Salem Media Group, Inc.

Greetings and welcome to the Salem Media Group Inc. Q1 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Evan Masur, CFO. Please go ahead, sir.

Thank you and thank you all for joining us today for Salem Media Group's first quarter 2022 earnings call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website at www.salemmedia.com. In the room with me today is David Santrella, Chief Executive Officer. David Evans, Chief Operating Officer, is traveling this week but is on the phone as well. We'll begin in just a moment with our prepared remarks. Once we are done, the conference call operator will come back on the line to instruct you on how to submit questions. Please be advised that statements made on this call that relate to future plans, events, financial results, prospects, or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available information. Actual results may differ materially from those anticipated and reported results should not be considered an indication of future performance. We do not intend and undertake no obligation to update our forward-looking statements, including forecasts of future performance, the potential for growth of existing markets, the opening of new markets, or the potential growth from future acquisitions. This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically Station Operating Income, or SOI, EBITDA, adjusted EBITDA, and adjusted free cash flow. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the investor relations portion of the company's website at salemedia.com. And I would now like to turn the call over to David Centralis. Dave? Thanks, Evan, and thanks to all of you for being on today's call. In my prepared remarks, I'll focus on our Q1 financial results, including our continued growth in digital, provide an update on M&A, and conclude with a discussion of our recently released movie produced in collaboration with Dinesh D'Souza and True to Vote. I'll then turn the call back to Evan, who will provide more detail on first quarter financial performance, and Evan will give guidance for Q2. Before I get into a discussion of Salem's overall numbers, I want to highlight the continued growth in digital revenue as Salem's evolution into a multimedia company continues. In the first quarter of 2022, our total combined digital revenue, that is the digital revenue within the broadcast division plus the revenue from the national digital division, was $18.5 million, an increase of 10.9% from the first quarter of 2021. Digital revenue now represents 30% of our total revenue. We expect this elevated level of revenue growth to continue for some time. With that said, let me turn to Salem's performance for the quarter. Compared to the first quarter of 2021, total revenue in the first quarter increased 5.5%. Expenses increased 8.4%, resulting in a decline of 13.6%, or $1.1 million in adjusted EBITDA. It's worth noting the decline in book publishing operating income, which I'll discuss in more detail, of $1.1 million. So, excluding the impact of the book publishing division, which is highly dependent on the timing and success of book releases, adjusted EBITDA would have been flat for the quarter. Compared to Q1 2019, total revenue was up 3.5% and adjusted EBITDA was down 8.1%. Now let's look at how each division performed for the first quarter. Revenue in the broadcast division was up 10% compared to the first quarter of last year, and it's encouraging to note that some of the biggest growth areas in this division is from traditional radio revenue. The largest driver of this growth in terms of dollars was a 10.4% increase in block programming. Local block programming was up 3.6%, and national block programming was up 13.9%. principally due to six ministries that expanded their footprint and two ministries that started national program radio ministries. I mentioned on Salem's last two earning calls the increase in the demand for limited airtime from national Christian block programmers will result in elevated revenue, and this growth is evidence of that. Keep in mind that we generally have a 95% plus renewal rate on this business So this will have a positive long-term impact on our broadcast revenues. Additionally, Salem had a 15.6% growth in local spot advertising revenue. Much of this improvement is due to the COVID recovery, yet local spot is still not back to its pre-pandemic levels. National spot advertising revenue was down just 0.5%, as many national advertisers are being cautious with their ad spending due to concerns about inflation and the state of the economy. Also, network revenue was down slightly, 0.8% for the same reasons National Spot is down, concerned by advertisers over the economy. You may have read that one of Salem National hosts, Larry Elder, decided to leave the Salem Radio Network and pursue other opportunities. While we are disappointed with Larry's decision to move on, we do not expect a significant decline in revenue. Carl Jackson has been filling in once again, as he did during Larry's run for governor. We just announced that Brandon Tatum will be joining over on the 6 to 9 p.m. Eastern time slot permanently on the Salem Radio Network, replacing Larry Elder. In addition, he'll be doing a daily podcast on the Salem Podcast Network. Brandon is a well-known political commentator and former police officer with 1.9 million YouTube subscribers and 900,000 Instagram followers. We believe he will be a great fit for our network. Finally, digital revenue within the broadcast division increased 16.1% to 8.2 million, driven primarily by the growth of revenue at Salem's Surround. Expenses in the broadcast division increased 14.3%, which resulted in a 3.7% decline in station operating income. Three big drivers of the increases in expenses are the reintroduction of the 401k match, increases in bad debt expense, and increases in travel and entertainment expenses now that employees are traveling again. Revenue increased 7.1% at Salem's National Digital Division in the first quarter compared to the first quarter of last year. Town Hall Media, Salem's group of conservative news and opinion websites, saw growth from Town Hall VIP, which is a subscription service for exclusive content. We also saw a growth in the Digital Division from an increase in ad rates. Finally, the church products business had meaningful growth in both children's ministry deals as Sunday schools are now more open and church staffing, which received a large increase in job postings. Finally, the impact of two acquisitions last year, Centerline Media and Shift Worship, have driven some of the increase in revenues. Expenses in the digital division were down 2.3% due to reduced marketing spend for Salem's investment newsletters, partially upset by some increases as noted in the broadcast division. Lastly, as I already briefly mentioned, the book publishing division had a 31.8% reduction in revenue in the first quarter as the book release schedule was significantly lighter compared to last year. The book release schedule for 2022 is heavily backloaded, whereas in 2021 was more evenly distributed. That being said, our top books this quarter were The Rational Passover Haggadah by Dennis Prager, Lost Airman by Charles Stanley, Rigged by Molly Hemingway, and Zelensky by Andrew Urban. Book publishing expenses were down 14.2% due to the reduced level of books sold. The book publishing division had an operating loss of $0.6 million in the quarter compared to operating income of $0.5 million in the first quarter of last year. Corporate expenses increased 12.2% due to the 401 match and an accrual for senior management bonuses in the quarter, which did not occur in the first quarter of last year. I'll now turn the discussion to M&A activity. There is continued work on some land sales. On January 10th, we sold 4.5 acres in Phoenix For $2 million, the site was used to transmit KXXT AM. The station is now in the process of being relocated and diplexed on our KPXQ AM site. This will actually result in an improved signal for KXXT. Closing the sale of nine acres in the Denver area for $8.2 million is also still in progress, with a close expected in June. The stations will continue broadcasting both KRKS-AM and KBJD-AM from this transmitter site after closing. Salem did make one small acquisition during the quarter on May 2nd, Eagle Financial acquired Retirement Media, which owns six retirement websites for $190,000. Now, before I turn the call back to Evan, I want to share some very exciting news. Salem is the executive producer and sole investor of $4.5 million in the film 2000 Mules. The movie is a documentary displaying video and mobile phone evidence of voting fraud in the 2020 presidential election. The movie was released in a special two-night event at almost 300 theaters and sold out 94% of the available seats. The red carpet premiere was last Wednesday at Mar-a-Lago, hosted by President Donald Trump, and included many prominent conservative media personalities and congressional representatives. It's too early in the movie release window to properly estimate where Q2 revenue for this film will end up, but we are pleased with the results to date and certainly expect to make a solid profit from Salem's investment in this movie. This is another great example of Salem's multimedia approach in generating both impact and revenue. And with that, I will turn the call back to Evan for additional details on the quarter's performance and guidance for Q2. Thank you, Dave. For the first quarter, total revenue increased 5.5% to $62.6 million. Operating expenses on a recurring basis increased 8.4% to $55.8 million. which resulted in a 13.6% decrease in adjusted EBITDA to $6.8 million. It's worth noting that many of our broadcast peers are mentioning on their earnings calls how they are closing in on 2019 revenue levels. For Salem, this is the third consecutive quarter with revenue ahead of the corresponding quarter in 2019. As Dave mentioned, comparing Q1 2022 to Q1 2019, total revenue increased 3.5%. Compared to last year, net broadcast revenue increased 10% to $48.4 million, and broadcast operating expenses increased 14.3% to $38.1 million, resulting in station operating income of $10.3 million, a decrease of 3.7%. On a same station basis, net broadcast revenue increased 9.4% to $48.1 million, and SOI decreased 5.0% to $10.3 million. These same station results include broadcast revenue from 96 of our 101 radio stations and the network operations, and represents 99.3% of our net broadcast revenue. I will briefly review revenue performance of our strategic formats. 39 of Salem's radio stations are programmed in our foundational Christian teaching and talk format. These stations contributed 39% of total broadcast revenue and increased 11.6% for the quarter. Salem's 32 news talk stations had an increase of 17.5% in revenue for the quarter. Overall, these stations contributed 19% of total broadcast revenue. Revenue from the 12 contemporary Christian music stations contributed 15% of total broadcast revenue and decreased 0.1% for the quarter. Broadcast digital revenue increased 16.1% to $8.2 million and represents 17% of our total broadcast revenue. Our network revenue decreased 0.8% for the quarter and represents 10% of total broadcast revenue. Revenue from the National Digital Division increased 7.1% to $10.3 million and represents 16% of our total revenue. Book publishing revenue decreased 31.8% to $3.9 million and represents 6% of total revenue. As of March 31st, 2022, total debt was $172.4 million, made up of $114.7 million of 28 notes and $57.7 million of 6.75% 2024 notes. Salem had nothing drawn on its $30 million ABL revolver. The leverage ratio was 4.59 as defined by our credit agreements. And looking forward for the second quarter of 2022, Salem is projecting total revenue to increase between 6% and 8% from second quarter 2021 total revenue of $63.8 million. Salem is also projecting operating expenses before gains or losses on the sale or disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense, and amortization expense to increase between 7% and 10% compared to the second quarter of 2021 non-GAAP operating expenses of $55.0 million. And this concludes our prepared remarks, and we would now like to answer any questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please while we poll for questions.

Your first question comes from line of Michael Kapinski with Noble Capital Markets. Please proceed with your question.

Thank you, and good afternoon, everyone. So let's start with the guidance. So the guidance looks a little stronger than what I was expecting, and I was just wondering what are the key drivers there. Maybe you could just talk a little bit about Are we cycling in now to a better environment for books titles, the number of titles versus last year? If you can give us a little thought about that. And then I have some further questions.

Yeah, David Evans may want to mention or talk about some of the book titles. Certainly it's a better Q2 in publishing revenue than Q1. That is part of it. But also just everyone else seems to be doing, you know, we're getting some positive indicators. Broadcast revenue is doing a little bit better. Digital is strong. Obviously, we have a little bit of revenue, kind of a nominal amount in the guidance for this film, 2,000 mules. That's also something that's different in Q2 that wasn't in Q1.

Gotcha. And in the titles, can you guys give us a sense of what that looks like for the balance of the year?

So book publishing is still soft in Q2, kind of looking ahead. Book publishing, the big titles are all in Q3 and Q4. You know, we've got books lined up from Ted Cruz, David Limbaugh, Dennis Prager, the Babylon Bee, Kurt Schlichter, who's one of our top writers on Town Hall. but all of those books are scheduled for Q3 and Q4. So I wouldn't expect a big increase from book publishing in Q2, more likely to be flat or even down a little bit. It's the second half of the year that you should be looking at. Gotcha.

And then can you talk a little bit about the film? Just to understand a little bit, the cost was $4.5 million. and you're in 300 theaters at this point. Do you have some sense of what revenues you're kind of contemplating in terms of the film, what type of return you're expecting, and then how you, I guess, further commoditize that on some of your other platforms?

So, Michael, first off, yeah, our $4.5 million investment was an investment in both the production of the film and the marketing of the film. The film was initially, it premiered in about 300 theaters, 400 screens for two days. It then moved to this premiere at Mar-a-Lago, then had a virtual showing at the War Theater in Las Vegas. And then as of Saturday... was also available on Salem Now, which is Salem's transactional video on demand platform, as well as on Rumble slash Locals as a paid release there. So that's kind of, you know, and right now, as of Sunday, it was available and is available on Salem Now and on Rumbles. as well as DVD sales, which are significant for the film. So that's kind of where we've gone with it. In terms of the revenue, it's really early on to speculate where that is, but I will tell you that we're very pleased with the pace that we're seeing right now and expect to see a nice profit there.

And David, how do you view Salem now? What are your thoughts in terms of adding more content? I mean, I'm just kind of trying to understand, are you, are you thinking you're getting into the movie business? Obviously it's more of a documentary if I recall, but can you kind of give us your thoughts on how you plan to develop Salem now?

Yeah. And I'll make some comments and I'd love David Evans to give some color as well, but Again, Salem's calling card is the fact that we appeal to a few very specific audience groups. That's what we do best, is appealing to those that are interested in content related to Christian, conservative, and family-themed values. And so as a result of that, it allows us to really be targeted in the kinds of things that we produce. And so Salem Now is just another great example of us being able to either acquire or invest in content that will appeal to that audience and put it on the Salem Now platform. We did that last year with No Safe Spaces from Dennis Prager and Adam Carolla. That was followed up with Larry Elder's Uncle Tom. We've had other movies of lesser of a hit. and now, of course, this movie, 2,000 Mules, which is a significant hit. So, Michael, we continue to look at curating additional content, both from existing content that's available that we can put on the site and then potentially from investment in other documentary-style movies going forward. David, anything to add to that?

Yeah, I think you should expect us to be highly selective. You know, we're not going to just kind of jump into the movie business, into the deep end of the swimming pool. You know, so we'll be looking for movies that are a fantastic fit for our audience. We know who our audience is. You know, we think we know what topics resonate with them. So we're going to be very focused on our sweet spot audience. talking about the right topics that our audience is interested in, brought to you by the right talent with the right timing. I think we have to get all of those things aligned. And I think you see that with 2000 Mules and Dinesh D'Souza. Dinesh D'Souza is a great fit for our audience. The topic of the movie is very much on the minds of our audience. right now. So, you know, expect a small number of movie investments all thought about very selectively.

Gotcha. And then my final question, any updates on Salem news channel? And then if you can just kind of give us some thoughts on how much of the elevated expenses that you're talking about, seven to 10% growth in Q2, how much of that might be related to the expenses related to the news channel?

Well, the Salem News Channel continues to make progress. You know, we have our first video-only program on with Andrew Wilkow. We now have put, in addition to that, the Dinesh D'Souza podcast as an edited video version. That's also on the Salem News Channel. So in addition to our network hosts, which are there. We now have a few video-only programs. We have some additional video-only programs that we'll be launching, kind of rolling those out slowly to control expenses. So we're pleased with where we're headed with the Salem News Channel. We are just beginning a more significant sales effort there as we wanted the product to be right. we're starting to get good signals that the product is right and we'll be moving more aggressively in the sales process moving forward. Yeah, I'm sorry, go ahead. Michael was going to say some of the increased expenses in Q2 certainly relate to expenses that weren't around in 2021 related to Salem News Channel. For example, the video-only show of Andrew Wilkow and some of the personnel needed to run the Salem News Channel. So that does impact some of the elevated expenses in the second quarter of 2022.

And is there a way to break that out or you're not breaking those elevated expenses out at this time?

No, we're not breaking out sale and news channel expenses separately at this point.

Okay. All right. That's all I have, guys. Thanks. I appreciate it. Thank you. Thanks, Michael.

Your next question comes from Lisa Springer with Singular Research. Please proceed with your question.

Good afternoon. I have a couple questions about political ad spending taking more towards the second half. I wonder with the Supreme Court potentially taking up the abortion issue again, do you expect that to have any kind of meaningful impact on political ad spending?

You know, a fair question and to be perfectly transparent, one that I've not given a lot of thought to how it would impact political ad spending. So Lisa, I can tell you this, we're already seeing an increase in political ad spending and that was up significantly obviously in Q1 of this year. Whether the Roe v. Wade, a reversal of Roe v. Wade would impact political ad spending, I guess my intuition says it probably would because it becomes a hot button issue that both sides of the aisle will want to play off of. So I think it probably will increase the intensity of political ad spending for both parties.

Okay. And the next question I have about political ad is, are you expecting with this cycle that it's going to be more heavily weighted towards digital than broadcasting compared to previous cycles? And if that is true, how could that impact your margins?

Well, first off, I think the trend with all political advertising in general has been an increased amount of their ad budget going to digital. The great news is that we have ample and robust digital vehicles to offer them now. Those vehicles do come at a slightly smaller margin than radio does, but Anytime that we talk about political advertising, we always talk about the very effective combination of radio and digital together. Radio creating awareness, digital creating action, and the two of them are a potent and effective combination. And so we actually, you know, look forward to this political season because we have more to offer than we ever have.

Okay, great. Thank you for your answers.

Thank you. Thank you.

Your next question comes from Barry Sign with Spartan Capital. Please proceed with your question.

Hey, good afternoon. Thank you for taking my questions. First, I know you're not giving estimates on, you know, how much revenue 2,000 mules could generate. But if you could kind of walk us through the mathematics, I think it's, what, $30 to stream the movie on Salem now. And I know that movie economics get kind of complex. If I were to make an estimate of how many people might stream that over the quarter, would all that $30 flow through as revenue? How do the economics work so we can kind of do our own math and do our own assumptions?

Yeah, and you're right, Barry. It is a complicated issue when you talk about movie accounting. But the first thing that happens is the marketing money gets paid back first. And then the second, the production cost. So Salem will get the first four and a half million plus a little bit of interest on that money of proceeds. So that will come to us. Additionally, anyone that streams on Salem now, we get a certain percentage for being the distributor of the film. The rest of the proceeds after that go into the LLC that is the owner of the film. And then there's a split from there which Salem will participate in as well.

So that first chunk, the $4.5 million recovery, does that show up as revenue?

That's a great question and one that we're still wrestling with and discussing with our outside auditors to figure out the exact correct accounting. It has a lot to do with how the LLC is established and financial control and things like that. So there was no revenue in Q1, so this is something we'll have certainly resolved as we get into Q2.

Okay, and kind of a larger macro question around Salem Now, and this also, I guess, relates to issues you've seen on publishing at Regneret. As you've seen other titles, whether they're authors or movies, get banned or blocked or canceled on more traditional publishing houses, or I don't know if Amazon Prime would have even allowed this movie to be shown. is that creating a new, longer-term, larger opportunity, a large proportion of the population describe themselves as conservative? Are you becoming kind of the welcoming platform, not just in movies but in publishing, and do you see that as a significant growth driver over the next several years?

I'll let David Evans address the publishing part. On the Salem Now part, Barry, I would say a couple things. First off, even before you get into films that maybe, or content that would be banned on more general marketplace platforms, you know, there's a very unique audience that we appeal to, and we can put content on Salem now that they, you know, it's just easier for them to find it on our site than it would be shifting through, you know, millions of titles on some other platforms. And so just general interest content for politically conservative audiences and Christian audiences can show up on our site and do well. But then beyond that, certainly Salem now becomes a home for content that maybe just wouldn't find a home at all on other platforms. largely due to the cancel culture. However, I will say this, and that's that Salem still has a responsibility, and we take it very seriously, to make sure that any content that shows up on our site is responsible content. And David, I don't know if you want to address the book publishing side.

Well, we've certainly seen... the general market New York publishers cancel or turn away a number of conservative authors. And, you know, that's certainly been an opportunity for us and we've signed up those authors and those books and, you know, we fit, you know, there's definitely an opportunity there and that's a gap that we sought to fill, you know, but kind of also recognizing what Dave said. We want to be proud of every book we publish. You know, we're selective and, you know, we're publishing the books that we think are a good fit for our audience and that we think are very well written. So it is an opportunity in both books and in movies.

Okay. And my last question, actually a two-part question around if you can help us in forecasting the free cash flow? And there's two parts to that question. First of all, I know you're upgrading many of the radio stations to add video capabilities. So presumably that's going to elevate both operating expense and capital expense. So if you could give us any color on that. And then also on cash interest expense, I know that's not linear. I think that tends to be higher in 2Q and 4Q If you could give us some help there and some outlook there, what that's likely to look like for the rest of the year.

Yeah, so we certainly are upgrading some of our studios. We already have in New York and Washington, D.C. I'm sorry, in Los Angeles and Washington, D.C., to have kind of more TV-friendly backdrops for our hosts that are on air, on the radio, but also on Salem News Channel. You'll see some more of that this year and certainly will be a cause for elevated CapEx. Not necessarily much in the OpEx, more in the CapEx line. I think that's where you'll, where you will tend to see that. And then as far as interest, you're right, we pay interest every June 1st and every December 1st. And with our interest or with our debt pared down, you're talking just over $6 million is the interest payment in June and December. So you're looking on a combined basis with our current debt, you know, $12.1 million.

Okay, thank you. You're welcome.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for more questions. Your next question comes from Edward Riley with EF Hutton. Please proceed with your question.

Hey, guys. Just to piggyback on the CapEx question, would love to hear more on capital allocation throughout the year. And you know, if you think you're going to reach your, your target leverage ratio below four, uh, by the end of the year and kind of what capital allocation looks like thereafter.

Yeah. You know, I don't, I'm not sure we're going to hit the, you know, below four level of leverage by the end of the year, but that still continues to be our target. And we're working very much towards that. And as far as right now, capital allocation, really the default is debt retirement. unless we have some good M&A opportunities out there. Obviously, we look at opportunities. We pass on a lot of them, but we certainly look at things to see if it makes sense. But you'll see us continue to focus on paying down debt the remainder of this year. And, yes, you will have elevated CapEx this year due to some additional studio upgrades. And then, I guess, to... kind of round out your question, what that's going to look like when we get below four. We'll see what we end up doing at that point. I don't think we've made any decisions on how we'll allocate capital at that point. The first thing is just to get there.

Gotcha. So we maybe use the first quarter as a guide for what subsequent quarters look like in terms of capex, particularly on the tenant improvements.

Yeah, that's probably a decent number. The other thing that we're doing that we'll probably say that it will be a little bit higher in the back half of the years, we're also in the process of upgrading all of our automation systems to be through the same vendor. Right now we have four different vendors for our various automation systems in the markets, and we're in the process of getting them all on one uniform automation system. So there will be some CapEx associated with that as well.

Okay, great. Thank you, guys. Thank you.

Your next question is a follow-up from Michael Kopinski with Noble Capital Markets. Please proceed with your question.

Thank you. It seems like you guys are pulling a rabbit out of the hat in finding sales of land and so forth. I was just wondering if maybe you can give us some update on any visibility of additional land sales or asset sales.

Yeah, Michael, we continue to look for other opportunities. Our real estate division is always getting updates on what our land values are and what the marketability is for those sites. And then at the same time, if we were to sell it, what are the opportunities for that transmitter being relocated or diplexed or whatever? I think right now... all of the low-hanging fruit that's available, we're grabbing at, and we want to get those to completion, and then we'll move forward from there.

I appreciate the call, and thank you.

Thanks, Michael.

Ladies and gentlemen, we have reached the end of the question and answer session. And I'd like to turn the call back to Mr. David Santrella for closing remarks.

Well, thanks, everybody, for being on the call. Thank you for your questions. We appreciate your interest in the Salem Media Group, and I look forward to speaking to you again next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.