Thank you for standing by. My name is Latif, and I will be your conference operator today. At this time, I would like to welcome everyone to the Salem Media Group Incorporated 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Evan Masyr, Chief Financial Officer.
Welcome, and thank you for joining us today for Salem Media Group's second quarter 2023 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, and David Evans, Chief Operating Officer. We'll 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 financial measures is available on the investor relations portion of the company's website at salemmedia.com. With that, I will now turn the call over to Dave Santrella. Dave?
Thanks, Evan. Thanks to everyone for joining us on the call and on the webcast. My prepared remarks will include a review of Salem financial performance in the second quarter and a discussion of some asset sales. Once I'm done, I'll turn the call back to Evan to provide more details on the second quarter financial performance, talk about our debt, and give guidance for the third quarter. Well, we continue to face some headwinds from a tough economy and high interest rates. Total revenue for the second quarter declined 4.2%. Expenses increased 5.2%. This resulted in a 77.2% decline in adjusted EBITDA. While these numbers are in line with the guidance we provided on our last call, we are not happy with these results.
Accordingly, we have taken further cost-cutting measures, including the elimination of the 401(k) match, banning all non-essential travel, a restructure of some general manager positions and our sales organizations, pay cuts have been taken by senior management. In total, these cuts amount to approximately $10 million in annual savings. We continue to look for additional efficiencies as we navigate the challenging economy. I always like to summarize the total of our digital efforts on each earnings call because I think this is often overlooked by investors. When we take the digital revenue in the broadcast division, which includes assets like our podcast network, Salem Surround, and the Salem News Channel, and the revenue from our national digital division, total Salem digital revenue was $20.8 million in the second quarter. This represents 31.6% of our total revenue.
While the growth in digital has slowed and was only up 0.5% in the quarter, we still believe that digital represents Salem's most important growth opportunity. Now, I'll review the financial performance for each division in the second quarter. Revenue from the broadcast division declined 5.3% in the quarter. Similar to last quarter, spot revenue is the biggest driver of the decline, with national spot down 29.5% and local spot down 10.1%. More than half of the decline is due to political revenue, which was $0.3 million in the second quarter, compared to $1.5 million in the second quarter of last year. Excluding the impact of political, broadcast revenue declined 3% in the quarter. It is worth noting that the first of the Republican presidential debates is scheduled for later this month.
We anticipate an increase in the pace of political revenue in the second half of this year. Aside from the reduction in political revenue and the continued decline in traditional spot advertising revenue, is due to the advertiser pullback in response to the overall economy. We also saw a slowing in the pace of revenue growth of the digital revenue in the broadcast division, which was up 0.6% in the quarter. Revenue from national block programming increased 0.8% in the quarter. As you know, most of our block programming deals are long-term. Many of our newer block programming deals were finalized in Q1 of 2022. As they anniversary, we see that growth slow down. Therefore, we're pleased to see that we continue to grow, albeit at a slower pace than the previous 12 months.
Network revenue, not surprisingly, is feeling the impact of a tough economy as it decreased 5.8% in the quarter. Excluding political revenue in both Q2 this year and last year, network revenue actually increased 0.4%. The pace of growth in broadcast expenses declined compared to last quarter. As a reminder, in Q1, broadcast expenses increased 12.3% as we continued to make investments in many of our digital initiatives, including the Salem News Channel. Broadcast expenses in the second quarter increased 4.8%. While we are still making these investments, as we believe digital will play an even larger part of the future, the reduced pace in expenses reflects the various cost-cutting measures that we've taken. Revenue at Salem's national digital division increased 0.5% in Q2.
This business continues to face challenges from algorithm changes made by Facebook and the declining use of the third-party cookie. In the national digital division, expenses in the quarter increased 9.1%, primarily due to increased marketing and sales costs and professional services. Book publishing revenue decreased 3.5% in the second quarter. Book sales, net of the estimated returns allowance, was just about flat in the second quarter compared to Q2 of last year. The best-selling titles in the quarter were Manhood by Josh Hawley, Letter to the American Church by Eric Metaxas, and Overture of Hope by Isabel Vincent. In the third quarter, we're releasing The Ever-Loving Truth by Voddie Baucham and The Babylon Bee Guide to Gender. Expenses in the book publishing division were up 10.9%, primarily due to an increased inventory obsolescence reserve.
Turning to M&A activity, we have a few asset sales to report. Last month, we closed on the sale of two stations in Seattle, KLFE AM, for $500,000 and KNTS-AM for $225,000. Additionally, on June 29th, we entered into an agreement to sell KSAC-FM in Sacramento for $1.0 million and expect to close that transaction in early October. With that, I'll turn the call back over to Evan Masyr for more details on the quarter's performance and guidance for the third quarter.
Thank you, Dave. For the second quarter, total revenue decreased 4.2% to $65.8 million. Operating expenses on a recurring basis increased 5.2% to $63.1 million, and adjusted EBITDA decreased to $2.7 million. Compared to last year, net broadcast revenue decreased 5.3% to $49.7 million, and broadcast operating expenses increased 4.8% to $43.5 million, resulting in Station Operating Income of $6.2 million, a decrease of 43.5%. On a same-station basis, net broadcast revenue decreased 5.8% to $49.4 million, and SOI decreased 37.7% to $6.8 million.
These same-station results include broadcast revenue from 99 of our 102 radio stations and the network operations, which represents 99.4% of our net broadcast revenue. As of June 30th, total debt was $182.0 million, composed of $159.4 million of 7.125%, 2028 notes, and $22.6 million outstanding on the asset-based loan facility. Because we had less than $4.5 million available on our revolver during the quarter, we were required to test against a fixed charge coverage ratio covenant. Unfortunately, due to declining adjusted EBITDA and free cash flow, we were not in compliance with that covenant. Yesterday, we signed a forbearance with Wells Fargo Bank, whereby they agreed not to exercise remedies on the default during the month of August.
The notional amount of the revolver was reduced from $30 million to $25 million, with a minimum availability required of $1 million. Finally, the interest rate associated with the revolver increased by two percentage points, effective July first, through the effective date of the forbearance. The company and the bank are mutually working toward a longer-term amendment and waiver, and we're optimistic that we will reach a reasonable outcome. Looking forward, for the third quarter of 2023, Salem is projecting total revenue to decline between 3% and 5% from third quarter 2022 total revenue of $66.9 million. Excluding the impact of 2022 political revenue, the company would project total revenue to decline between 1% and 3%.
Salem is also projecting operating expenses before gains or losses on the sale of 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 be between a decrease of 1% and an increase of 2% compared to third quarter of 2022 non-GAAP operating expenses of $60.8 million. This concludes our prepared remarks, and we would now like to answer any questions. With that, I will turn it back to the operator to poll for questions.
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster... Okay. Your first question comes from the line of Michael Kupinski from Noble Capital Markets. Please go ahead.
Thank you. Good afternoon, everyone. As I kind of look at the trend line numbers as we look for 2023, we're looking at roughly flat revenues to what you reported in 2021. Then, if you look at the expenses, it's up, you know, what looks like to be trend line growth of about $30 million. I was just wondering if you can kind of give us a sense of where the, the initiatives and what type of initiatives, and in terms of the expense growth that we've seen over the course of the last couple of years, where that's being spent and what you anticipate? Are there, are there ways that we can see like, I, I understand that you're, seems like you're going to kind of pare down some of the investments in some of the digital.
I'm just wondering if there are ways that we can see expense reduction going forward?
Yeah. So I mean, Michael, what you're seeing is, you know, increased expenses, you know, in digital, right? Primarily in, from two places. First off, we're bringing more people in-house, here with digital expertise, and we're doing that to reduce third-party marketing costs, right? So when we sell something on our owned and operated websites or owned and operated digital assets, we sell it, and it's much, you know, more profitable for us than when we sell something, where we have a cost of sales of those goods. You know, the more that we can control that by having people inside, the better those margins will eventually become. There's that kind of curve when you're when you're kind of in the middle of doing that, which is where we are in many respects right now.
We've-- we're investing in digital, you know, in, in digital personnel, and of course, as we sell more direct marketing services, digital advertising, that comes with a lower margin and a greater expense.
Gotcha. Then in terms of just looking at the publishing revenues, it was a little bit better than what I was looking for. Were there some expenses in publishing that were maybe, may have been pulled forward just because of the timing of, you know, the publishing aspect of that and marketing around the books? In looking forward to, like, the third quarter, would expense growth be slower because of that, or I'm just wondering if there was any?
Uh, the-
Movement?
I guess there were two in the, in the publishing expenses. We did increase our inventory obsolescence reserve in the second quarter, which is why the expense increase in publishing is larger than the kind of revenue being flat. That, that's really just to kind of an increase in the reserve, so that wouldn't have any impact on Q3 or Q4.
Okay. Just in general, do you have any... I'm sorry.
By Q3 and Q4, our biggest titles are Q4. Looking ahead, we've got Ted Cruz, Rand Paul, and Tulsi Gabbard as three big books that will get published. Yeah, maybe some books will ship Q3, but the vast majority are Q4. Yeah, that's really what you should expect for the rest of the year is, yeah, those opportunities.
Gotcha. Do you have a sense of what the titles or the number of titles that you'll have for 2024? Because I know that that's a very big year for you.
We're still signing titles for 2024, but I would say, you know, we'll be targeting 75-80 titles in total. It's really driven by, you know, what, what big titles are we able to sign? It's a little too early to kind of really comment on that. It is a political year, so typically, even-numbered years are better for Regnery than odd-numbered years.
In, in 75-80 titles, is that a typical year for?
Yeah
even number?
Yeah, we don't really change the number of titles from odd-numbered years to even-numbered years. Just, the bigger titles tend to kind of get published in the, in the even-numbered political years.
Gotcha. Then in terms of the expenses, is there also in, in, investments in a movie, or can you, can you talk a little bit about that? Because I think there was another movie that you guys were looking like you were going to invest in.
Yeah, we're under contract for another Dinesh D'Souza movie. We've made the initial investment, and that investment is sitting on our balance sheet. Yeah, that, you know, all the revenues and expenses associated with that movie would be recorded once it's released. There's a few hundred thousand dollars sitting on the balance sheets, I believe.
Gotcha. Just in terms of the broadcast environment, I know, you're, you, you reported, you know, kind of, roughly flat, let's say, results. Can you talk a little bit about the, the tone of the advertising market, the scatter market, spot market, as you kind of look into Q3?
Yeah, I mean, Michael, it, you know, it, it's, it's, it's spotty, I would say, at best right now. I, I don't, you know, it's still sluggish, and typically, local follows national, at least that's been my experience. You know, national's been hit particularly hard across our sector. You know, when, when the big guys aren't spending money, the, the smaller- their smaller mom-and-pop competitors tend to sit on their cash as well. You know, I think we're going to see, and at least the way pacing would tell me right now, I think we're gonna see, you know, a, a, a challenging third quarter from a spot perspective.
Final question. In terms of the recent austerity moves that you guys have made, you said that it's $10 million on an annualized basis. When does the bulk of that savings come through? Does that begin in the third quarter, or is it really kind of fully affect Q4?
Most of what we put in place, you'll see hitting in Q3 and continuing into Q4. Some of it will phase in, but most of it we've already taken action on, and you'll see that impact in Q3. That's why you see our expense guidance is, you know, on the, the low side, down 1, on the high side, up 2.
It's only a partial impact on Q3. Very little impact on July, for example.
Gotcha. Okay. All right, I'll let others ask questions. Thank you.
Thanks, Michael.
Again, if you would like to ask a question, press star one on your telephone keypad. Your final question comes from the line of David Marsh from Singular Research. David, go ahead.
Hi, guys. Thanks for taking the questions. Could you just tell me, in terms of political, have you guys seen any revenue as of today from political? You know, what are you hearing on that front in terms of when that's gonna start to pick up?
We, we, you know, we've seen a little political. I think we, we mentioned 0.3, what, 0.3, so about $300,000, you know, so far in political, which is, which is almost nothing. It's, but it's a little bit. You know, just based on conversations we're having with different political agencies, with our political contacts, you know, I would anticipate that we'll start to see some political revenue late Q3, Q4. I think next year is going to be a really big political year for all of us, but I do think you'll start to see some late Q3, Q4. David, do you. Just being a bit more specific, I think there are three states, maybe four, that have early Republican primaries, for example, Iowa. There is spending in those three or four states.
However, those aren't states where we have radio stations, so we're picking up a little bit of business there, where we have a digital presence or where we have a radio affiliate. For us, that's relatively small dollars because they're not the states that we have a radio presence in. The political spending has started in those early primary states.
Okay, could you remind us of what the top line contribution of political was in 2022, and would it be safe to assume that it's probably going to grow from there in 2024?
Yeah, I believe our, our number in 2022 was $6.6 million, which was our biggest political year. Look, I, I think you would expect political to grow next year from that.
Okay, that makes a lot of sense. Lastly for me, you know, congrats on the station sales in the quarter. Any other assets that, you know, have been identified and classified as asset sales for sale at this point, or any other assets in particular that there is, you know, maybe some significant potential interest where you could, you know, perhaps sell an asset and help to delever the balance sheet a little bit?
Yeah, David, we're, we're working on a number of asset sales. Some are further along than others. Until we, you know, have those transactions signed, it's a little too premature to discuss them. As soon as we have those deals locked in, we'll certainly let you know.
Would it then be safe to assume that you wouldn't expect any, any other sales to close this fiscal year?
No, I would not, I would not agree with you on that.
Okay. Okay, well, that's, that's good. All right, well, it sounds like things are moving along with the bank, so I wish you well on that, and look forward to an announcement in the near term of a nice amendment there. You know, wish you, wish you well for the balance of the quarter, and hopefully, the political starts kicking in here and starts moving things the right direction.
Thank you.
Yeah, thanks, Dave.
All right, guys. Thanks.
I will now turn the call back over to David Santrella, Chief Executive Officer. David?
Okay. Thanks, operator. Thanks, everybody, for being a part of the call. We'll talk to you again next quarter. Bye.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.