Salem Media Group is America’s leading multimedia company specializing in Christian and conservative content, with media properties comprising radio, digital media and book and newsletter publishing. Each day Salem serves a loyal and dedicated audience of listeners and readers numbering in the millions nationally. With its unique programming focus, Salem provides compelling content, fresh commentary and relevant information from some of the most respected figures across the Christian and conservative media landscape.
Michael Kupinski, Director of Research, Equity Research Analyst, Digital, Media & Technology , Noble Capital Markets, Inc.
Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Announces a new credit facility. The company announced that it has a new $26.0 million credit facility with Siena Lending Group, replacing its prior revolver with Wells Fargo Bank. We believe that the new revolver allows some financial flexibility as the company works to close on the sale of its Church Publishing division.
Likely to largely pay off the revolver. The sale of Salem Church Products business to Gloo, LLC for $30 million has been somewhat delayed, but is still on track to close imminently. In our view, the proceeds from the sale will be used to largely pay off the company’s revolver, providing further financial flexibility.
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*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Michael Kupinski, Director of Research, Noble Capital Markets, Inc.
Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.
Refer to the bottom of the report for important disclosures
Overview: A new small-cap cycle?Small cap stocks have underperformed the large cap stocks for the past several years. Notably, there is a sizable valuation disparity between the two classes, one of the largest in over 20 years. Some of the small cap stocks we follow trade at a modest 2 times Enterprise Value to EBITDA, compared with large cap valuations as high as 13 to 15 times. Are we on a cusp of a small cap cycle?
Digital Media & Technology:Stocks Outperform – But Don’t Get Too Excited. Each of Noble’s Internet and Digital Media Indices, which are market cap weighted, outperformed the S&P 500 in the third quarter, but the double-digit gains from the previous quarter moderated significantly. Despite these relatively positive results, the prevailing theme within each sector was that the largest cap stocks performed the best, while smaller cap stocks across a variety of sectors struggled.
Television Broadcasting:Advertising Stabilizing?As we look toward the third quarter, local advertising appears to be weakening as the economy appears to be slowing. But, national appears to be improving. In addition, while it was assumed that Political would increase in the fourth quarter due to the run-off of the Republican presidential candidates, we believe that President Biden has recently stepped-up advertising in the third quarter, particularly in Hispanic communities.
Radio Broadcasting:Shoring up balance sheets.As many radio companies face a challenged revenue environment and at the same time invested in faster growth digital revenue, some companies have been caught carrying a substantial amount of debt. In this report, we highlight one company that was able to shore up its balance sheet through asset sales.
Publishing:Stocks outperform. It may be hard to imagine for some investors, but the Publishing stocks outperformed in both the latest quarter and for the trailing 12 months the S&P 500! But, there is still a wide valuation gap between most of Publishers and the shares of The New York Times, with the NYT shares at 15 times cash flow and the rest near 5.
Overview
The case for small caps
Small cap investors have gone through a rough period. For the past several years, investors have anticipated an economic downturn. With these concerns, investors turned toward “safe haven” large cap stocks, which typically have the ability to weather the economic headwinds and have enough trading volume should investors need to exit the position. Since 2018, small cap stocks have underperformed the general stock market, with annualized returns of just 3.7% as measured by the S&P 600 Small Cap Index versus the general market of 10.2% as measured by the S&P 500 Index. Another small cap index, the Russell 2000, increased a more modest 2.9% annually over the comparable period. The S&P 500 is larger cap, with the minimum market cap of $14.6 billion. The S&P 600 is smaller cap, a range of $850 million to $3.7 billion, with the Russell 2000 median market cap $950 million. Some of the even smaller cap stocks, those between $100 million to $850 million, have significantly underperformed the S&P 600. This is the first time that small caps underperformed a bullish period for all stocks since the 1940s. Notably, there is a sizable valuation disparity between the two classes, large and small cap, one of the largest in over 20 years.
Some of the small cap stocks we follow trade at a modest 2 times Enterprise Value to EBITDA, compared with large cap valuations as high as 13 to 15 times. By another measure, small cap stocks may be the only class trading below historic 25 year average to the median Enterprise Value to EBIT. Why the large valuation disparity? We believe that there is higher risk in the small cap stocks, especially given that some companies may not be cash flow positive, have capital needs, or have limited share float. But, investors seem to have thrown the baby out with the bathwater. While those small cap stocks are on the more speculative end of the scale, many small cap stocks are growing revenues and cash flow, have capable balance sheets, and/or are cash flow positive. For attractive emerging growth companies, the trading activity will resolve itself over time. Some market strategists suggest that small cap stocks trade at the most undervalued in the market, as much as a 30% to 40% discount to fair value.
Are we on a cusp of a small cap cycle? Some fund managers think so. Such a cycle could last 10 years or longer. In this report, we highlight a few of our small cap favorites in the Media sector, those include companies that have attractive growth characteristics, some with or without an improving economy, capable balance sheets, and limited capital needs. Our current favorites based on growth opportunity and stock valuation include: Direct Digital (DRCT), Entravision (EVC), E.W. Scripps (SSP), Gray Television (GTN), and Townsquare Media (TSQ).
After increasing by 8% in the second quarter of 2023, the S&P 500 was unable to hold onto those gains in the third quarter. The S&P Index decreased by 3.6% in the third quarter, a decline which we attribute to the market revising its interest rate expectations to one in which rates would remain “higher for longer”. Large cap stocks that weighed on the broad market index included tech stocks such as Apple (AAPL: -12%), Microsoft (MSFT: -7%) and Tesla (TSLA: -4%). Despite this small step backwards, the S&P 500 Index increased by 20% through the first nine months of the year.
Each of Noble’s Internet and Digital Media Indices, which are market cap weighted, outperformed the S&P 500 in the third quarter, but the double-digit gains from the previous quarter (2Q 2023) moderated significantly. Digital Media 3-Month Performance Sectors that outperformed the S&P 500’s 4% decrease include Noble’s Digital Media Index (+6%), Social Media Index (+4%), Gaming Index (+3%), Ad Tech Index (+1%) and MarTech Index (-3%). Despite these relatively positive results, the prevailing theme within each sector was that the largest cap stocks performed the best while smaller cap stocks across a variety of sectors struggled.
Figure #1 Digital Media 3-Month Performance
Source: Capital IQ
Perhaps more importantly, each of Noble’s Internet and Digital Media Indices have outperformed the S&P 500 over the latest twelve months as illustrated in Figure #2 Digital Versus S&P 500 LTM. The S&P 500 Index has increased by 20% over the last year (through 9/30/2023), which trailed the performance of the each of Noble’s Internet and Digital Media Indices, as shown in Figure #3 Digital Media LTM Performance.
Figure #2 Digital Versus S&P 500 LTM
Figure #3 Digital Media LTM Performance
Source: Capital IQ
Alphabet Powers Digital Media Index Higher Despite Broader-Based Sector Weakness
The best performing index during the quarter was the Noble’s Digital Media Index, but the sector’s “strong” performance is deceiving. Shares of Alphabet (a.k.a. Google: GOOGL) increased by 9% during the quarter, and the company size relative to its peers helps explain the vast majority of the sector’s performance. Google’s market cap is 8x larger than its next largest “peer” in Netflix, and it is 160 times that of the average market cap of its Digital Media peers. Google beat expectations across all metrics (revenue, EBITDA, free cash flow) and guided to improved profitability as it streamlines workflows. The company is also increasingly perceived as a beneficiary of AI. While Alphabet shares performed well, they mask the fact that shares of only 2 of the sector’s 12 stocks were up during the third quarter. The other Digital Media stock that performed well in the quarter was FUBO (FUBO), whose shares increased by 29% in 3Q 2023. Of the 10 other digital content providers in the sector, 7 of them posted double-digit stock price declines in the third quarter.
Large Cap Meta Powers the Social Media Index Higher
Shares in Meta Platforms (formerly Facebook) rose for the third straight quarter. Shares increased by 5% and were up 150% through the first nine months of the year. Meta shares increased by 8% at the start of the third quarter due to excitement around the launch of Threads, Meta’s answer to Twitter. Over 100 million people signed up for Threads within the first five days of its rollout and positions the company well for continued revenue growth once it begins to monetize this new opportunity.
As with the Digital Media Index, the Social Media Index masked underlying weakness across several smaller cap stocks. Of the 6 stocks in the Social Media Index, only Meta shares increased during the quarter. Several social media companies performed poorly during the quarter including Spark Networks (LOVL.Y: -59%), which filed to delist its shares, Nextdoor Holdings (KIND: -44%), which has struggled to reach profitability, and Snap (SNAP: -25%), which guided to revenue declines in 3Q 2023.
“No Love” For Small Cap Stocks
As was the case in the Digital Media and Social Media sectors, the same trends held true in the other sectors: in general, large cap stocks outperformed small cap stocks. For example, Noble’s Video Gaming Index increased by 3% in the third quarter, driven by Activision Blizzard (ATVI: +11%), and to a lesser extent SciPlay Corp (SCP: +16%). However, 7 other stocks in the video gaming sector posted stock price declines in the third quarter. Larger cap names such as EA Sports (EA: -7%) and Take-Two Interactive (TTWO: -5%) posted mid-single digit stock price declines while every small cap video gaming stock posted double digit declines.
Noble’s Ad Tech Index increased by 1% during the quarter driven by shares of AppLovin (APP: +55%), and Taboola (TBLA: +22%). However, just 7 of the sector’s 20 stocks were up for the quarter, and 10 stocks in the sector posted double digit declines. One of our favorites is an attractive growth, small cap company, Direct Digital. The DRCT shares declined 20% in the quarter, in spite of posting favorable Q2 revenue that beat expectations and raising full year revenue estimates. Direct Digital leads our list of favorites in the digital Ad Tech companies. As Figure #4 Ad Tech Comparables indicate, Direct Digital is among the cheapest in the industry trading at 4.7 Enterprise Value to our 2024 adj. EBITDA estimate, well below larger cap peers trading at multiples of 12, 13, or even much higher. Finally, Noble’s MarTech Index decreased by 3% (the only index that declined during the quarter), with the sector’s largest companies, Adobe (ADBE: +4%) and Shopify (SHOP: -16%) posting mixed results. Outside of these mega-cap stocks, the theme of underlying weakness prevailed: only 5 of the 20 stocks in the sector posted stock price increases, while one was flat and the other 14 were down. Eleven of the 20 stocks in the MarTech sector posted double digit stock price declines. One of our favorites in the sector, Harte Hanks performed well in the quarter up 18.8%. This was a welcomed bounce from the steep decline in the shares over the past 12 months, down 44%. The company stumbled on quarterly expectations. We believe that the sell-off was over done, providing a compelling opportunity for investors. As Figure #5 MarTech Comparables illustrates, the HHS shares trade at 3.8 times Enterprise Value to our 2024 adj. EBITDA estimate, a fraction of the multiples of many of its larger cap peers. We view the HHS shares as among our favorites in the sector.
Figure #4 Ad Tech Comparables
Source: Company filings & Eikon
Figure #5 MarTech Comparables
Source: Noble estimates & Company filings
Traditional Media
Virtually all traditional media stocks underperformed the general market in the past quarter and trailing 12 months, as illustrated in Figure #6 Traditional Media LTM Performance, save the Publishing group. In the latest quarter, Publishing stocks outperformed the general market, up 3.0% versus down 3.6% for the general market as measured by the S&P 500 Index. The average Publishing stock is up 6.9% over the past 12 months, with some of the larger cap publishing stocks up significantly more, over 20%. More details on the Publishing performance is in the Publishing section of this report. In the last quarter, the Radio stocks were the worse performing group, down on average 10.2%, As illustrated in Figure #7 Traditional Media 3-Month Performance. In addition, the Radio stocks were the worst performing group in the third quarter as well, down and average of 12.7% for the quarter.
Figure #6 Traditional Media LTM Performance
Source: Capital IQ
Figure #7 Traditional Media 3-Month Performance
Source: Capital IQ
Television Broadcasting
Have the TV stocks discounted too much?
We believe that the economic headwinds of rising interest rates and inflation have begun to hit local advertising. Local advertising had been relatively stable, favorably influenced by a resurgence of Auto advertising. Notably, local advertising fared much better than national advertising, which was down in the absence of Political advertising. As we look toward the fourth quarter, local advertising appears to be weakening. But, notably, national advertising appears to be doing much better, driven by an early influx of Political advertising. While it was assumed that Political would increase in the fourth quarter due to the run-off of the Republican presidential candidates, especially in early primary States, we believe that President Biden has recently stepped-up advertising, particularly to the Hispanic community. We have noticed Biden advertising even in Florida! So, what does this mean for media fundamentals?
It is difficult to predict where Political dollars will be spent and not all Political dollars will be spent evenly, geographically or by stations in a particular market. Furthermore, Political dollars may be pulled back in a market should a particular candidate pull ahead in the polls. Political dollars were anticipated to be spent in early primary States, specifically for the Republican candidates. But, the Biden money is a surprise. Biden appears to be spending early and in areas to solidify a key voting block, Hispanics. Of course, the Biden campaign may broaden its spending to other voting blocks as well. In our view, 2024 will be a banner year for Political advertising given the large amount of Political fundraising by the candidates and by Political Action Committees. The prospect of weak local advertising, however, may cast a pall over the current expected strong revenue growth in 2024. Many analysts, including myself, expected that economic prospects would improve in 2024, which would have provided a favorable tailwind for a significant improvement in total TV advertising in 2024. Certainly, it is likely that the Fed may lower interest rates in 2024, potentially providing a boost to local advertising prospects, but that improvement may come late in the year. But, overall, in spite of the weakening Local advertising environment, given the improving National advertising trends, overall TV advertising appears to have stabilized.
For now, we are cautiously optimistic about 2024, with the caveat that revenue growth may be somewhat tempered given the current weak local advertising trends. Nonetheless, we believe that we are nearing the trough for this economic cycle. Some companies, like E.W. Scripps, are in a favorable cycle for Retransmission renewals. Retransmission revenues now account for a hefty 50% of Scripps’ total broadcast revenue. In Scripps’ case, 75% of its subscribers are under renewal, which it recently announced was completed. As such, the company reaffirmed guidance that Retransmission revenue will increase 15% in 2024 and lead to a substantial increase in net Retransmission revenue. We remain constructive on TV stocks, as high margin Political advertising should boost balance sheets and improve stock valuations.
In the latest quarter, TV stocks underperformed the general market. As Figure #7 Traditional Media 3-Month Performanceillustrates, the Noble TV Index decreased 13.2%, underperforming the 3.6% decline in the general market as measured by the S&P 500. The poor performance of the latest quarter adversely affected the trailing 12 month performance, bringing the Noble TV Index to a 17.6% decline for the trailing 12 months. Individual stocks performed more poorly, with only the shares of Fox Corporation registering a modest gain for the trailing 12 months of 2.7%. The Noble TV Index is market cap weighted, and, as such, Fox with a $15 billion market cap, carried the index. Outside of the relatively strong performance of this large cap stock, all of the TV stocks were down and down big, between 18% to 59% over the past 12 months.
We believe that investors have shied away from cyclicals, smaller cap stocks, and from companies with higher debt levels. This accounts for the poor performance of Gray Television and E.W. Scripps, both of which have elevated debt leverage given recent acquisitions. Both were among the poorest performers for the latest quarter and for the trailing 12 months. The GTN shares were down 12% in the third quarter and 38% for the last 12 months; the SSP shares down 40% and 58%, respectively.
We believe that the sell-off has been overdone, especially as the industry is expected to cycle toward an improved fundamental environment in 2024. As Figure #8 TV Industry Comparables indicate, the Broadcast TV stocks trade at a modest 5.3 times Enterprise Value to our 2024 adj. EBITDA estimates, well below historic 20 year average trading multiples of 8 to 12 times. We believe that the depressed valuations largely discount the prospect of an economic downturn and do not reflect the revenue and cash flow upside as we cycle into a Political year. Given the steep valuation discount to historic levels, we believe that the stocks are 15% to 20% below levels where the stocks normally would be given a favorable Political cycle. Our favorites in the TV space include: Entravision (EVC), one of the beneficiaries of the influx of Political advertising to Hispanics; E.W. Scripps (SSP), a play on Political, with the favorable fundamental tailwind of strong Retransmission revenue growth; and, Gray Television (GTN), one of the leading Political advertising plays.
Figure #8 TV Industry Comparables
Source: Noble estimates & Eikon
Radio Broadcasting
Shoring up balance sheets.
The Radio industry has struggled in the first half as National advertising weakened throughout the year. On average National advertising was down roughly20% or more for many Radio broadcasters. Local held up relatively well, although down in the range of 3% to 5%. Fortunately, for many broadcasters, a push into Digital, which grew in the first half, helped to stabilize total company revenues. As we look to the fourth quarter, we believe that Local advertising is weakening, expected to be down in the range of 5% to 7%, or more in some of the larger markets. But, for some, National advertising is improving, driven by Political advertising. But, Political is not evenly spread. As such, we anticipate that there will be a cautious outlook for many in the industry for the second half of the year.
For some in the industry, the challenged revenue environment has put a strain on managing cash flows to maintain hefty debt loads. We believe that debt leverage is among the top concern for investors. Many of the poorest performing stocks in the quarter and for the trailing 12 months carry some of the highest debt leverage in the industry. The Noble Radio Index decreased a significant 13.7% in the latest quarter compared with a 3.7% decline for the general market. But, a look at the individual stock performance tells a more disappointing story. The shares of Salem Media declined 38% in the latest quarter, bringing 12 month performance to a 44% decline. The shares of iHeart Media decline 49% for the year.
Notably, Salem Media assuaged much of its liquidity concerns with recent asset sales. Such sales will bring in roughly $30 million, allowing it to fully pay off its $22 million revolver and have some flexibility with remaining cash on its balance sheet. We do not believe that investors have fully credited the significance of the recent asset sales.
One bright spot in the group has been the shares of Townsquare Media. While the TSQ shares gave back a significant 27% in the third quarter, the shares are still up 20% over the past 12 months, among one of the best performance in the industry. We believe that the company’s initiation of a substantial dividend resonated with investors.
While the industry faces fundamental headwinds given the current economic challenges, we believe that most companies have made a shift toward faster growth, digital business models. In addition, we believe that Radio will see a lift from Political advertising in 2024, although not to the extent that the TV industry will see. Nonetheless, we look for an improving advertising scenario in 2024. As such, we are constructive on the industry. One of our current favorites leads the industry in its Digital transition, Townsquare Media. As Figure #9 Radio Industry Comparables indicates, the TSQ shares are among the cheapest in the industry, trading at 5.1 times EV to our 2024 adj. EBITDA estimate, well below the average of 7.1 times for the industry. In addition, we like Saga Communications, one of the cheapest stocks in the industry, trading near 4 times EV to 2024 adj. EBITDA.
Figure #9 Radio Industry Comparables
Source: Noble estimates & Eikon
Publishing
Further cost cutting will cut deep.
Publishers are not likely to be spared from the weakening local advertising business. But, publishers have a play book on areas to cut expenses to manage cash flows. Certainly, we believe that its Digital businesses should help offset some of the anticipated revenue declines on its print legacy business. We believe that publishers are eliminating print days. Such a move likely will indicate further pressure on print revenues, but would not proportionately decrease cash flow. Some print days have very little advertising and/or advertisers may shift some spending to other print days. Lee Enterprises indicated in its last call that it will go down to 3 print days in 44 of its smaller markets. We believe that the move has been a success. While revenues may have decreased slightly more than expected given the current weak advertising environment, we believe that cost savings have been more than anticipated.
While many publishers would like to have a long runway for its cash flowing print business, such possible moves would necessarily increase the digital transition. Notably, with just some stabilization of revenues on the print side, many publishers have the potential to show total company revenue growth given benefit from digital revenue. With the prospect of strategies that may cut print days and the current weak local advertising environment, we believe that total revenue growth may be pushed out to 2025.
Many of the Publishing stocks were written off long ago. But, surprisingly, the Publishing stocks have been among the best stock performers in the latest quarter and for the trailing 12 months. The Noble Publishing Index increased a solid 36% in the trailing 12 months, outperforming the general market (as measured by the S&P 500) of 19% in the comparable time frame. In the third quarter, Publishing stocks increased 3.5%, outperforming the S&P 500, which declined 3.7%. All of the publishers increased, with the exception of Lee Enterprises. The Lee shares increased substantially a year earlier on takeover rumors. Since then the shares have come back down to earth, while the rest of the industry moved higher. The stronger performers in the industry, however, were the larger cap companies, such as News Corp and The New York Times. In the latest quarter, the shares of The New York Times increased roughly 5% and the shares are up 27% for the trailing 12 months. The shares of Gannett increased a solid 9% in the latest quarter, as well.
As Figure #10 Publishing Industry Comparables illustrate, there is a disparity among some of the larger, more diversified companies, like The New York Times and News Corporation. The NYT shares trade at a hefty 15.7 times EV to 2024 adj. EBITDA estimates, well above much of the pack currently trading in the 5 multiple range. We believe that this valuation gap should narrow, especially as many of the companies, like Lee and Gannett, have a burgeoning Digital business. While the industry faces secular challenges of its Print business and there are economic headwinds in the very near term, we believe that companies like Lee Enterprises have the ability to manage cash flows and grow its Digital businesses. Given the compelling stock valuation disparity, the shares of Lee Enterprises lead our list of favorites in the sector.
Figure #10 Publishing Industry Comparables
Source: Noble estimates & Eikon
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Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis. Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.” FINRA licenses 7, 24, 63, 87
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Gaming company Snail, Inc. is shaking up single-player games with the launch of Survivor Mercs, featuring groundbreaking Twitch integration that allows streamers to actively engage viewers.
Survivor Mercs is a roguelite military action game for PC. But what makes it truly unique is the ability for streamers to let their audience influence gameplay through real-time voting on upgrades, mercenaries and enemies.
This pioneering social element empowers streamers to meaningfully interact with fans during solo play for the first time. It expands engagement beyond passive viewing, creating a more immersive community experience.
As streaming continues growing, innovative integrations like Snail’s can profoundly impact both streamers and game developers. The company is leading the way in exploring how to make single-player gaming more social and fun to watch.
For streamers, it unlocks new ways to creatively involve their community. For developers, it opens up opportunities to design streamer-friendly games tailored for live audiences.
Snail’s CEO called the integration a “small step” toward reimagining audience participation in live gaming. But it could be a giant leap for revolutionizing solo play for the streaming era.
Beyond the groundbreaking Twitch element, Survivor Mercs promises challenging roguelite action with thousands of character combinations and procedurally generated maps.
Snail is pioneering the future of streaming-based gameplay. The company’s innovative integration of Twitch with solo play in Survivor Mercs kicks open the door to deeper social interaction and engagement between streamers and their loyal fans.
IRVING, Texas–(BUSINESS WIRE)– Salem Media Group, Inc. (NASDAQ: SALM) announced today the launch of the podcast show Hearing Jesus for Kids on Salem-owned LifeAudio Podcast Network. The Hearing Jesus for Kids podcast is a daily audio program designed to help kids explore the fascinating stories of the Bible and apply the lessons they learn to their everyday lives. Following the success of the Hearing Jesus podcast, which consistently ranks in the top 200 charts on Apple Podcasts for Religion & Spirituality, host Rachael Groll has expanded her creativity and knowledge to reach the next generation of Christians with this new companion show.
“Sometimes people think that the Bible is just for adults, but God actually really wants kids to know about Him,” Rachael Groll said. “On this podcast, we are going to learn all about God’s big story and how he shows Himself to us through the Bible.”
The pilot episode, available on all podcast platforms, uncovers hidden stories of brave heroes, epic battles, and amazing miracles that set the stage for the arrival of Jesus.
ABOUT RACHAEL GROLL:
Rachael Groll is the host of the Hearing Jesus podcast, one of Apple Podcasts’ most successful shows. As a pastor, missionary and author, her greatest calling in life is to help women learn how to hear the Lord more clearly in their lives. Rachael has served both locally and globally, focusing on evangelism and discipleship, and counts it a privilege to share God’s Word on the podcast every week. Rachael has her undergraduate degree in Ministerial Leadership from Southeastern University and received her MA in Bible Exposition at Biola University in May. Rachael is the author of She Hears: Learning to Listen to Jesus as well as numerous other titles. She and her husband, Tim, live in rural Pennsylvania and have three beautiful daughters. Find more from Rachael at her website, shehears.org.
ABOUT LIFEAUDIO PODCAST NETWORK:
For more than 20 years, Salem Web Network has delivered inspirational Christian content all over the world through some of the most recognizable brands in Christian media. Now, with LifeAudio Podcast Network, we are proud to offer a suite of captivating and original new audio content from trusted pastors, authors, and ministry leaders. Home to top-charting shows like Your Daily Prayer, Abide Bible Sleep Meditation and The Becket Cook Show, LifeAudio is proud to bring entertaining, life-changing, and family-friendly podcasts for the engaged, evangelical Christian audience. Learn more about us on Facebook, Twitter/X, Instagram and TikTok.
ABOUT SALEM MEDIA GROUP:
Salem Media Group is America’s leading multimedia company specializing in Christian and conservative content, with media properties comprising radio, digital media and book and newsletter publishing. Each day Salem serves a loyal and dedicated audience of listeners and readers numbering in the millions nationally. With its unique programming focus, Salem provides compelling content, fresh commentary and relevant information from some of the most respected figures across the Christian and conservative media landscape. Learn more about Salem Media Group, Inc. at www.salemmedia.com, Facebook and Twitter.
X, the Company Formerly Known as Twitter – Here’s Why It Rebranded
If you’re like me, when Elon Musk announced a rebranding of Twitter to the new name X, you waited for the punchline – or thought of it as a stunt. Although weeks later I’m still typing “Twitter” into my search bar, and still refer to posts as tweets.” I have become sure that this is no stunt, it is a business decision. A decision that begs the question, Why?
This week, X’s CEO, Linda Yaccarino shared her insights in a CNBC interview. She explained the company’s decision to rebrand from Twitter, citing alignment with owner Elon Musk’s overall strategic vision for the platform and how Musk, who has owned the URL X.com since his PayPal days, has championed the social media company as the future, all-encompassing app.
“Elon has been talking about X, the everything app, for a very long time,” Yaccarino said during the interview with CNBC’s Sara Eisen. “Even when we announced that I was joining the company, I was joining the company to partner with Elon to transform Twitter into X, the everything app,” Yaccarino said.
Yaccarino, who took the helm in June, indicated the transformation and growth include extended video content, articles, and even subscriptions to content providers.
“Think about what’s happened since the acquisition,” X’s CEO elaborated, “Experiences and evolution into long-form video and articles, subscribe to your favorite creators, who are now earning a real living on the platform. You look at video, and soon you’ll be able to make video chat calls without having to give your phone number to anyone on the platform.”
Attention was brought to the once microblogging platform’s intentions to facilitate transactions between users, friends, and content creators. The past Twitter was confining, she explained, the new brand will allow evolution without a legacy mindset.
“The rebrand represented really a liberation from Twitter,” she said. “A liberation that allowed us to evolve past a legacy mindset and thinking. And to reimagine how everyone, how everyone on Spaces who’s listening, everybody who’s watching around the world. It’s going to change how we congregate, how we entertain, and how we transact all in one platform.”
The CNBC host asked about the risk in light of name recognition, Yaccarino responded likening the change Johnson & Johnson made by spinning off Band-Aids and Tylenol brands under the new name Kenvue. Her reply suggested the tech giant is almost entrepreneurial now, and can begin with a start-up mentality.
“If you stay Twitter, or you stay whatever your previous brand is, change tends to be only incremental. And you get graded by a legacy report card,” Yaccarino said. “And at X we think about what’s possible. Not the incremental change of what can’t be done.” She pointed to the new product changes and infrastructure improvements, saying it “answers the question of ‘why rebrand?’”
About Yaccarino’s Duties
She is operating independently under Musk’s leadership, Yaccarino assured.
“The roles of Elon and myself are well-defined.” She continued, “Elon is working on accelerating the rebrand and working on the future,” adding, “and I’m responsible for the rest. Running the company, from partnerships to legal to sales to finance.”
Questions regarding Yaccarino’s autonomy within Musk’s framework had arisen due to his comprehensive control over the company and his ventures like Tesla and SpaceX.
Yaccarino, formerly a senior advertising executive at NBC Universal, underscored X’s dedication to enhancing the advertiser experience. This commitment arose from brands withdrawing from the platform following Musk’s acquisition of Twitter.
A large part of the Twitter brand has in the past been questioned by advertisers related to trust and safety. Yaccarino disclosed that X’s trust and safety team is now more capable compared to its pre-acquisition state. While acknowledging that not all content may align with everyone’s views, she highlighted efforts to improve the platform’s content environment.
In November, Twitter disbanded its ethical artificial intelligence team and downsized its trust and safety department. This move halted the team’s work on “algorithmic amplification monitoring,” which mainly aimed to scrutinize content amplification during elections and political events. This stands in sharp contrast to the trust which the new brand has been building.
Rebuilding advertiser confidence stands as a large challenge for Yaccarino. Musk has claimed continuous spikes in user engagement, but concrete data supporting these claims are slim. Yaccarino pointed out the return of prominent brands like Coca-Cola and Visa to advertising under her leadership, facilitated by her direct engagement with marketing and communication executives.
Yaccarino asserted that brands are now insulated from the risk of adjacency to problematic content. She acknowledged that content that is “lawful but awful” can be challenging to manage but emphasized the company’s new content controls in reducing such risks for advertisers.
Yaccarino also addressed the threat posed by Meta’s Threads, indicating that while it hasn’t fully taken off since its high-profile launch, it’s essential to stay vigilant about competitors. Despite already commanding substantial advertiser spending through Instagram and Facebook, Meta’s Threads has yet to introduce advertising.
As for a potential octagon face-off between Musk and Meta CEO Mark Zuckerberg, Yaccarino took a playful stance saying that if the event occurred, Musk “is training” and noted the potential for a great brand sponsorship opportunity.
Michael Kupinski, Director of Research, Noble Capital Markets, Inc.
Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.
Refer to the bottom of the report for important disclosures
Overview: Is The Recession Here? Economic activity is slowing, taking pressure off of inflation. But, the Fed seems intent on pushing interest rates higher, likely through the balance of this year. As such, recent economic forecasts anticipate GDP to contract over the next few quarters. This does not paint a favorable picture for advertising in the very near term. But, given the increased likelihood of a recession, has timeliness in media stocks improved?
Digital Media & Technology:A broad based recovery? For the second quarter in a row, the best performing index was Noble’s Social Media Index, which increased by 34% in 2Q 2023, followed by Noble’s Ad Tech Index (+24%), MarTech Index (+18%), Digital Media Index (+16%), and Video Gaming Index (+5%). The largest stocks carried the performance in each of the indices. Can the stocks hold on to recent gains?
Broadcast Television: Are ad trends really improving? Recent reports indicate that television advertising is showing some improvement. While it is likely that Auto and Political advertising are bright spots, we remain skeptical that core advertising pacings are improving in the third quarter given the weak economic outlook. Nonetheless, the TV stocks appear to be cheap and we highlight a few of our key favorites.
Broadcast Radio:The pall over radio. Soft advertising trends heading into an economic downturn does not bode well for companies, like Audacy, that are in the midst of a financial restructuring. We believe that high debt leverage is the pall over the stocks. It is likely that many radio companies will go through a round of cost cutting to shore up cash flow in the midst of an economic downturn.
Publishing: Cash flow gurus. We do not believe that the Publishing industry will be spared from the weak advertising environment. The industry has a playbook for cutting costs, however, and has a history of maintaining cash flow through difficult times.
Overview
The Recession Is Here
Figure #1 YoY Real GDP Growth illustrates that the economy grew post pandemic through the first quarter 2023, reflecting a rebounding economy, fueled by government spending. But, economic activity is slowing, taking pressure off of inflation. Nonetheless, the Fed seems intent on pushing interest rates higher, likely through the balance of this year. Most economists anticipate that the Fed will raise interest rates by 25 basis points two times in the second half of this year. Not only will the interest rate increases be a headwind for the economy, but government spending, a key driver to the economy this year, is likely to wane. Recent economic forecasts anticipate GDP to contract over the next few quarters, a classic definition of an economic recession. The Conference Board of Economic Forecasts anticipate that the US economy will contract -1.2% in Q3 2023, -1.9% in Q4 2023, and -1.1% in Q1 2024.
This does not paint a favorable picture for advertising in the very near term. Advertising is highly correlated to personal disposable income, particularly discretionary income. If consumers have discretionary income, companies advertise for them to spend. As Figure #2 YoY Real Disposable Income Growth highlights, disposable income has declined over the past 18 months. Not surprisingly, economically sensitive National advertising has been down nearly 4 quarters and at high double digit rates. Given the significant declines, as much as 25% in each quarter for the past year, National advertising trends should moderate, given that the comps get easier. As such, even with an economic downturn becoming more visible, it is possible that National advertising declines may moderate.
National advertisers tend to spend when there is light toward the end of an economic recession, when consumer personal disposable income shows signs that it will improve and consumers have the propensity to spend. In our view, that light at the end of the tunnel is still pretty dim given the economic forecast that anticipates a decline in GDP through the Q1 2024. While the visibility of an improvement in National advertising seems to have improved as we enter an economic downturn, especially given the easing comps and the benefit from Political advertising (expected to begin in Q3 2023), we think that it is too early to be optimistic. The length and severity of an economic downturn is not yet visible.
What does this mean for the stock market and for media stocks? Figure #3 Federal Funds Rate Vs. S&P 500 performance illustrates the recent increases in Fed Funds rates had little effect on the general stock market as measured by the S&P 500 Index. Unfortunately, late cycle and economically sensitive media companies declined or under performed the stock market. In spite of Fed Fund rate increases over the past year, the S&P 500 Index increased 18% in the last 12 months. The anticipation of an economic recession, however, weighed on media stocks. The stock performance of the various media sectors that we follow are discussed in this report, but have generally under performed the market. The exception to the poor performance were the Internet and Digital Media stocks, which had a broad based recovery. Is it possible that early cycle media stocks will outperform the general market in the near term? In our view, yes. But, this may mean that the general market may decline as media stocks decline less. Historically, it has been the case to buy media stocks in the midst of a recession as media stocks strongly outperform the general market in a economic recovery. But given the likely disappointment in revenue in the coming quarters, it is likely that media stocks will be volatile as investors weigh the near term revenue and earnings disappointments to the prospect of a revenue rebound in an improved economic scenario. This would suggest that if one would try to time the stocks, investors may want to wait a quarter or two, buy on the improved momentum. This may mean that one might miss the large gains. As such, for long term investors, we believe that we are nearer to the bottom and that the downside appears relatively limited, valuations appear compelling. But, given the anticipate volatility in the near term, media investors should look for opportunistic purchases and accumulate positions in our favorite media names highlighted in this report.
Figure #1 YoY Real GDP Growth
Source: Federal Reserve Bank of St. Louis
Figure #2 YoY Real Disposable Income Growth
Source: Federal Reserve Bank of St. Louis
Figure #3 Federal Funds Rate Vs. S&P 500 performance
Source: Federal Reserve Bank of St. Louis & Yahoo Finance
Digital Media & Technology
A Broad-Based Recovery in Shares
The Internet and Digital Media sectors rebounded nicely over the last 12 months (LTM). As Figure #4 LTM Internet & Digital Technology Performance illustrates, the Video Gaming index was the only sector that underperformed the S&P 500 over the last year. The S&P 500 Index was up 17.6% over the LTM, outperforming the Video gaming index’s increase of 9.7% and in line with Noble’s Digital Media Index increase of 18%. The MarTech Index and AdTech Index both performed strongly, increasing 35.8% and 39.8%, respectively. The Social Media index had the strongest performance of the indices, increasing an impressive 80.2% over the LTM.
Figure #4 LTM Internet & Digital Technology Performance
Source: Capital IQ
Despite macroeconomic headwinds that include higher interest rates, a regional banking crisis, elevated inflation and a war in Europe, the S&P 500 powered higher for the third quarter in a row. The S&P 500 Index continued its streak of steady increases, with an 8% increase in the Index in 2Q 2023, which followed a 7% increase in 1Q 2023 and a 7% increase in 4Q 2022. The broad index is up a healthy 24% since the end of the third quarter of 2022. The S&P 500 bottomed on October 12, 2022, and is up 26% from that date through mid-July.
The S&P 500’s performance was driven primarily by its largest constituents. As a market weighted index, the largest stocks have an outsized impact on its performance, and that was certainly the case in 2Q. Eight of the largest stocks in the S&P 500 Index were up in 2Q 2023 by 2x-3x or more than the Index’s 8% gain. Stocks that powered the Index higher included Nvidia (NVDA, +52%), Meta Platforms (a.k.a Facebook, META, +35%), Netflix (NFLX, +28%), Amazon (AMZN, +26%), Tesla (TSLA, +26%), Microsoft (MSFT, +18%), Apple (AAPL, +18%) and Google (GOOGL, +15%).
Noble’s Internet and Digital Media Indices, which are also market cap weighted, also powered higher thanks to the biggest constituents in their respective Indices. Each of these Indices posted double digital percent increases, with only the exception being Noble’s Video Gaming Index (+5%), which slightly underperformed the broader market/S&P Index. For the second quarter in a row, the best performing index was Noble’s Social Media Index, which increased by 34% in 2Q 2023, followed by Noble’s Ad Tech Index (+24%), MarTech Index (+18%), Digital Media Index (+16%), and Video Gaming Index (+5%).
Meta Powers the Social Media Index Higher
We attribute the strength of the Social Media Index to its largest constituent, Meta Platforms, whose shares increased by 35% in the second quarter. We noted last quarter that Meta appeared to be returning to its roots and focusing on profitability, rather than its nascent and riskier web3 initiatives. That return to its core strengths has been greatly rewarded by investors. Shares of Meta were up 225% from its 52-week low of $88.09 per share in early November through the end of June. Shares are up another 8% since the start of the third quarter with the launch of Threads, Meta’s answer to Twitter. Over 100 million people signed up for Threads within the first five days of its rollout. Meta has not yet begun to monetize this opportunity, but it will clearly add to its growth in coming quarters.
Ad Tech Stocks Embark on a Broad-Based Recovery Following a Difficult 2022
Noble’s AdTech Index increased by 24% in 2Q 2023, and this performance was very broad based, with 15 of the 24 stocks in the sector up, and a dozen of the stocks up by double digits. Ad Tech stocks that performed best during the quarter include Applovin (APP, +63%), Magnite (MGNI, +47%), Tremor International (TRMR, +37%), Pubmatic (PUBM, +32%), Double Verify (DV, +29%), The Trade Desk (+27%), and Integral Ad Science (IAS, +26%). Ad Tech stocks were the worst performing sector in our universe in 2022, with the index down 63% for the year in 2022. The strong performance in 2Q 2023 in many respects reflects a bounce back off multi-year lows for several stocks. Year-to-date, one standout in particular is Integral Ad Science, whose shares were up 104% in the first half of 2023.The company continues to expand its product suite, scale its social media offerings (i.e., for TikTok) and is well positioned to continue to benefit from the shift from linear TV to connected TV (CTV). The company is benefiting from new partnerships with YouTube and Netflix and shares likely benefited during the quarter from anticipation of the company’s mid-June analyst day presentation.
Noble’s MarTech Index was up 18%, with performance within the group also broad based. The Digital Media & Technology indices market-cap weighted performances in 2Q are illustrated in Figure #5 2Q Internet & Digital Technology Performance. Thirteen of the 20 stocks in the Index were up in the quarter. MarTech stocks that performed best during the quarter include Cardlytics (CDLX, +86%), Shopify (SHOP, +35%), Live Ramp (RAMP, +30%), Adobe (ADBE, +27%), and Hubspot (NUBS, +24%). One of the poor performers in the group was one of our closely followed stocks, Harte Hanks, which declined 42% in the latest quarter. The stock gave back nearly all of its 54% gains in the prior year. The weakness was due to a disappointing quarterly revenue outlook as the company indicated that it is seeing economic headwinds and more difficult second half comparables. Notably, the company has significant levers to maintain much of its favorable cash flow outlook and is well positioned for growth as those headwinds diminish. We believe that downside risk in the HHS shares appear limited and view the shares as among our favorite rebound plays. Overall, MarTech stocks were victims of their own success: the group traded at double digit revenue multiples in 2021, but the sector’s revenue multiples were more than halved in 2022. The group currently trades at 5.9x 2023E revenues, up from 4.1x 2023E revenues at the end of the first quarter, and 3.5x 2023E revenues at the start of the year. Current trading multiples are illustrated in Figure #7 MarTech Comparables.
Finally, the Digital Media Index was up 16% in 2Q 2023, and here again, the performance was broad based with 8 of the 12 stocks in the Index posting gains. Digital Media stocks that performed best during the quarter include Fubo TV (FUBO, +72%), Travelzoo (TZOO, +31%), Netflix (NFLX, +28%), Interactive Corp (IAC, +22%), and Spotify (SPOT, +20%). Year-to-date, the two best performing Digital Media stocks are Spotfiy (+103% YTD), which has shifted its priority to running a profitable company and took additional steps in 2Q to achieve it, for instance, by consolidating and streamlining several of its podcast company acquisitions from recent years. The second best performing Digital Media stock through the first half of the year was Travelzoo (TZOO), whose shares were up 77% in the first half of the year. The company continues to benefit from pent up demand that helped a surge in travel as the pandemic ebbed. Lodging and domestic travel demand rebounded first, but Travelzoo appears to be benefiting from cruises and international travel, where pent up demand took longer to recover. Management indicated that travel related advertising may increase as economic headwinds adversely affect hotel and air travel occupancy, forcing these travel businesses to offer discounts. We rate the TZOO shares as Outperform.
Figure #5 2Q Internet & Digital Technology Performance
Source: Capital IQ
Figure #6 AdTech Comparables
Source: Company filings & Eikon
Figure #7 MarTech Comparables
Source: Noble estimates & Eikon
Traditional Media
Traditional media stocks largely underperformed the general market over the LTM, the Radio sector was the hardest hit. As Figure #8 LTM Traditional Media Performance illustrates, the Noble Radio Index decreased 37.7% over the LTM, compared with the general market increasing 17.6%, as measured by the S&P 500 over the same period. The Television Index was down 14.8% and the Publishing index outperformed the general market, increasing 28.4% over the LTM. Notably, there were company stock performance disparities within each sector, highlighted later in this report. Given the indices are market cap weighted, larger market capitalized companies skewed the indices’ performance.
The traditional media industry is still finding its footing in the difficult economic environment, given the indices performance in Q2. While the Newspaper and Radio indices performed better in Q2 than Q1, the TV Index did not. The general market, as measured by the S&P 500, increased 8.3% over the last quarter and outperformed all but one traditional media sector. The Newspaper Index, which increased 8.5% over the same period narrowly outperformed the general market. The TV Index was the hardest hit traditional media sector and decreased -11.1%. While the Radio index underperformed the market in Q2, it improved upon a difficult Q1 and increased 3.1%, as illustrated in Figure #9 Q2 Traditional media performance.
Figure #8 LTM Traditional Media Performance
Source: Capital IQ
Figure #9 Q2 Traditional Stock Performance
Source: Capital IQ
Broadcast Television
Are ad trends really improving?
The TV Index underperformed the general market in the second quarter. While none of the stocks in the TV Index increased in the second quarter, many performed better than the market cap weighted return of -11.1%. Fox Corporation (FOXA; down 0.1%), E.W Scripps (SSP; down 2.8%), Nexstar (NXST; down 3.5%) and Gray Television (GTN; down 9.6%) were among the best performing stocks in the hard-hit TV index. The stocks hit the hardest in Q2 were Sinclair Broadcast Group (SBGI; down 19.5%) and Entravision (EVC; down 27.4%). Given the recent turmoil in TV stock performances we view the depressed prices as a potential opportunity given the prospect of an advertising recovery over the next few quarters.
While there have been some recent reports indicating that television advertising is improving, possibly related to increased political advertising and Auto advertising in the third quarter, we remain skeptical that the improvement is sustainable given the prospect of a weakening economy. Nonetheless, the TV stocks appear cheap. One of our favorites in the index is Entravision (EVC) which is among the industry leaders in revenue growth as illustrated in Figure #10 TV Q1 YoY Revenue Growth. While the EVC shares had a poor performance in Q2, down 27.4%, the shares had increased 26% in Q1. Entravision’s revenue growth is the product of a robust digital business that comprises approximately 80% of total revenue. We believe that the recent under performance is related to Meta’s (Facebook’s) announcement that it plans to implement efficiencies, implying that it may take margin away from some of its advertising agencies, like Entravision, which represents Facebook in Latin America. In our view, Entravision is in a strong position to push back on that prospect given its favorable business relationship with the company. Given the influx of lower margin digital revenues, Entravision’s EBITDA margin is much lower than industry peers, illustrated in Figure #11 TV Industry Q1 EBITDA Margin. But, importantly, the company has one of the better revenue and cash flow growth profiles.
Figure #12 TV Company Comparablesillustrates the trading levels of the companies in the index. Some of our favorites Entravision (EVC) and E.W Scripps (SSP) trade at multiples well below the industry peer group highs. While E.W Scripps had modest year over year revenue decline, we believe it will benefit from favorable Retransmission revenue, strong Political advertising and improved margins in 2024. Given the SSP shares low float, the shares tend to underperform when industry is out of favor and outperform when the industry is back in favor. As for Entravision, we view the company’s digital transformation favorably and, notably, the shares are trading at a modest 3.9 times Enterprise Value to our 2024 Adj. EBITDA estimate. In our view, there appearas to be limited downside risk. The EVC shares and SSP shares, in our view, both offer a favorable risk reward relationship.
Figure #10 TV Q1 YoY Revenue Growth
Source: Company filings
Figure #11 TV Industry Q1 EBITDA Margin
Source: Company filings & Eikon
Figure #12 TV Company Comparables
Source: Noble Estimates & Eikon
Broadcast Radio
While the Radio Index underperformed the S&P 500 in Q2, it was an improvement from a difficult Q1. Notably, there were a few strong performances in the market cap weighted index. Beasley Broadcast Group (BBGI, up 24.4%) , Cumulus Media (CMLS, up 11.1%) and Townsquare (TSQ, up 48.9%) all strongly outperformed the S&P 500 in Q2. The largest stocks in the group did not perform well in the quarter skewing the index lower, Audacy (AUD, up 2.6%) and iHeart Media (IHRT, down 6.7%). The second quarter stock performances were a mixed bag and largely did not reflect the first quarter operating results. As Figure #13 Radio Q1 YoY Revenue Growth illustrates, most companies had modest revenue growth. The larger Radio companies that rely more on National advertising had the greatest declines of YoY revenue. With CMLS being the exception, the larger Radio companies underperformed relative to Radio companies with a stronger digital and highly localized presence. Figure #14 Radio Industry Q1 EBITDA Margin Margins illustrate that the margins for the industry remain relatively healthy.
Some of our favorite Radio stocks have strong digital businesses and highly localized footprints, which provides some shelter from weakness in national advertising. Those stocks included Townsquare, Beasley Broadcast Group, Salem Media (SALM; down 12.1%) and Saga Communications (SGA, down 3.9%). While the shares of Saga Communications (SGA) were down 3.9%, the performance did not reflect its favorable first quarter operating results. Importantly, Saga grew revenues a modest 1.3% and had an above average Q1 EBITDA margin of 9.6%. Saga has a highly localized footprint, as approximately 90% of revenues come from local sources. Furthermore, the company has been placing more importance on growing a profitable digital business in recent years. While Saga’s Digital business is early in its development, management is focused on growing digital revenues from 7.5% of total revenue in Q1 to 20% of total revenue over the next couple years. Additionally, we believe the company is likely to maintain a strong cash position given the economic uncertainty.
We view Townsquare Media (TSQ), Salem Media (SALM), Beasley Broadcast (BBGI) and Saga Communications (SGA) as among our favorites in the industry given the diverse revenue streams and localized footprints. While these companies are not immune to the economic headwinds, we believe that its Digital businesses and local footprints should offer some ballast to its more sensitive Radio business. Beasley’s recent digital revenue growth has been robust, digital revenue was 17% of total revenue in Q1 and is expected to reach 20% to 30% of total revenue for full year 2023. In the case of Salem, 30% of its revenues are from reliable block programming.
We believe that Radio advertising pacings likely will be problematic in the second half given the economic headwinds. Unlike Television, the industry does not benefit as much from Political advertising. As such, we expect that advertising pacings likely will be lower in Q3 than the Q2 results. It is likely that many radio companies, especially those with higher debt leverage, will implement cost cutting measures. With many of the radio companies already relatively lean from the Pandemic, it is likely that such measures will be difficult.
As Figure #15 Radio Company Comparables illustrates, the shares of Townsquare and Saga are among the cheapest in the industry, trading below peer group averages. Notably, Townsquare implemented a hefty dividend in Q1, providing the unique opportunity to get a return of capital while waiting for a turn toward more favorable fundamentals. As such, the shares of TSQ tops our list of favorites. We also view the shares of Saga as among our favorites. The company is early in its transition toward digital and has a lot of headroom for enhanced revenue growth.
Figure #13 Radio Q1 YoY Revenue Growth
Source: Company filings
Figure #14 Radio Industry Q1 EBITDA Margin
Source: Company filings & Eikon
Figure #15 Radio Company Comparables
Source: Noble estimates & Eikon
Publishing
The Publishing industry is no exception to the advertising weakness that is impacting the broader Media landscape. As such, revenues are likely to continue to decline, despite an already weak performance in the first quarter of the year. Figure #16 Publishing Q1 YoY Revenue Growth illustrates the predominantly negative trends in the industry in the most recently reported quarter. The advertising challenges are hitting the traditional Print side of the publishing business hardest. For example, Lee Enterprises (LEE), one of our favorites in the industry, reported a 10% Print advertising revenue decline for the quarter ended March 31st, while Digital advertising grew a modest 2%. The company’s adj. EBITDA generation fell 15% compared with a more moderate 2% drop in total company revenues.
Not surprisingly, the dampened industry revenue resulted in lower industry cash flow generation with EBITDA margins averaging in the 10% range, as illustrated in Figure #17 Publishing Industry Q1 EBITDA Margins. Yet despite the constraints on cash flow generation on Lee and the other Publishers, we believe the companies have the ability to cut costs to help offset the pressure on cash flow generation. In particular, companies could cut costs in their Print manufacturing and distribution operations, reducing overhead in the same business segments where revenues are expected to lag. Publishing companies have a playbook on cutting legacy print costs and have the ability to maintain cash flow. However, cost cuts can take time to go into full effect, which could result in poor cash flow performance over the next quarter or so.
In spite of the nearer term economic headwinds impacting the operating performance of the industry, we believe that the industry is near an inflection point towards revenue growth. This dynamic is related to the degree of the recovery in its digital media businesses, a key driver to the industry’s overall revenue performance. While there are secular challenges to the industry’s print business, digital revenues account for an increasing portion of total revenues. For companies like Lee Enterprises, digital accounts for over 38% of total revenues in the most recent quarter. In our view, publishing companies will be a player in the advertising recovery as economic prospects improve. Furthermore, we believe that stock valuations are compelling.
Figure #18 Publishing Company Comparables illustrates the Publishing companies trading levels. Notably, the New York Times (NYT) trades well above the levels of the rest of its peers. In comparison, Lee and Gannett appear to be compelling. However, both Lee and Gannett are highly levered. Yet, in our view, Lee’s debt profile has several favorable characteristics, such as a fixed 9% annual rate, no fixed principal payments, no performance covenants and a 25 year maturity. Given that the LEE shares trade near 5.3 times enterprise value to our 2024 adj. EBITDA forecast, we believe the shares offer limited downside risk. With a favorable Digital transformation of the business well underway, we believe the LEE shares could close the valuation gap with some of its higher trading peers. As such, the LEE shares represent one of our favorites in the industry, especially as the economic downturn bottoms out and the prospect for a recovery begins to come to the forefront. As such, the LEE shares are among our favorite recovery plays.
Figure #16 Publishing Q1 YoY Revenue Growth
Source: Company filings & Eikon
Figure #17 Publishing Industry Q1 EBITDA Margins
Source: Company filings & Eikon
Figure # 18 Publishing Company Comparables
Source: Noble estimates & Eikon
The following companies are highlighted in this report. Click on the links for additional information and disclosures.
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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis. Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.” FINRA licenses 7, 24, 63, 87
WARNING
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RESEARCH ANALYST CERTIFICATION
Independence Of View All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or research report.
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Record pipeline and recent contract wins expected to accelerate revenue growth in second half of 2023
Merger integration underway with $8 million of annualized cost savings expected in 2023
Company initiates 2023 guidance reflecting pro-forma sales of $75 to $80 million, and annual gross margins of 30% – 35%
TORONTO, ON / ACCESSWIRE / May 18, 2023 / GameSquare Holdings, Inc. (“GameSquare“, or the “Company“) (NASDAQ:GAME)(TSXV:GAME) announced that GameSquare Esports, Inc. has filed its standalone financial results for its first quarter ended March 31, 2023. As a result of the April 11, 2023 merger of GameSquare Esports and Engine Gaming and Media, Inc. (“Engine Gaming”), GameSquare provided a pro-forma income statement for the 2023 first quarter. The Company expects to file its second quarter 2023 consolidated financial statements for the combined entity, in August of 2023. The Company also provided 2023 guidance as a consolidated company.
“With the merger now behind us, our business momentum is accelerating, driven by a record pipeline, increasing ad spend, and the benefits of the merger. In addition, we believe advertising partners are already recognizing the value of our combined company’s assets. We recently have signed several significant brand deals across numerous verticals, including healthcare, automotive, and CPG, with average expected contract values north of seven figures. We believe that our record pipeline and recent wins indicate that global brands see the value of GameSquare’s leading end-to-end media platform and our success helping companies connect with gaming and youth audiences. As a result of the merger, GameSquare now serves approximately 350 brands, 1,500 creators, and has an aggregate audience reach over 500 million,” said Justin Kenna, CEO of GameSquare.
“Since our inception in late 2020, we have invested heavily in our business to build industry leading capabilities, create new and innovative revenue opportunities, complete a transformational merger, and assemble a team of experienced, motivated, and passionate leaders, talent, and influencers. With a solid foundation, we are focused on successfully integrating the merger, scaling our business, and pursuing a path to profitability. As we look forward, we believe pro-forma annual sales of the combined company in 2023 will be between $75 and $80 million. In addition, we have identified approximately $8 million of annualized cost savings and other opportunities to streamline and optimize the combined company. We expect annual gross margin in 2023 will range between 30% and 35%. As a result, we believe we will see significant improving trends towards profitability starting in the second half of 2023,” continued Mr. Kenna.
“I am encouraged by the growing momentum underway, as we focus over the near-term on integrating the merger, growing sales, and accelerating our path to profitability. I am excited by the direction we are headed, and I look forward to updating you on the progress we are making as we convert our growing pipeline into profitable sales,” concluded Mr. Kenna.
First Quarter 2023 GameSquare Esports Standalone Highlights (Comparisons are to Prior Year Period)
Revenue of $5,050,713, compared to $5,040,074
Gross margin increased to 40.2%, compared to 32.6%
Net loss of $4,258,273, compared to a net loss of $3,993,629
Adjusted EBITDA loss of $2,255,835, compared to a loss of $2,742,172
First Quarter 2023 Pro-Forma Highlights
Revenue of $13,843,347, compared to $12,897,929 in the prior year period
Gross margin of $4,267,983 or 30.8% in Q1 23
Net loss of $12,150,604 in Q1 23
Adjusted EBITDA loss of $5,045,947, compared to loss of $7,333,281 in the prior year period
Conference Call Details
Justin Kenna, CEO, Lou Schwartz, President, Paul Bozoki, former CFO of GameSquare Esports, and Mike Munoz CFO of GameSquare Holdings, are scheduled to host a conference call with the investment community. Analysts and interested investors can join the call via the details below:
GameSquare Holdings, Inc. (NASDAQ:GAME | TSXV:GAME) is a vertically integrated, digital media, entertainment and technology company that connects global brands with gaming and youth culture audiences. GameSquare’s end-to-end platform includes GCN, a digital media company focused on gaming and esports audiences, Cut+Sew (Zoned), a gaming and lifestyle marketing agency, USA, Code Red Esports Ltd., a UK based esports talent agency, Complexity Gaming, a leading esports organization, Fourth Frame Studios, a creative production studio, Mission Supply, a merchandise and consumer products business, Frankly Media, programmatic advertising, Stream Hatchet, live streaming analytics, and Sideqik a social influencer marketing platform. www.gamesquare.com
Forward-Looking Information
This news release contains “forward-looking information” and “forward-looking statements” (collectively, “forward-looking statements”) within the meaning of the applicable securities legislation. All statements, other than statements of historical fact, are forward-looking statements and are based on expectations, estimates and projections as at the date of this news release. Any statement that involves discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions, future events or performance (often but not always using phrases such as “expects”, or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “budget”, “scheduled”, “forecasts”, “estimates”, “believes” or “intends” or variations of such words and phrases or stating that certain actions, events or results “may” or “could”, “would”, “might” or “will” be taken to occur or be achieved) are not statements of historical fact and may be forward-looking statements. In this news release, forward-looking statements relate, among other things, to: the Company’s future performance and revenue; continued growth and profitability; the Company’s ability to execute its business plan; and the proposed use of net proceeds of the Offering. These forward-looking statements are provided only to provide information currently available to us and are not intended to serve as and must not be relied on by any investor as a guarantee, assurance or definitive statement of fact or probability. Forward-looking statements are necessarily based upon a number of estimates and assumptions which include, but are not limited to: the Company being able to grow its business and being able to execute on its business plan, the Company being able to complete and successfully integrate acquisitions, the Company being able to recognize and capitalize on opportunities and the Company continuing to attract qualified personnel to supports its development requirements. These assumptions, while considered reasonable, are subject to known and unknown risks, uncertainties, and other factors which may cause the actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to: the Company’s ability to achieve its objectives, the Company successfully executing its growth strategy, the ability of the Company to obtain future financings or complete offerings on acceptable terms, failure to leverage the Company’s portfolio across entertainment and media platforms, dependence on the Company’s key personnel and general business, economic, competitive, political and social uncertainties including impact of the COVID-19 pandemic and any variants. These risk factors are not intended to represent a complete list of the factors that could affect the Company which are discussed in the Company’s most recent MD&A. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this news release. GameSquare assumes no obligation to update the forward-looking statements of beliefs, opinions, projections, or other factors, should they change, except as required by law.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
PHOENIX, May 12, 2023 (GLOBE NEWSWIRE) — QuoteMedia, Inc. (OTCQB: QMCI), a leading provider of market data and financial applications, announced financial results for the quarter ended March 31, 2023.
QuoteMedia provides banks, brokerage firms, private equity firms, financial planners and sophisticated investors with a more economical, higher quality alternative source of stock market data and related research information. We compete with several larger legacy organizations and a modest community of other smaller companies. QuoteMedia provides comprehensive market data services, including streaming data feeds, on-demand request-based data (XML/JSON), web content solutions (financial content for website integration) and applications such as Quotestream Professional desktop and mobile.
Highlights for Q1 2023 include the following:
Quarterly revenue increased by 11% to $4,750,048 in Q1 2023 from $4,263,796 in 2022, an increase of $486,252.
On an FX-neutral basis, revenue growth for Q1 2023 vs Q1 2022 was 14% (1) .
Quarter-over-quarter revenue increased 4% when comparing Q1 2023 to Q4 2022.
Adjusted EBITDA for Q1 2023 was $829,585 compared to $680,424 in Q1 2022, an improvement of $149,161 (22%) (1) .
“2022 was another great year for QuoteMedia, and as anticipated, that momentum is carrying forward into 2023,” said Robert J. Thompson, Chairman of the Board. “We expect improved revenue growth for the remainder of the year, and record profitability for fiscal 2023. These are truly exciting times for QuoteMedia, as we continue to expand our product lines, develop new partnerships, increase our market share and broaden our presence in the financial data industry. We are very pleased with our results to date; and anticipate extending QuoteMedia’s growth and profitability into the foreseeable future.”
QuoteMedia will host a conference call Monday, May 15, 2023 at 2:00 PM Eastern Time to discuss the Q1 2023 financial results and provide a business update.
Conference Call Details:
Date: May 15, 2023
Time: 2:00 PM Eastern
Dial-in number: 800-245-3047
Conference ID: QUOTEMEDIA
An audio rebroadcast of the call will be available later at: www.quotemedia.com
About QuoteMedia
QuoteMedia is a leading software developer and cloud-based syndicator of financial market information and streaming financial data solutions to media, corporations, online brokerages, and financial services companies. The Company licenses interactive stock research tools such as streaming real-time quotes, market research, news, charting, option chains, filings, corporate financials, insider reports, market indices, portfolio management systems, and data feeds. QuoteMedia provides industry leading market data solutions and financial services for companies such as the Nasdaq Stock Exchange, TMX Group (TSX Stock Exchange), Canadian Securities Exchange (CSE), London Stock Exchange Group, FIS, U.S. Bank, Bank of Montreal (BMO), Broadridge Financial Systems, JPMorgan Chase, Scotiabank, CI Financial, Canaccord Genuity Corp., Hilltop Securities, Avantax, Stockhouse, Zacks Investment Research, General Electric, Boeing, Bombardier, Telus International, Business Wire, PR Newswire, The Goldman Sachs Group, Regal Securities, ChoiceTrade, Cetera Financial Group, Dynamic Trend, Inc., Credential Qtrade Securities, CNW Group, iA Private Wealth, Ally Invest, Inc., Suncor, Leede Jones Gable, Firstrade Securities, Charles Schwab, First Financial, Equisolve, Stock-Trak, Mergent, Cision and others. Quotestream®, QMod™ and Quotestream Connect™ are trademarks of QuoteMedia. For more information, please visit www.quotemedia.com .
Statements about QuoteMedia’s future expectations, including future revenue, earnings, and transactions, as well as all other statements in this press release other than historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. QuoteMedia intends that such forward-looking statements be subject to the safe harbors created thereby. These statements involve risks and uncertainties that are identified from time to time in the Company’s SEC reports and filings and are subject to change at any time. QuoteMedia’s actual results and other corporate developments could differ materially from that which has been anticipated in such statements.
Below are the specific forward-looking statements included in this press release:
We expect improved revenue growth for the remainder of the year, and record profitability for fiscal 2023.
We believe that Adjusted EBITDA, as a non-GAAP pro forma financial measure, provides meaningful information to investors in terms of enhancing their understanding of our operating performance and results, as it allows investors to more easily compare our financial performance on a consistent basis compared to the prior year periods. This non-GAAP financial measure also corresponds with the way we expect investment analysts to evaluate and compare our results. Any non-GAAP pro forma financial measures should be considered only as supplements to, and not as substitutes for or in isolation from, or superior to, our other measures of financial information prepared in accordance with GAAP, such as net income attributable to QuoteMedia, Inc.
We define and calculate Adjusted EBITDA as net income attributable to QuoteMedia, Inc., plus: 1) depreciation and amortization, 2) stock compensation expense, 3) interest expense, 4) foreign exchange loss (or minus a foreign exchange gain), and 5) income tax expense. We disclose Adjusted EBITDA because we believe it is a useful metric by which to compare the performance of our business from period to period. We understand that measures similar to Adjusted EBITDA are broadly used by analysts, rating agencies, investors and financial institutions in assessing our performance. Accordingly, we believe that the presentation of Adjusted EBITDA provides useful information to investors. The table below provides a reconciliation of Adjusted EBITDA to net income attributable to QuoteMedia, Inc., the most directly comparable GAAP financial measure.
QuoteMedia, Inc. Adjusted EBITDA Reconciliation to Net Income:
Three-months ended March 31,
2023
2022
Net income
$
113,290
$
149,041
Depreciation and amortization
627,987
487,095
Stock-based compensation
78,125
59,864
Interest expense
1,452
1,224
Foreign exchange loss (gain)
8,001
(17,590
)
Income tax expense
730
790
Adjusted EBITDA
$
829,585
$
680,424
In addition to the non-GAAP measures discussed above, we also analyze certain measures, including net revenues and operating expenses, on an FX-neutral basis to better measure the comparability of operating results between periods. Management believes that changes in foreign currency exchange rates are not indicative of the company’s operations and evaluating growth in net revenues and operating expenses on an FX-neutral basis provides an additional meaningful and comparable assessment of these measures to both management and investors. FX-neutral results are calculated by translating the current period’s local currency results with the prior period’s exchange rate. FX-neutral growth rates are calculated by comparing the current period’s FX-neutral results by the prior period’s results.
Goffin Recognized for Driving Company & Team Growth at Colossus SSP, a Direct Digital Holdings Company
HOUSTON, April 28, 2023 /PRNewswire/ — Direct Digital Holdings, Inc. (Nasdaq: DRCT) (“Direct Digital Holdings” or the “Company”), a leading advertising and marketing technology platform operating through its companies Colossus Media, LLC (“Colossus SSP”), Huddled Masses LLC (“Huddled Masses”) and Orange142, LLC (“Orange142”), today announced that Lashawnda Goffin, Chief Executive Officer of Colossus SSP, has been selected to win the 2023 Catalyst Award, a special accolade that is part of the AdExchanger and AdMonsters’ 2023 Top Women in Media & Ad Tech program. The award is given to a woman industry leader who has driven a tremendous amount of growth for the business and team over the past year.
“Since Lashawnda began her leadership role with Direct Digital Holdings’ supply-side platform, Colossus SSP, she has been a major force in its rapid growth. Year-over-year revenues between 2021 and 2022 more than tripled – an impressive achievement,” said Mark D. Walker, CEO and Co-Founder of Direct Digital Holdings. “She is deserving of this award for her work at Colossus SSP, as well as for advancing diversity and progress within our industry.”
“Throughout my time at Direct Digital Holdings, I’ve encouraged my team at Colossus SSP to adopt innovative ways to grow our business, while working towards building a more inclusive marketplace by empowering niche and multicultural publishers,” said Goffin. “I am very honored to receive this award and will accept it as recognition of the exceptional business results my entire team continues to achieve.”
Currently, Colossus SSP represents 26,000 media properties – offering inventory from both multicultural/diverse and general market publishers. The company has 163,000 advertisers accessing its platform monthly, generating over 130 billion impressions per month across display, CTV, in-app and other media.
Lashawnda Goffin will receive the 2023 Catalyst Award on Monday, June 5 at the AdExchanger and AdMonsters’ Top Women in Media & Ad Tech Awards Gala, which will be held at the Metropolitan Pavilion in New York City.
About Direct Digital Holdings Direct Digital Holdings (Nasdaq: DRCT), owner of operating companies Colossus SSP, Huddled Masses and Orange 142, brings state-of-the-art sell- and buy-side advertising platforms together under one umbrella company. Direct Digital Holdings’ sell-side platform, Colossus SSP, offers advertisers of all sizes extensive reach within general market and multicultural media properties. The company’s subsidiaries Huddled Masses and Orange142 deliver significant ROI for middle market advertisers by providing data-optimized programmatic solutions at scale for businesses in sectors that range from energy to healthcare to travel to financial services. Direct Digital Holdings’ sell- and buy-side solutions manage approximately 90,000 clients monthly, generating over 100 billion impressions per month across display, CTV, in-app, and other media channels. Direct Digital Holdings is the ninth Black-owned company to go public in the U.S and was named a top minority-owned business by The Houston Business Journal.
Forward-Looking Statements This press release may contain forward-looking statements within the meaning of federal securities laws, including the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are subject to certain risks, trends and uncertainties.
As used below, “we,” “us,” and “our” refer to Direct Digital Holdings. We use words such as “could,” “would,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar expressions to identify forward-looking statements, but not all forward-looking statements include these words. All statements contained in this release that do not relate to matters of historical fact should be considered forward-looking statements.
All of our forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Our forward-looking statements are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Although we believe that these forward-looking statements are based on reasonable assumptions, many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance expressed in or implied by the forward-looking statements, including, but not limited to: our dependence on the overall demand for advertising, which could be influenced by economic downturns; any slow-down or unanticipated development in the market for programmatic advertising campaigns; the effects of health epidemics, such as the ongoing global COVID-19 pandemic; operational and performance issues with our platform, whether real or perceived, including a failure to respond to technological changes or to upgrade our technology systems; any significant inadvertent disclosure or breach of confidential and/or personal information we hold, or of the security of our or our customers’, suppliers’ or other partners’ computer systems; any unavailability or non-performance of the non-proprietary technology, software, products and services that we use; unfavorable publicity and negative public perception about our industry, particularly concerns regarding data privacy and security relating to our industry’s technology and practices, and any perceived failure to comply with laws and industry self-regulation; restrictions on the use of third-party “cookies,” mobile device IDs or other tracking technologies, which could diminish our platform’s effectiveness; any inability to compete in our intensely competitive market; any significant fluctuations caused by our high customer concentration; any violation of legal and regulatory requirements or any misconduct by our employees, subcontractors, agents or business partners; any strain on our resources, diversion of our management’s attention or impact on our ability to attract and retain qualified board members as a result of being a public company; our dependence, as a holding company, of receiving distributions from Direct Digital Holdings, LLC to pay our taxes, expenses and dividends; and other factors and assumptions discussed in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and other sections of our filings with the SEC that we make from time to time. Should one or more of these risks or uncertainties materialize or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this release to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances, and we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Takeaways from the National Association of Broadcasters’ NAB Show
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Michael Kupinski, Director of Research, Noble Capital Markets, Inc.
Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.
Refer to the bottom of the report for important disclosures
Overview: Key takeaways from the NAB. Media investors are unpacking the information from the National Association of Broadcaster’s (NAB) convention. While there are promising new technologies that are sure to create shiny new objects to catch investor’s attention, particularly AI, the chatter is about the current advertising environment. Looking for the key takeaways? Sign up here for the virtual conference on April 27th.
Digital Media & Technology:Head fake? Every one of Noble’s Internet and Digital Media Indices not only finished the quarter up, but significantly outperformed the S&P 500. The best performing index was Noble’s Social Media Index, which increased by 70% in the first quarter of 2023, followed by Noble’s Ad Tech Index (+31%), MarTech Index (+30%), and Digital Media Index (+18%).
Television Broadcasting: Weak current revenue trends.While auto advertising appears to be faring better, the weight of the economic challenges appear to be causing further moderation in advertising. Will auto and, potentially Political, carry the second half 2023 revenue performance?
Radio Broadcasting: All out of love.The industry is reeling from a Wall Street research downgrade to an underperform on iHeart Media, which sent all radio stocks tumbling. Some stocks performed better than others. What’s behind the downgrade and which stocks performed better?
Publishing:Advertising takes a hit. After a period of moderating revenue trends, Publishers reported a weakened advertising environment. The downturn was due to Print advertising which took a nose dive. As a result, publishing companies implemented another round of expense cuts to bolster cash flow. There is a bright spot as Digital continues to perform strongly.
Overview
The NAB Show Stopper
Media investors are unpacking all of the information from last week’s National Association of Broadcaster’s (NAB) convention. There is a lot to digest given that there were over 1,400 exhibits, 140 new exhibitors this year. Because of the overwhelming number of exhibitors, many that go to Vegas for this annual convention do not go to the convention floor. It is a shame. There was a lot to see and learn. As Noble’s Media & Entertainment Analyst I walked the convention floor, which covers 4.6 million square feet of exhibit halls and meeting rooms. I stopped by booths and taped presentations to explain the new technologies, the plan for implementation of new services, and the prospect for revenue monetization. One important demonstration focused on the new broadcast standard, ATSC 3.0, the hope for a bright future for the television industry. This new standard should allow the industry to become more contemporary in terms of how its audience consumes video and information. In addition, it offers the ability for the industry to participate in new revenue streams, including Datacasting, which may become bigger than Retransmission revenue in the future.
In addition to touring the floor, I attended NAB panel discussions and hosted meetings with media management teams in a fireside chat format to discuss current business trends, the new technologies (including Artificial Intelligence (AI) and the new broadcast standard). In addition, these C-suite management teams provided their key takeaways from the NAB convention and offered why they participated in the conference this year. These discussions are available to you for free on Channelchek.com on April 27th in a virtual conference. In this upcoming Channelchek Takeaway Series on the NAB Show, I offer my key takeaways, including the current advertising outlook, my take on the monetization of the new technologies and what media investors should do now given the current economic and advertising environment. Your free registration to this informative event is available here.
This report highlights the performance of the media sectors over the past 12 months and past quarter. Overall, media stocks struggled in the past year, but there has been some improved quarterly performance, particularly in Digital Media and Broadcast Television, discussed later. All media stocks are struggling to offset losses over the course of the past year with trailing 12 months stocks down in the range of 5% on the low end to down 68% on the high end. The best performing sector in the past 12 months were Social Media stocks, down 5% versus the general market decline of 9% over the comparable period.
In the first quarter, stock performance was mixed. The best performers in the traditional media sectors were Broadcast Television stocks, up nearly 10% versus the general market which increased 7% in the comparable period. But, the individual TV stock performance reflected a different story, explained later in this report. The worse performer for the quarter were the radio stocks, driven by a Wall Street downgrade of one of the leading radio broadcasters. The Digital Media stocks had another good performance. We believe that stock performance will be a roller coaster for at least another quarter or two as the weight of the Fed rate increases begin to adversely affect the economy.
While National advertising has remained weak, we believe that Local advertising is now beginning to moderate as well. The Local advertising weakness appears to be in the smaller markets as well as the larger markets. This is somewhat different than the most recent economic cycles whereby the smaller markets were somewhat resilient. It seems that the smaller markets are feeling the adverse affects from inflation, rising employment costs and tightening bank credit. In our view, the disappointing advertising outlook likely will cause second quarter revenue estimates to come down, creating a difficult environment for media stocks. As such, we encourage investors to be opportunistic and take an accumulation approach to building positions for the prospective economic and advertising improvement. Our favorites have digital media exposure, given that we expect Digital Advertising (while softening as well) will be more resilient than traditional advertising mediums. Our favorites include Travelzoo (TZOO), Townsquare Media (TSQ), Harte Hanks (HHS), E.W. Scripps (SSP), and Direct Digital (DRCT).
Digital Media
Head fake?
Last quarter we wrote that the S&P 500 increased for the first time since the fourth quarter of 2021 and that we were beginning to see signs of life in Noble’s Internet and Digital Media Indices as well. Those signs of life continued to bear fruit throughout the first quarter, as every one of Noble’s Internet and Digital Media Indices not only finished the quarter up, but significantly outperformed the S&P 500. Figure #1 LTM Digital Media Performance highlights that many of the Digital Media sectors are now approaching year earlier levels given the most recent favorable performance. The best performing index was Noble’s Social Media Index, which increased by 70% in the first quarter of 2023, followed by Noble’s Ad Tech Index (+31%), MarTech Index (+30%), and Digital Media Index (+18%).
Figure #1 LTM Digital Media Performance
Source: Capital IQ
Noble’s Indices are market cap weighted, and we attribute the strength of the Social Media Index to its largest constituent, Meta Platforms (META; a.k.a. Facebook) whose shares increased by 76% in the first quarter. Figure #2 Q1 Digital Media Performancehighlights the first quarter performance for the digital stocks.Meta’s management stirred interest in the shares from its 4Q 2022 earnings call when they spent most of their time talking about “efficiency”, which investors interpreted to mean that Meta was newly focused on profitability. After a relatively disastrous 3Q 2022 earnings call, after which shares fell by 25%, the company demonstrated on its 4Q 2022 earnings call that it clearly had gotten the message: investors were not enamored about the company’s plans in October 2022 to spend billions of dollars to develop its Metaverse initiatives. Rather, on its fourth quarter call, management focused on driving its short form video initiative, Reels (i.e., becoming more TikTok like), reducing its headcount by reducing layers of management, lowering its operating expenses and reducing its capital expenditures. Investors applauded this newfound focus on profitability and shares rebounded from a low of $88.90 per share in early November to $211.94 at the March quarter-end.
The next best performing index was Noble’s Ad Tech Index which increased by 31% during 1Q 2023. Fourteen of the 23 stocks in the index were up in the first quarter. Standouts during the quarter were Integral Ad Science (IAS; +62%) and Perion Networks (PERI; +56%). Integral Ad Science exceeded expectations in its fourth quarter results and guided to better-than-expected results in 1Q 2023. The company continues to expand its product suite, scale its social media offerings (i.e., for TikTok) and is well positioned to continue to benefit from the shift from linear TV to connected TV (CTV). Perion shares continued their winning: Perion was the only ad tech stock whose shares were up in 2022. Perion’s 56% increase in 1Q 2023 reflected beat on both revenues (by 2%) and EBITDA (by 10%) as well as improved guidance for 1Q 2023. Perion’s profitability increased significantly in 2022, with EBITDA nearly doubling (+90%) from 2021 ($70M) to 2022 ($132M).
Noble’s MarTech Index increased by 30% with 14 of the 22 stocks in the index posting increases in 1Q 2023. The best performing stocks were Qualtrics (XM; +70%) Sprinklr (CXM; +59%), Salesforce (CRM; +51%), Hubspot (HUBS; +48%) and Yext (YEXT; +47%). Qualtrics agreed to be acquired for $12.5 billion by Silver Lake and the Canadian Pension Plan Investment Board, which came at a 73% premium to its 30-day volume weighted stock price. Sprinklr beat revenue expectations and significantly beat EBITDA expectations (doubling the Street expectations) and guided to a current year forecast that focuses more on efficiency and profitability.
MarTech stocks have been victims of their own success. Two years ago at this time the sector was trading at 11.3x forward revenue estimates, and a year ago the group was trading at 6.5x forward revenues. Today the group trades at 4x forward revenues and investors appear to be wading back into the sector. Figure #3 Marketing Tech Comparables highlights the compelling stock valuations.One of the laggards in the sector has been Harte Hanks (HHS), which declined 20% in the first quarter. We believe that the shares have not gained traction following the successful rebound toward profitability in 2022. The shares advanced a powerful 136% in 2022 from lows in May to highs achieved in August 2022. Since that time, investors appear to be taking chips off the table. In our view, the HHS shares appear to be oversold. Its business appears to be resilient. Given the recent weakness in the shares, the shares appear to be undervalued and offer a favorable risk reward relationship. As such, the HHS shares are among our favorites in the sector.
Another one of our current favorites is Direct Digital Holdings (DRCT). As Figure #4 Advertising Tech Comparables illustrates, the DRCT shares trade in line with the averages for the group at roughly 5.4 times 2024 adj. EBITDA. Notably, the company recently restated upward its 2022 full year revenue and adj. EBITDA results. Given the favorable operating momentum, we raised our full year 2023 and 2024 revenue and adj. EBITDA estimates, keeping our previous growth estimates. With the higher 2024 adj. EBITDA, we tweaked upward our price target from $5.50 to $6.00. Given a favorable fundamental outlook and compelling stock valuation, we view the shares as among our favorites.
Finally, Noble’s Digital Media Index, while lagging that of its digital peers at an 18% increase, significantly outperformed the S&P 500 (+7%), with a broad based recovery in which 9 of the sector’s 11 stocks increased during 1Q 2023. The best performing stock was Spotify (SPOT; +69%), whose revenues fell short of expectations by less than 1%, significantly beat consensus Street EBITDA expectations by $58M and more importantly pivoted towards demonstrating operating leverage. Spotify, which posted an EBITDA loss of nearly $500 billion in 2022, is expected to generate $650 billion in EBITDA in 2024, according to Street estimates. A deteriorating ad market in 2022 combined with higher interest rates likely prompted the company to shift its priorities to running a profitable company and doing it more quickly and with some urgency. The second best performing stock was Travelzoo (TZOO; +36%), as the company’s 4Q 2022 revenues and EBITDA increased by 31% and 328%, respectively. Notably, Travelzoo’s EBITDA came in 58% higher than Street consensus. The company appears to be benefiting from pent up travel demand for travel and management highlighted the opportunity for margin expansion in the coming quarters. Given the favorable outlook, we raised our price target to $10. Near current levels, the TZOO shares appear to offer above average returns and we reiterate our Outperform rating.
Figure #2 Q1 Digital Media Performance
Source: Capital IQ
Figure #3 Marketing Tech Comparables
Source: Eikon, Company filings & Noble estimates
Figure #4 Advertising Tech Comparables
Source: Eikon, Company filings & Noble estimates
Traditional Media
As Figure #5 LTM Traditional Media Performance illustrates, these stocks have struggled to gain sea legs, trending lower over the course of the past year. All traditional media sectors have underperformed over the past year, with Radio the poorest performing group. As Figure #6 Q1 Traditional Media Performance illustrates, only the TV Broadcast stocks edged out the general market performance in the latest quarter.
Figure #5 LTM Traditional Media Performance
Source: Capital IQ
Figure #6 Q1 Traditional Media Performance
Source: Capital IQ
Television Broadcast
Weak current revenue trends
As illustrated in the previous chart, the TV stocks outperformed the general market in the first quarter. This market cap weighted index masked the performance of many poor performing stocks in the quarter. Sinclair Broadcasting (SBGI; up 10%), Entravision (EVC; up a strong 26%), and Fox (FOX; up 12%) were among the best performing stocks and favorably influenced the TV index in the quarter. But, there were many poor performing stocks including E.W. Scripps (SSP; down 29%), Gray Television (GTN; down 22%) and Tegna (TGNA; down 20%). We believe that there was heightened interest in Entravision given its favorable Q1 results which was fueled by its fast growing Digital business. Figure #7 TV Q4 YoY Revenue Growth illustrates the Entravision’s Q4 revenue performance was among the best in the industry. While Entravision was among the best revenue performers, its margins are below that of its peer group as illustrated in Figure #8 TV Q4 EBITDA Margins. This is due to the accounting treatment of its Digital revenues given that it is an agency business. Given that Digital represents roughly 80% of the company’s total company revenue, we plan to put the EVC shares into the Digital Media sector to more accurately reflect its business. The poorer performing stocks are among the higher debt levered in the industry. As such, we believe the underperformance reflects concern of a slowing economy and investors flight to quality in the sector.
We do not believe that we are out of the woods with the TV stocks and the market is expected to be volatile. The advertising environment appears to be deteriorating given weakening economic conditions. There are bright spots which include some improvement in the Auto category. Dealerships appear to be stepping up advertising given higher inventory levels. In addition, broadcasters appear optimistic about Political advertising, which could begin in the third quarter 2023. There is a planned Republican presidential candidate debate scheduled in August. As such, there is some promise that candidates will advertise in advance of that debate and into the fourth quarter given the early primary season. We do not believe that Political and Auto will be enough to offset the weakness in National and in the weakening Local category. In our view, Q2 and full year 2023 estimates are likely to come down. Furthermore, we believe that broadcasters will be shy about predicting Political advertising even into 2024 given the past disappointments in management forecasts in the last Political cycle.
We encourage investors to take an accumulation approach to the sector. Notably, as Figure #9 TV Comparables highlights, nearly all of the stocks are trading near each other, with the exception of the larger media stocks. In our view, the valuations are near recession type valuations and appear to have limited downside risk. Our current favorite is E.W. Scripps (SSP). While the company is not immune to the current weak advertising environment, we believe that there is a favorable Retransmission revenue opportunity as 75% of its subscribers are due in the next 12 months. In addition, we believe that Retransmission margins will improve. Given the relatively small float for the shares, the SSP shares tend to underperform when the industry is out of favor, but then outperform when the industry is back in favor. In our view, the SSP shares offer a favorable risk/reward relationship and top our favorites in the sector.
Figure #7 TV Q4 YoY Revenue Growth
Source: Eikon & Company filings
Figure #8 TV Q4 EBITDA Margins
Source: Eikon & Company filings
Figure #9 TV Comparables
Source: Noble Estimates & Eikon
Radio Broadcasting
All out of love
The Radio stocks had another tough quarter, down 17% versus a 7% gain for the general market. Notably, there was a wide variance in the individual stock performance, with the largest stocks in the group having the worst performance in the quarter, including Audacy (AUD; down 40%), Cumulus Media (CMLS; down 41%) and iHeart Media (IHRT; down 36%). The first quarter stock performance did not appear to reflect the fourth quarter results. As Figure #10 Radio Industry Q4 YoY Revenue Growth illustrates, revenues were relatively okay, with some exceptions. Some of the larger Radio companies which have a large percentage of National advertising, underperformed relative to the more diversified Radio companies, especially those with a strong Digital segment presence. Figure #11 Radio Industry Q4 YoY EBITDA Margins illustrate that the margins for the industry remain relatively healthy.
The weakness in the Radio stocks was fueled in the quarter from a downgrade to under perform on the shares of iHeart by a Wall Street firm. Many radio stocks were down in sympathy. The analyst attributed the downgrade to the current macro environment and its heavy floating rate debt burden. The company is not expected to generate enough free cash flow to de-lever its balance sheet. We believe the downgrade as well as the excessive debt profile of Audacy, another industry leader which likely will need to restructure, sent all radio stocks tumbling. Some stocks performed better than others. While Cumulus Media’s debt profile is not as levered as iHeart or Audacy, the shares were caught in the net of a weak advertising outlook. Cumulus is among the most sensitive to National advertising, which currently continues to be weak.
Some of our favorite stocks which are diversified and have developing digital businesses performed better. Those stocks included Townsquare Media (TSQ; up 10%), and Salem Media (SALM; up 4%). Notably, while the shares of Beasley Broadcasting (BBGI) were down 10%, the shares performed better than the 17% decline for the industry in the quarter. Importantly, Beasley recently provided favorable updated Q1 guidance for the first quarter. Q1 revenues are expected to increase 1% to 2.5% and EBITDA growth is expected to be in the range of 40% to 50%, significantly better than our estimates. Furthermore, management provided a sanguine outlook for 2023 and 2024. Digital revenue is expected to reach 20% to 30% of total revenue with a goal of reaching 40% in 2024. By comparison, Digital revenue was 17% of total revenue in the fourth quarter 2022. Furthermore, the company is sitting on roughly $35 million in cash. It has opportunistically repurchased $10 million of its bonds at a significant discount. We believe that it is likely to maintain a strong cash position given the economic uncertainty.
We view Townsquare Media (TSQ), Salem Media (SALM) and Beasley Broadcast (BBGI) as among our favorites in the industry given the diverse revenue streams. While these companies are not immune to the economic headwinds, we believe that its Digital businesses should offer some ballast to its more sensitive Radio business. In the case of Salem, 30% of its revenues are relatively stable with block programming. As Figure #12 Broadcast Radio Comparables illustrates, the shares of Townsquare are among the cheapest in the industry, trading below peer group averages. Notably, the company instituted a hefty dividend. As a result, investors get paid while we await a favorable upturn in fundamentals. As such, the shares of TSQ tops our list of favorites.
Figure #10 Radio Industry Q4 YoY Revenue Growth
Source: Eikon & Company filings
Figure #11 Radio Industry Q4 YoY EBITDA Margins
Source: Eikon & Company filings
Figure #12 Broadcast Radio Comparables
Source: Noble estimates & Eikon
Publishing
Advertising takes a hit
After a period of moderating revenue trends, Publishers reported a weakened advertising environment. As illustrated in Figure #13 Publishing Industry YOY Revenue Growth, illustrates that revenue trends deteriorated with Print advertising taking a nose dive. This trend was illustrative in the results from Lee Enterprises, one of our current favorites in the sector. After a fiscal fourth quarter flat revenue performance, the company reported a 8.5% decline in its fiscal first quarter. The Q1 revenue performance reflected an 18.5% decrease in Print advertising, an acceleration in the rate of the 11% decline in the previous quarter.
The surprisingly weak quarter hit the company’s adj. EBITDA margins. Traditionally, Lee maintained some of the best margins in the industry. As Figure #14 Q4 Publishing Industry EBITDA Margins illustrates, the company fell in ranking to among the lowest in the sector. Importantly, in spite of the revenue weakness, the company maintains its previous adj. EBITDA guidance of $94 million to $100 million. To achieve its cash flow target in light of the soft revenue outlook, Lee implemented a round of expense cuts to bolster cash flow. Cost reductions are expected to result in $40 million of savings in FY23, and $60 million in annualized savings going forward. While we are disappointed that the company’s Print business is not moderating as previously expected, the company’s Digital businesses remain favorably robust. In addition, its Digital business is turning toward contributing margins. As such, we remain sanguine about the company’s digital transition.
As Figure #15 Publishing Comparables highlights, there is a wide gap between the valuation of the New York Times (NYT) and the rest of the industry, including Lee. While the highly debt levered shares of Gannett appear cheaper, we believe that Lee has a more favorable debt profile with a fixed 9% annual rate, no fixed principal payments, no performance covenants and a 25 year maturity. With the shares trading at 5.3 times our 2024 adj. EBITDA estimate compared with 15.4 times at the New York Times, we believe that there is limited downside risk in the LEE shares. Furthermore, we believe that the company is well positioned as economic and advertising prospects improve. Given the company’s favorable outlook for its Digital transition, we believe that the shares should close the gap in valuations with the leadership stock in the group. Consequently, the shares of LEE are among our favorite play for an improving economic outlook.
Figure #13 Publishing Industry YoY Revenue Growth
Source: Eikon & Company filings
Figure #14 Q4 Publishing Industry EBITDA Margins
Source: Eikon & Company filings
Figure #15 Publishing Comparables
Source: Noble estimates & Eikon
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Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis. Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.” FINRA licenses 7, 24, 63, 87
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A Focus on Profitability Drives A Strong Start to the Year
Last quarter we wrote that the S&P 500 increased for the first time since the fourth quarter of 2021 and that we were beginning to see signs of life in Noble’s Internet and Digital Media Indices as well. Those signs of life continued to bear fruit throughout the first quarter, as every one of Noble’s Internet and Digital Media Indices not only finished the quarter up, but significantly outperformed the S&P 500. The best performing index was Noble’s Social Media Index, which increased by 70% in the first quarter of 2023, followed by Noble’s eSports & iGaming Index (+32%), Ad Tech Index (+31%), MarTech Index (+30%), and Digital Media Index (+18%).
Noble’s Indices are market cap weighted, and we attribute the strength of the Social Media Index to its largest constituent, Meta Platforms (META; a.k.a. Facebook) whose shares increased by 76% in the first quarter. We attribute this increase to management’s 4Q 2022 earnings call when they spent most of their time talking about “efficiency”, which investors interpreted to mean that Meta was newly focused on profitability. After a relatively disastrous 3Q 2022 earnings call, after which shares fell by 25%, the company demonstrated on its 4Q 2022 earnings call that it clearly had
gotten the message: investors were not enamored about the company’s plans in October 2022 to spend billions of dollars to develop its Metaverse initiatives. Rather, on its fourth quarter call, management focused on driving its short form video initiative Reels (i.e., becoming more TikTok like), reducing its headcount by reducing layers of management, lowering its operating expenses and reducing its capital expenditures. Investors applauded this newfound focus on profitability and shares rebounded from a low of $88.90 per share in early November to $211.94 at the March quarter-end.
Noble’s eSports and iGaming Index increased by 32% as 9 of the 16 stocks in the index posted gains, the two largest market cap weighted stocks. Shares of the largest stock in the index, Flutter Entertainment (FLTR) increased by 31%) while shares of the second largest stock in the index, DraftKings (DKNG) increased by 70%. Flutter’s improvement is likely due to an improved inflection point in the company’s U.S. operations which include its FanDuel operations. DraftKings also beat revenue and EBITDA expectations in 4Q 2022 and appears to be proving out its path to profitability. In both cases, investors are rewarding companies who are accelerating their path to profitability.
The next best performing index was Noble’s Ad Tech Index which increased by 31% during 1Q 2023. Fourteen of the 23 stocks in the index were up in the first quarter. Standouts during the quarter were Integral Ad Science (IAS; +62%) and Perion Networks (PERI; +56%). Integral Ad Science exceeded expectations in its fourth quarter results and guided to better-than-expected results in 1Q 2023. The company continues to expand its product suite, scale its social media offerings (i.e., for TikTok) and is well positioned to continue to benefit from the shift from linear TV to connected TV (CTV). Perion shares continued their winning streak: Perion was the only ad tech stock whose shares were up in 2022. Perion’s 56% increase in 1Q 2023 reflected beat on both revenues (by 2%) and EBITDA (by 10%) as well as improved guidance for 1Q 2023. Perion’s profitability increased significantly in 2022, with EBITDA nearly doubling (+90%) from $70 million in 2021 to $132 million in 2022.
Noble’s MarTech Index increased by 30% with 14 of the 22 stocks in the index posting increases in 1Q 2023. The best performing stocks were Qualtrics (XM; +70%) Sprinklr (CXM; +59%), Salesforce (CRM; +51%), Hubspot (HUBS; +48%) and Yext (YEXT; +47%). Qualtrics agreed to be acquired for $12.5 billion by Silver Lake and the Canadian Pension Plan Investment Board, which came at a 73% premium to its 30-day volume weighted stock price. Sprinklr beat revenue expectations and significantly beat EBITDA expectations (doubling the Street expectations) and guided to a current year forecast that focuses more on efficiency and profitability. MarTech stocks have been victims of their own success. Two years ago at this time the sector was trading at 11.3x forward revenue estimates, and a year ago the group was trading at 6.5x forward revenues. Today the group trades at 4.1x forward revenues and investors appear to be wading back into the sector.
Finally, Noble’s Digital Media Index, while lagging that of its digital peers posted an 18% increase and significantly outperformed the S&P 500 (+7%) with a broad based recovery in which 9 of the sector’s 11 stocks increase during 1Q 2023. The best performing stock was Spotify (SPOT; +69%), whose revenues fell short of expectations by less than 1%, significantly beat consensus Street EBITDA expectations by $58M and more importantly pivoted towards demonstrating operating leverage. Spotify, which posted an EBITDA loss of nearly $500 million 2022 is expected to generate $650 million in EBITDA in 2024, according Street estimates. A deteriorating ad market 2022 combined with higher interest rates likely prompted the company to shift its priorities to running a profitable company and doing it more quickly. The second best performing stock was Travelzoo (TZOO; +36%), as the company’s 4Q 2022 revenues and EBITDA increased by 31% and 328%, respectively. Notably, Travelzoo’s EBITDA came in 58% higher than Street consensus. The company appears to be benefiting from pent up demand for travel and management highlighted the opportunity for margin expansion in the coming quarters.
Sluggish M&A Market Carries Over into 2023
Last quarter we remarked that M&A deals in the Internet and Digital Media sector had held up well through the first three quarters of 2022 despite economic headwinds. However, the number of deals slowed in 4Q 2022 (by 17%) and total deal value fell dramatically (by 70%). The slowdown carried over into 1Q 2023. According to Dealogic, Global M&A fell by 48% to $575 billion in 1Q 2023 compared to $1.1 trillion in 1Q 2022. Global M&A dollar values fell to their lowest level in a decade. In the U.S., deal values fell by 44% to $283 billion from $176 billion in 1Q 2022.
The M&A market had weathered stock price declines, Fed rate hikes, elevated inflation, and geopolitical conflict in 2022. In 1Q 2023, to this “recession that never comes” economic environment we added increased volatility and uncertainty caused by banking failures. One of the biggest impediments to deals is debt financing. Private equity firms have had to write larger check in lieu of a robust debt financing market. Banks have been less willing to provide financing because some have had to hold loans on their balance sheet or take losses when selling debt to investors while smaller regional banks have seen deposits flee to larger banks, especially those considered too big to fail.
Finally, increased antitrust scrutiny likely has played a role in the M&A deal slowdown. Lengthy merger reviews resulted in three public transactions being blocked by regulators: Standard General’s acquisition of Tegna; JetBlue’s acquisition of Spirit Airlines, and Intercontinental Exchange’s acquisition of Black Knight, Inc.
1Q 2023 Internet and Digital Media M&A: A Dearth of Large Deals
Based on Noble’s analysis, deal making in the first quarter of 2023 in the Internet and Digital Media sectors actually increased by 11% compared to 1Q 2022. The total number of deals we tracked in the Internet and Digital Media space increased to 202 deals in 1Q 2023 compared to 182 deals in 1Q 2022. On a sequential basis, the total number of deals increased by 39% compared to 145 deals in 4Q 2022. The only explanation we can provide for this is that with the expectation that an economic slowdown was pending, many companies likely made the decision to sell in mid-2022, with the deals being announced in 1Q 2023.
The biggest change was in the first quarter’s M&A deal value, where the total dollar value of deals fell by 95% to $5.4 billion of announced deals in 1Q 2023 compared to $108.5 billion in announced deals in 1Q 2022. On a sequential basis, deal value fell by 40% from $9.1 billion in deal value in 4Q 2022.
From a deal volume perspective, the most active sectors we tracked were Digital Content (59 deals), Agency & Analytics (51 deals), and MarTech (39), followed by Information Services (17 deals), Ad Tech (11 deals) and eCommerce sectors (10 deals). From a dollar value perspective, MarTech led the way with $1.6 billion in transactions, followed by Information Services ($1.4 billion), Digital Content ($922 million) and Agency and Analytics ($875 million). The largest deals in the quarter by dollar value are shown below.
Notably, there were no mega deals ($10B+) in the first quarter of 2023, compared to the first quarter of 2022 when Microsoft agreed to by Activision Blizzard for $68 billion and Take-Two Interactive agreed to acquire Zynga for $12 billion. Once the Fed stops hiking rates and visibility into operating trends returns, we may begin to see an environment in which mega deals will be contemplated again.
TRADITIONAL MEDIA COMMENTARY
The following is an excerpt from a recent note by Noble’s Media Equity Research Analyst Michael Kupinski
The NAB Show Stopper
Media investors are unpacking all of information from last week’s National Association of Broadcasters (NAB) convention. There is a lot to digest given that there were over 1,400 exhibits, and 140 new exhibitors this year. Because of the overwhelming number of exhibitors, many that go to Vegas for this annual convention do not go to the convention floor. It is a shame. There is a lot to see and learn. Noble’s Media & Entertainment Analyst Michael Kupinski walked the convention floor, which covers 4.6 million square feet of exhibit halls and meeting rooms. He stopped by booths and taped presentations to explain the new technologies, the plan for implementation of new services, and the prospect for revenue monetization. One important demonstration focused on the new broadcast standard, ATSC 3.0, the hope for a bright future for the television industry. This new standard should allow the industry to become more contemporary in terms of how its audience consumes video and information. In addition, it offers the ability for the industry to participate in new revenue streams, including datacasting, which may become bigger than Retransmission revenue in the future.
In addition to touring the floor, he participated in NAB panel discussions and hosted meetings with media management teams in a fireside chat format to discuss current business trends, the new technologies (including Artificial Intelligence (AI)) and the new broadcast standard. In addition, these C-suite management teams provided their key takeaways from the NAB convention and offered why they participated in the conference this year. These discussions will be available for free to Channelchek users on Channelchek.com on April 27th as a virtual conference. In this upcoming Channelchek Takeaway Series on the NAB Show, Michael offers his key takeaways, including the current advertising outlook, his take on the monetization of the new technologies and what media investors should do now given the current economic and advertising environment. Free registration to this informative event is available here.
This report highlights the performance of the media sectors over the past 12 months and past quarter. Overall, media stocks struggled in the past year, but there has been some improved quarterly performance, particularly in Digital Media and Broadcast Television, discussed later. All media stocks are struggling to offset losses over the course of the past year with trailing 12 months stocks down in the range of 5% on the low end to as high as down 68%.
In the first quarter, stock performance was mixed. The best performers in the traditional media sectors were Broadcast Television stocks, up nearly 10% versus the general market which increased 7% in the comparable period. However, the individual TV stock performance reflected a different story, explained later in this report. The worse performer for the quarter were the radio stocks, driven by a Wall Street downgrade of one of the leading radio broadcasters. We believe that stock performance will be a roller coaster for at least another quarter or two as the weight of the Fed rate increases begin to adversely affect the economy.
While national advertising has remained weak, we believe that local advertising is now beginning to moderate as well. The local advertising weakness appears to be in the smaller markets as well as the larger markets. This is somewhat different than the most recent economic cycles whereby the smaller markets were somewhat resilient. It seems that the smaller markets are feeling the adverse affects from inflation, rising employment costs and tightening bank credit. In our view, the disappointing advertising outlook likely will cause second quarter revenue estimates to come down, creating a difficult environment for media stocks.
Broadcast Television
Weak Current Revenue Trends
TV stocks outperformed the general market in the first quarter. This market cap weighted index masked the performance of many poor performing stocks in the quarter. Sinclair Broadcasting (up 10%), Entravision (up a strong 26%), and Fox (up 12%) were the best performing stocks and favorably influenced the TV index in the quarter. But, there were many poor performing stocks including E.W. Scripps (down 29%), Gray Television (down 22%) and Tegna (down 20%). We believe that there was heightened interest in Entravision given its favorable Q1 results which was fueled by its fast growing digital advertising business. Entravision’s Q4 revenue performance was among the best in the industry. While Entravision was among the best revenue performer, its margins are below that of its peer group EBITDA Margins. This is due to the accounting treatment of its digital revenues given that it is an agency business.. The poorer performing stocks are among the higher debt levered in the industry. The underperformance reflects concern of a slowing economy and investors flight to quality in the sector.
We do not believe that we are out of the woods with the TV stocks and the market is expected to be volatile. The advertising environment appears to be deteriorating given weakening economic conditions. There are bright spots which include some improvement in the Auto category. Dealerships appear to be stepping up advertising given higher inventory levels. In addition, broadcasters appear optimistic about political advertising, which could begin in the third quarter 2023. There is a planned Republican presidential candidate debate schedule in August. There is some promise that candidates will advertise in advance of that debate and into the fourth quarter given the early primary season. We do not believe that political and auto will be enough to offset the weakness in national and Local advertising. In our view, Q2 and full year 2023 estimates are likely to come down. Furthermore, we believe that broadcasters will be shy about predicting political advertising even into 2024 given the past disappointments in management forecasts in the last political cycle.
Broadcast Radio
All Out of Love
Radio stocks had another tough quarter, down 17% versus a 7% gain for the general market. Notably, there was a wide variance in the individual stock performance, with the largest stocks in the group having the worst performance in the quarter, including Audacy (AUD down 40%), Cumulus Media (CMLS down 41%) and iHeart Media (IHRT down 36%). The first quarter stock performance did not appear to reflect the fourth quarter results, during which revenues were relatively okay, with some exceptions. Some of the larger radio companies which have a large percentage of national advertising, underperformed relative to the more diversified radio companies, especially those with a strong digital segment presence. Margins for the industry remain relatively healthy.
The weakness in the Radio stocks was fueled in the quarter from a downgrade to Underperform on the shares of iHeart by a Wall Street firm. Many radio stocks were down in sympathy. The analyst attributed the downgrade to the current macro environment and its heavy floating rate debt burden. The company is not expected to generate enough free cash flow to de-lever its balance sheet. We believe the downgrade as well as the excessive debt profile of Audacy, another industry leader which likely will need to restructure, sent all radio stocks tumbling. Some stocks performed better than others. While Cumulus Media’s debt profile is not as levered as iHeart or Audacy, the shares were caught in the net of a weak advertising outlook. Cumulus is among the most sensitive to national advertising, which currently continues to be weak.
Some of our favorite stocks which are diversified and have developing digital businesses performed better. Those stocks included Townsquare Media (TSQ, up 10%), and Salem Media (SALM, up 4%). Notably, while the shares of Beasley Broadcasting (BBGI) were down 10%, the shares performed better than the 17% decline for the industry in the quarter. Importantly, Beasley recently provided favorable updated Q1 guidance for the first quarter. Q1 revenues are expected to increase 1% to 2.5% and EBITDA growth is expected to be in the range of 40% to 50%, significantly better than our estimates. Furthermore, management provided a sanguine outlook for 2023 and 2024. Digital revenue is expected to reach 20% to 30% of total revenue with a goal of reaching 40% in 2024. By comparison, digital revenue was 17% of total revenue in the fourth quarter 2022. Furthermore, the company is sitting on roughly $35 million in cash. It has opportunistically repurchased $10 million of its bonds at a significant discount. We believe that it is likely to maintain a strong cash position given the economic uncertainty.
Townsquare Media (TSQ), Salem Media (SALM) and Beasley Broadcast (BBGI) are all diversifying their revenue streams. While these companies are not immune to the economic headwinds, we believe theirdigital businesses should offer some ballast to its more sensitive Radio business. In the case of Salem, 30% of its revenues are relatively stable with block programming.
Publishing
After a period of moderating revenue trends, publishers reported a weakened advertising environment. Revenue trends deteriorated with print advertising taking a nose dive. This trend was illustrative in the results from Lee Enterprises. After a fiscal fourth quarter flat revenue performance, the company reported a 8.5% decline in its fiscal first quarter. The Q1 revenue performance reflected an 18.5% decrease in print advertising, an acceleration in the rate of the 11% decline in the previous quarter.
The surprisingly weak quarter hit the company’s adj. EBITDA margins. Traditionally, Lee maintained some of the best margins in the industry., but the company fell in ranking to among the lowest in the sector. Importantly, in spite of the revenue weakness, the company maintained its previous adj. EBITDA guidance of $94 million to $100 million for F2023. To achieve its cash flow target in light of the soft revenue outlook, Lee implemented a round of expense cuts to bolster cash flow. Cost reductions are expected to result in $40 million of savings in FY 23, and $60 million in annualized savings going forward. While the company’s print business declined more than expected , the company’s digital businesses remains favorably robust. In addition, its digital business is turning toward contributing margins; another step in the company’s digital evolution.
This newsletter was prepared and provided by Noble Capital Markets, Inc. For any questions and/or requests regarding this news letter, please contact Chris Ensley
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CULVER CITY, Calif., April 13, 2023 (GLOBE NEWSWIRE) — Snail, Inc. (Nasdaq: SNAL) (“Snail” or “the Company”), a leading, global independent developer and publisher of interactive digital entertainment, is pleased to announce that that Noble Capital Markets has initiated company-sponsored equity research coverage on the Company. The full report by Noble Capital Markets Senior Research Analyst Michael Kupinski, as well as news and advanced market data on Snail, Inc. is available on Channelchek.
About Snail, Inc.
Snail is a leading, global independent developer and publisher of interactive digital entertainment for consumers around the world, with a premier portfolio of premium games designed for use on a variety of platforms, including consoles, PCs and mobile devices.
About Noble Capital Markets
Noble Capital Markets, Inc. was incorporated in 1984 as a full-service SEC / FINRA registered broker-dealer, dedicated exclusively to serving underfollowed small / microcap companies through investment banking, wealth management, trading & execution, and equity research activities. Over the past 37 years, Noble has raised billions of dollars for these companies and published more than 45,000 equity research reports. www.noblecapitalmarkets.com email: contact@noblecapitalmarkets.com
About Channelchek
Channelchek (.com) is a comprehensive investor-centric portal – featuring more than 6,000 emerging growth companies – that provides advanced market data, independent research, balanced news, video webcasts, exclusive c-suite interviews, and access to virtual road shows. The site is available to the public at every level without cost or obligation. Research on Channelchek is provided by Noble Capital Markets, Inc., an SEC / FINRA registered broker-dealer since 1984. www.channelchek.com email: contact@channelchek.com
