Earnings Call Transcript - SGA Q1 2022

Operator, Operator

Good afternoon, everyone, and welcome to the Saga Communications First Quarter Earnings Conference Call. It is now my pleasure to hand it over to your host, Ed Christian. Ed, please go ahead.

Edward K. Christian, CEO

Thank you, Matthew. I appreciate it. Good afternoon, everyone, and thank you for being here. We hope to have a bit of fun as we get started. A moment ago, I was thinking we needed to add some excitement to this, and it reminded me of our previous conversation. We spoke to the agent for Johnny Gilbert, the announcer for Jeopardy!, to see if he could do some work for us. I thought that hiring Johnny Gilbert for the introduction would make it sound much better than me trying to handle it for Sam. Anyway, thank you again. I'll be back shortly after Sam goes over some numbers and information. So with that said, here is Sam.

Samuel D. Bush, CFO

Thank you, Ed. This call will include forward-looking statements regarding our future performance and operational results, which involve risks and uncertainties outlined in the Risk Factors section of our latest Form 10-K. We'll also discuss certain non-financial measures, with reconciliations for all non-GAAP financial measures to the most comparable GAAP measures provided in the selected financial data tables. For the quarter ended March 31, 2022, net revenue rose 12% to $25 million, up from $22.3 million last year. Political revenue did not significantly impact the comparison, with gross political revenue for the first quarter of 2022 at $121,000 compared to $209,000 in the same quarter last year. We anticipate a considerable increase in political revenue as the year progresses, especially in the third and fourth quarters. Station operating expenses increased 8.7% to $20.6 million for the three-month period. Station operating income rose 17.8% to $5.6 million, while overall operating income was $1.7 million, compared to $883,000 for the same period last year. Free cash flow for the quarter was $1.9 million, versus $1.8 million for the same quarter in 2021. Net income for the first quarter of 2022 was $1.2 million, or $0.20 per fully diluted share. The second quarter of 2022 is currently tracking approximately 6% ahead of the same period last year. However, due to ongoing global instability, everything is assessed week by week and month by month. Local direct revenue remains strong at $12.4 million in the first quarter of 2022, accounting for about 50% of our total net revenue for the quarter. We also experienced substantial increases in digital and non-traditional revenue during the quarter. It's encouraging to see non-traditional revenue, often referred to as NTR, grow as our markets start moving forward with numerous local events we have traditionally participated in. Our balance sheet reflects $55.2 million in cash as of March 31, 2022. Currently, we have $52.1 million in cash. Combined with the quarterly dividend of $0.16 per share and the $0.50 per share special dividend paid on January 14, 2022, along with the $0.16 per share quarterly dividend paid on April 8, Saga has distributed over $78 million in dividends since initiating dividends in 2012. We will address another question shortly, but while discussing cash, we received an inquiry about April's cash usage in relation to the $55 million we had at the end of March and the $52 million as of this week. About $1.6 million was for a quarterly tax payment, which is not particularly exciting but necessary. The more interesting news is that around $1 million was used to purchase a building in Norfolk, Virginia, enabling us to relocate from our current studio site that we've leased for over 25 years. This was an excellent opportunity since the seller was already operating the site as radio studios. We will need to undertake some updates once we take possession, but moving will allow us to significantly decrease our operating costs in the market. This move will mark the end of the largest lease we've ever had for a property. Capital expenditures for the first quarter of 2022 were $923,000 versus $534,000 for the quarter ending March 31, 2021. The company anticipates higher capital spending in 2022 after reducing it in 2020 and 2021 due to uncertainties related to the COVID-19 pandemic and subsequent supply chain disruptions. We project capital expenditures to range between approximately $5.5 million to $6 million in 2022, including a few building projects, one of which I've just mentioned. Additional projects will be discussed as they come to fruition. We currently expect our station operating expenses to increase by about 5% to 7%, factoring in additional sales commissions tied to our revenue growth and rising costs of sales services in healthcare. Our ongoing tax rate is projected to be between 29% to 30%, with deferred taxes of 5% to 10%. With that, Ed, I'll hand it back to you.

Edward K. Christian, CEO

Thank you, Sam. I want to highlight one important point. Regarding the building we have acquired and will be moving into within the next 6 months to 2 years, we have a policy at Saga where we own most of our structures, with only two exceptions. This new building will become the only other location that we lease, as it is set to be moved into a new facility, specifically in Hilton Head, which is actually in Boston. By this time next year, we will have just one very small lease building in one of our smallest markets. Other than that, we believe in owning our locations, as it provides good depreciation benefits and allows us to shape and design the building to our specifications. Sam and I were discussing how to present something new and exciting without repeating the same presentation each time. Reflecting on the first quarter, while some may view it as challenging, we prefer to see it as an opportunity for growth. Our goal at Saga has always been to explore innovative ways to maintain good broadcasting while introducing fresh ideas. It is indeed a challenge, but a valuable one that encourages us to enhance our properties and engage more effectively with our audience. Since our inception, Saga's mission has been to target middle markets where we believe we can make a significant impact, finding a balance in market size that is neither too large to disregard radio nor too small to generate a reasonable return on investment. We have made significant progress in developing this vision, starting with just a couple of larger stations and ultimately building our portfolio to around 165 to 170 radio licenses today.

Samuel D. Bush, CFO

We have 113 AM and FM and 80 translators, metro signals, so almost 200.

Edward K. Christian, CEO

I often lose track of how many we have because I'm focused on acquiring translators, and Sam keeps reminding me when they'll be back. However, they have proven to be extremely effective for us, enabling us to handle what we refer to as stackables, where we utilize metro signals as an additional feature. I recall early in my career when a sales manager described successful shoe salespeople, who would always suggest buying socks with the shoes as an add-on. That's similar to how we approach our secondary stations, packaging them to generate extra revenue. I mentioned previously that we've raised our rates. Recently, we had a thorough discussion with our managers to reassess their selling rates and configurations. We implemented about a 10% increase in rates, which we deemed necessary in light of rising music and insurance costs. While rates in the industry appear to be declining, ours are on the rise, which we find to be an interesting strategy. Additionally, we invest a significant amount of time engaging with our local communities. I previously noted that we are in the process of hiring news personnel, despite the declining number of dedicated news reporters in radio, and we see this as crucial for our business. We’ve faced challenges in recruitment; for example, out of 24 resumes received, about two-thirds were from individuals wanting to report from home instead of engaging directly with the community, which is not what we are looking for. We seek individuals who are active members of their communities, able to connect with local leaders to provide valuable information. This approach is essential for fostering professionalism and recognition in the community. In a world where we need to be more engaged, our focus is on creating enjoyable radio stations that provide comprehensive coverage of local happenings, and we will continue to prioritize that. Although it's been a tough environment for sales, we are excited about developing innovative products. I was discussing a new order for a company that specializes in invisible fencing for dogs, which creates a unique selling opportunity we hadn't considered before. This is just one example of how we're exploring diverse avenues for revenue rather than relying on major national agencies, which are reducing their advertising rates. We aim to be creative and proactive in our strategies while keeping you informed without overwhelming you with data from an entire company perspective. We encourage you to reach out to Sam or myself with any questions about our business initiatives to enhance our effectiveness. Yes, it is a challenging time. But we welcome that because it keeps us engaged and thinking. We're working on some really great inventive ideas. I mentioned one that we plan to launch in about a week, and you might find it a bit surprising. Well, can I share that?

Samuel D. Bush, CFO

Go ahead.

Edward K. Christian, CEO

Okay. A few weeks ago, I realized that more Americans are having trouble sleeping, as discussed in an article I read. This issue affects their health and well-being due to restlessness at night. Radio has seen a decline in overnight listening, which used to be significant. Currently, there are a couple of good syndicated overnight talk shows, but many music formats for overnight listening have become automated, with no one present in the facilities. I thought it would be beneficial to introduce a unique concept for commercial radio. We are developing a prototype for a new air station in Boston, specifically in Hilton Head, where we operate four radio stations, one of which, Easy Favorites, has been successful for several years. However, we've noted the absence of an overnight listening audience. Thus, we plan to offer deep sleep music overnight, which will actually feature calming sounds, specifically rain and thunder, from midnight until 5 AM. While some may question this approach, we believe it makes sense. We will include very brief sponsorship messages from relevant advertisers, such as mattress stores, with only two mentions per hour during this period. We aim to transform the overlooked overnight hours into a revenue opportunity while providing a valuable service to listeners. This initiative represents a fresh perspective on the challenges facing radio. If it doesn’t work out, we’ll learn from it and continue to innovate. We have a question coming up, and I'll get back to that what we do. But the question is, where do we envision radio in 10 years? We'll talk about that in a couple of minutes. And in the meantime, let me just toss this back to Sam to see if he has any other comments or anything or any other questions that we've had.

Samuel D. Bush, CFO

No, we had a couple of questions that I already took care of. Another one asked us about uploading audio recordings of the conference calls. We did start doing that with the fourth quarter call. So in addition to this transcript, which gets posted to our website, you can also find audio recordings of the calls now on the website as soon as we get them processed and back to us. And then as Ed said, there was a question about 10 years from now, do you expect more or less radio listeners in your markets? And what's the grand plan for radio?

Edward K. Christian, CEO

The future of radio really hinges on the dedication of broadcasters and commercial owners today. If they choose to keep the meetings live, we can definitely accommodate that. However, if the focus shifts solely to survival by cutting staff and resources, the outlook may be bleak. For commercial radio to thrive, broadcasters need to think creatively and avoid simply centralizing everything. If we approach it with the same spirit that has defined radio in the past while embracing innovative ideas, we can maintain a strong position. It’s essential to remember that listeners seek local information. A good radio signal can reach a 40-mile radius, and that's the area we should prioritize and protect. Serving those listeners is crucial for our relevance and importance in the community. If we stray into creating a one-size-fits-all radio program for the entire country, it will lead to a decline. However, if the passion and desire to connect with the audience remain, there will always be strong broadcasters. The value of radio will keep it relevant. While I can’t predict more than a decade into the future, I believe radio will still endure due to our innovative ideas and the dedicated people in our organization, always striving to develop new concepts. It’s about commitment and passion, not just viewing it as a commercial endeavor. Radio, much like art, requires creativity and focus. If we maintain this mindset, we can avoid losing our momentum and the passion that fuels us, leading to a longer lifespan for the industry. Meanwhile, we remain optimistic about Saga's future since we hold firm to the values we've established over the years. That pretty much sums it up.

Samuel D. Bush, CFO

That's very good. I mean it's all about our radio being local, and that's what Saga does best.

Edward K. Christian, CEO

Let's hope so. We continue to focus on doing radio that connects with people. This morning, I listened to one of our stations, the River WRSI in Northampton, where Monte hosts a unique morning show. He engages with a lot of listeners through calls and interaction on various topics. Monte has a spontaneous style, which makes his show distinct and beneficial for the community, fostering a sense of connection. That’s just one example, and I could discuss many of our morning shows and personalities and their community ties. This connection is crucial in our business, and genuinely caring for the community is where I believe we will excel. I've been reflecting on this; is there anything else I might be missing, Sam?

Samuel D. Bush, CFO

I think that's good. And I think Matthew, we can turn it back over to you to wrap up the call.

Operator, Operator

Certainly. Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.