Salem Media Group, Inc.

Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. I would like to welcome everyone to the Salem Media Group Incorporated third quarter 2022 earnings call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 once again. Thank you, and I will now turn the conference over to Evan Masur, Chief Financial Officer. You may begin.

Thank you, Abby, and thank you all for joining us today for Salem Media Group's third 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 Evans, Chief Operating Officer. David Santrella, Chief Executive Officer, is traveling this week, but is also on the phone as well. We will begin in just a moment with our prepared remarks. And 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 security Relegation 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. And 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 salemedia.com. And with that, I will now turn the call over to Dave Santrella.

Thanks, Evan, and thanks, everybody, for joining us on the call today. Today, we'll review Salem's third quarter financial results and provide a brief M&A update. I'll turn the call back to Evan to provide more details on third quarter financial performance and give guidance for the last quarter of the year. Let me start by saying that this was a very challenging quarter, to say the least. Total revenue increased 1.3%. Expenses increased 17.2% and adjusted EBITDA decreased 78.8%. While those numbers are obviously disappointing, there were a few one-time items impacting the quarter, all of which have previously been publicly announced. First, we had to push back the release date of the 2000 Mules book by Dinesh D'Souza from the third quarter to the fourth quarter. Additionally, the results from the release of Uncle Tom 2 were much less than expected. That was a movie. And finally, on September 26th, we settled a lawsuit for $5.3 million. While we adamantly deny the allegations that were made, we nevertheless believe settling the lawsuit was preferable to uncertain and costly litigation and in the best interests of the company. On top of these one-time items, the economy, as you know, is weakening. Before getting into performance by division, let me talk about the performance of digital revenue as a whole, the digital revenue within the broadcast division plus the national digital division. Combined digital revenue represents 29% of our total revenue and was down 0.5% in the quarter. The decline in revenue was due to the softening advertising market that we're starting to see across most of our businesses. Digital, however, continues to be the company's top growth initiative as Salem continues its evolution into a multimedia company. Nevertheless, there were a number of positive developments in the quarter. Total revenue was up 1.3%, and broadcast revenue was up 3.1%. Despite the headwinds I just mentioned, Salem continues to outperform its pre-pandemic numbers with total revenue up 4.3% and broadcast revenue up 7.3% above the third quarter of 2019. Now I'll review each division's performance in the third quarter. In the broadcast division, revenue was up 3.1% compared to the third quarter of last year. According to Miller Kaplan, this is well above the industry, which was down 1.5% in the markets in which we operate. Political revenue is driving much of this growth. In the third quarter, we recognized $1.5 million in political revenue compared to only $0.4 million in the third quarter of last year. On a year-to-date basis, we're still pacing above where we were in the last two election cycles. In 2020, we had $3.1 million in political revenue through September and $3 million in political revenue through September of 2018. This year, We've booked $3.8 million in political revenue for September. While it's still difficult to predict where all the political spending will be, Salem certainly is poised for a good year in political revenue. Despite this robust political revenue, traditional spot advertising was down 0.9%, with national spot advertising increasing 5.7% and local spot advertising declining 3%. There is, as you know, a slowdown in spot advertising due to the current economic environment. Block programming, which is a unique component to Salem's business model, continues to show resiliency with revenue up 5% in the quarter. This growth is being led by national Christian ministry revenue, which is up 9.1% due to an ongoing increased demand and programming time from both new ministries and existing ministries, looking to grow their footprint and their impact. Digital revenue within the broadcast division, which encompasses Salem Surround, the Salem Podcast Network, and Salem Now, grew 4.2% during the quarter. The macroeconomic conditions resulted in lower growth rate as compared to previous quarters. Network revenue was up 16.6% in the quarter, due in large part to the increases in political revenue. Broadcast expenses increased 9.9%, driven primarily by the costs associated with the rollout of the Salem News Channel, the reinstatement of the 401k match, and expenses associated with more listener events, which were held during the quarter. Let me now discuss Salem's National Digital Division, where revenue declined 4.3% compared to the third quarter of last year. Much of the revenue decline is a result of Facebook making changes to its algorithm, leading to a significant decline in traffic for Facebook to Salem's conservative opinion websites. Additionally, a number of browsers and mobile devices are increasingly blocking access to third-party cookie information, which is hurting CPMs. Finally, the weakening economy has put pressure on digital revenues with less advertiser demand for digital inventory. Digital expenses were up only 0.8% due to very careful cost management. Revenue at our book publishing division was down 3.7% in the third quarter. As we announced in late August, we moved the release of the Dinesh D'Souza book, 2000 Mules, from Q3 to Q4, which negatively impacted our third quarter revenues. In addition to the 2000 Mules book, we have two other titles that we expected to perform well in the fourth quarter. Justice Corrupted by Ted Cruz, and The Rational Bible, Deuteronomy by Dennis Prager. Publishing expenses were up 25.5% largely due to the fact that we had to recall the copies of 2,000 mules that were printed in Q2 and destroy them. While we did not close on any acquisitions or dispositions during the quarter, we do have some M&A and activity to report. We recently entered into two separate agreements to buy radio stations in Miami, Florida. First, we'll be acquiring WMYM 990AM and the related transmitter site for $5 million. In a separate transaction, we're buying WWFEAM 670 and WRHCAM 1550 and the related transmitter site for an additional $5 million. All three stations have FM translators. We expect both transactions to close around the beginning of 2023. These stations will be formatted with Spanish language conservative news talk program. Additionally, on October 1st, we acquired the day trade spy investment website for $0.6 million. And with that, I'll turn the call back to Evan for additional details on the quarter's performance and guidance for Q4.

Thank you, Dave. For the third quarter, total revenue increased 1.3% to $66.9 million. Operating expenses on a recurring basis increased 10.3% to $60.8 million, and adjusted EBITDA decreased to $2.3 million. Despite the softness we're seeing in the overall economy and its impact on financial results, this is the fifth consecutive quarter with revenue ahead of the corresponding pre-pandemic quarter in 2019. I know that many of our peers are still trying to get back to their pre-pandemic revenue levels. Compared to last year, net broadcast revenue increased 3.1% to $51.1 million, and broadcast operating expenses increased 9.9% to $41.2 million, resulting in station operating income of $10 million, a decrease of 17.9%. On a same station basis, net broadcast revenue increased 3.2% to $51.1 million, and SOI decreased 16.7% to $10.1 million. These same station results include broadcast revenue from 97 of our 98 radio stations and network operations, and represents 99.9% of our net broadcast revenue. As of September 30, 2022, total debt was $159.4 million, made up of $114.7 million of 7.18% 2028 notes, and 44.7 million of six and three quarter 2024 notes. We have nothing drawn on our $30 million ABL revolver. The leverage ratio was 4.38 as defined under Salem's credit agreements. Looking forward for the fourth quarter of 2022, Salem is projecting total revenue to decrease between 3% and 5% from fourth quarter 2021 total revenue of $69.1 million. This decrease is due largely to the fact that Regnery had an extremely strong fourth quarter in book sales last year. Salem is also projecting operating expenses before gains or losses on the sale of disposable assets, stock-based compensation expense, legal settlement, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense, and amortization expense to increase between 4% and 7% compared to the fourth quarter of 2021. non-GAAP operating expenses of $58.3 million. And this concludes our prepared remarks, and we would now like to answer any questions. So, I'll turn it back over to you, Abby.

Thank you. As a reminder, in order to ask a question, press star 1 on your telephone keypad, and we will pause for just a moment to compile the Q&A roster. And we will take our first question from Michael Kupinski with Global Capital Markets. Your line is open.

Thank you. I was wondering if you can give us your thoughts since we're so close to the end of the political season, if you can give us your thoughts on what political is going, any thoughts on what the total is going to be for this quarter. And, you know, maybe just give us a thought what political is going to wind up for the year.

Evan and I might need to answer this question kind of together. Michael, I anticipate that political will continue to be strong throughout the quarter, obviously ending on Election Day. But I think it's going to be strong. If there's any runoffs, that would, of course, provide some additional revenue. But Evan, I know you and I were looking at some numbers earlier. You may want to review that.

Yeah, let me give a little historical context of what we've done in Q4 the last couple of election years. So Q4 of 20, we had $3.5 million in the fourth quarter. I will tell you that seems to be a bit of an anomaly. That was a real high water mark for us in one quarter. Q4 of 18, the last midterms were $1.7 million of political revenue. And Q4 of 16, was 1.4 million. So I think it's reasonable to expect something more in line with those two numbers rather than what we did Q4 of 20.

Yeah. And so the fact that you're guiding towards revenues to be down in the quarter, can you just kind of give me a little thought about are the number of titles then in Reg Re down significantly from a year ago? Can you just kind of give me the ballpark of what the number of titles were?

Yeah, so the biggest reason for the revenue guidance being down is Regnery. It's not a function of the number of titles. It's a function of the number of big titles. And I think some of that is kind of based upon the date shipped. But Q4 a year ago, I think we had three titles that were 50,000 units plus. And I think Q4 this year will be one title, 50,000 units plus. So it's more about the number of big titles, which is obviously down, rather than the total number of titles. Does that make sense?

Yeah. And as you gear up for 2024, do you tend to get more titles the year prior to the election year, or do you get the titles in the election year?

Typically, if you look back over the last 5 or 10 years, an even-numbered year, i.e. an election year, I think the revenues are typically about 7 or 8% higher than in a non-election year, i.e. there are more titles, there is more interest in an election year. But 2021 was the exception that proved the rule. So last year, we had four big titles in Q4, Pandemia, Rigged, Eric Metaxas' book on atheism, and a book from the Babylon Bee. So note that two of those titles were Christian. So, you know, that was a very, very strong quarter a year ago. So it's just really tough comps.

And then if you look at Salem Surround, can you Kind of give us some thoughts about how that's performing into Q4. Are we still seeing, you know, significant growth there? Just kind of give us a framework of what you're seeing on that portion of your business.

Yeah, Michael, we're still very excited about sale and surround and the growth that we're seeing there. You know, it slowed down a bit in Q3, as you can imagine, as the economy has slowed down, people have sat on their money a little bit. But that's still an extremely strong growth initiative for us, you know, both on our east and west regions, you know, and will be the revenue growth driver on the broadcast side, you know, I anticipate well into 2023 and beyond.

I would assume that you're not really seeing any weakness on your block programming. So, if you could just talk a little bit about what you're hearing from advertisers, you know, certainly you would, one would assume that we're not really seeing that, I guess, the economy is still relatively healthy. I mean, it's sticking in there, although we're getting rate increases, which maybe we're starting to, you know, see that affect advertising. Can you kind of give us a thought about what you're hearing from the advertisers? Most of your advertising tends to be more local in general, I would imagine. So can you give us your thoughts about what you're hearing?

Yeah, so many of our advertisers are still healthy and going relatively well. The problem is really in a few categories that are really big for Salem and perhaps big for other broadcasters as well, and that's, for instance, the home mortgage business. home mortgage business is a big category, and when interest rates are where they are and where they're headed, you know, they want to put their money back in their pocket for a little while. And so, you know, that's having some impact on us both at a national level, a little bit on the network side, and certainly at a local level with a number of, you know, local, you know, refinance, mortgage refinancing companies that do business with us. So that's That single category is probably impacting us more on the spot side than any other category.

And so from that perspective, then you are seeing more weakness on the national side than you are local?

Well, we're seeing that weakness largely locally, but then some nationally as well. We have a couple of key areas. mortgage accounts on the national side as well.

And then given the, you know, the weakness that we're seeing in the revenues, can you talk a little bit about the expenses? You know, because we're still seeing kind of mid to high single-digit expense growth. Can you kind of talk a little bit about what the outlook might be if we still see a prolonged weakness in revenues, the ability to cut costs? What are your thoughts on that? Dave, if you want, I can talk a little bit about that.

First of all, one of the things you're seeing on expenses this year as compared to last year that's driving it is, you know, we did reinstate the 401k match this year, and that's been driving costs up a little bit. And you'll see in the fourth quarter compared to certainly this quarter, less of an expense increase in our guidance. I think as we get into next year, we should see expenses more moderated because we won't have that difficult comp. And look, we'll see what this economy holds before we start making decisions on expense cuts. If there's a deep and prolonged cut, we'll take actions. If not, you know, we hope to not have to take those actions. And we hope that the economy will be able to, you know, snap back, hopefully quickly.

Gotcha. Okay. That's all I have. Thank you. Thank you.

And we will take our next question from Derek Winger with Concise Capital. Your line is open.

Yes, thank you. I have two questions. The first has to do with the 4.3 times calculation that you cited on the covenant. What is the covenant restriction and how do you actually calculate the 4.3? Because I get something a little higher. And then I have a second question with regards to the Spanish stations, but we'll circle back.

Yeah, so let's talk about the covenant calculation. First of all, it's only an incurrence test covenant. So it's only if our leverage is above five and a quarter, we cannot incur any new debt. So it's not a maintenance covenant. So that's kind of issue one, as far as you were wondering, you know, about the testing. Now, as far as the calculation, the credit agreements allow us to exclude unusual non-recurring type items like you'll see there was a separate line item on the financials called legal settlement. So we got to exclude that from the calculation because that's not necessarily reflective of ongoing operations. And that's probably the main difference you get from looking at the financials. We also get to do other adjustments like pro forma income for acquisitions and dispositions. So it's not something you can necessarily tie to straight from the financial statements.

So I can't use your 20.9-month year-to-date adjusted EBITDA as, like, that's not the same number?

Correct. And it's also, it's always on the LTM basis, last 12 months.

No, I know that, but I think your fourth quarter, maybe I should just ask you what the fourth quarter was last year.

I don't have that number in front of me, but you're not going to, even be able to tie there because if we have an acquisition or disposition, the credit agreement requires us to go back as if we didn't own, if it's in the case of a disposition, as if we didn't own it for the entire time or an acquisition as if we did own it for the entire time. So even the EBITDA number will vary from what's publicly reported. Fair enough.

And then did you give EBITDA guidance for the fourth quarter?

We do not. We only give revenue and expense guidance. Okay.

So why don't we jump to my second question, which is the purchase of the stations in Miami. I happen to be in Miami. Those are 3 a.m. stations, right?

Yes. Yes.

So this will be – what is the content of these, and what were they before, who owned them, and why the endeavor into Miami at this point?

Well, first off, we look at Miami as a growing market. There's a lot of good information about Miami and the economic growth that you see there. So we look at it as an opportunity market for us. And as you know, there's been some changes in the radio landscape, particularly on the Spanish side this year in Miami. And so we look at that as an opportunity to step into the market and offer some programming and content. that may change elsewhere or may not be the same as it used to be elsewhere. And so we look at that as a great opportunity to provide an alternative. Did that, I think you had another question in there.

Well, yeah, who you bought them from and what's the metric you use to justify the $15 million, $10 million, I'm sorry.

So we bought these stations from two different owners. And, Evan, you might have that information. I apologize, guys. I'm a little bit at a disadvantage today is that I'm on the road in Chicago, so I don't have all of the data I normally have with me. But two stations were purchased from Edom. The other two were purchased from?

They were both independent owners. that didn't own stations in any other markets. They weren't acquired from a large radio group. They were both small independent operators. In terms of the purchase price, both those acquisitions came with land that is quite valuable. So we valued the land element separately. And then the purchase price is kind of aside from the land were based upon our projections of what we thought we could do with those properties over the next three, four, five years, and kind of an appropriate multiple based upon that evaluation.

Okay, so both purchases came with land. I'm assuming the two stations was one owner, obviously, and that was one piece of property, or?

I believe there are three pieces of property, two pieces of land and a building, if I recall correctly.

That's okay. That's on the two-station one.

That's in aggregate across the three stations. Oh, okay. Two transmitters and one building. Two transmitters and one studio slash building.

Okay, okay. So the first station, 990 AM for five million, that was an independent owner and that came with land and a building or no?

I don't recall which one came with the building, I apologize.

Okay, okay, okay. So one of the two purchases came with a building and one of them is just land?

Yeah, but both acquisitions came with a piece of land One of them came with a building. I wish I could remember which one the building came with. I apologize.

Well, how are they operating a station with no land?

Sometimes you can rent a tower site or you can own a tower site.

Okay. Okay. Okay. So that was probably the case in this case. Well, yeah, Miami land has been going up in value, that's for sure.

And I can get into more detail on that later. Okay, thank you. Thank you.

We will take our next question from Edward Riley with EF Hutton. Your line is open.

Hey, guys, all my questions were covered. Thanks.

Thank you. Thanks, Ed.

All right, and we have no further questions at this time, so I will now turn the call back to David Centrello for closing remarks.

Okay, well, thanks, everybody, for being a part of the call. We'll talk to you again next quarter.

Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.