Earnings Call Transcript - SGA Q4 2024

Operator, Operator

Greetings, and welcome to the Saga Communications Fourth Quarter and Year-End Conference Call. At this time, all participants have been placed on a listen-only mode and we will – excuse me. And it is now my pleasure to turn the floor over to your host, Chris Forgy. The floor is yours.

Christopher Forgy, CEO

Thank you, John. Good morning, and thank you to everyone who's taken the time to join Saga's Q4 and year-end 2024 earnings call. We appreciate your continued interest, your questions, your suggestions, and your support of Saga Communications, what we believe is the best media company on the planet. We have a lot to cover today, but first, I'd really like to thank those who have been so instrumental in the transformational change Saga has been going through and continues to go through over the past two years. Our corporate team, our Saga Board of Directors, our carefully chosen third-party partners, our shareholders, our leadership teams in each of Saga's 28 markets. Our Saga Media advisers are nearly 800 Saga employees all over the country who make this engine go and to our customers, those who trust us with their advertising dollars to bring about outcomes. After all, money does come from customers, doesn't it? Transformational change is really not easy. We're in the midst of it. It takes time, resources, people, training, commitment, and a very strong belief in what you're building will be successful. And we do. We chose this passive transformational change, both out of necessity and because we believe we have identified a local digital advertising market ready for disruption. We determined these four things. Number one, there's a significant increase in advertising dollars. Businesses are pouring their money, more money into digital advertising each and every year. But the rapid growth of digital budgets has outpaced the ability of advertisers to use them effectively. Number two, there are frustrated buyers with unmet needs. Advertisers are simply fed up with ineffective evergreen, set-it-and-forget-it campaigns and empty promises. They don't like what they're buying or who they're buying it from. These are the same local advertisers who say they trust radio salespeople most for market knowledge and advice but aren't buying from us. For example, the RAB recently released a report that in 2024, radio surpassed the $2 billion mark in digital sales. Unfortunately, that is a pedestrian 0.67% of all digital spend in 2024. Radio simply cannot win celebrating less than 1% of the digital ad pie. We cannot simply compare it to where radio came from. We need to lift our eyes and look to the macro digital marketplace for what's available to us. Here's why. According to an eMarketer 2024, excluding political, there was approximately $421 billion spent on advertising in the U.S. 73% or $309 billion of those dollars was spent in digital. In 2025, estimated advertising expenditures in the U.S. will top $456 billion. And 75% or $342 billion will go into digital advertising. That number is expected to increase to 83% by 2029. Radio's approach to digital, in our opinion, is broken. And number three, there's a fragmented and confusing marketplace. Too many providers, too many conflicting solutions, businesses don't know who to trust. In this disruptive marketplace, simplicity and clarity win. Just ask the broadcasters who I like and respect that have gone through their own fourth, fifth, and sixth iterations of digital strategy. It's frustrating and costly. And finally, number four, there is a shift in consumer behavior. Advertising strategies haven't caught up with the journey people take when they buy. In other words, there's a gap where technology meets human behavior. Focusing on the influence of ads on real consumer journeys will allow everyone to win versus the product-focused offerings that exist today. As a part of Saga's digital strategy development, we call blended advertising. We've really benefited from talking with and observing the third-party struggles of our brethren. There's an old saying that says this: the second mouse gets the cheese. Blended advertising focuses on the consumer journey and for now, these simple and effective products: radio, search, and display. Radio leads to a search always and gets the advertiser wanted. Search gets the advertiser found, and display gets the advertiser chosen. We see it; we cannot unsee it. We believe it. We have studied it and trained our media advisers with all of this data in mind. The question we had to ask ourselves was this: Do we build upon our already existing radio infrastructure or start anew? We chose the former. Infrastructure requires training, training requires time and expense. This is why we forecasted a rise in expenses over a year ago. And by investing in infrastructure versus starting brand new, the speed of our growth increases. Unfortunately, the short term was impacted by the broadcast sector experiencing a significant downdraft. So why should you continue to invest in Saga or maybe become a new investor? Because we see a broken local digital market ripe for disruption, and we are the right media company to take advantage of that opportunity. The customers we work with every day already like us and trust us, and if we can impact just 5% of the digital dollars available in our 28 Saga markets over the next 18 to 24 months, we could double our total gross annual revenue, most of it digital, while also protecting, preserving, and growing radio. For example, in our 28 markets, there's approximately $2.9 billion available in just search and display. To disrupt just 5% of the available dollars would result in more gross revenue than Saga generates in an entire calendar year. Before I share some of the successes blended advertising has helped us create, let me take you back to the future for just a moment to address the comment I made earlier regarding building on existing infrastructure versus starting anew. On virtually every quarterly earnings call for the past two years, I have asked this question: Where would Saga be if we had not decided to go down this path and had not added the revenue verticals to our arsenal when we did to help us launch into the state of transformational change? Today, I can answer that question. In 2024, we generated nearly $7.5 million of revenue that could not have existed before we began this transformation. They consisted of the following revenue verticals: our online news sites, e-commerce, streaming, our market-specific best-of programs, plus a variety of other digital products and services. These strategy additives have served us well in building the infrastructure of transformational change and will continue to do so as we grow. Again, at the same time, we forecasted a lift in expenses as we invested in our people, our products, and our processes. These efforts are increasingly more important as the broadcast sector faces growing headwinds. Following Sam's remarks, I will share with you in detail the early success of this disruption and how they show promise for Saga, its customers, its employees, and its financial strength for both the short and long term. Sam, after a long discussion, the floor is yours.

Samuel Bush, CFO

Thank you, Chris. This call will contain forward-looking statements about our future 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 are attached in the selected financial data tables. For the quarter ended December 31, 2024, net revenue decreased 1.3% to $28.8 million compared to $29.1 million last year. Political impacted this year's performance. As for the quarter, we had $2.0 million in gross political revenue this year compared to $407,000 for the same period last year. Without political, our overall gross revenue for the quarter would have decreased approximately 6.5% from last year. Station operating expense increased 4.1% to $24.3 million for the three-month period. Operating income was $984,000, and station operating income, a non-GAAP measure, was $5.9 million for the quarter. Capital expenditures were $600,000 for the quarter compared to $1 million for the fourth quarter last year. Net income for the quarter was $1.3 million or $0.20 per fully diluted share. On a same-station basis for the quarter ended December 31, 2024, net revenue decreased 3.9% to $28 million, and station operating expense increased 0.7% to $23.5 million. Operating income decreased to $1 million. For the 12-month period ended December 31, 2024, net revenue decreased 2.2% to $110.3 million compared to $112.8 million last year. Political impacted this year's performance as for the year we had $3.3 million in gross political revenue this year compared to $944,000 for the same period last year. Without political, our overall gross revenue for the year would have decreased approximately 4.3% from last year. Station operating expense increased 4.5% for the 12-month period to $94.3 million. Operating income was $2.4 million, and station operating income, again, a non-GAAP measure, was $21.1 million. Capital expenditures for the 12 months were $3.8 million compared to $4.4 million in 2023. Net income for the year was $3.5 million or $0.55 per fully diluted share. As an additional note regarding political, we did $6.9 million for the year in 2020 compared to $3.3 million in 2024. For the fourth quarter of 2020, we did $3.8 million compared to $2 million in 2024. Unfortunately, we were limited as to the states to be the battleground states for national and to some extent, state and local elections. In the strategic update press release we put out last Friday, March 7, we indicated that we committed during our annual budget review and approval process to work directly with the leadership teams in all of our markets to identify potential efficiencies in operations that can enhance profitability. This initiative is not a stand-alone initiative as we have been and will continue to analyze specific places where we can improve efficiencies in station operations. We believe that existing expenses can be reduced by 1% to 2% on a pro forma basis without impacting investments we are making regarding the revenue initiatives that Chris will be talking more about in a few minutes. The increase in our expenses in 2024 compared to 2023 included $1.8 million that was attributable to our acquisition of the radio stations in Lafayette. The increase in same-station operating expenses were primarily due to compensation-related bad debt, interactive expenses, sales surveys, and advertising and promotion expenses. It should be noted that the increase in same-station expenses in 2024 versus 2023 was primarily in the first and second quarters. The increase in the first and second quarters were $1.3 million and $937,000, respectively, as compared to a $50,000 reduction in the third quarter and a $171,000 increase in the fourth quarter. In the first and second quarters, $450,000 and $492,000, respectively, was due to salary increases that we have spoken about before. Most of our staff had not received any salary increases in the past three to five years. Salary increases were $257,000 in the third quarter and $205,000 in the fourth quarter. It should also be noted that approximately half of the salary expense increases were due to our interactive initiatives. I also previously spoke about the unusual level of bad debt expenses that we experienced primarily due to one agency we did business with. Again, this was primarily in the first and second quarters. In the fourth quarter, bad debt expense actually decreased by $77,000 over the same period last year. From a revenue perspective, interactive revenue, which includes online news, continued to grow in the quarter and in the year. For the year, gross interactive revenue increased 20.9% to $11.6 million, and for the fourth quarter, it increased 19.5% to $3 million. Also, gross national revenue increased 3.3% for the year and 13.1% for the quarter. E-commerce revenue also increased $904,000 to $2.4 million for the year and $55,000 to $569,000 for the fourth quarter. As Chris has said previously and will do so again today, we anticipate continued growth in these areas. We currently expect to spend between $4 million and $4.5 million for capital expenditures in 2025. The company paid a quarterly dividend of $0.25 per share on December 13, 2024. And subsequent to the end of the year, paid an additional quarterly dividend of $0.25 per share on March 7, 2025. The aggregate amount of each quarterly dividend was approximately $1.6 million. To date, Saga has paid over $137 million in dividends to shareholders since the first special dividend was paid in 2012. The company intends to continue to pay regular quarterly cash dividends as declared by the Board of Directors in the future. The company's balance sheet reflects $27.8 million in cash and short-term investments as of December 31, 2024, and $27.3 million as of March 10, 2025. Pacing for the first quarter is soft. For the quarter, we are currently pacing down mid to high single digits. It continues to be an unsettled advertising market, particularly in radio. We expect revenue to turn positive from a growth perspective beginning with the second quarter. Chris will talk more about the transformational change that Saga has undertaken. This change impact our expenses in 2024 as we invested in the training necessary to allow our media advisers to take on the challenges of altering our standing within our local radio markets with the addition of our online local news service, e-commerce, national network advertising, market-specific best-of offerings and digital, including streaming and a variety of other digital projects. We currently expect our station operating expense will increase by approximately 1.5% to 2.5% for the year as compared to 2024. This takes into consideration the pro forma expense reductions we are making in addition to any costs incurred as the expenses are reduced as well as our continued investment in the ongoing revenue initiatives. We anticipate that the annual corporate general and administrative expenses will be approximately $12 million for 2025 compared to $12.6 million in 2024. Our tax rate is expected to be 26% to 29%, with a deferred tax rate of 5% to 9% going forward. All said, we believe Saga is in a strong financial position to improve profitability as our digital initiatives improve, both radio and interactive revenue. This includes as a part of our capital allocation strategy to continue to evaluate non-core asset sales with an intent to maximize value from these assets. As an example, we've had multiple interactions with companies that have been interested in one or more of the towers we own. We expect to receive shortly an offer to purchase some of our tower sites, which we will be evaluating. I expect that we will know more about this potential asset sale when we report our first quarter 2025 earnings in early May. The Board is committed to using a not insignificant portion of the proceeds from such a sale for stock buybacks. This may include open market, block trades, or other forms of buybacks as a part of our overall capital allocation plans this year.

Christopher Forgy, CEO

Thank you for that, Sam. I’d like to share some insights from a five-market analysis within Saga, highlighting the impact of blended advertising on our local direct and digital revenues. We examined local direct advertisers who opted for blended products, which include search, display, OTT, or social advertising, by comparing data from January to October 2023 with January to October 2024. Our findings showed that local direct advertisers who invested in blended products saw a 9% increase in their radio spending year-over-year, and an overall 27% increase in radio and digital spending. In contrast, those who did not purchase blended products experienced a 13% decrease in radio spending in the same timeframe. Additionally, advertisers who were never offered blended advertising at all had a significant drop in radio spending of 50% to 55%. Even clients who were pitched blended advertising but chose not to buy still had a radio spend increase of 1% to 2%. Since our last conversation on November 7, we’ve secured $5.7 million in local direct blended orders from 203 different customers, with $2.9 million coming from digital and $2.8 million from radio. During this period, blended advertising orders produced 4.3 times the revenue of non-blended orders. When comparing radio-only revenue, those who opted for blended spent 96% more than those who did not. Building on these results, we’ve recently signed an additional $2 million in new advertising contracts in just three markets with clients who have never advertised before. These successes don’t even tap into our existing pipeline. Consequently, our predictions for digital revenue in April and May are showing significant gains. In the past, it was said that to succeed in this industry, you needed to control the creative; today, it’s about controlling the strategy. Blended advertising enables radio to be integral to the overarching strategy, and we are committed to executing this blended approach effectively. Radio remains a pivotal component of Saga's digital strategy, and its strong consumer trust drives search activity. Research shows that radio is the most effective top-of-funnel medium, successfully prompting consumers to engage with advertisers. Essentially, radio attracts customers while digital ensures they are found and chosen. To sum up, blended advertising addresses critical issues for our clients, making it easier to purchase and understand, as opposed to the confusion and frustration often associated with traditional advertising methods. We focus on genuine consumer engagement, emphasizing actionable metrics that lead to sales rather than drowning clients in irrelevant data. Radio retains its ability to perform magic in this realm. We have a strong belief in our blended advertising strategy and see its potential to double our gross revenue, primarily in digital. We are enthusiastic about what blended advertising can achieve for radio. Although this earnings call may not have delivered the results we all expected, the positive aspect is our plan is functioning effectively. You've just heard about it. Reducing expenses won't resolve the ongoing challenges; instead, we need to refine our sales approach, execute flawlessly, and focus on selling, which we are committed to doing. Thank you again for your time during Saga's Q4 and 2024 earnings and year-end call. Sam, do we have any questions? Oh, I almost forgot to mention something important. Since Ed Christian's passing two years ago, the Saga Board of Directors has been undergoing changes. Two board members have left, and we’ve welcomed a representative from Saga's largest shareholder, reducing the board size from eight to seven. As part of our ongoing board refresh, during our December meeting, the non-government committee identified the need for a digital expert on the board. We are currently interviewing candidates with strong digital expertise for this role. Over the next 12 to 18 months, we will continue refreshing the board to create additional value for Saga and its shareholders. Apologies for missing that point, Sam.

Samuel Bush, CFO

That's an important point to make. Thank you, Chris. We received a few questions, many of which we've already addressed, so I won't revisit those. One question we got was about the current advertising market in the first quarter since the quarter is nearly over, specifically asking for trends by month. What is the status of spot advertising and what feedback are we getting from local advertisers? I'll begin by saying that I discussed the first quarter broadly in my comments, so let me break it down a bit more. January and February were relatively similar, both experiencing declines in the high single digits. March showed some improvement, with a decline in the mid-single digits. If we look beyond the first quarter, April, May, and June have all shown signs of improvement, and we anticipate this trend will continue into the second quarter, starting with April down in the mid-single digits and June looking flat to slightly up in pacing. June is still a while away, and as we know, radio and digital advertising decisions are made more quickly now. Chris, perhaps you can share what you're hearing from local advertisers and regarding spot advertising.

Christopher Forgy, CEO

I don't think it's a secret that the industry is experiencing a significant downturn. The CEOs I talk to are not pleased with the situation. However, I want to emphasize that many of them lack a plan. While some do have solid strategies, we have an excellent plan in place. Personally, and I believe I represent our team, we are very optimistic, especially as we approach the second half of this year and beyond.

Samuel Bush, CFO

Thank you, Chris. Another question, many radio stations have turned to central casting to reduce head count and talent costs and/or looking to regional hub and spoke strategies. Is this something that's obviously contemplating?

Christopher Forgy, CEO

I'll take that one, Sam. Massive cuts, no. We're not going to central casting. Our most important assets are the people who walk in and out of the doors of our radio stations every day. That being said, we are always and continue to take advantage of operating efficiencies across all platforms in all of our Saga markets. That's something we do on an ongoing basis, be more efficient. But our people are most important and our sustaining resource, and that is not a plan that we have now or in the future.

Samuel Bush, CFO

And to add to that, that gives us the extreme localism that we do have that a lot of our brethren don't have, which allows us to continue to connect as a trusted source for advertising, both local and digital, in all our markets. There was another question that had to do with changes in terms of your digital strategy. I don't think we need to add any more there. But as we all know, and as you said, radio improves as digital improves, and we're on a good transformational strategic plan to move forward. And with that, I will turn it back over to John for wrapping up.

Operator, Operator

Yes. Thank you. This does conclude today's conference call. Thank you for your participation. You may disconnect at this time.