SAGA COMMUNICATIONS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Results of Operations
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto of Saga
Communications, Inc. and its subsidiaries contained elsewhere herein and the
audited financial statements and Management Discussion and Analysis contained in
our Annual Report on Form 10-K for the year ended December 31, 2013. The
following discussion is presented on both a consolidated and segment basis.
Corporate general and administrative expenses, interest expense, other (income)
expense, and income tax expense are managed on a consolidated basis and are
reflected only in our discussion of consolidated results.
For purposes of business segment reporting, we have aligned operations with
similar characteristics into two business segments: Radio and Television. The
Radio segment includes twenty-three markets, which includes all ninety-two of
our radio stations and five radio information networks ("Networks"). The
Television segment includes two markets and consists of four television stations
and four LPTV stations. The discussion of our operating performance focuses on
segment operating income because we manage our segments primarily on operating
income. Operating performance is evaluated for each individual market.
We use certain financial measures that are not calculated in accordance with
generally accepted accounting principles in the United States of America
(GAAP) to assess our financial performance. For example, we evaluate the
performance of our markets based on "station operating income" (operating income
plus corporate general and administrative expenses, depreciation and
amortization). Station operating income is generally recognized by the
broadcasting industry as a measure of performance, is used by analysts who
report on the performance of the broadcasting industry and it serves as an
indicator of the market value of a group of stations. In addition, we use it to
evaluate individual stations, market-level performance, overall operations and
as a primary measure for incentive based compensation of executives and other
members of management. Station operating income is not necessarily indicative of
amounts that may be available to us for debt service requirements, other
commitments, reinvestment or other discretionary uses. Station operating income
is not a measure of liquidity or of performance in accordance with GAAP, and
should be viewed as a supplement to, and not a substitute for our results of
operations presented on a GAAP basis.
We are a broadcast company primarily engaged in acquiring, developing and
operating broadcast properties.
Our radio segment's primary source of revenue is from the sale of advertising
for broadcast on our stations. Depending on the format of a particular radio
station, there are a predetermined number of advertisements available to be
broadcast each hour.
Most advertising contracts are short-term and generally run for a few weeks
only. The majority of our revenue is generated from local advertising, which is
sold primarily by each radio markets' sales staff. For the three months ended
March 31, 2014 and 2013, approximately 87% and 89%, respectively, of our radio
segment's gross revenue was from local advertising. To generate national
advertising sales, we engage independent advertising sales representative firms
that specialize in national sales for each of our broadcast markets.
Our revenue varies throughout the year. Advertising expenditures, our primary
source of revenue, generally have been lowest during the winter months, which
include the first quarter of each year. We expect a significant increase in
political advertising for 2014 due to the number of congressional, senatorial,
gubernatorial and local elections in most of our markets.
Our net operating revenue, station operating expense and operating income varies
from market to market based upon the market's rank or size which is based upon
population and the available radio advertising revenue in that particular
The broadcasting industry and advertising in general, is influenced by the state
of the overall economy, including unemployment rates, inflation, energy prices
and consumer interest rates. Our stations primarily broadcast in small to
midsize markets. Historically, these markets have been more stable than major
metropolitan markets during downturns in advertising spending, but may not
experience increases in such spending as significant as those in major
metropolitan markets in periods of economic improvement.
Our financial results are dependent on a number of factors, the most significant
of which is our ability to generate advertising revenue through rates charged to
advertisers. The rates a station is able to charge are, in large part, based on
a station's ability to attract audiences in the demographic groups targeted by
its advertisers. In a number of our markets this is measured by periodic reports
generated by independent national rating services. In the remainder of our
markets it is measured by the results advertisers obtain through the actual
running of an advertising schedule. Advertisers measure these results based on
increased demand for their goods or services and/or actual revenues generated
from such demand. Various factors affect the rate a station can charge,
including the general strength of the local and national economies, population
growth, ability to provide popular programming, local market competition, target
marketing capability of radio compared to other advertising media and signal
When we acquire and/or begin to operate a station or group of stations we
generally increase programming and advertising and promotion expenses to
increase our share of our target demographic audience. Our strategy sometimes
requires levels of spending commensurate with the revenue levels we plan on
achieving in two to five years. During periods of economic downturns, or when
the level of advertising spending is flat or down across the industry, this
strategy may result in the appearance that our cost of operations are increasing
at a faster rate than our growth in revenues, until such time as we achieve our
targeted levels of revenue for the acquired station or group of stations.
The number of advertisements that can be broadcast without jeopardizing
listening levels (and the resulting ratings) is limited in part by the format of
a particular radio station. Our stations strive to maximize revenue by
constantly managing the number of commercials available for sale and adjusting
prices based upon local market conditions and ratings. While there may be shifts
from time to time in the number of advertisements broadcast during a particular
time of day, the total number of advertisements broadcast on a particular
station generally does not vary significantly from year to year. Any change in
our revenue, with the exception of those instances where stations are acquired
or sold, is generally the result of inventory sell out ratios and pricing
adjustments, which are made to ensure that the station efficiently utilizes
Our radio stations employ a variety of programming formats. We periodically
perform market research, including music evaluations, focus groups and strategic
vulnerability studies. Because reaching a large and demographically attractive
audience is crucial to a station's financial success, we endeavor to develop
strong listener loyalty. Our stations also employ audience promotions to further
develop and secure a loyal following. We believe that the diversification of
formats on our radio stations helps to insulate us from the effects of changes
in musical tastes of the public on any particular format.
The primary operating expenses involved in owning and operating radio stations
are employee salaries, sales commissions, programming expenses, depreciation,
and advertising and promotion expenses.
The radio broadcasting industry is subject to rapid technological change,
evolving industry standards and the emergence of new media technologies and
services. These new technologies and media are gaining advertising share against
radio and other traditional media.
We are continuing to expand our digital initiative to provide a seamless
experience across numerous platforms to allow our listeners and viewers to
connect with our products where and when they want. In 2013, we completed a
project to bring all of our websites in house while making them fully accessible
on mobile devices. This change will provide new avenues for revenue and improve
our overall digital reach.
In addition, we continue the rollout of HD Radio. HD Radio utilizes digital
technology that provides improved sound quality over standard analog broadcasts
and also allows for the delivery of additional channels of diversified
programming or data streams in each radio market.
During the three months ended March 31, 2014 and 2013 and the years ended
December 31, 2013 and 2012, our Columbus, Ohio; Des Moines, Iowa; Manchester,
New Hampshire; Milwaukee, Wisconsin and Norfolk, Virginia markets, when
combined, represented approximately 34%, 33%, 34% and 35%, respectively, of our
consolidated net operating revenue. An adverse change in any of these radio
markets or our relative market position in those markets could have a
significant impact on our operating results as a whole.
The following tables describe the percentage of our consolidated net operating
revenue represented by each of these markets:
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