The Arena Group Holdings, Inc. (NYSE:AREN) Q3 2023 Earnings Conference Call November 14, 2023 4:30 PM ET

Company Participants

Rob Fink - FNK Investor Relations

Ross Levinsohn - Chairman and Chief Executive Officer

Doug Smith - Chief Financial Officer

Andrew Kraft - Chief Operating Officer

Conference Call Participants

Mark Argento - Lake Street Capital Markets

Daniel Day - B. Riley Securities

Operator

Good day, and thank you for standing by. Welcome to The Arena Group Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your host today, Rob Fink. Please go ahead.

Rob Fink

Thank you, Liz. Hosting the call today are Ross Levinsohn, Chairman and Chief Executive Officer; Doug Smith, Chief Financial Officer; and Andrew Kraft, Chief Operating Officer.

Before we begin, I'd like to note that some of the comments made during this presentation may include forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward looking. Forward-looking statements relate to future events, future performance and include, without limitation, statements concerning the company's business strategy, the company's proposed transaction with Simplify Inventions, future revenues, market growth, capital requirements, product introductions and expansion plans, and the adequacy of the company's funding.

The company cautions investors that any forward-looking statements presented in this presentation or that the company may make orally or in writing from time to time, are based on the beliefs or assumptions made by and information currently available to the company. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the company's control or ability to predict.

Although the company believes that its assumptions are reasonable, these assumptions are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, the company's actual future results can be expected to differ from its expectations and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements, which are based only on known results and trends at the time they are made to anticipate future results or trends.

Certain risks are discussed in the company's filings with the SEC. The company disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. In addition, reference will be made to non-GAAP financial measure, adjusted EBITDA. Information regarding reconciliation of this non-GAAP measure to the closest GAAP measure can be found in the press release that was issued this afternoon on the company's Investor Relations website at investors.thearenagroup.net.

With all that said, I'd now like to turn the call over to Ross. Ross, the call is yours.

Ross Levinsohn

Thank you, Rob, and good afternoon to everyone joining us here today. This has been an incredibly busy time here at The Arena Group. During our last earnings call in August, I announced our intention to combine with Bridge Media Networks, a dynamic and innovative media group that offers a range of platforms for delivering the latest news, sports, automotive and travel content.

After several months of due diligence, today, I'm pleased to share that last week, we signed a definitive agreement in which The Arena Group will combine operations with Bridge Media Networks. In addition to our existing operations, The Arena group will include the video programming, distribution and production assets of Bridge Media Networks, including two 24-hour networks, NEWSnet and Sports News Highlights; as well as the automotive and travel properties, Driven and TravelHost. This transaction will expand the reach and capabilities of The Arena Group and provide it with growth capital while also enabling us to reduce our overall debt and extend the terms of our existing debt facility, further strengthening and fortifying The Arena Group's balance sheet. The proposed transaction is expected to close in the fourth quarter of this year or the first quarter of 2024, subject to the approval of The Arena Group stockholders, the receipt of any required regulatory approvals, and certain other closing conditions.

While we have been focused on this transaction, we have also delivered strong Q3 results from our existing businesses, all against an industry dealing with severe headwinds in both the advertising market and shifting audience migrations. A few of our key highlights. Total revenue was $63.4 million, up 11% from the third quarter of last year, driven largely by our digital advertising business, which grew by almost 30% as compared to last year.

Total digital revenue represented 72% of our total revenue, and that's up from 66% of total revenue in Q3 of 2022. Total RPMs grew 46% as compared to the third quarter of last year, in a time when many of our competitors are struggling with monetization. In fact, this quarter, our display programmatic CPMs were 40% higher than industry benchmarks, according to STAQ, a market norm, benchmarking service provided by Operative.

This growth more than offset an 8% year-over-year decline in total page views for the quarter. Gross profit increased by nearly 15% to $28.2 million, representing a gross margin of 44%. Our total operating expenses decreased by 4% from the third quarter last year, primarily as a result of decreased advertising costs and lower stock-based compensation. Our adjusted EBITDA was $6.4 million, representing an improvement of $2.9 million or 86% better as compared to the third quarter of last year, reflecting our focus on cost control and efficiencies while continuing to diversify and grow our revenue.

These results underscore the strength of our business and our ability to operate efficiently during less than optimal circumstances. The ad market across our industry remained challenging during Q3, with headwinds particularly pronounced in direct sales. Largely, we have fared better than our competition, but we saw some softness due to advertiser pullback.

Our sales team has remained nimble during this -- in this environment, working with our advertising partners to drive innovative solutions, and I'm bullish on our ability to succeed despite these headwinds, particularly under the new leadership of our Chief Revenue Officer, Katie Kulik, who joined us just a few weeks ago. Katie brings a wealth of experience and relationships that span over 25 years in traditional and digital media and advertising technology, including more than a decade at CBS, where she was Executive Vice President and Head of Global Digital Sales. Web audiences are continuing to migrate from web pages to social media and social platforms, and thanks to our audience development team, we are continuing to capture audience engagements across all platforms.

We doubled our total followers on Instagram from over a year ago, and our social video views across all platforms have more than quadrupled since this time last year, according to ListenFirst. Our brands have maintained their relevance in search with Sports Illustrated and TheStreet, in particular, seeing their best-performing quarters to date in total SEO clicks, according to Google Search console. At the start of the year, we highlighted 2 growth initiatives for the company, which we believed were crucial to the diversification and growth of The Arena Group; e-commerce and the creator/influencer space. Both have begun to contribute to our success, and as the industry shifts, we believe we have positioned the company for growth.

With the Creator Network, we have introduced new formats that are resonating with our advertising partners. Since our official launch in August, we have engaged in several new advertiser/creator partnerships, already generating 7 figures of revenue and one of which resulted in Sports Illustrated's highest-viewed original content series ever, with 40 million views across Instagram and TikTok. Seeing such a successful campaign come to fruition in such a short period of time, really underscores the power of combining strong brands with content creators, and we're just getting started.

We are also continuing to diversify our revenue streams through initiatives such as e-commerce, which saw a 637% increase in revenue year-over-year, after a strong performance on Amazon Prime Day. We intend to make e-commerce and performance marketing a larger part of our everyday experiences. As a media organization with more than 100 million users each month in targeted areas, verticals and with robust data across all user sets, we believe the company is a vibrant and powerful partner to brands.

We deliver to consumers content experiences that both create that unique emotional connection for users, but also provide targeted solutions for marketers looking to connect to consumers when and where they engage. With the addition of linear and over-the-top video solutions, we have dramatically improved our offerings for both. Sports Illustrated Media Group for the first time reached the #2 spot in ComScore's sports rankings this quarter, an enormous milestone for the brand that just a few years ago was struggling outside the top 10.

In July of 2020, we occupied the number eleven spot in the comScore rankings. We've seen incredible growth this quarter, particularly in our FanNation and Athlon Sports businesses which increased quarterly page views by 48% and 116% year-over-year, respectively, according to Google Analytics.

Our growth is not limited to site traffic, but our social media presence continues to expand, with over 600,000 new followers across SI's social platforms during the quarter. SI's F1 TikTok is now the fastest-growing F1 account in North America among sports news publishers, according to ListenFirst. Our finance vertical anchored by TheStreet had its best quarter in history for page views, with a 40% year-over-year growth as compared to the third quarter last year, according to Google Analytics.

We are continuing to create video content from the floor of the New York Stock Exchange, which appears on TheStreet.com, and additional syndication partners online and on-air across America. Our lifestyle vertical anchored by Parade and our men's lifestyle vertical anchored by Men's Journal have also had a strong third quarter. Both verticals continue to add new publishing partners, with Parade now partnering with National Day calendar on daily themed content, and Men's Journal with new partner publishers ranging in topics from mountaineering to cycling to adventure travel. We are looking forward to the fourth quarter of this year, particularly as holiday season e -commerce content ramps up.

And our Adventure Network properties acquired late last year, including Powder, Surfer and Bike Magazine, have all experienced growth online and across social platforms. I'd like to talk about our outlook for the remainder of the year. But first, I'd like to let Doug Smith, our Chief Financial Officer, take you through some of the numbers. Doug?

Doug Smith

Thank you, Ross. In the third quarter, revenue increased to approximately $63.4 million, up 11% from $57.3 million for the third quarter of last year, reflecting continued growth in our digital advertising and our e-commerce businesses. Total digital revenue of $45.8 million represented 72% of our total revenue, up from 66% a year ago, and it grew nearly 21% versus the third quarter last year. Digital advertising revenue increased by nearly 29% from $28.5 million in the prior year quarter to $36.7 million in this quarter. This growth was due to a 46% increase in revenue per page view, which more than offset the 8% overall decline in traffic that Ross mentioned.

Digital subscription revenue, which is principally from TheStreet.com, was $3.2 million as compared to $4.6 million in the prior year quarter. It represented a decrease of 31% as we continue to focus most of our resources on free or our partner's free ad or partner supported content. However, it's important to note that for the first time in the third quarter, the increase in digital advertising revenue at TheStreet form the significant traffic increases we've seen there, exceeded the decline in digital subscription revenue.

Licensing and Syndication revenue was $4.5 million, an increase of 2% as compared to the prior year quarter, which reflected stable traffic from our syndication partners. Other digital revenue, which includes the e-commerce business was $1.5 million, a 3x improvement over the $0.5 million reported in the prior year quarter. This was a result of the investments that Ross discussed that we have made in our e-commerce business. Total print revenue decreased by 9% to $17.6 million from $19.3 million in the prior year quarter, which is in line with historical print advertising trends, in general.

Gross profit increased by nearly 15% to $28.2 million, representing a gross margin of 44%, a 1.4 percentage point increase as compared to the prior year quarter, which reflects our tight focus on cost control while growing revenue.

For the 9-month period, this gross profit increased 18% over the prior year, and we saw increases year-over-year in every quarter. Total operating expenses decreased by $1.4 million or 4% to $35 million as compared to $36.4 million in the prior year. Selling and marketing costs increased by $847,000 or about 5%, primarily due to higher payroll and marketing costs associated with lower end-marketing services, which was offset by lower stock-based comp in advertising. However, general and administrative expenses decreased by $2.5 million or 18%, primarily due to lower payroll costs, including stock-based compensation.

Non-operating expenses increased by $244,000 to $4.3 million for the quarter, driven primarily by increased interest expense of $858,000, reflecting higher debt, which was offset by a decrease in income taxes of $486,000. As a result, net loss was $11.2 million as compared to a loss of $16.5 million in the prior year, representing an improvement of $5.3 million or 32%.

2023 third quarter adjusted EBITDA was $6.4 million compared to $3.4 million in the same quarter last year, representing a $2.9 million improvement or 86% improvement year-over-year.

Looking at the balance sheet, we ended the quarter with $7.3 million in cash and cash equivalents compared to the $5.5 million at June 30 of 2023. In the 3 months ended September 30, 2023, net cash used in operating activities was $5.9 million, an improvement from the $7.2 million used in the prior year period.

We had $17.3 million borrowed under our $40 million working capital line of credit, up from $14.9 million at June 30, 2023. As Ross discussed, we have signed a definitive agreement with Simplify Inventions to combine their subsidiary Bridge Media Networks with The Arena Group. Financial details related to the proposed transaction were filed in a press release and an 8-K dated November 6. Because we are following a proxy seeking shareholder approval for this transaction, we're limited in what we can publicly discuss at this time.

I'd now like to turn it back to Ross for closing comments.

Ross Levinsohn

Thanks, Doug. I'm incredibly proud of our team for their tireless work delivering these results during a difficult quarter and a difficult year for our industry. With football season underway and the holidays coming up, we are gearing up for a very busy fourth quarter.

I'm confident in our ability to continue to drive growth across all of our major properties, despite any softness in the ad market. We believe 2024 has substantial opportunity for our business, in particular with the upcoming U.S. presidential elections, the Summer Olympics in Paris, and our investments in e-commerce and the creator space. We are already seeing an uptick in RFPs from advertising clients and agencies and believe we have positioned this company well for the future.

We also remain focused on completing the transaction with Bridge Media Networks, and we'll share updates as they are available. And before we move to questions, I want to thank the incredible team at The Arena Group who over the past 3 years have overcome so much to position this company for its next phase with our soon-to-be partners at Bridge Media. Their work through COVID, work-from-home, shifting audience and advertiser pullbacks, talent changes and difficult capital markets highlight our resilience, our commitment and our ability to react quickly and drive growth.

If you look around at our competitors and the industry struggles, you will see just how far we've come, how complete our opportunity is and how real our growth is. None of this would have been possible without our core investor group, whose confidence, support, and capital has enabled us to stabilize, sustain and grow. We are also very grateful for their support and for the support from our Board of Directors.

And with that, I'd like to answer any questions you may have. So, operator, I'll turn it back to you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mark Argento with Lake Street Capital Markets.

Mark Argento

Really impressive growth in the revenue per page, just overall productivity. Could you drill down a little bit for us kind of why do you think you're bucking the trend, the broader trend that you're seeing out there in the market right now?

Ross Levinsohn

Yes, I'll take it, and Andrew or Doug can also chime in. Look, we've worked really hard over the last couple of years in getting our platform to be highly efficient, to be able to use the data that we're gathering from -- across our 300-plus sites, which enables us to target better. I think it's a combination of that, plus really providing the right solutions, both on the direct side and on the programmatic side for consumers. We optimize our pages each and every day. We have some really great partners who are contributing like Outbrain.

And I think it's a combination of all those things, plus, frankly, we've got good content and we're doing it in a way that consumers are recognizing it, seeing it, engaging with it. So, it's not just one thing, Mark, as you well know. It's the combination of great technology and good content, and then really optimizing the pages each and every day and it pays off.

I mean you know, you look through the industry. When you look across our competitors, everybody is down. I mean, all the main players who you would comp us to have had really tough -- a really tough quarter digitally and digital revenue overall, digital advertising. And we're showing plus 21% on digital revenue and plus 29% on digital advertising, when some of the biggest players are down 10%, 12%, 30%, even 35%. So I think it speaks to this combination of a technology and media company that can optimize and work very quickly in a challenging environment. And Andrew, feel free or Doug, feel free to jump in.

Doug Smith

I think you hit it on the head. I think the one thing I would add is diversification, both of revenue and of content. The breadth of The Arena Group's strategy by having multiple arenas where throughout the year from seasonality as well as from advertiser demand, we always have an opportunity for advertisers to reach their audience. That has helped us buck some of the trends in the market.

Mark Argento

Yes, it's helpful. And I mean, TheStreet in particular was really kind of stuck out to us as much as what was the growth rate of 40%-plus year-over-year, up sequentially from a traffic perspective. Obviously, volatile markets probably helped that business. Again, anything you're doing there in particular that really is kind of, had a little wind of the sales or are you just kind of taking advantage of a more volatile, higher interest rate environment?

Ross Levinsohn

Yes. I think it's a combination of things, Mark. For sure, the markets and the [VIX] in particular have been pretty volatile. I mean, you tend to see higher clicks on that. But we -- a couple of years ago, we brought in a new team, a new editor in Chief, new digital marketing people, and they've really performed. It does come down in a lot of cases to the talent that you have in the company, and we feel really, really good about the quality of the people that work here and in particular, work at TheStreet.

Some of the video work we've been doing from the floor of the exchange has been terrific, and we're now syndicating that across dozens of digital outlets and now terrestrial television stations are running it. So, we continue to see diversification of -- or syndication of the content as well as just a higher quality of the stuff we're doing.

Mark Argento

Great. And then I know you guys still have to get through the proxy, but has there been any kind of initial integration efforts? I know you can't really integrate when you haven't closed yet, but how much time are you guys spending right now on the combined business with Bridge at this point? And then maybe any update in terms of the timing of the proxy? That's it for me. Thanks guys.

Ross Levinsohn

Yes. Doug, why don't you take the proxy?

Doug Smith

Yes. I think the issue, Mark, is because we signed a definitive agreement, the SEC deemed that we are within the proxy period. So anything we say -- we're very limited in what we can say. We do anticipate filing the S-4 and proxy in the very near future. As Ross indicated, anticipate a final shareholder vote in closing either by year-end or in the first quarter. But other than that, we can't really discuss further what's going on there. We will give you updates, especially when we do the filing.

Mark Argento

Great. Well, maybe I'll just ask one more then because I get another spot, I guess. I heard great things about Katie, your new Chief Revenue Officer. Maybe you could just talk a little bit, Ross, like what is her main focus here? What does she bring to the table, capabilities that she brings to the table for you guys?

Ross Levinsohn

Yes. I mean, she has obviously had a tremendous career to-date. The time she spent at CBS and CNET and even Criteo, most recently gives her a really unique, diverse background to bring to The Arena Group. Her charge, obviously, is growing revenue across the board, but her relationships with premium brands and the agencies across the country are really par excellence.

And so she's bringing relationships there that I think will benefit us, in particular on the direct side, where obviously, you get higher yield, higher CPM. So, we're excited about expanding our direct business in a way that I think could really be transformative.

The second thing that I'd point out, which is critical in any hire you make at this senior level, is sort of relationships in the industry to attract talent and we're already seeing that to a degree. She has just an impeccable reputation, has already stepped in and hit the ground running, and has already helped transform some of the things we're doing. So as we head into a year where there are a couple of really big events coming up, as I mentioned earlier, having those relationships should bode well for us.

Operator

Our next question comes from the line of Daniel Day with B. Riley.

Daniel Day

So, you talked about the decline in page views in the quarter, overall page views and what you talked about it's an audience migration. So, is the way we should think about that, like you're not anticipating a turnaround in overall page views anytime soon, but maybe you make up for that by investing in things like the Creator network and driving revenue from the content you're creating on Instagram and TikTok, like you talked about. And then you did talk about a couple of the properties like TheStreet seen really solid page-view growth. So maybe just a little more on where those declines are concentrated.

Ross Levinsohn

Yes. Yes, that is a good question. I would say that the macro environment is that as we have for pretty much the last 5 years or so, more and more users are migrating to the social platforms, whether the newest obviously being TikTok, which is taking up a big share, but across Instagram threads, Facebook, Snap, et cetera, we see more and more people going there. And we, I think, have really positioned this company well to take advantage of that. We're just growing like crazy there.

Across our core brands, it's a little bit of a mixed bag, to be honest. The most pronounced decline, which has had the most impact to our business has been at The Spun, which last year really the last 1.5 years has just been an absolute rocket ship. And over the last year, that and one of our other brands HubPages took a little bit of a hit, which has really been the only area across all our brands that we saw declines, but they were pronounced. You saw the growth at TheStreet. You can see some real growth at FanNation and Athlon Sports and SI Swimsuit. Parade is doing fantastic. Men's Journal is starting to hit its stride; Adventure Network has grown dramatically.

So as a whole, I'm not that worried at all about the page view declined because it really was centralized on two of our sites. But it's more than offset by the growth across social platforms and some of our other brands that have done well. So I'm less worried about that. I think this has been, as I said, it's a couple of times. It's been a really tough year for the industry, in particular in the direct world, and we've done a great job monetizing our pages using all the avenues we could find and that's held us up a bit.

So, that's a positive, and I'm really optimistic about next year, it probably will be the largest amount of money ever spent in a political campaign. It's not just presidential, it's obviously the Congress and then propositions across the board, and with our new partners at Bridge who have 84 or so local television stations that can reach voters in their living room. We think that's got opportunity for us.

So, that's good. You got the Summer Olympics in Paris. That is always going to be -- that's a big opportunity for us, and I think you're going to see -- it goes down -- I hate to get into the weeds, Dan, but just to tell you how we think about it. The changes in college football and college basketball, opening up portals where people can shift teams, extends the lifecycle of college sports for us in a way that didn't exist previously. So even those small things make a difference, and we count on all of them. So, '24, assuming the environment -- the economic environment is somewhat stable or perhaps getting better, we expect it to be a good year for us.

Daniel Day

Great. And then maybe one for Andrew and whoever else wants to chime in. on the ad tech side here, like I think Google's intentions with third-party cookie are pretty clear and well telegraphed and people are also talking about IP addresses being deprecated or unable to be used. I think the thing everyone is talking about is, how do you get consented first-party data on your audiences that might be able to fill in the hole there? So just any efforts underway to collect more of that? Anything worth talking about that you guys have been doing and how that's been going?

Andrew Kraft

Yes. I'll jump in on this one. So we do have a dedicated team who focuses on the evolution of our ad stack, and that includes the evolution of identity and even more -- which means data, and even more importantly than that, identifiers and the ability to recognize a user when the user comes. And that's really the key issue that Google is challenging in its deprecation of third-party cookies.

So this team is working with industry consortia, working with the vendors themselves, Google, identity providers, both deterministic, meaning where there's an e-mail address, and probabilistic, meaning where there's not, to ensure that we can find and recognize our users, no matter how our advertiser partners want to recognize those users.

If they're using particular identifiers or using particular technologies, our goal and what we've gotten pretty far ahead on is the ability to enable all of those technologies for advertisers. And so that's how we're staying ahead of the curve. And we're at every gathering of publishers and buyers, with marketers and with vendors in order to make sure that we stay on that cutting edge.

Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Ross Levinsohn for closing remarks.

Ross Levinsohn

Thank you so much, and thank you all for joining us again, and we look forward to talking to you next quarter. Have a great rest of the week.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.