Salem Media Group, Inc.

Good day and welcome to the Global Media Group Incorporated second quarter 2022 conference call. Please note today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, a question and answer session. If you would like to ask a question during this time, simply press star, the number one on your telephone key. If you would like to withdraw your question, press star followed by the number one again. Thank you. At this time, I'll hand the conference over to Evan Masur, Chief Financial Officer.

Welcome and thank you for joining us today for Salem Media Group's second quarter 2022 earnings call. 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 will begin in just a moment with our prepared remarks. And once we are done, the conference operator will come back on the phone 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 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 may 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, and Adjusted EBITDA. 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 salemmedia.com. With that, I would now like to turn the call over to Dave Centrella. Dave? Thanks, Evan, and thanks to all for joining today's call. Today we'll discuss Salem's second quarter financial results, focusing on the continued growth in digital. We'll provide a brief M&A update, talk about the success of the film, 2000 Mules, and conclude with a few comments on Salem's leverage and future dividend policy. At that point, I'll turn the call back to Evan, who will provide more detail on second quarter financial performance and will give guidance for the third quarter. Let's start with a discussion of the company's performance for Q2 2022. Compared to the second quarter of 2021, total revenue increased 7.7%, expense increased 10.7%, and adjusted EBITDA, which includes $3.9 million from the film 2000 Rules, which I'll discuss in more detail later on in the call, increased 33.6%. There are a few items driving the increase in expenses, including the reinstatement of the 401 match, expenses associated with the launch of Salem's News Channel, increased travel and entertainment costs, and increased professional services costs. Without these increases, overall expenses would be up only 4.2%. Before we get into the detailed performance of each division, I want to take a minute to focus on our digital revenue. The second quarter combined digital revenue, which includes digital revenue within the broadcast division, plus revenue from the digital division grew 14.5% from the second quarter of last year. Combined digital revenue represents just over 30% of total revenue as we continue to evolve into a multimedia company. Our expectation is digital revenue will continue to be our fastest growing segment. Now let's look at each division's performance in the second quarter of 2022. Revenue in the broadcast division was up 12.1% compared to the second quarter of last year. Digital is the fastest growing component within broadcast revenue. Digital revenue within the broadcast division increased 27.9% to $9.9 million. This growth is driven by Salem Surround, Now, and the Salem Podcast Network. Our more traditional broadcast revenue streams also performed well over the quarter. Block programming improved over last year. Local block programming was up 1.0%, and national block programming was up 0.5%. I've mentioned in the last three calls that there's an increased demand for programming from both new ministries and existing ministries. with the high renewal rates in block programming, expect us to continue having a positive impact on our long-term revenue. Traditional spot advertising increased 95% per quarter. Local advertising revenue increased 6.9%. National, 17.4%. While we continue to see advertising news, local spot is still not back to its pre-pandemic level. especially with concerns about inflation and fears of a recession. Network revenue was up 93% last year. This is driven largely by growth in political revenue. Before I move on to the divisions, it's worth reviewing political revenue as a whole. For the quarter, we had $1.5 million of political revenue compared to only $400,000 in 2022 of last year. The $1.2 million is more than we had in Q2 of 2020, which was $6,000, and more than we had in Q2 of 2019, which was $1.1 million. Let me switch over to Salem National Digital Division, where revenue increased 4.5% compared to Q2 of 2021. Revenue at our Christian website grew 0.1%. due to strong advertising demand in both direct and programmatic revenue. Town Hall Media, our conservative news and opinion websites, had a 18.1% increase in revenue from its growth at its VIP subscription service. The Church Products business had meaningful growth of 18.2% due to acquisitions made last year. Finally, we had a 22.5% decline in revenue at financial publications due to stock market weakness and recession concerns. Our last division, book publishing, had an 18.5% decrease in revenue in the second quarter. The principal reason for the decline was a 20.6% decrease in revenue at regulatory publishing due to no significant titles being released during the quarter. We said before that the book release schedule for 2022 is heavily back-loaded. We do have two titles scheduled for release in Q3 that we expect to perform very well. Justice Corrupted by Ted Cruz and The Book, 2,000 Mules by Dinesh D'Souza. Additionally, Salem Author Services was down 4.6% due to author concerns about the economy, inflation, and recession. Turning to the discussion of M&A activity, on June 27th, Salem closed on the sale of nine acres of land in the Denver area for $8.2 million. Both stations operating at that site, KRKS-AM and KBJD-AM, will continue to broadcast from a portion of the site. We had one small acquisition during the quarter. On May 2nd, Eagle Financial acquired Retirement Media, which owns six retirement websites for $190,000. So now let's talk about 2000 Mules. I mentioned that earlier. In addition to the solid performance we experienced overall from our broadcast and digital assets, we are equally pleased with the results from our first ever movie investment, 2000 Mules. Salem was the executive producer and sole financial investor of $4.5 million into the film company's standalone LLC. On the last earnings call, I mentioned that the film had private screens throughout the country. It was then available for download and DVD purchase on Salem Now and Rumble. Based on the success and the media buzz the film generated, certain movie theater chains and independent theaters decided to carry the movie for a few weeks. Not only did we get the $4.5 million investment returned almost immediately after the release, We generated approximately $900,000 in income distribution fees at Salem Now, advertising revenue platform from the LLC, and interest earned on our initial investment. Finally, through June 30th, we have earned an additional $3.9 million in income from the unconsolidated joint venture. To say the film has been a success would be an understatement. Based on this success, Salem is looking at other opportunities to invest in select films that we think best fit our audience, and indeed, we are already in some of those discussions. We do recognize, however, that few films will have the same level of financial performance at 2,000 meals. It is worth mentioning that Salem is the exclusive distributor of the upcoming film, Uncle Tom 2, which is scheduled to be released on August 26th. While Salem has not invested in the film, we intend to market the movie to make it as successful as possible, given the economics we get for distributing the film. One final point on 2,000 mules. If you factor the 3.9 million of profit share we earned into the revenues, approximately 41% of our revenue in the quarter came from non-broadcast sources. This further demonstrates how Salem has truly become a multimedia company. Finally, let's discuss Salem's leverage and dividend policy. As a result of Salem's strong operations and asset sales, the company had sufficient cash flow to buy back some additional 2024 notes in the open market. During the quarter, we repurchased $13 million of bonds at a slight discount. The reduction in debt coupled with the 33.6% growth in adjusted EBITDA brought our leverage ratio down to 3.97. If you factor in the cash on hand as of June 30th, the leverage ratio would be 3.91, a significant improvement and the lowest it's been in more than 20 years. As the company has been improving its balance sheet and getting our leverage ratio under control, investors have asked about Salem's plans to get back to returning capital to shareholders through dividends. Since the start of the pandemic, the board has not even discussed the subject of dividends, recognizing that leverage has been too high. However, now that leverage is under four times, the board will likely start to debate the merits. It is therefore risk-reviewing friction Salem has on paying dividends. Of the two bond issues outstanding, the 2028 notes are more limiting. Under the terms of that indenture, Salem can pay up to $500,000 in quarterly dividends when the leverage is below 4.75. If the leverage is below 4.0, Salem is able to pay up to $0.5 million in quarterly dividends. Obviously, if the board makes any decisions to resume the payment of dividends, we'll let investors know. And with that, I'll turn the call back to Evan for additional details on the quarter's performance and guidance for Q3. Thank you, Dave. For the second quarter, total revenue increased 0.7% to $68.9 million. Operating expenses on a recurring basis increased 10.7% to $60.9 million. and adjusted EBITDA increased 33.6% to $11.7 million, which includes a $3.1 million profit share from 2,000 mules, as Dave outlined. I know some of our broadcast peers are still mentioning how they're getting revenue close to 2019 levels. For us, this is our fourth consecutive quarter where revenue was ahead of the corresponding 2019 quarter. Compared to the second quarter of 2019, total revenue increased 6.2%, and adjusted EBITDA increased 16.1 percent. Compared to last year, net broadcast revenue increased 12.1 percent to $52.5 million, and broadcast operating expenses increased 17.5 percent to $42.5 million, resulting in station operating income of $10 million, a decrease of 6.2 percent. On the same station basis, net broadcast revenue increased 12.2 percent to $52.4 million, and SOI decreased 5.9% to $10 million. These same station results include broadcast revenue from 97 of our 98 radio stations in the network operations, representing 99.9% of our net broadcast revenue. I will briefly review the revenue performance of Salem's strategic formats. 39 of Salem's radio stations are programmed in our foundation teaching and talk format, and these stations contributed 36% of total broadcast revenue and increased 8.9% for the quarter. Our 33 news talk stations had an increase of 21.2% in revenue for the quarter. Overall, these stations contributed 18% of broadcast revenue. Revenue from the 12 contemporary Christian music stations contributed 15% of total broadcast revenue and increased 2.0% for the quarter. Broadcast digital revenue increased to $9.9 million and represents 19% of our total broadcast revenue. Network revenue increased 9% to $5.4 million for the quarter and represents 10% of total broadcast revenue. Revenue from the National Digital Media Division increased 4.5% to $10.8 million and represents 16% of our total revenue. Publishing revenue decreased 18.5% to $5.4 million and represents 8% of our total revenue. As of June 30th, total debt was $109.4 million, made up of $114.7 million of 7.8% 2028 notes and $44.7 million of 6.75% 2024 notes. Salem had virtually nothing drawn on its $30 million ABL revolver. The leverage ratio, as Dave mentioned, was 3.97 as defined by Salem's credit agreements. Looking forward for the third quarter of 2022, Salem is projecting total revenue to increase between 6% and 8% from the third quarter 2021 total revenue of $66 million. Salem is also projecting operating expenses before gains or losses on the sale of 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 11% and 14% compared to the third quarter of 2021 non-GAAP operating expenses of $55.2 million. This concludes our prepared remarks, and now we would like to answer any questions. Operator?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Michael Kopinski with Noble Capital Markets.

Thank you, and good afternoon, everyone. So first of all, congratulations on your quarter. You know, just spectacular. So the question is that I have a couple questions. The Q3 revenue up 6% to 8% is far better than many of what I would call the media out there in about the third quarter. And I was wondering if you can just give a color on some of those components of that growth that you're expecting in Q3. Number one, if you could talk a little bit about the network business on the broadcast side, maybe also talk a little bit about national and local spot. It seems like your national business has performed far better than anyone else, particularly in the second quarter. I was just wondering how that is continuing as you go into the third quarter. And let's stop there and then address some of the other questions.

So, Michael, and Evan and I might kind of tag team on this a little bit, but I think some of the new drivers you're seeing in Q3, certainly political, will heat up even more in Q3. Books certainly is something, as we've mentioned, we've got two what we believe are very strong books in Q3, and that will drive revenue. And then, really, digital. Our digital component continues to be a driver, plus, of course, Uncle Tom 2 coming out. We think that's August 26th. Like 2000 Mules, the big bulk of revenue when you release a movie is digital. you know, right away, getting it within the first four to six weeks. And then, you know, you'll continue to have revenue, but 90% of it is, you know, real fast. And so, you know, that will add to the quarter as well. And then, Evan, more? No, I guess that's kind of, yeah, that's what we think are the revenue drivers. Now, can you go to the next? You had a lot there, and I forget the rest of it.

Well, I'm just wondering, you know, the... just the network and the national business in general outside of political, what can you kind of give us a tone of place in what you're hearing? And also maybe if you can update us on your thoughts about political for the year. I mean, obviously you're pacing well ahead of, you know, your prior cycle. I was wondering maybe if you can update us what your thoughts are for the year.

Yeah, so our network business is doing well, and I think it's driven really as we look to do more what we would call 360-degree deals. We've got, as an example, you've got a host who's doing a network program. They're also doing a podcast. They might be on the Salem News Channel as well, and so we're trying to incorporate kind of more into, more media vehicles within Salem's ecosystem into what they're doing. And we're seeing positive response from their advertising base from that. And I think that's helping overall. In terms of political, it's just such a, the political environment has never been as interesting and as heated and intense as it is right now. And so I think, you know, protesters like us and others or radio programs that very politically, you know, have a lot of political content in them, just have a particular interest right now, interest to the candidates and their campaign managers.

Gotcha. And then in terms of your expense growth for the third quarter, it seems a little strong, and I was just wondering, is there any particular things going on in terms of the expenses for that quarter, things that are pushed forward into the quarter, any extraordinary items that you're facing, or kind of give us some what the 11%, 14% is about?

I mean, first of all, we hope that the guidance is a little conservative and that the company performs better than that guidance. Now, That being said, some of the issues that led to the elevated Q2 expenses will affect us again in the third quarter. Things like the reinstitution of the 401K match, the continued investment in Salem News Channel, increased travel and entertainment expenses. Also expecting to increase marketing spend in the third quarter. So those are a couple of the real big drivers that will drive expenses in Q3.

And how much of those are just what you would call somewhat one-time because your increased marketing spend, I suppose, is really related to the distribution of the film, right? And is that, I guess, going into fourth quarter or when the release is in third quarter, right? So would you expect that the fourth quarter expenses will moderate a little bit? I'm just trying to get a flavor of what would be continuing to the fourth quarter. What could we expect?

Yeah, the items that we continue into the fourth quarter is the 401K match. We started again in the first of this year, so that will hit all four quarters. Travel and entertainment will likely hit most of the year as well. You know, the other thing that's a big item is we're continuing to invest in talent in the Salem News Channel. You know, we recently hired someone to run that division, and I think there will be a continued investment there with, at least to start, very little revenue, but we think there's a great opportunity there and it's worth the investment. So I think you'll see some of that persist through the remainder of the year.

Okay. I'll let others ask questions. Thank you so much. Thanks, Michael.

Your next question comes from the line of Edward Riley with EF Hutton.

Good afternoon, guys. Thanks for taking my question. Notice that the digital media segment saw some margin sequentially and from Q2 2021. Just wondering what platform is really driving that right now?

You see the increased margins as we're doing a better job, quite frankly, of selling our owned and operated digital assets. So when you sell third-party markets, whether it's a PC pay-per-click campaign or something like that, you have a cost of goods sold because you've got to pay Google or Bing or whomever. But when you sell, for instance, a campaign or an email campaign that's within your own database or your owned and operated digital assets, you keep a lot more of that money. So that helps our margins. We've taken more of the fulfillment of our digital marketing in-house, so that helps our margins. as well. And then what's really driving that growth right now is around which are the digital advertising agencies that we have associated with all of our radio station clusters. Those are selling that digital marketing plus we have digital only sellers in many of those markets. That's driving and of course Salem Podcast Network and Salem Now which are also revenue That's helping drive that.

Gotcha. It sounds like it's pretty sustainable. Would it be fair to maybe project in the future? You're saying project the current margins in the future? Correct. Yeah, I think that's reasonable. Okay, great. And get some more color on what's driving the 17% increase in national supply there. Well, there's political in there.

So political is a huge part of that. Do you guys have any figures ex-political? Let me give you the political numbers overall. Obviously, it includes network and other. I know Dave mentioned some of them for the quarter. For the quarter, political was $1.5 million compared to last year. of almost $400,000. What's also interesting about political, and I know Michael Katynski asked a question as well, if you look year to date, you know, political is basically $2.3 million. Last year was under a million. And 2020, our biggest political year ever, was $1.2 million. So we're actually pacing quite ahead of that. So I don't have any national spot numbers ex-political in front of me, but certainly that's been one of the things.

Gotcha. And then on the publishing side, you mentioned revenues sort of being produced in the back half of the year. You mentioned that there's going to be some third quarter releases. Any titles expected to be released in the fourth quarter that you're excited about?

David, I don't know if you respond to that. I know you're on the line because you may have the biggest type. The biggest title in Q4 is probably going to be Dennis Prager with the next in his series of Bible commentaries. That's the most significant title, but not as big as Q3 where we have both Dennis D'Souza and Ted Cruz.

Okay, gotcha. And then I'm curious about the total benefit that you guys have received from 2,000 mules thus far?

Well, if you take a look at the fact that we had about $900,000 came in between the advertising they did with us, with the interest income that we got, and the $3.9 million, So you're talking basically $4.8 million in addition to the return of our $4.5 million. So as Dave said, to say the success would be an understatement, I think that certainly underscores that when we invested $4.5 million, we got that back in an additional $4.8 million.

Okay, great. That's it from me, guys. Congrats. Thank you.

At this time, there are no further questions.

I will now turn the call over to David Centrella, Chief Executive Officer, for any closing remarks.

Well, I have no closing remarks. Thanks, everybody, for being part of the call. Great questions, and we'll look forward to talking to you next quarter.

Thank you for participating.

You may disconnect at this time.