Salem Media Group, Inc.

This is Evan Masur. I'm the CFO of Salem Media Group, and I thank you all for joining us today for our first quarter 2023 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. I'm joined on the call by David Santrella, Chief Executive Officer, and David Evans, Chief Operating Officer. We'll begin in just a moment with our prepared remarks. I'll be staying on the line, and I will 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, and Adjusted EBITDA. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the investor relation portion of our website at salemmedia.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. I'll start my prepared remarks with a review of Salem's first quarter results. I'll discuss some M&A and provide an update on our debt. I'll then turn the call back to Evan to provide more details. on the first quarter financial performance and give guidance for the second quarter. Overall, total revenue for the first quarter increased 1.4%, expenses were up 11.4%, and adjusted EBITDA declined 79.6%. Based on this performance and recognizing the state of the economy, we made the difficult but necessary decision in late March to lay off 44 positions representing about 3% of our workforce in addition to cutting other expenses. In total, we expect to save approximately $5 million annually through these cost containment actions. The associated severance cost in the first quarter was $0.4 million. As I've done on recent calls, I want to summarize our digital revenue to remind you of the magnitude of our overall digital footprint. When we combine digital revenue included in the Broadcast Division with the National Digital Division, Overall digital revenue increased 6.4% in the first quarter and now represents 31% of our total revenue. We continue to invest in digital and see it as the best opportunity for continued growth. Now I'll review the financial performance of each division in the first quarter. The broadcast division had a slight decrease of 0.2% in Q1. While it is a decline, it is noticeably better than the overall industry, which, according to Miller Kaplan, declined 2.8% in the markets where we operate. The biggest cause of the decline for both us and for the industry is traditional spot revenue. We saw national spot increase by 20.7%, while local spot decreased by 8.3%. This is due to the weakness in the broader economy, which is causing advertiser pullback. National block programming increased 3.6%, once again showing its resilience during challenging economic times. I mentioned earlier that overall digital revenue rate of 6.4% growth. Digital revenue within the broadcast division increased 12%. This included results from Salem Surround, the Salem Podcast Network, and the Salem News Channel. We're continuing to invest in these businesses to continue their growth. Network revenue also had very nice improvements, growing revenue by 5.9%. This growth came from a number of our network shows that are continuing to grow in popularity. On the expense side, broadcast expenses increased 12.3%, largely due to the continued investment in the Salem News Channel and our other digital initiatives. As I said earlier, we have eliminated a number of positions and have scaled back certain planned investments. Revenue at Salem's National Digital Division increased 2% in Q1. We're still facing some significant headwinds from the demise of the third-party cookie and algorithm changes made by Facebook to present less political-related content. That change has led to a decline of approximately 80% in Facebook traffic on Town Hall and our other conservative news and opinion websites. Additionally, advertising dollars have declined due to the softness in the overall economy. Offsetting these declines, however, is revenue associated with the acquisition of the George Gilder line of investment products in February 2023. Expenses in the digital division increased 6.1%, primarily due to increased marketing. Book publishing revenue increased 19.7 in the first quarter of the year due to a strong backlist in sales. The biggest titles were Scalia by James Rosen, Letter to the American Church by Eric Metaxas, and One China Attacks by Colonel Grant Newsham. In the second quarter, we're publishing Manhood by Josh Hawley and Life After Capitalism by George Gilder. Expenses in the book publishing division were up 20.3%, primarily due to variable expenses from increased revenue and increased marketing and sales costs. On the M&A front, we closed on the purchase of three Miami radio stations in January, WMYM-AM, WWFE-AM, and WRHC-AM, and three translators for $6.3 million for the FCC licenses and related broadcast assets. We're formatting the stations in Spanish language, conservative news talk, and Christian talk formats. Also, on February 1st, we acquired the George Gilder line of investment products for no cash. We assumed the deferred subscription liability and will pay the seller 25% of the net revenue generated from the assets acquired for a period of one year. I want to conclude my prepared remarks with a brief update on our capital structure. In March, we issued $44.7 million in new 7.125% 2028 notes and use the net proceeds to take out the remaining 6.75% 2024 notes. We now have $159.4 million in 2028 notes in addition to our revolver, which had $18.2 million drawn as of March 31st. And with that, I'll turn the call back over to Evan for additional details on the quarter's performance and guidance for the second quarter.

Thank you, Dave. For the first quarter, total revenue increased 1.4% to $63.5 million. Operating expenses on a recurring basis increased 11.4% to $62.1 million. And adjusted EBITDA decreased to $1.4 million. Compared to last year, net broadcast revenue decreased 0.2% to $48.3 million. and broadcast operating expenses increased 12.3% to $42.8 million, resulting in station operating income of $5.5 million, a decrease of 46.4%. On a same station basis, net broadcast revenue decreased 0.5% to $48.1 million, and SOI decreased 41.6% to $6.0 million. These same station results include broadcast revenue from 98 of our 103 radio stations and the network operations, representing 99.6% of our net broadcast revenue. As of March 31st, total debt was $177.6 million, made up of $159.4 million of 7-8-2028 notes and $18.2 million outstanding on the asset-based loan facility. The leverage ratio was 6.19 as defined in Salem's credit agreements. On March 20, 2023, we issued $44.7 million in new 7.8% senior secured notes due 2028 at a discount for $41.9 million, resulting in an effective yield of 8.625%. We used a portion of the proceeds of this borrowing to redeem the remaining $36.5 million of 6.75% senior notes due 2024. The redemption of the 2024 notes closed on March 27th, 2023. We are currently working on a new revolver. Our current revolver matures in March of 2024. As soon as we have more information on this, we will certainly provide an update. Looking forward for the second quarter of 2023, Salem is projecting total revenue to decline between 5% and 7% from second quarter 2022 total revenue of $68.7 million. Salem is also projecting operating expenses before gains or losses on the sale or disposal of 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 3% and 6% compared to the second quarter of 2022 non-GAAP operating expenses of $60.0 million. Now this concludes our prepared remarks and we will answer any questions. So if you wish to ask a question, hit star one. If your question has been answered, hit star one to remove yourself from the queue. And with that, I think we can open the call to Michael Kopinski at Noble.

I have a couple of clarifications. First of all, you mentioned that national spot decreased how much and local was down how much in the quarter. Can you just repeat that for me, please?

yeah let me let me get back there so um national spot increased michael 20.7 percent whereas local spot decreased by 8.3 percent gotcha okay um a couple of questions here um so you you've obviously been building up miami and that seems like a unique opportunity can you discuss how the market is performing and if you can

Give us some thoughts. You know, I know there's a unique opportunity there in that market and was wondering if you think that those stations that you've acquired will swing profitable probably sooner than what you normally have as benchmarks for station acquisitions.

Yeah, well, you're right, Michael. We do think it's a great opportunity in Miami based on some other dynamics specific to that market that have taken place. And we're pleased with the revenue growth we've seen already in that market. We've got a great leader in that market in Monica Rabassa, and we're pleased with what she's been doing. We're also pleased with some other strategic moves we've made as of late there. In terms of the speed with which we'll get to profitability, you know, Right now, I would say that we're optimistic that we'll become profitable more quickly than our pro formas we're showing. But I would say that right now that's cautious optimism.

Okay. And then can you just discuss the nature of the expense increases? And I know a lot of that has to do with Salem News, but can you kind of give us some thought process about how you're investing the money at this point? When will you start cycling the expenses? expense for Salem News and just kind of give us a thought about how expenses should look for the balance of the year.

Yeah, and Evan and David can also chime in here. But overall, Michael, you know, we made a decision that we would use 2023 as an investment year in in our digital infrastructure and in some other aspects of what we're doing in terms of digital advertising and digital revenue generation. So, for instance, we've hired a number of people with a specialty in social media marketing that are working with all of our network hosts and our podcast hosts on more effective social media marketing for them to build bigger audiences, because bigger audiences mean more episode downloads on the podcast side, and that means more revenue for us. On the Salem News Channel, a number of positions that we needed to fill. And so, you know, some of them on the social media side, other in other audience building aspects of the video business, particular in an OTT world. as well as just other technical positions that we needed to hire for. So all of that, we believe, is building a better future, but comes with pain in the current year.

And in terms of cycling through those additional expenses, those additional investments, I'd say you're looking at Q1 of next year.

Okay. And then if you could just talk a little bit about the revenues that declined to 5% to 7%. Is there... Any one piece of that that maybe – I know that typically you don't break out the segments and how each are performing, but I was just wondering if you can kind of just parse out for us what might be driving, you know, the nature of the expense decline or the revenue decline in the quarter, and then just give us a little added color if you can.

The biggest area of weakness is, no surprise, local spots. And the weakest advertising category, again, no surprise, is mortgages.

Right. Yeah. And then is there anything in particular in terms of the nature of the environment right now? I mean, can you kind of give us the tone of the advertising environment in general?

Well, I think, you know, we need to be – smarter than ever when it comes to prospecting for business. It's coming right now from a lot of new business generation. And you've got to be really smart because even when business gets a little tough, even radio stations that have been traditionally more reliant on agency-based business start going more aggressively after direct business. So the competition heats up and the direct business And so it creates a need to be smarter than ever in terms of how we prospect for that business and what our presentations look like and a lot of focus there.

Advertisers, they're concerned about the economy. They're concerned about the government's response to the state of the economy, the Fed's response to the state of the economy. So advertisers are cutting back spending, spending cautiously, delaying decisions. So it's a tough environment.

Yeah, Michael, I found it interesting. that one of the advertising categories that grew in Q1 was auto parts. And that's typically not a huge category for us, but people are hanging on to their cars. There's not really deals to be found on new cars right now. People are less confident about spending their money. And so they're fixing their cars, which means auto parts are going up. I thought that was just an interesting piece of information.

Yeah. And then you mentioned about 5 million annual savings from some cost cuts that you initiated in the first quarter. Would that be evenly split? Are you saying for full year 2023 or on an annualized basis? And if you could just tell us, how do you think that will, how much of the cost savings are in your guidance for Q2? And then, or when do you think most of that will fall in terms of the expense savings?

Yeah, I would say that's an annual number. So, you know, figure we took most of that action in late March, very late March. You will see that kind of, you know, split evenly over the next four quarters. So, you know, that's what's in our guidance for the first quarter.

Okay. For the second quarter. Okay.

Correct.

Yeah. Okay. All right. Well, I'll let others ask questions. Thank you.

Thank you, Michael. Our next question comes from the line of Edward Riley from EF Hutton. Your line is open.

Hi, guys. Can you hear me okay? We can. Oh, great. Just wondering if you've been getting any inquiries for political advertising for next year yet, and maybe if we should anticipate any at the back half of this year.

Okay. You know, I would say inquiries is probably too strong a word. There's a lot of kind of spade work being done politically right now, both by us and, you know, as well as by the campaigns and the PACs. So not at the point yet where we're getting, you know, an RFP or request for proposal, but a lot of questions going back and forth and some conversations taking place.

And, you know, we do expect Yeah, political revenue coming in Q3 and Q4. I think the Republican debates kick off in August, and there'll be a series of debates from August through the end of the year. So presumably there'll be a bunch of candidates running, and they'll want to market to our audience.

Okay, great. And wondering if you can maybe break down second quarter outlook by business segment, a little bit more granular fashion, if you could.

Yeah, we don't usually break that down by segment. When we give guidance, we just give overall. I can tell you one of the drivers to the decline is publishing has a lighter schedule in Q2 of 23 than Q2 of 22. And so that is a bigger decline there than we're seeing in other areas of the business.

Okay, great.

Thank you so much. The strongest area continues to be data science.

Our next question comes from the line of David Marsh from Singular Research. Your line is open.

Hey, guys.

I was wondering if you could provide us with a liquidity update, Evan, and just with regard to the balance of the year. It looks like it's going to be kind of a tough free cash flow year this year, but you feel like you have adequate liquidity to get through the year until the political stuff starts kicking in.

Yeah, Dave, we're certainly looking at liquidity. We do have the asset baseline, which will provide liquidity for the rest of the year. We also are looking at some asset sales where it makes sense. We've been pretty opportunistic on some sales in the last few years, and we're looking at what else we might be able to monetize, in particular with respect to real estate, as we've done in the past.

That actually dovetails nicely into my follow-on question, which was going to be around what assets you may be considering selling. With regard to real estate in particular, are you still seeing pretty decent bids for assets in the real estate space in terms of relative to what you own? And then would you look at perhaps divesting anything else? And if so, what would be kind of the pecking order in terms of you know, types of things that you might look to divest?

Well, I think the math is whether it's real estate or a business is still kind of the same. It's, you know, how much value can we get versus what are we giving up in the way of free cash flow? So whether it be, you know, one of our, you know, a radio station or whether it be real estate where maybe we even do a sale lease back and have to, you know, pay a rent. It's kind of that same math that we're looking at. So we're looking at what's the most attractive for us, giving up the least amount of free cash flow. And, you know, when we have something more concrete, we'll certainly provide an update.

And then the last question I have, I just was curious, I picked up in the press release on the bullet about the million and a half invested in the LLC for the motion picture. Could you give us a little bit more color around that and what the expected timing of that production might be and so on?

So if you recall, last year we invested in a movie with Dinesh D'Souza, 2000 Mules. We were the executive producer and sole financier of that movie. It was a tremendous success for us, so we agreed with Dinesh that we would again take that role for his next movie, tentatively scheduled for early 2024. More news to come on the precise topic, but we're very excited to be partnered with Dinesh again. Last movie was a great success. And we're looking forward to another great success with him.

That's great. Really appreciate the call. Hey, thanks, guys. Appreciate it. Thank you. Thank you.

I would now like to turn the call over to David Centrella for closing remarks.

Okay. Well, I guess my closing remarks are sorry the call was such a, you know, technical trial today. And thanks for being here. We'll talk to you again next quarter, and hopefully we'll have a better conference call experience. Bye.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.