Salem Media Group Inc (SALM) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Salem Media Group Third Quarter 2020 Earnings Call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the conference over to our host, Evan Masyr, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Thank you, and welcome all of you for joining us today for Salem Media Group's Third Quarter 2020 Earnings Call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website www.salemmedia.com.

Joining me on the call today are Edward Atsinger, Chief Executive Officer; David Santrella, President of Broadcast Media; and David Evans, President of Interactive and Publishing. We will 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. Given the current circumstances, we once again are continuing to work remotely, so that may cause some extra coordination during the Q&A portion of the call.

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 salemmedia.com.

With that, I would now like to turn the call over to Edward Atsinger. Ed?

Thank you, Evan, and thanks to all of you who have joined the call today. The third quarter of 2020 was certainly a much better quarter than the second quarter, due to the at least partial reopening of the economy. In my prepared remarks today, I'll focus on our financial results and also some of the challenges that we continue to deal with due to the COVID-19 pandemic. I'll then turn the call back to Evan to provide more detailed financial information on the third quarter.

So, for the third quarter of 2020, total revenue declined 5.4%. Expenses declined by 7.4%, which resulted in a 6.9% increase in adjusted EBITDA. To get a little better understanding of performance, let me look at our performance by division.

For the third quarter, broadcast revenue increased by 15% when compared to the second quarter, but declined 4.8% when compared to the third quarter of last year. Despite that decline, those numbers compare favorably to the industry as a whole, according to Miller Kaplan. In the markets where we operate, the radio industry was down 30.2% compared to last year. And our performance, I think, highlights the difference in our business model, with a foundation on national and local ministry block programming, and our most recent investments in Salem Surround and SalemNow. Just as a reminder, Salem Surround is our local digital multimedia advertising agency and SalemNow is the over-the-top streaming movie business that we launched in Q2.

Political revenue certainly helped us, as would be expected. In the third quarter, we recorded $1.9 million of political revenue, compared to only $200,000 in the third quarter of 2019. The $1.9 million compares favorably to both the third quarter of 2018, when we had $1.2 million of political revenue, and interesting enough, for the third quarter of 2016 when we had $1.5 million of political revenue.

National Christian ministry block revenue, which represents approximately 25% of our total broadcast revenue, was down less than 2% and continues to provide a solid foundation for our broadcast business.

On an organic basis alone, local digital revenue was up 40.8% over last year. Add to that growth, then the contribution from SalemNow, and local digital in total was up $7.8 million, or 107.4%. So we continue to see encouraging returns from our investments in Salem Surround and more recently, SalemNow.

Turning to traditional radio advertising, spot revenues continue to recover. Total spot was up 26.4% when compared to the second quarter of this year, 2020. However, compared to last year, local spot revenue was down 25.8%, while national spot revenue only declined 8.4%. Combined, total spot revenue was down 21.7% in the third quarter compared to last year. Again, this was much better than the radio industry overall, which, according to Miller Kaplan, total spot revenue declined 33.6% for the industry as a whole.

Our syndicated network business remains strong and actually grew revenue 4.9% in the third quarter, when compared to last year. And on October 5, we added to our already exceptional lineup of radio talk shows with the launch of the Charlie Kirk Show. Charlie Kirk is an exceptionally talented young man with a very bright future. We were quite excited to add him to our lineup.

Broadcast expenses were down 8.1% due to lower sales commissions and the cost control measures that we outlined to investors during our second quarter earnings call. These cost control measures have included some furloughs, some layoffs and some pay cuts and other miscellaneous expense reductions. The reductions in expenses resulted in an increase of 7.1% in station operating income.

In the national digital division, revenue was up 7.2%. Townhall media, our collection of conservative news and opinion sites, had a fantastic quarter, with revenue up 55%. This certainly was driven largely by the heightened interest in the election and politics. Furthermore, we are seeing meaningful increases in website visits, which are up 71% over the prior year, and growth from our premium subscription premium subscription service, Townhall VIP, which launched at the end of 2019. However, this revenue growth was somewhat offset by a revenue decline of 7.5% on our Christian websites, which saw reductions in advertising demand and advertising rates, which were directly related -- declines that were directly related to COVID-19.

Expenses in the national digital division decreased 1.9%, again, due to the cost savings we put in place throughout the company. The decline in expenses would have been greater, but were partially offset by the costs associated with the rollout of Townhall VIP.

Finally, revenue at our Publishing division was down 25.3%. Regnery, our traditional book publisher, was down 28.5% in the third quarter of this year. COVID was a major factor. Third-party distribution facilities and printers that we use had a major slowdown, as they had to change work practices to properly socially distance their workers. The pandemic also caused many book retailers to temporarily close. That had a significant impact on sales. Additionally, third quarter 2019 had strong book sales from Justice on Trial, a book that we offered from Mollie Hemingway and Carrie Severino, but that strong third quarter 2019 performance exacerbated the decline in third quarter 2020. Revenue at Salem Author Services declined 18.7% in the quarter, again, primarily due to the impact of the pandemic, as its authors and had minimal live events at which they sell many of their books. But our publishing expenses were also down 10.8%.

We did have one small acquisition. On September 15, we purchased Hyper Pixel Media for [$1.1 million]. We paid $400 million at closing and have deferred payments for the remaining $700,000. Hyper Pixel sells, videos and other multimedia resources to churches and should provide a nice accretive tuck-in acquisition to our Salem Church Products business.

And with that, I'll turn the call back to you, Evan, for additional details on the quarter's performance.

Thank you, Ed. For the third quarter, total revenue decreased 5.4% to $60.6 million. Operating expenses on a recurring basis decreased 7.4% to $51 million, which resulted in a 6.9% increase in adjusted EBITDA to $9.6 million.

Net broadcast revenue decreased 4.8% to $45.4 million, and broadcast operating expenses decreased 8.1% to $34.3 million, resulting in station operating income of $11.1 million, an increase of 7.1%. On a same-station basis, net broadcast revenue decreased 2.4% to $44.6 million, and SOI increased 2.7% to $11.1 million. These same-station results include broadcast revenue from 95 of our 99 radio stations in our network operations and represents 98.3% of our net broadcast revenue.

I'll briefly review revenue performance of our strategic formats. Thirty-seven of our radio stations are programmed in our foundational Christian teaching and talk format. These stations contributed 38% of total broadcast revenue and decreased 9.8% for the quarter. Our 32 news talk stations had a decrease of 3.3% in revenue for the quarter, and overall, these stations contributed 18% of total broadcast revenue. Revenue from our 12 contemporary Christian music stations contributed 16% of total broadcast revenue and decreased 19.2% for the quarter. Our network revenue increased 4.9% for the quarter and represents 11% of total broadcast revenue.

Revenue from our digital media businesses increased 7.2% to $9.8 million and represents 16% of our total revenue. Our publishing revenue decreased 25.3% to $5.4 million and represents 9% of our total revenue.

As of September 30, we had $216.3 million in bonds outstanding and $16.6 million drawn on our revolver. We also had $19.3 million in cash at the end of the quarter. Our leverage ratio was 8.59.

And once again, because of the continued uncertainty surrounding the economic environment due to COVID-19, and we will not be providing guidance for the fourth quarter. We are in the process of finalizing our books for October, so I can provide some preliminary numbers for the month. Total revenue was up around 3%. Broadcast revenue in total was down 1%. Local spot advertising was down 20%, and national spot advertising was up 34%. Local programs, including sports programming, were down 18%, while national programs were down 6%. Local digital revenue was up 47%. Revenue in our national digital division increased 21%, and Publishing revenue increased 4%.

And that concludes our prepared remarks, and we would like to now answer any questions, so I'll turn the call back over to the operator.

(Operator Instructions) Our first question comes from Michelle (sic) [Michael] Kupinski with NOBLE Capital Markets.

That's an interesting one, Michelle. Okay. Congratulations on your quarter. Actually, you beat my expectations and things look like they've certainly improved from the second quarter. Just a couple of questions. Can you give a little bit more color on how significant Salem Surround is at this point in terms of revenues in the third quarter and how that's looking as it goes into Q4? And then I know that you gave the political number for Q3. I was wondering now that political's over, what is the total political for the year? Or can you just give us the political for Q4?

Yes. I'll start with answering the question on political. The fourth quarter -- first of all, I think there will still be some additional fourth quarter political revenue with the 2 Senate seats in Georgia that will be highly contested, and that election is January 5, and we have stations in Atlanta that should get some additional revenue for that. It looks like our revenue will be north of $2 million of political in the fourth quarter of '20, which, by the way, compares favorably. Fourth quarter of '18 was $1.7 million, and fourth quarter was 1.4 million, so it looks like a robust political year for us.

And in terms of, Michael, in terms of Salem Surround, Salem Surround continues to be a growth engine for the company right now. It's generating, pretty regularly, 40-plus percent revenue growth on a quarter-over-prior-year-quarter basis. And we really, right now, it's still pretty early on with that. We don't see that slowing down too drastically, at least within the next several quarters.

And what margins are you getting on that? Are you getting some decent margins?

Yes, I mean, the margins are okay. Certainly, they're not the size of radio, but they're still, Evan, what, in the 30...

Yes, I would say it depends on what we're actually selling. So different products have different margins. I'd say the high is 30 and some margins could be as low as 10. Yes.

Got you. And you obviously went through a lot of cost cuts earlier in the second quarter. How should we think about the cost savings that you've had so far as we cycle into Q4 and it looks like business trends are improving a little bit?

I would -- the cost cuts that we've had in place during the latter half of Q2 and all of Q3 will continue through all of Q4.

Okay. Great. I'll let others ask questions.

Our next question comes from Lisa Springer with Singular Research.

In the publishing business, I'm wondering in October if you're seeing any improvement in the bookselling environment, if you're seeing booksellers with a little more ability to sell. And if you could give us some insight into what -- if you got new titles coming out in the fourth quarter and early into next year?

So we have seen I'd say a return or more of a return to normal in the book publishing area. Our numbers are beginning to get much more comparable to last year. Having said that, Q4 is always pretty light in terms of releases, and that's particularly so this year, because with the election, we wanted to make sure that we released any political titles early enough in the election cycle to have enough weeks to sell. So our biggest release of Q3 was our Ted Cruz book on the Supreme Court, which was extremely timely. And that book has continued to sell very well in October, and as a result of that, we expect to see our book publishing business in Q4 up on last year, kind of probably low double digits. So that does reflect a return to normal and the strong sales of that particular cycle.

Our next question comes from Michelle Lim with New York Life.

Just two quick ones. Can you update us on your revolver availability?

We typically, at this point, keep about $4.5 million or so available. So we had $16.6 million drawn, so we had about $21 million available at the end of the quarter.

Okay. And can you give us any updates on how you're progressing with your asset sales?

Ed, you may want to talk about any asset sales.

Well, we haven't announced any station sales, and we don't have anything in the works. We are looking at opportunities to monetize some of our real estate holdings that might provide some capital, but nothing has been finalized. And we probably should have some progress on that, and we can make some further comments in Q1, maybe January, February. But right now, discussions are underway, and we're exploring options and some of the challenges that we have or that we want to figure out how that we can continue to operate some of our facilities, while at the same time, monetizing surplus real estate and/or putting together situations where we can have a dual-use facility that doesn't impact negatively either of the uses. So, as we get closer to deals, of course, we will announce them.

Can you give us a sense for the magnitude of the potential proceeds, and then, where they're located in the country?

It's difficult to do. The biggest challenge is determining whether or not you have a dual-use opportunity, and that gets into a lot of complicated engineering problems. But it's -- we've got -- we have a lot of real estate holdings all over the country. How many of them we can actually be able to develop and monetize and generate revenue is still an open question. But we're actively exploring all opportunities. And I can't really, at this point, I think it would be highly speculative because the regulatory environment is so complicated these days. And particularly, if you have towers and you have to move towers, it's -- that can be a complicated road, which takes a lot of time and a lot of money in terms of the degree of entitlement requirements that you have, sometimes in evolving environmental impact reports, extensive ones. But it's something that likely will continue for the foreseeable future. We'll continue to explore it, and I think that we'll find some opportunities next year and in subsequent years. But as we get closer, we'll certainly try to be transparent on that.

Great. And congratulations on a good quarter.

(Operator Instructions) Our next question comes from Steven Pfeiffer with Wells Capital Market -- Management.

Question for you is about your cash management strategies. I saw that your debt for the revolver went down by $3 million in the third quarter from the second quarter. I'm not quite -- you say that -- I think that's basically -- you keep it at about $5 million less than the max. Does that mean that the revolver availability dropped by $3 million in the quarter, and that's why you paid it down? Or -- because your cash seems to be about the same, and I was just kind of wondering what the general game plan is for cash management and possibly paying down debt or buying back bonds, which you did before, or what are the general ideas?

Yes, the revolver, absolutely -- the availability did drop. It's an asset-based loan, so it's a function of a calculation of some real estate availability that we have, but more importantly, based on our receivables. So, as you would imagine, during this pandemic, you saw not only us, but other companies' revenues drop. Therefore, receivables dropped, and therefore, the amount we could borrow declined.

Now as far as cash management strategies and buying back bonds, it's something that we will look to do again, but probably not at this point. We'd like to see the market stabilize. Right now, we'd like to just maintain as much liquidity as possible.

Okay. Then in the -- as far as the asset sale, the call cut out just a little bit on the previous comment on here. You are continuing the current asset sale process to continue? Is that what I heard? It cut out.

What I said was that we are actively reviewing all of the opportunities that may exist within -- across the whole landscape of the country. We've got -- we have lots of real estate holdings, some of which can be monetized through dual-use modifications, some of which can be monetized by relocation of station facilities from one location to another and then develop property, and we're actively exploring all those opportunities. As you might imagine, they're complicated. The entitlement process today is very complicated. And -- but we have -- we've got holdings in many, many states, and there are many opportunities that should be explored and we are exploring. And we think some of them will come to fruition and could result in some substantial increased cash to the company that we would welcome. But we don't have anything that we can announce today, and as these things develop, I'd be happy to share that with the investment community.

Okay. I want to make sure that I understood correctly. It is ongoing, then. I just want to make sure it was -- could have been appraised.

Yes. No, no, we're doing -- we've got an active group within the company that deals with our real estate issues, and also the deals with non-essential properties that we might consider -- that are not mission sensitive, that we might consider selling. This is not a great environment for selling radio stations right now, given the crunch the industry is facing, so this is not a time where we would be real aggressive in trying to sell the radio facilities.

But we have some facilities in our reparatory that are probably not critical. They're not -- if they're not mission oriented, we have certain key formats that we like to offer in most of the cities. We've picked up stations along the way that were just bargains and that we could roll in and tuck into an existing cluster to get a little scale that aren't that essential. And if they're underperforming and are minimally performing, and we get offers that are attractive, we'll look at those. That just isn't -- that isn't a phenomenon that's occurring very widely today, and I doubt that it will until this economy opens up fully and business improves.

But we have an active -- we're actively reviewing all of our assets, both station assets, web assets, real estate assets, and we're constantly reviewing them and determining whether or not there's some that we can monetize that can better serve the company if we spin them off, and that's an ongoing effort.

Our next question comes from Michael Kupinski with NOBLE Capital Markets.

Just a clarification. Evan, you mentioned that national was up about 34% in October. I was wondering how much of that was political, and ex-political, what would national be up?

I don't have that number of ex-political, but I can tell you that was a large driver of why national spot was up.

There are no additional questions at this time. I'll turn it back to Mr. Edward Atsinger for closing remarks. Thank you.

All right. Thank you, operator. And again, thanks to all of you for joining us for the earnings call. We look forward to visiting with you again on our next call.

This concludes today's conference. All parties may disconnect. Have a great day.