Good afternoon, ladies and gentlemen. Welcome to the Salem Media Group Q4 2022 Earnings Conference Call. [Operator Instructions]. And now at this time, I'll turn things over to Mr. Evan Masyr, Executive Vice President and Chief Financial Officer. Please go ahead, sir..

Thank you, and thank you all for joining us for Salem Media Group's Fourth 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 are David Santrella, Chief Executive Officer; and David Evans, Chief Operating Officer.

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.

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 information -- financial measures is available on the Investor Relations portion of the company's website at salemmedia.com. And with that, I will now turn the call over to Dave Santrella.

Dave?.

Thanks, Evan, and thanks all for being a part of the call today. Today, we'll review Salem's fourth quarter results, discuss some new developments with respect to our debt and provide a brief M&A update.

I'll then turn the call back to Evan to provide more details on fourth quarter financial performance and to give guidance for the first quarter of 2023. One thing that you'll hear throughout the call today is the slowing down of the overall economy and its impact on Salem, particularly on ad-driven revenue.

Total revenue for the fourth quarter was down 0.5%. Expenses were up 5.7% and adjusted EBITDA declined 33%. Before I review the results by division, I want to summarize our overall digital revenue for you.

When you combine the digital revenue within the Broadcast division and the National Digital division, overall digital revenue was flat in the quarter and is nearly 30% of total revenue. The Broadcast Digital revenue grew 14%, while the more mature National Digital division declined 10.3%. I will address that decline in a little bit.

Despite the overall digital revenue being flat due to the softness in the economy, we still see digital revenue as the best source of future growth and where we will continue to invest our financial resources. Now I'll go over the financial performance in the fourth quarter in each division.

Revenue in the Broadcast division increased 4.5% in the fourth quarter compared to the fourth quarter of 2021. This growth is well above the industry according to Miller Kaplan, which shows industry growth of 1.6% in the markets where we operate.

One of the drivers growing revenue in the fourth quarter, both for us and the overall industry was political revenue. We recognized $2.1 million in political in the fourth quarter compared to just $0.5 million in the fourth quarter of 2021.

For the year, we had $5.9 million in political revenue, which is the highest level of political revenue in a mid-term election for Salem. The political revenue is seen principally in national spot, which is up 7.7% and network revenue up 11.3%. Local spot advertising was down 4.3% due to the weak economy.

I'm pleased to report that our block programming revenue was up 3.4% in the quarter. Remember that block programming is a unique component to Salem's business model and has routinely shown resiliency during recessionary times. This growth is being led by National Christian ministry revenue, which was up 4.8% in the quarter and 9.7% for the year.

This is due to ongoing increased demand for limited programming time. I already talked about our combined digital revenue within the Broadcast division, digital revenue, which encompasses Salem Surround, the Salem Podcast Network, SalemNOW and the Salem News Channel increased 14% during the quarter.

Because we believe this is our biggest growth opportunity, we are investing further in these initiatives. Broadcast expenses increased 11.4%, driven by our continued investment in the sale of News Channel, the 401(k) match, which was reinstituted in the beginning of 2022 and the impact of a bad debt credit in the fourth quarter of 2021.

Revenue at Salem's National Digital division declined 10.3% compared to the fourth quarter of 2021. Similar to last quarter, the revenue decline is due to Facebook and the demise of the third-party cookie. In July, Facebook implemented changes to its algorithm to feature less political content.

This has led to a significant decline in traffic from Facebook to Salem's conservative opinion websites. Also, many browsers and mobile devices are blocking access to third-party cookie information, which is hurting digital advertising CPMs. On top of these 2 issues, the weak overall economy is also putting pressure on digital advertising revenues.

Digital expenses were up 1.8% due to cost management initiatives. Revenue at our Book Publishing division declined 21.3% in the fourth quarter. We had a light book release schedule compared to a strong book schedule in the fourth quarter of 2021.

Our top books in the fourth quarter of 2022 were Justice Corrupted by Ted Cruz and Letter to the American Church by Eric Metaxas. As is normally the case, there is not a strong book release schedule in the first quarter. The 3 biggest titles are Dining with the Saints by Leo Patalinghug. David, help me..

Patalinghug..

Thank you, Leo Patalinghug, forgive me, and Michael Foley, Scalia by James -- Scalia, sorry, Scalia by James Rosen; and How to Save the West by Spencer Klavan as well as strong ongoing sales of books by Eric Metaxas. Publishing expenses were down 10.6% due to the related decline in revenue. I want to provide an update on our capital structure.

Last month, we exercised the delayed draw back stop we negotiated back in September 2021. We will be issuing $44.7 million in new 7.125% 2028 notes to take out the remaining 6.75% 2024 notes. We have initiated the call of the 2024 notes through our trustee and expect everything to close by the end of the month.

After the close, we will have access to approximately $4 million to pay down the ABL revolver. I want to shift our discussion to M&A activity. On October 1, we acquired the DayTradeSPY financial newsletter for $600,000. Also on December 1, we closed on the acquisition of KKOL-AM in Seattle for $500,000.

Finally, on December 30, we purchased ISI Publishing for $425,000. In January, we closed on the purchase of 3 Miami radio stations, WMYM AM, WWFE AM and WRHC AM for $10 million. Salem paid $6.3 million for the FCC licenses and related broadcast assets and Edward Atsinger, Salem's Executive Chairman paid $3.7 million for the transmitter sites.

The company entered into an agreement whereby the company is able to acquire the land from ad for the same price Salem could have purchased the land from the radio station sellers. This was done to preserve liquidity for the company.

On February 1, we closed on the acquisition of the George Gilder report and other digital newsletters and related websites. We did not pay any cash at closing for this transaction but assume the deferred subscription liabilities and will pay 25% of certain future subscriptions.

And with that, I'll turn the call back to Evan for additional details on the quarter's performance and guidance for Q1..

Thank you, Dave. For the fourth quarter, total revenue decreased 0.5% to $68.8 million. Operating expenses on a recurring basis increased 5.7% to $61.6 million and adjusted EBITDA decreased to $7.3 million.

Compared to last year, net broadcast revenue increased 4.5% to $53.3 million and broadcast operating expenses increased 11.4% to $43.2 million, resulting in station operating income of $10.1 million, a decrease of 17.4%. On a same-station basis, net broadcast revenue increased 4.5% to $53.3 million, and SOI decreased 15.7% to $10.3 million.

These same-station results include broadcast revenue from 98 of our 100 radio stations and network operations and represents virtually all of our net broadcast revenue.

As of December 31, 2022, total debt was $162.7 million, made up of $114.7 million of 7 1/8% 2028 notes, $39 million of 6 3/4% 2024 notes and $9 million outstanding on the ABL facility. The leverage ratio was 4.88 as defined under Salem's credit agreements.

Looking forward, for the first quarter of 2023, Salem is projecting total revenue to be between flat and a decline of 2% from first quarter 2022 revenue of $62.6 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 7% and 10% compared to the first quarter of 2022 non-GAAP operating expenses of $55.8 million.

And this concludes our prepared remarks, and we would now like to open the call up for any questions.

Operator?.

[Operator Instructions]. We'll take our first question this afternoon from Mr. Michael Kupinski of NOBLE Capital Markets..

First of all, I know it was a difficult quarter, but I'm glad to see that you guys beat my estimates, so that's always a good thing. A couple of things. Can you kind of give us an idea of what the price increase was for the block programming in the first quarter? I know you typically put in your price increases in the first of the year.

Any thoughts there?.

Yes, it was just shy of 3%..

Okay. And can you kind of give us a little color on the revenue outlook for Q1? I know that your guide is actually a little better than what I was looking for. And I was wondering if you can just kind of give us a flavor of are the same trends that were in the fourth quarter kind of continuing into the first quarter.

Any particular things that are showing some brightness, some signs of life? Or is it across the board? Just kind of give us a thought about the revenue trends..

Yes, January was pretty sluggish. February actually got a little better than January was in terms of dollars written in the month, for the month. So far, March has actually started out pretty good.

I look, Michael, at kind of how much do we write today for the current month and then how much do we write today for the next month and the next month after that. And I've been pleased with at least what I've seen us writing in the first several days of March. So all of that is good.

But there's no question, we're fighting a headwind in a significant way as is it seems most of the industry right now. I can't necessarily point to a particular category and tell you that this is a category that's going gangbusters.

I can tell you in Q4, we had, as you might expect, real estate and mortgage, which is always a big radio category is not doing great right now because interest rates are really high. In 2021, we had a lot of spending from the government, right, promoting vaccines and whatnot. Well, that advertising is not really there as much anymore.

So there's been a few categories that are down and again, just overall headwinds..

Got you. And it's interesting that your local was weak, whereas national was maybe a little bit better. I was just wondering for the most part, others have been saying National has been extremely weak and local has been holding up.

What are you seeing between national spot and local spot?.

Well, national, our network has really been what's stronger than national spot. And I think it's -- our network is just strong, Michael, because of kind of that 360-degree approach that we're able to take because you can listen to that radio program, you can then also listen to a podcast of that. We're selling different commercial in each of those.

And then, of course, national spot itself in Q4 was driven particularly by political..

Right, right.

But what are you seeing in terms of local then for Q1?.

Can you rephrase the question?.

I'd say we are seeing national stronger than local in Q1, which does seem a little at odds with the rest of the industry. And I'd say that's because our national organization has got momentum because of things like the sale and podcast network and sale and news channel and our newer digital initiatives that's feeding our national business..

Got you. And then, I guess, in terms of just -- I would assume that the cash flow that you plan to drive this year is largely going to be used to pay down debt, I would assume.

So -- but just to kind of confirm the capital allocation for this year?.

Yes, Michael, definitely, the single -- the #1 use for free cash flow this year will continue to be pay down debt, as you've seen us do really -- you compare back to 2017, when we put the bond issue in place, we had $255 million of bonds and our debt is down quite a bit from there. So we will continue to focus on paying down debt and deleveraging..

We go next now to Edward Reily of EF Hutton..

Mike got most of my questions. But just regarding this quarter's guidance, Q4, you guided towards negative 3% to negative 5% growth in the quarter. I was wondering if you could maybe help us reconcile the difference between the guidance and the actual result, and maybe what surprised you in the months of November and December.

And just wondering if any of that momentum is carried through a little bit into 2023..

I think a couple of things that did a little better. When we were putting together our guidance for the fourth quarter, the biggest glaring negative was publishing and just because of the slate of books that we had in the fourth quarter of the prior year.

But we did have a better Q4 with the books that Dave mentioned, Justice Corrupted by Ted Cruz and Letters to the American Church by Eric Metaxas. That was definitely a part of why we did better than we expected from a guidance perspective. And I think political came in a little bit stronger as well..

Okay. And it seems we're really targeting the Florida market.

Just with regard to capital allocation, should we maybe expect more of the same for next year?.

I don't see us at this point adding any additional licenses in the Miami market. I think we feel good with the 3 licenses that we have that we can achieve what we're trying to accomplish there..

And we'll take our next question now from David Marsh of Singular Research..

As we look out throughout the rest of the year, are there any publishing titles that you guys are particularly excited about that could get publishing moving back in the right direction?.

I wouldn't call out one particular home run title. But when I look at the slate as a whole, I think we will see both revenue and profit growth for the Book Publishing business in 2023 compared to 2022.

If I were to mention specific titles and authors, I'd list books from Josh Hawley, George Gilder, Gad Saad, The Babylon Bee, Tulsi Gabbard and Ted Cruz..

Okay. That's very helpful. I appreciate that.

And then when you guys take a look at the asset portfolio as a whole, are there any particular assets it makes sense to possibly look at divesting here? I know it's a tough market right now, but as you look at the portfolio overall, are there any that stand out as ones that maybe could use a source of liquidity going forward?.

Well, I can tell you, we're constantly assessing that, whether it's real estate that we have and continually looking at real estate and changing values there. And then we constantly look at the performance of all of our individual business units and assess on a regular basis, if they're best in our hands or best in the hands of somebody else..

Sure. That's fair. And then, I guess, just lastly for me. XM just had -- SiriusXM just had reduction in force.

I was just curious if perhaps there's some -- maybe some talent available that wasn't perhaps previously available that you guys might be able to add that might helped drive revenue as a result of that reduction in force or any other actions by other operators in the industry?.

Yes. I think the best opportunity there is maybe less on the talent side. We always are looking for great talent. And if there's a good talent that fits the profiles for Salem with our formats. If there's a good talent there, we certainly will consider them.

Where the greater opportunity has been with other workforce reductions both at SiriusXM and at other broadcasters, as we're investing in Salem Surround and our other digital assets, there's some very talented people that are available.

And of course, we're looking at them for both sales and sales support within our digital -- our digital initiatives..

And we'll take a follow-up question now from Michael Kupinski..

I appreciate that. I just kind of wanted to drill down on the expense outlook for Q1. Can you repeat that? What that is? And is that the comparable from Q1 2022 of $55.8 million? If you can just kind of explain that a little bit..

Yes. I'll give you an update or refresh on what the numbers were, and then Dave can maybe talk about what's driving the increase. So it's a 7% to 10% increase in expenses from that $55.8 million in the first quarter of '22.

And Dave, do you want to talk about it?.

Yes. In terms of the expense guidance, it's really being impacted by, as I just mentioned, hiring additional digital sales staff to continue to grow our digital business. You have to remember, on the broadcast side of Salem, our digital business is really only about 5 years old. We really launched later than other broadcasters did.

We kind of wanted to be faster -- fast followers as opposed to pioneers there. And we're glad that we moved in that direction. But in order to keep it growing, we have to add more people to it.

We have to build both larger sales force around it and then a larger digital -- kind of a sales infrastructure so that we can fulfill those digital orders in-house. It's cheaper to fulfill them in-house, but then by using third parties. And so we found that the ROI of new sellers is real positive for us.

And with big tech companies laying off really qualified salespeople, we're able to take advantage of that opportunity..

Is your digital business on the broadcast side profitable at this point? Or how do -- yes, right? And so can you kind of give us an idea of what the margins are and where do you think the margins could grow to as this matures?.

Yes. I guess it's difficult to look at the margins because we sell a lot of different products. I'd say on average, incrementally, incremental digital is probably in the 35% profit margin range. But as we look to bring some of the stuff in-house, we want to grow that margin..

Yes. You can't really calculate a kind of stand-alone profit margin because it's sharing the sales team with radio broadcast. It's sharing with General Manager. So there's a bunch of shared expenses.

It is lower profit margin on an incremental basis than local spot sales because when we're selling digital, we are selling some owned and operated inventory, but we're also reselling other people's inventory. So there is a cost of goods sold to our digital media business that we don't have with the core local spot business.

So it is lower profit margin because of that, but still nicely profitable..

Yes, the cost of goods sold on the local advertising or national spot advertising buckets for that matter, the cost of goods sold is really baked into the operating expenses of the business unit, whereas with digital, there's a real cost of goods sold. We're writing a check to somebody for that..

And gentlemen, it appears we have no further questions this afternoon. Mr. Santrella, I'd like to turn things back to you for any closing comments..

Okay. Well, thanks, everybody, for being a part of the call today. We appreciate it, and we'll see you again next quarter..

Thank you, Mr. Santrella. Ladies and gentlemen, that does conclude the Salem Media Group Q4 2022 Earnings Conference Call. We'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye..