SBSAA - Spanish Broadcasting System Inc. (SBSAA) Q3 2023 Earnings Call Transcript

2023-12-07 13:30:24 ET

Spanish Broadcasting System, Inc. (SBSAA)

Q3 2023 Results Conference Call

December 07, 2023 11:00 AM ET

Company Participants

Brad Edwards - Investor Relations

Albert Rodriguez - President and Chief Operating Officer

Jose Molina - Chief Financial Officer

Richard Lara - General Counsel

Presentation

Operator

Good day. And welcome to the Spanish Broadcasting System Third Quarter 2023 Conference Call [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Brad Edwards, Investor Relations. Please go ahead.

Brad Edwards

Thank you, Tom, and good morning, everyone. Before we begin, please recognize that certain statements on this conference call are not historical facts. They may be deemed therefore to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. In particular, statements about future results expected to be obtained from the Company's current strategic initiatives are forward-looking statements. Many important factors may cause the Company's actual results to differ materially from those discussed in any such forward-looking statements. Spanish Broadcasting System undertakes no obligation to publicly update or revise its forward-looking statements. Please also note that we will be discussing non-GAAP financial measures. The Company believes that station operating income, SOI and adjusted operating income before depreciation and amortization, gain or loss under disposal of assets, impairment charges and other operating expenses, excluding non-cash stock based compensation or adjusted OIBDA, is useful in evaluating its performance because it reflects the measure of performance for the Company's stations before considering costs and expenses related to capital structure and dispositions. This information is not intended to be considered in isolation or as a substitute for operating income, net income or loss, cash flows from operating activities or any other measure used in determining the Company's operating performance or liquidity that’s calculated in accordance with U.S. GAAP. A reconciliation with the Company's U.S. GAAP information to SOI and adjusted OIBDA is provided in the tables attached to the Company's third quarter 2023 earnings release, which is available on the Investor Relations section of the Company's website at www.spanishbroadcasting.com.

I will now turn the conference over to Mr. Albert Rodriguez.

Albert Rodriguez

Good morning, ladies and gentlemen. Welcome to the SBS 2023 third quarter earnings conference call. On today's call, we will provide an overview of recent operating developments and review our financial results. Joining me today are Jose Molina, our Chief Financial Officer; and Richard Lara, our General Counsel. During the third quarter, we continued to expand our multi platform reach, invested in strategic areas of our business and drove further aggregate audience growth. The underlying strength of our audio, network and digital assets remains unmatched in Spanish language audio, and we are focused on driving improved performance and finishing 2023 on a very high note. Our Orlando and Tampa audio stations continue to perform ahead of our expectations and combined will be profitable for 2023. In addition, our AIRE remains the largest minority owned Hispanic audio network, and our digital presence has never been stronger.

Now let's review our operations and let's start with AIRE Radio Networks. For the third quarter of 2023, AIRE Radio Networks was down 23% per Miller Kaplan and the network revenue was down 12%. The network category was significantly impacted by insurance categories. AIRE Radio Networks the largest minority owned Hispanic Audio Network delivering 95% of all Spanish language listeners across the country adults 18 to 49 and its commitment to super serving Hispanics. AIRE Radio Networks reaching 15 million weekly Hispanic listeners across more than 300 affiliates, NMSDC certified with presence in the top 50 U.S. Hispanic markets. Some of the key highlights for AIRE's new initiatives include El Terrible morning show, La Mezcla with Alex Sensation, the Influencer Network, delivering campaign messaging through a national platform while penetrating local markets and Artistas360 were brands that are aligned with Latin artists. The audio division at SBS stands as a shining beacon of example of dedication to serving the Hispanic community. We have not only achieved our goals but have exceeded them significantly. Our impressive ratings are a clear indicator of our success, yet the increasing loyalty and engagement from our audience is even more rewarding. Our strategy has been straightforward but impactful. We focus on crafting distinctive captivating content that truly connects with a diverse Hispanic audience. This achievement is the result of our imaginative efforts and the synergistic work of our team.

SBS proudly hosts three of the top 10 most streamed stations in America. WSKQ Mega New York, the most streamed station in America. KXOL Mega Los Angeles, KLAX La Raza Los Angeles. Additionally, SBS has WPAT Amor in New York among the top 20 most streamed stations in America. Key milestones New York, WSKQ FM Mega 97.9 leads the pack reigning as both top station in New York and the leading online streaming station in the country; Miami, WXDJ FM, El Zol 106.7 XL is ranking number one in crucial demographic groups; Orlando WPYO FM El Nuevo, Zol 95.3 maintains its lead with El Despelote with Rocky, the Kid dominating key demographics and number one in the market among all stations in the adults 18 to 34 demo; Puerto Rico dominating the airwaves with WMEG FM Mega 106.9 and WODA FM La integrado, and the successful rebrand of WRXD FM Estereo 96.5; San Francisco, KRZZ La Raza 93.3 tops all Hispanic demographic groups. And when you look at all of our stations and our alignments, when you look at the performance of Miller Kaplan in all of these big markets, SBS typically ranks in the top tier with respect to billing across the board. In particular, New York, every month it's either number one or the number two billet in the entire New York market.

Now in New York's competitive market, our content and teams have been captivating the discerning Hispanic audience, our forward looking approach has made us a vital part of their lives. KLAX FM Morning Show, Al Aire, with Terry is reaching number one. As we celebrate these accomplishments, we remain committed to our ethos of creativity and innovation. Looking ahead, our goal is unwavering to continue being the preferred source of entertainment and information for the entire Hispanic community. In addition, our existing achievements we've reached a remarkable milestone in Tampa with our station WSUN FM El Zol 97.1. This station has now become the number one Spanish language station among all adults 18 to 34 demographic. This accomplishment is a testament to our deep understanding of the diverse preferences and interest in younger Hispanic listeners. Our ability to connect and engage with this demographic group in Tampa underscores our deep commitment to delivering content that resonates across all age groups. Within the Hispanic community, this success in Tampa further solidifies our position as a leader in the Spanish language broadcasting.

Now turning to our mobile and digital platforms and strategic initiatives. Over the last several years, we have had great success transforming SBS into a leading multi media Hispanic media company. Today, we connect with brands with more Hispanics than ever before, and aggregate audience continues to expand. For our brand partners, there has never been more of an important time to have a Latino focused marketing strategy and outreach program. The Latino population is growing rapidly in size, cultural influence and purchasing power. SBS has the multimedia assets, the reach and over four decades of experience and commitment to the Latino community across the US. As such, we can deliver compelling integrated advertising opportunities that cross all major media platforms and offer access to coveted demographic groups. As I stated earlier, our aggregate audience continues to grow. As of September 30th, our total audience was up 10% compared to Q3 in the prior year. September 2023, we had 3.3 million unique listeners to live audio compared to 3 million in 2022. Our LaMusica platform reaches over 3.7 million people across all devices who combine for over 26 million streaming hours per month. Usage and [adaptation] of LaMusia continues to accelerate as it offers a truly unique mobile and digital experience, including original daily video content, short form programming, millions of songs and a personalized experience. Overall, we have placed strategic emphasis on identifying new digital revenue streams as well as increasing our CPMs on existing digital office offerings. We have launched Digidea, an in-house marketing agency to allow us to sell additional products our clients need as SEO, SEM, OTTS and more.

During the second quarter, our total streaming audience surpassed 3.3 million unique listeners per month. This audience has delivered 37 million listening hours and over 80 million total sessions in the quarter. Given Hispanics heavily over-index on mobile phone ownership and usage, mobile remains the primary driver of our mobile digital traffic and accounted for approximately 95% of our total digital traffic in the quarter, a key driver [Technical Difficulty] with an average time spent listening of over 45 minutes in the most popular categories. In summary, our audio network and digital assets remain at the forefront of the Spanish language media and our aggregate audience remains up significantly compared to last year. We're excited about the future for SBS and our audiences. I want to thank you for your time and attention. Now let's turn the call over to Jose Molina for the financial overview. Jose?

Jose Molina

Thank you, Albert. Before turning to our results, I would like to mention that during the comparative prior year period ending September 30, 2022, our operating results were impacted by the receipts of 2.3 million related to the 2020 business interruption insurance claim recognized as other revenue and political sales of approximately $700,000. In addition, our operating expenses in the third quarter of this year were impacted by investments in our unique Spanish language talent and content for our terrestrial and digital properties, and our digital infrastructure and capabilities personnel offerings, such as Digidea, our pure play digital marketing department. Now let's turn to our third quarter results. Our revenues from continuing operations totaled $35 million compared to $38 million for the same prior year period, resulting in a decrease of 8%. The decrease was primarily due to other revenues, network, local and digital sales, partially offset by increases in barter and national sales. Excluding the prior year insurance proceeds and political sales, our net revenues from continuing operations were flat, totaling $35 million for both the current and prior year period. Our operating expenses increased 4% primarily due to increases in barter expense, compensation and benefits, cost of digital sales and music license fees, partially offset by a decrease in advertising and promotions and the allowance for doubtful accounts. Excluding barter expenses, our operating expenses were flat totaling approximately $23.1 million for both the current and prior year periods.

Our station operating income, a non-GAAP measure, totaled $10 million compared to $14 million for the same prior year period, representing a decrease of 28%. Excluding the prior year insurance proceeds and the effects of political sales, our station operating income was down $1 million or 9% totaling $10 million compared to $11 million for the prior year period. Corporate expenses decreased 5% due to decreases in compensation and benefits and travel and entertainment, partially offset by increases in professional fees and outside services. Adjusted OIBDA, a non-GAAP measure, totaled $6.7 million compared to $10.4 million for the same prior year period, representing a decrease of $3.7 million or 36%. Excluding of the prior year insurance proceeds and the effects of political sales, our adjusted OIBDA was down 9%, totaling $6.7 million compared to $7.4 million for the same prior year period. Capital expenditures totaled approximately $500,000 for the third quarter. As of yesterday, we had cash on hands of approximately $7 million. In addition, if needed, we have approximately $6 million available of our revolver, which is currently limited to $7.5 million based on our leverage and fixed charge ratios. For the full fiscal year of 2023, we now expect capital expenditures to be in the range of $2.4 million to $2.7 million and cash taxes to be between $1.8 million to $2.2 million.

As previously reported, we terminated our agreement with Voz after they failed to cure their breach by, among other things, failing to timely close on the sale of Mega TV operations and the related assets. We then filed a lawsuit related to the termination of these agreements where we are seeking to recover monetary damages. In general, we do not comment on the detail of current litigation or their potential outcomes. As to the status of the case, currently the lawsuit is in its initial stage, all of the defendants have been served with a legal complaint and some with initial discovery requests. We are awaiting their responses. Also reported on November 15th, we entered into an amendment to the $7.5 million KROI radio station purchase agreement, which provided us the right to delay the closing until mid-2024. As of today we have made approximately $1.9 million in payment towards the purchase price. Under this amendment, we are scheduled to make additional $1 million payments in January, March, April and May, and the remaining balance of $1.6 million on the closing date. We intend to use cash on hand and asset proceeds to close on this transaction.

Lastly, I'm pleased to provide you with an update on our strategic initiatives aimed to enhance the company's financial health and liquidity. In response to current market dynamics and a commitment to optimize our resources, we have and will continue to implement cost cutting measures that are already yielding positive results. These series of cost cutting measures will result in significant cost savings. In addition, we continue to pursue the sale of our television operations and real estate assets, which are listed as discontinued operations. We have engaged with reputable brokers to facilitate the strategic sale of these assets and to ensure a seamless and efficient process. Their network and market's knowledge have generated considerable interest from potential buyers, which should maximize the value that we can extract from these assets. Together, these strategic initiatives will allow us to unlock value and redirect resources, which should position us for growth in the face of economic uncertainty. This will conclude our formal remarks. And with that, I would like to turn the call over to Brad for any questions.

Question-and-Answer Session

A - Brad Edwards

So we did get some questions. First one being digging a little bit deeper into the third quarter results, particularly on the revenue side. Could you give a little bit more color on the Q3 performance in terms of local versus national network and digital?

Albert Rodriguez

Look, the main sales drivers that decreased the third quarter were, network was down 18%, digital was down 14% and local was down 4%. And some of these things that offset the performance, these were some of the increases. National was up about double-digits 10% and barter was up 57%. I want to give a little color to that. We were doing everything possible to reduce the cash expenditures, so that's why barter was up. We've been strategically using barter to get maybe marketing services that we typically need. And look, some other highlights per Miller Kaplan, which excludes our Puerto Rico market. Our national markets were down 8% and our -- by Miller Kaplan. Miller Kaplan stated that National as an industry where in the markets that we serve were down 8% and SBS was up 7%. So down 8% and we were plus 7% in national, we beat the market basically by 15 points, when the national markets overall are significantly down. So it shows a very positive story that Spanish broadcasting and still continues to grow national markets. Our local markets were down 7% and we were down less than that. So we beat the local markets as well. Some of the categories that were strong were entertainment, automotive, food and beverage and general services. Some of the challenges that we had, the categories that were weak, obviously, in 2022, we had political. So the entire industry, the broadcast industry is going up against the political comps from the prior period. So political was down, the healthcare division was down, professional services. And retail was down. A lot of it has to do with a lot of retailers that are leaving like the State of California and they're consolidating in other states. So some of that has impacted the performance.

Brad Edwards

Turning to the next area, the Orlando and Tampa stations. How did they do in Q3 and what was the stations -- the station, what was our revenue impact in the quarter and how you see profitability tracking for the rest of this year?

Albert Rodriguez

So I want to go over -- the station is called El Zol in both markets. So Orlando, it started off immediately with a very, very strong ratings performance, and right now we basically lead the Orlando market in ratings. And in financial performance, when we took over the station, the station was ranked about 22 or 23 and the station with respect to revenue rank right now is in, I believe in October, it was the third rank station in the market with respect to billing. So we are very pleased about that. I also want to say I'm really pleased about Tampa and I'm going to give you some color on Tampa. Tampa, although the ratings, the ratings didn't grow as fast as Orlando did, the performance of Tampa compared to where it was before has significantly increased. Even when you look at Miller Kaplan, our station when we took it over it was ranked 23 and I think year-to-date Tampa will be maybe '17 or '18. And I think every single month it's getting -- the shares are growing, the revenue shares are growing, the audience share is growing, and the rank is growing. So I feel very comfortable that the station is going to do really well. And in particular what I said in my comments before that for the last two months of adults 18 to 34, El Zol in Tampa is the number one station. So when you start delivering strong numbers 18 to 34, the 18 to 49 and 25 to 54, key demographic groups are going to continue to grow. So we're really pleased with that. Jose, did you want to give some other color?

Jose Molina

As to the financials, for the third quarter, Orlando and Tampa had combined net revenues of about $1.9 million and combined adjusted OIBDA totaled a loss of about $100,000. For the third quarter, our LTM adjusted OIBDA was a loss of $1.7 million, which is an improvement of about $400,000 compared to the second quarter LTM loss of approximately $2.1 million so we're slowly but surely reducing that loss. Our LTM results include significant promotional expenditures, which occurred at the latter half of 2022. Given the significant promotional expenditures, during 2022, we continued to expect Orlando and Tampa operations combined to have positive adjusted OIBDA for 2023.

Brad Edwards

Not surprising, but another area of question was Q4 pacings. So how did October, November do in terms of pacings, and to the degree that you can you break that down in terms of local, national network and digital? And then maybe Jose, could you provide a little bit more detail on how we should think about operating expenses for the full year?

Albert Rodriguez

Let me give you a little color on Q4. Let's look at October. October overall was down low single digit. For obvious reasons, we were excluding political sales. But if you exclude political, October was up mid single digits. And I'm going to say that we performed really well compared to where the market is at. But it's important to note that our core business is still solid. November was down low double digits excluding political. And it was still up, even when you excluded we were down like high single digits. Look, we're doing everything possible now as it relates to the operating expenses. And I believe Jose you wanted to give a little color on that?

Jose Molina

For the full year of 2023, we believe that our operating expenses will increase in the low single digit range and corporate expenses will decrease in the low double digit range for the full year.

Brad Edwards

And then last question we have here is regarding the digital business. Can you provide some detail in what exactly investments in digital entail and when you expect to see returns on those investments?

Albert Rodriguez

Look, we've increased the traffic and engagement on our Web sites, on our stream shows, on social media, on our LaMusica app. And look after a very successful refinance about two years ago, we wanted to make sure that we were investing in developing short form content, podcasts, content distribution partnerships like Audacy and iHeart. They were putting our premier content on their platforms. We've invested in training and personnel and different system platforms that we believe that the marketplace was asking for and we wanted to make sure we're super serving our clients. And in addition for our clients we started a marketing solutions company, it's called Digidea Marketing Solutions. It's a full service digital marketing agency, allowing SBS to expand beyond our current owned and operating digital platforms and extend our reach to 250 million verified users. Jose, did you want to give some financial color on that?

Jose Molina

Digital currently right now is approximately 7% of our gross revenues. As of September, our gross digital sales totaled $8.4 million versus $9 million in the prior year, and that's year-to-date as of September. And then currently, our digital business is a low margin business. But as we build and scale our digital, those margins will significantly improve.

Brad Edwards

So Albert and Jose, that's all the questions that we have. So now I'll turn it back to Albert for closing remarks.

Albert Rodriguez

Look, I want to take a moment to all of our investors and our clients and all of our colleagues in the industry and the SBS family. After much reflection and consideration, I've decided to resign from my position as President and COO of Spanish Broadcasting System. It's been an incredible journey and I'm immensely proud of what we've achieved together, in particular to the beacon of the Hispanic Voice in America, which is my dear brother, Raúl Alarcón Jr. that he's like a brother to me. While stepping down from the role of President and COO, I am pleased to announce that I'll be staying on as a Senior Advisor. In this capacity, I will continue to support 1 million percent the company's vision providing guidance and strategic insights to ensure seamless transition. And I'm going to continue to look forward to continuing to collaborate with all of you and with SBS team in my new role. So Jose, is there anything else that you want to add to that you and me have worked next to each other for 25 years.

Jose Molina

Albert, we wish you the best in your new role and we'll be working together still. So you did an amazing job and we'll continue to do amazing things. As to the investors and employee, we look forward to the next call, fourth quarter call. Thank you so much for your time.

Albert Rodriguez

Thank you, guys. We appreciate it.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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