, I’ll hand it back to you now.

Thank you, Sam. As I mentioned earlier, I wanted to spend some time on one of Saga’s radio and then some transformational growth strategies. As many of you have heard on previous earnings calls and perhaps more recently, have read in some publications, Saga is moving full steam ahead with online news, local news, and community sites in 18 soon to be 19 total markets once our newest acquisition, Lafayette, Indiana, is onboarded. This product, as I have mentioned before, was the brainchild of Saga’s former Clarksville, Tennessee General Manager, Katie Wheeless, who is now our Director of Innovative Online News Services. Katie will tell you the reason for the development of this original site over 12 years ago was based on the fact that the 101st Airborne out of Fort Campbell, Kentucky, was being deployed to Iraq, and the servicemen and women needed a way to stay close and connected to the local community while they were deployed. The solution was what came to be known as ClarksvilleNOW. No Op-Eds, no deep dive investigative reporting. We focus on practical community news, city hall, local sports teams, and news from the police and fire departments. At the same time, the unfortunate decline of the newspaper industry created a void for a local unbiased news source. One of Saga’s company-wide unrelenting non-negotiables is to be hyper-local in the communities in which we serve. In fact, some members of our market leadership team have served on City Council, the local school board, or even ran for Mayor of the city where the radio stations were located. I was asked recently and interviewed by Barrett Media what is the number one thing people want from local media. My answer was simple. It was connectivity. That is why the local aspect of what we do is so critical. People want to feel connected to something special. And this is consistent with all the data we are seeing in the tech surveys. Saga operates in markets we can impact, make a difference in, connect in, and those markets – and those markets make it more feasible to create these hyper-local and hyper-impact news verticals. We also create meaningful relationships with civic, business, and community leaders. These are all conduits that foster local ties. Not to mention the advertising opportunities created with an online news service and community site. Recently, Jacobs Media conducted another survey that found 7 out of 10 radio core fans read newsletters of this type each week. We are tapping into a market and a medium that is consumed more than podcasts are. And it is wanted and needed by local community leadership. We engaged these local community leaders to talk about our sites. We meet with the mayor, the city council, the Chief of Police, and others to inform them of our local market mission and to forge a connected community relationship with them. In fact, we frequently hear from local leadership that this is how they connect. They use their online news and community sites to communicate with the community. They tell us, it’s how we get our local news out because there is no other trusted news source available out there. Why do I share all this with you? Because this is one, just one important part of the transformational change and growth Saga Communications has been experiencing over the past 20 months. And as I have said before, transformational change takes time, unrelenting commitment, and resources. Our expense increases, albeit planned, are not for everything. We forecasted them long ago. The expenses are now beginning to level off and stabilize and now we grow. By the way, if you have ever had a doubt that feeling and being connected is the number one attribute consumers crave for media and that radio delivers on that need better than any other media out there, allow me to read an email exchange between one of our on-air personalities and a loyal connected listener. This letter and this correspondence really speaks for itself and really needed no further introduction. So, thank you for indulging me on this. Hi. You might recognize my name as I am a frequent caller and I just love all of you guys. I am going through some stuff, and I got to thinking that I bet there are others out there who might be in my boat. I am 41, a mom, and an alcoholic. But you may not notice from the outside right away. I could be charming, funny, put together, a soccer mom, a regular woman. My struggles have intensified lately to the point I was thinking the worst. I knew I was at my rock bottom. Tuesday morning, I got dressed for work and went on my way on a whim. I tried calling an alcohol detox facility I had before they were full. This time, I simply said, “I need help, and I need it now.” And the woman said, “Be here at 10 with a week’s worth of clothes.” I was so scared. And all after 10, I started detox. It was awful. Imagine feeling so sick and confused and scared that you would rather die, but there were people there to help you. These people were angels. So now I am home and coping. I am either sleeping or running around the house making epic snacks and cleaning something random, like the handle on the microwave. It’s driving my family crazy, but they are just happy I am not drinking. The reason for telling you my story is my first goal is to start re-strengthening my body. I am wondering if you would take me to my first workout at the workout facility you endorse on the radio. I am completely out of shape, sore most of the time, get winded easily, low muscle tone due to years of poisoning my body, but I need to get healthy. You have said that the exercises can be adjusted for any fitness level, so I am hoping I can get on the road to feeling better about myself. I understand if your schedule is too packed, and it was just a shot in the dark. Because at this point, it’s all I have at this moment, with much admiration. And here was the reply from the on-air personality. I am glad you reached out, smiley face. So, first off, it’s the one thing I don’t talk about on air, and that is that I am very familiar with alcoholism addiction, and it runs in my family. So, I have a soft spot instantly for you and your kids in my heart for you. I do have a question, though. How amazing is it that you were strong enough to admit that you had a problem and asked for help? You are a queen. So, detox, as awful as it is, done, checked the box. Are you going to any sort of rehab or AA program? The support in that way is super important; do you have a plan for after? And now for your crazy idea, not so crazy because, of course, I will take you to the first class with you. We have to get you signed up for it. So, let me know what day works for you. I will be there this week Monday through Friday at 11:00 a.m. Now, I just had surgery, so I will be barely doing anything, but I am going and doing what I can. So, I will be in the same boat as you. Looking forward to hearing back and meeting you. Don’t give up, stay strong, and keep asking for help because it only makes you stronger, with much admiration. Thank you for indulging me in that letter. I wanted to emphasize the fact that people still use radio to connect because it’s important and it’s meaningful. And what we do every day is important and it’s meaningful, and it’s impactful, and it does make a difference. Thank you again. Hang in there with us. We are doing some transformational and special things at Saga Communications, the best media company on the planet.

Thank you, Chris. And we did get a few questions that we will address now, most of which we have already talked about a little bit. The first question is, broadcasters have reported that advertising trends have deteriorated into the third quarter given the macroeconomic trends. What are you hearing from your local advertisers? Are they holding back given the economy? Do they anticipate stepping up advertising as the Fed lowers the rates? You have already talked about this a bit, but would you like to give a little more color?

Yes. Sam, thanks for the question. As I said, interest rates and inflation impact the media sector greatly more so than most businesses. And as I have said earlier, it’s a Main Street thing, not a Wall Street thing. And it’s a category of business, being that $2,000 to $4,000 per month of advertisers that have said they will return. It’s just a matter of when. So, we do anticipate them coming back, but they have taken a pause in that space, which is clearly a small business.

Very much so. The second question – thank you for that. The second question is, what are the struggles that you have experienced with the rollout of your digital offerings? One of the leading radio broadcasters that has effectively transitioned to digital recently expanded services to offer CRM products. Do you believe that you have runway on your current service offerings? Do you believe that you will still need to invest to offer an expanded product suite?

So, I will answer the first question first. And that is speed, speed is what we need. And so from a sales perspective, our CRM is tied tightly to our entire operation. The investments have been made in the people, the products, and the processes. Now, it’s a matter of execution. And our team is getting more and more comfortable with the new processes, making the processes second nature and not having to think before they act. So, they can play fast. And once they are able to play fast and make it second nature, we will be able to better serve our customers because it won’t be clunky and the like. So, being able to play fast by getting comfortable. And yes, we have significant runway ahead of us. We are – as I have said, we have had a number of transformational changes and growth taking place at Saga. And the one piece that we haven’t talked a lot about is the one that’s coming last. And there is a reason we don’t talk a lot about it because we don’t want other people to know about it. And it is the one that is – will have the largest impact and is the slowest, unfortunately.

Very good. Thank you, Chris. The last question, I will answer as I go. But the question was, can you talk about the allocation of capital? With the recent sell-off of the shares, do stock repurchases represent the best allocation of capital at this point? We have said continuously, our Board discusses capital allocation, share buybacks, dividends, acquisitions, etcetera, on a continuous basis. We do have a 10b5 program in place, but it’s not currently active. Over the past 12 years, we have paid out over $132 million in dividends to our shareholders as a return of capital. Additionally, over the past 20-plus years, we have repurchased approximately 2.2 million shares of stock at a purchase price of approximately $58 million. The Board will continue to evaluate capital allocations. And while buybacks have not been a part of the plans recently, they may be in the future. Okay. I think, Chris, if you have got anything to add, other than that, we can wrap it up.

No, thank you. Sam, I think you can turn it back over to Matt, and we will adjourn. Thank you all very much.

Thank you, Matt. We will let you wrap it up.

Thank you. Everyone, this concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Thank you, Matt.