Salem Media Group Inc (SALM) 2022 Q2 法說會逐字稿

Good day, and welcome to the Salem Media Group, Inc. Second Quarter 2022 Conference Call. Please note, today's conference is being recorded. (Operator Instructions)

Thank you. At this time, [I'll turn] the conference over to Evan Masyr, Chief Financial Officer.

Welcome, and thank you for [joining] us today for Salem Media Group's Second 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, who 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 [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 (inaudible) results may 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 Santrella. 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 2,000 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 we'll 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%. Expenses increased 10.7%. And adjusted EBITDA, which includes $3.9 million from the film 2,000 Mules, which I'll discuss in more detail later on in the call, increased 33.6%. There are a few items driving increase in expenses, including the reinstatement of the 401(k) match, expenses associated with the launch of Salem's news channel, increased travel and entertainment cost and increased professional services cost. 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 was driven by Salem Surround, SalemNOW and the Salem Podcast Network.

Our more traditional broadcast revenue streams also performed well in the quarter. Block programming improved [8.7%] over last year. Local block programming was up [1.0%]. National block programming was up (inaudible). As mentioned in the last 3 conference calls, the increased demand from block programming (inaudible) from both new ministries and existing ministries. With the high renewal rates in block programming, we expect this to continue having a positive impact on our long-term revenue.

Traditional spot advertising revenue increased 9.5% in the quarter. Local average revenue increased 6.9%; and national, 17.4%. While we continue to see [local] advertising (inaudible), local spot is still not back to its pre-pandemic levels, especially with concerns of inflation and fears of a [recession].

Network revenue was up 9.3% [this quarter]. This is driven largely by growth in political revenue. And before I move on to the divisions, (inaudible) reviewing political revenue as a whole. For the quarter, we had $1.5 million of total revenue compared to only $400,000 in Q2 of last year. The [$1.5 million] is more than we had in Q4 of [2020], which was $600,000, and [more] than we had in Q2 2019, which was $1.1 million.

Let me [switch and go] to Salem's national digital division, where revenue increased 4.5% from Q2 of 2021. Revenue at our Christian sites improved [0.1%] due to strong advertising demand in both direct and programmatic revenue. Townhall Media, our conservative news and opinion websites, had a [15.1%] increase in revenue primarily 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 Regnery Publishing due to no significant titles being released during the quarter. We said before that the book release schedule for 2022 is heavily backloaded. We do have 2 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 27, Salem closed on the sale of 9 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 2, Eagle Financial acquired Retirement Media, which owns 6 retirement websites, for $190,000.

So now let's talk about 2,000 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, 2,000 Mules. Salem was the executive producer and sole financial investor of $4.5 million into the film company's stand-alone LLC. On the last earnings call, I mentioned that the film had private screenings throughout the country. It was then available for download on -- and DVD purchase on SalemNOW 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 of income and distribution fees at SalemNOW, advertising revenue from the platform from the LLC and interest earned on our initial investment.

Finally, through June 30, 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 as 2,000 Mules. It is worth mentioning that Salem is the exclusive distributor of the upcoming film Uncle Tom II, which is scheduled to be released on August 26. 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 nonbroadcast 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 a 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 30, 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 4x, the Board will likely start to debate the merits.

It is, therefore, worth reviewing [restrictions] Salem has on paying dividends. Of the 2 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 4.75x. 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 [7.7%] to $68.5 million. Operating expenses on a recurring basis increased to 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. Comparing to the second quarter of 2019, total revenue increased 6.2%, and adjusted EBITDA increased [15.1%].

Compared to last year, net broadcast revenue increased 12.1% to $52.5 million, and broadcast operating expenses increased 17.5% to $42.5 million, resulting in station operating income of $10 million, a decrease of 6.2%. On a same-station basis, net broadcast revenue increased 12.2% 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 and the network operations, representing 99.9% of our net broadcast revenue.

I will briefly review revenue performance of Salem's strategic formats. 39 of Salem's radio stations are programmed in our foundational [Christian] 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 27.9% to $9.9 million and represents 19% of our total broadcast revenue. Network revenue increased 9.3% 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. Net publishing revenue decreased 18.5% to $5.4 million and represents 8% of our total revenue.

As of June 30, total debt was $159.4 million, made up of $114.7 million of 7.125% 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 areas.

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 $66.0 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 continued 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?

(Operator Instructions) Your first question comes from the line of Michael Kupinski with NOBLE Capital Markets.

So first of all, congratulations on your quarter, just spectacular. So the question is -- that I have, a couple. The Q3 revenue up 6% to 8% is far better than many of what I would call the media (inaudible) out there (inaudible) about the third quarter. And I was wondering if you can just give us 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 local spot. It seems like your national business has performed far better than anyone else and particularly in the second quarter. And I was just wondering how that is continuing as you go into the third quarter. And let's -- I'll stop there and then address some of the other questions.

So Michael, and Evan, I might kind of tack him on this a little bit, but I think some of the 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 2 what we believe are very strong books in Q3, and that will drive revenue. And then really, digital, our digital revenue component continues to be (inaudible) plus, of course, Uncle Tom II coming out, we think -- that's August 26. That will -- like 2,000 Mules, the big bulk of revenue when you release a movie is right away, getting it within the first 4 to 6 weeks. And then it will -- you'll continue to add revenue, but 90% of it is real fast. And so that will add to the quarter as well. And then Evan, (inaudible) more? I guess that's kind of -- yes, those -- 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 just the network and the national business in general. Outside of political, what -- can you try and kind of give us a tone [and place] on what you're hearing? And also, maybe if you could update us on your thoughts about political for the year. I mean, obviously, you're pacing well of your prior cycle. Just wondering maybe if you can update us what your thoughts are for the year.

Yes. 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 [radio] program. They're also doing a podcast. They may be -- 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 our 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 investors like us and others or radio programs that very politically have a lot of political content in them just have a particular interest right now and interest to the candidates and their campaign managers.

Got you. 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 some (inaudible) on what the 11% to 14% increase is about?

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 401(k) match, the continued investment in Salem News Channel, increased travel and entertainment expenses. We're 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 onetime? Because your increased marketing spend, I suppose, is really related to the distribution of your -- of the film, right? And is that, I guess, going into fourth quarter or when is -- 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 into the fourth quarter, what could we expect.

Yes. The items (inaudible) continues to the fourth quarter. The 401(k) match, we started again in the first of this year. So that will hit all 4 quarters. Travel and entertainment will likely hit most of the year as well. The other thing that's a big item is we're continuing to invest in talent in the Salem News Channel. We recently hired someone to run that division, and I think [there's] 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.

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

Noticed that the digital media segment saw some [improved] 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 marketing, whether it's PPC campaign, pay per click campaign or something like that, right, you have a cost of goods sold because you've got to pay Google or a Bing or whomever. But when you sell, for instance, a [digital] campaign or an e-mail 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 sales around -- which are the digital advertising agencies that we have associated with all of our radio station clusters. Those sellers are selling that digital marketing, plus we have digital-only sellers in many of those markets. That's driving (inaudible). And of course, Salem Podcast Network and SalemNOW, which are also digital revenue, that's helping drive that.

Got you. It sounds like it's pretty sustainable. Would it be fair to maybe project [margins] in the future?

You're saying project the current margins in the future?

Correct.

Yes. I think that's reasonable.

Okay. Great. And can you give us some more color on what's driving the 17% increase in national spot (inaudible)?

Well, is political -- political is a huge part of that.

Do you guys have any figures ex political?

I can -- let me give you, I think, the political numbers overall. Obviously, it includes network and other. 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 Kupinski asked the question as well, if you look year-to-date, political is basically $2.3 million. Last year, it was under $1 million. And 2020, our biggest political year ever, was $1.2 million. So we're actually pacing quite ahead of that. So we don't have any national spot numbers ex political in front of me. But certainly, that's been one of the things driving it.

Got you. And then on the publishing side, you mentioned revenues sort of being produced in the back half of the year and 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 want to respond to that. I know you're on the line because you may have...

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 Dinesh D'Souza and Ted Cruz.

Okay. Got you. And then I'm curious about the total (inaudible) 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 of $4.8 million in addition to the return of our $4.5 million. So as Dave said, to say the success -- to say it was a success would be an understatement. I think that certainly underscores that when we invested $4.5 million, we got that back and an additional $4.8 million.

At this time, there are no further questions. I will now turn the call over to David Santrella, Chief Executive Officer, for any closing remarks.

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

Thank you for participating. You may disconnect at this time.