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?

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