Saga Communications, Inc. — Q1 2023 Form 10-Q
Period: Three months ended March 31, 2023; unaudited. Saga operates radio stations and related digital businesses in 27 markets, with 79 FM and 33 AM stations. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net operating revenue | $25.304 | $24.967 | +1.3% |
| Operating income | $0.905 | $1.710 | -47.1% |
| Net income | $0.920 | $1.204 | -23.6% |
| Diluted EPS | $0.15 | $0.20 | -$0.05 |
| Operating cash flow | $4.835 | $5.296 | -$0.461 |
Operating margin was approximately 3.6%, versus 6.8% a year earlier; net margin was approximately 3.6%, versus 4.8%. Station operating expenses rose 5.5% to $21.703 million, outpacing revenue growth. Revenue comprised broadcast advertising of $21.468 million (down from $21.587 million), digital advertising of $1.910 million (up from $1.749 million), and other revenue of $1.926 million (up from $1.631 million).
Cash and cash equivalents were $27.254 million at quarter-end, down from $36.802 million at year-end 2022; short-term investments were $10.210 million. The company had no debt outstanding and approximately $50 million of unused revolving-credit capacity. Total liabilities were $50.120 million and shareholders’ equity was $178.419 million. Investing cash outflow was $0.629 million, including $1.362 million of capital expenditures. Financing cash outflow was $13.754 million, primarily the payment of the previously declared $2.00-per-share special dividend and quarterly dividend.
Material changes and notable items
- Revenue increased modestly, supported by non-spot, digital/streaming, national, political, and other revenue; local revenue declined. Management attributed the local decrease primarily to several markets, including Columbus, Ithaca, and Milwaukee.
- Operating income fell as station costs increased, including compensation, healthcare, utilities, programming, and promotion expenses. Lower corporate G&A partly offset the increase.
- Net income benefited from higher interest income and FCC spectrum-repacking reimbursements, which partly offset weaker operating income. Interest income increased by $0.285 million, largely reflecting higher returns on cash and short-term investments. The company recorded $0.115 million of FCC reimbursement income and does not anticipate further reimbursements.
- Other operating expense included an $80,000 net loss on asset sales/disposals, including the sale of WPVQ-AM and cancellation of the WHMQ-AM license.
- Founder, Chairman, President, and CEO Edward Christian died in August 2022. His Class B shares converted to Class A shares; no Class B shares remained outstanding at quarter-end. Management expects corporate G&A to decrease significantly from 2022 as approximately $3.8 million of death-related expenses fall away, partly offset by higher directors’ fees and planned corporate staffing and sales/training investment.
Outlook, liquidity, and risks
- Management anticipates 2023 political revenue will be below 2022 because fewer elections are expected. Q1 political revenue nevertheless increased in two markets due to issue-related advertising.
- Expected 2023 capital expenditures are approximately $5.0–$5.5 million, expected to be funded from operating cash flow. The filing gives no specific revenue or earnings guidance.
- The credit facility matures December 19, 2027; rates are based on SOFR or a base rate, with spreads varying by leverage. The facility is secured by substantially all assets other than FCC licenses and certain other assets. The company reported compliance with financial covenants.
- The board declared a $0.25-per-share quarterly dividend in March, paid April 7, and declared another $0.25-per-share dividend in May, payable June 16. Future dividends and acquisitions may be funded from operations, cash, or financing; availability and terms of financing are not assured.
- Management said inflation was beginning to affect the cost of goods and services, though its impact had not been significant to date. Risks include economic and advertising-market conditions, competition from newer media, interest rates, audience trends, key personnel, regulation, technology and cybersecurity, and concentration in major markets. Five markets contributed about 37% of Q1 revenue.
- The company accrued death-related expenses for the former CEO, but cannot estimate its potential obligation for the estate’s income taxes associated with a life-insurance payout. Management reported no material ongoing litigation and no interim impairment trigger for broadcast licenses or goodwill.
Important facts for investors to verify
- Whether revenue and digital growth can offset higher station operating costs and the weakness in local advertising.
- Cash generation and liquidity after recurring dividends, planned capital expenditures, and any future acquisitions; note the substantial cash use for the special dividend paid in January.
- The potential amount and timing of the former CEO estate-related tax obligation, which the filing says cannot currently be estimated.
- Performance and valuation sensitivity of broadcast licenses and goodwill if market, advertising, or economic assumptions deteriorate.
- The impact of the CEO transition and the expected G&A reductions alongside planned spending and governance changes.