Earnings Call Transcript - SGA Q4 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Saga Communications Fourth Quarter and Year-End Earnings Release. At this time, all participants are placed on listen-only mode. It is now my pleasure to turn the floor over to your host, Ed Christian. Sir, the floor is yours.

Ed Christian, CEO

Good morning, everybody. And let me again have the pleasure of introducing you to, after many years, you should all know him. The amazing Sam Bush will dazzle you with numbers as it begins. So, let's begin. Okay, go ahead.

Sam Bush, CFO

Thank you, Ed. 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 table. The fourth quarter saw our net revenue increase 19.1% to $28.8 million, up from the $24.1 million we reported for the third quarter of this year. Our focus on local continues to pay off as the combined local direct and local agency increased 10.4% between the third and fourth quarters. Net revenue was down less than 10% when compared to the fourth quarter of 2019, which I think is pretty good performance given the ongoing COVID issues that we are all still facing. Free cash flow for the quarter was also good at $5.1 million, compared to $5.4 million for the same quarter last year. For the year ended December 31, 2020, net revenue was $95.8 million, station operating income was $20.4 million, and free cash flow was $7.6 million. As indicated in the press release, our net loss for the year was $1.3 million, but without the non-cash impairment charge, we would have shown net income of $1.7 million. I’ve heard a number of reports of other companies in the industry having increased bad debt issues in 2020 due to the pandemic. I’m happy to say that our markets have been able to do a great job managing accounts receivable and collections, resulting in actual bad debt expense as a percent of revenue to remain almost the same when comparing 2019 to 2020, at less than 1.5%. Gross political revenue for the quarter was $3.8 million; for the year, it was $6.9 million. Some of you have asked how this compares to our annual political revenue in previous election years. We had gross political revenue of $2.9 million in 2018 and $3.8 million during the last presidential election in 2016, so we saw a nice increase in 2020. We have $51.4 million in cash on hand as of December 31, compared to $44 million at the beginning of the year. Currently, as of our last check this week, we have $56 million in cash on hand. At the end of the year, our outstanding debt remained $10 million, which given the cash on hand presents no covenant or liquidity issues. Leverage for our bank covenants is actually negative when you consider the cash we have on hand. And Ed, with that short commentary on what was an unprecedented year, I will turn it back over to you.

Ed Christian, CEO

As always, thank you, Sam. And let today be the last day that we discuss 2020; it is baked and over. I actually thought we would be done with 2020 around November. I didn’t use the word pandemic there, but I thought we would be done with that in November, but it was not to be. We were right back in pandemic mode in late November and through December and even January of 2021. And it still kind of lingers out there. When this was all over, the second wave or the third wave, it was all over the media and it drove our advertisers back to where they were. It looks like the economy was improving. What I can say about 2020 is, obviously, as Sam just said, we made it. We did structural rearranging of the enterprise, but we never compromised our stated mission of doing excellent broadcasting. We survived, but some of this was painful, make no mistake. For one, putting a hiatus on the dividend was something that we never before would have considered. I, personally, and I also speak for our Board of Directors on this, feel that we’re seeing tiny sprouts emerge of normalcy and that as soon as practical, we can get back to re-establishing Saga dividends. I do think our shareholder partners deserve thanks for their understanding and appreciation of the difficult situation that we successfully navigated. For me personally, it was a very tough year. I never thought that in the 33 years, that 33 plus years, that I would be having to go back and, frankly, deconstruct albeit lightly, that which we had built over the years. Fortunately, I do believe that I too now am optimistic that the dark times are slipping away. I would be remiss if I didn’t thank also all of our Saga staffers for both their understanding and even commitment to keep our operations warm and welcoming to our listeners during the darkness. My feelings are that this is the beginning of a proactive recovery with still the possibility of outside surprises. It’s almost like going on a ride in an amusement park. I mean, if you think back to the early days of that, where you would get in a little car and go through doors that would open up into darkness, and you’d be riding in a car when suddenly a zombie jumps out at you and then you ride further and a hideous skeleton jumps out at you and then another and another until the doors open and your car rides into the sun. Maybe we’re not yet in the sun, but for sure there’s daylight ahead. And that makes me feel good. For a while during 2020, I certainly was not feeling good. I was not feeling pessimistic, but I was just feeling so challenged to keep everything going with where we were with the operation and keep it in tiptop shape. To put it in terms of our well-understood Q1 for this year, it was still in recovery. But in March, we believe that we’ll be up perhaps 3% from last year. Now you could call that opportunity yet 3%. Well, wait a minute. And that’s good, as the last two weeks in March last year, there was a giant cascade of advertising cancellations. I can’t tell you about sitting or answering the phones and getting calls from our managers saying, what is going on here? Bam, bam, bam, cancel our advertising, hold our advertising. So, 3% is good. And by the way, I don’t want to jinx anything, but right now, April and forward are showing us gaining much momentum compared to 2020. Sam has always told me, don’t tell figures in advance or anything like that, but it looks good as we work towards a normalcy of 2019 growth kind of growth that we were experiencing back in 2018 and 2019. We do see that. We’re getting calls from national advertisers wanting to get back on the air, which is very encouraging. Now, honestly, not all companies are looking this way, but maybe just maybe we can convince them that our model of serving our communities with love, laughter, information, and caring concern is the right commitment. Frankly, we are not standing at the shredder and feeding radio into it. That is not in our DNA. We’re proud, very proud of what we do and accomplish. It’s not bragging. It’s not showing off. It really is about caring and going – hold on, hold on, sorry. This is a little unusual, but I’ll try. I’m going to try and do something here. If I can, let me just find it. So my computer here, I’m going to do something a little different and Sam probably is rolling his eyes right now, wondering what’s going on here. Hold on. All right. Let me try this. This is I have to move the computer screen and I have the link, I think. And I have to come up with a Rube Goldberg of sending audio. So just bear with me and I want you to hear something. I want you to listen to something and then we’ll talk about it. So be patient for a sec here. [Video Presentation] Headset back on here. We just got that the other day. And it just – and we get these all the time from our stations, not all the time, but plot just showing us. This was something from Mr. Bob and Kathy, who have been there for years and years at K-Country, an amazing radio station. Nobody wanted it in Ocala, Florida. It’s one that I lost it after; that’s not sinful, but I wanted a station for many years, because it’s such a great radio station. We were fortunate enough that the family that owned it, who is up North, chose us to have the radio station. I can’t tell you how fulfilling it is to know that this is so real to the community. Mr. Bob and Kathy at WOGK are iconic influencers and personalities in the market, essentially, what their dominance. There is no second play station. And this is not just one market, but this happens all the time. And by the way, it’s a perfect example of why good radio will never die. Bring on the skeptics, bring on the podcasts, bring on the satellites, bring on music streamers, none can compete locally better than great local radio. And you’ve just heard one example, and you’ve got to put yourself into that market to understand it. So we can sit here all day long and go through figures and facts, but it is the emotion and the commitment that we put into the radio stations to ensure that we’re part of that community, making sure that we own top of mind awareness. When you hear the outstanding commitment and service to your community and that occurs every single day in Saga radio stations. I wish I could do a conference call just sitting here playing you audio clips of what comments we receive from what we do both outside and inside the radio station. It is so important. You can’t measure, by the way, this feeling of good local radio with ratings or cost per point or impressions. You really have to be in the community to feel both the commitment and the passion and the tactile imagery that local radio has the ability to energize. All right. I got off message. I’m sorry. But I’m actually not worried about it. My job is also to play a kind of teaching position. As radio is the only job that I’ve ever had, I think I understand it pretty well. We, as an industry, will survive. I mean there are some of the naysayers out there claiming radio is over, that local radio is not functioning anymore and is irrelevant. Well, I’m sorry, we will prosper because what we do cannot be replaced. Local radio has survived so many attacks. The list goes on, starting with TV, outdoor drive-ins, 8-track audio cassettes, digital, local newspapers, magazines, music streaming, podcasts, and more. Let me give you another great example. I was talking the other day with Bill Holst, who’s our General Manager in Yankton, South Dakota. He’s at WNAX Radio. We’re extremely proud of what they’ve accomplished in the Yankton area as part of our portfolio. We’ve had it for many years. Most people would probably say it’s a speck on the map. But those who know understand that this radio station, a steward for coming up on 100 years, 2022 marks the 100th anniversary of WNAX serving the community. You think [indiscernible]? No, no, no, no, no. This station has an incredible signal. It’s all agribusiness for the most part and is reaching farmers in five different states. In fact, if you look at it and understand it, it has the largest WNAX coverage, the largest land mass coverage in the United States. It’s non-stop ag programming from sunrise to late in the afternoon with a lot of people just talking about the community. It is a point to the farm community in five states, and it’s been doing this for 100 years. And by the way, I was mentioning its ability to please: please tell people that I am not the original manager, he’s been with us for many years, but he can’t make that claim. A little aside to show you just the power of this and about 80 years ago WNAX had gas stations with the motto that you’ll run out of gas before you run out of signal. That’s how powerful it is. WNAX is a big example of the importance of local broadcasting. If you’re ever in South Dakota and you end up in Yankton, please visit our studios and talk to our people. In the lobby, you’ll actually find a copy of the WNAX gas pump. One other final thing about WNAX that a lot of people won’t even know the name, the original band leader for the radio station was Lawrence Welk. This was back in the stage of radio when they had studio bands; we are dating ourselves here. Not that I remember that either. So, what’s in our future? Well, we’ll know it when we hear it, and we will adapt to it. We’re very agile and we’ll still be on the air. I have gotten off message, and I apologize, but actually, no, I don’t apologize for my passion. Sometimes it outweighs reporting numbers and percentages and EBITDA and all the other noise that goes with it. We have picked middle-market Americas, fitting in with our categories and criteria for looking at radio stations, which include state capitals, big college towns, non-closable military bases, and high net worth retirement communities like Ocala, which also has the villages. There are hundreds of thousands of people there, and they’re building another copy of the village right there, which is going to have room for 100,000 new residents in Florida. We have all of this going for us, and the stations have never been bought in mass or in big numbers, but one at a time with individual understanding of the marketplace and what it can do and when it can generate revenue. It’s secure; it’s not going to go away in the long run, and it will continue to grow as the marketplace grows itself. As long as we maintain that relationship with the marketplace, Saga will continue to be a strong profitable company with an excellent perspective in the industry. And as I said, I’m sorry I got off message. My job is to let the passion flow and let the stations do what is right. With that said, Sam, and I’m sorry if I got a bit carried away. We still welcome questions. So, Sam, do we have a question?

Sam Bush, CFO

Yes, we did have one question that came in, and it basically was asking about what our policy was or what our future looks like when we were talking about the internet/podcasting and our activity in web broadcasting, which are mainstreaming and how we are doing that to defend our enviable dominant position in local markets.

Ed Christian, CEO

Well, let’s talk about streaming first off. We are doing very well in monetizing it, and I think we will be up about three times the revenue that we had last year. The issue of course is SoundExchange’s rates, which means that we have to work harder just to meet the delta of servicing the money to SoundExchange for the right to play music on the internet. That’s a problem. As far as podcasting goes, you might have some numbers on this; I’m not sure. The way we view it is that while podcasting has great potential for social media communication and certainly serves a function and purpose, it has become so large that it is becoming increasingly challenging to make any profit in podcasting. Sam, do you have any numbers at all?

Sam Bush, CFO

Yes, we’ve done some research on this, Ed. An article we received not long ago from Edison Research indicated that there are currently, and this changes every day, over 1,750,000 podcasts available as of January of this year, including over 43 million episodes. The issue you pointed out is significant: the podcasting industry is so fragmented that it’s very difficult to monetize. Furthermore, I understand there are a lot of podcasts and many listeners, but monetizing them remains a challenge.

Ed Christian, CEO

I think part of the problem is that in order to survive, they are taking remnant inventory, which is that which is left unsold, and they are selling it very cheaply. The term remnant comes from the garment industry. The challenge is that while there are some fascinating projects associated with podcasting, they become almost boutique operations. Now, there are some that are quite profitable, but for the most part, they still fall into the boutique category and struggle to find money. And when funds are available, it’s at a very low price point. So, I think that covers everything we had today. Did we miss anything?

Sam Bush, CFO

Yes, I would just add to your streaming comment that in recent conversations, we’re doing many different things on the streaming side to enhance revenue. As you mentioned, Ed, we’ve separated our streams from our over-the-air broadcasts. We’re selling sponsorships on the streams and on our website. We’re selling ad inventory with some streaming injections and also a lot of local inventory to our clients on our streams versus on the air. We’re working with our clients on targeted display, targeted audio advertising, targeted display advertising, targeted video advertising, banner ads, pre-rolls; we have a very active interactive department. So, I think we’re seeing a lot of growth in that this year, as you mentioned.

Ed Christian, CEO

No, and that’s – that was something we purposely designed to revamp about a year and a half ago. Yes, what we were doing and how we were doing it to make that an actual profit center of the company. It’s turned out that it is becoming that very nicely, so I’m really pleased about what we’ve done on that. So again, if you have questions, feel free to call Sam or me. We thank you for your time. We appreciate your interest in Saga. If you are a Saga shareholder, you see that we care about your investment, and we promise our commitment to continue doing what we’ve been doing all these years. Thank you very much, and that should conclude our call for this time. We’ll see you all in about 90 days, right, Sam?

Sam Bush, CFO

Well, a little less than that since we are in March now, and next month in May the first quarter always sneaks up on us.

Ed Christian, CEO

Okay. Thanks everybody. We appreciate it very much.

Sam Bush, CFO

Thank you, Catherine. We’ll turn it back over to you.

Operator, Operator

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

Sam Bush, CFO

Thank you, Catherine.