The Arena Group Holdings, Inc. (NYSE:AREN) Q2 2023 Earnings Conference Call August 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

Welcome to The Arena Group Q2 2023 Earnings Conference Call.

I will now turn the call over to Rob Fink, Investor Relations. You may begin.

Rob Fink

Thank you, operator. 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 or 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 present 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 an 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 these 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 these expectations and those differences may be material.

Accordingly, investors should use caution in relying on forward-looking statements, which are based only unknown results and trends at the time they are made, that 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 the 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 Investor Relations website at investors.thearenagroup.net.

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

Ross Levinsohn

Thank you, Rob, and thanks to everyone for joining us here today. The Arena Group has come a long way over the last three years since I was asked to assume the role of CEO. And today, I'm thrilled to share with all of you the next phase of our evolution. Just after the market closed today, we announced that we have signed a binding letter of intent with Simplify Inventions to combine our assets with those of their subsidiary, Bridge Media Networks.

Bridge Media Networks is a dynamic and innovative media group whose portfolio includes more than 100 owned and affiliated over-the-air television stations, two national television networks, cutting-edge streaming platforms and news, sports and programming distributed over 35 OTT, connected TV, MVPD and cable outlet. They also have a state-of-the-art production facility and operate two content verticals and travel through their brand TravelHost and automotive through their brand Driven.

As part of this proposed transformative partnership and in addition to the strategic assets I just mentioned, The Arena Group will receive a $50 million cash investment and a five-year guaranteed advertising commitment of approximately $60 million from a group of consumer brands also owned by Simplify Inventions, including 5-hour ENERGY. We intend to use a portion of this cash to reduce our term debt held by B. Riley and B. Riley has agreed to extend the maturity of our remaining senior notes by three years at a fixed rate of 10%. That is a great outcome and a final solution for what has been an overhang of our company for the last several months.

I'm truly grateful to Bryant Riley and the B. Riley team for working so closely with us on this deal and on this solution. They have been amazing partners for us and I couldn't ask for more. Not only is this partnership expected to strengthen our balance sheet, but it also allows us to dramatically broaden our reach, diversify our business and expand into some of the fastest-growing segments of the video market.

As part of this transaction and subject to the final terms, completion of due diligence and shareholder approval and the receipt of any required regulatory approvals. We will merge the Bridge Media Networks 2 24-hour networks, NEWSnet and Sports News Highlights into The Arena Group as well as acquire their travel and automotive businesses, TravelHost and Driven, further expanding into two highly lucrative verticals.

This transaction gives us a platform to create, distribute and monetize high-quality content from our iconic and premium brands in all forms, long form, trending news, social and now video. This capability is anticipated to deepen our relationships with advertisers, allowing us to create integrated sales and marketing packages across all platforms. I'm grateful for the entire team at Bridge Media Networks and 5-hour ENERGY and Simplify Inventions for their commitment to this incredible step forward for our businesses.

Over the past three years, we have laid a strong foundation and have successfully revitalized iconic brands like Sports Illustrated, Parade, Men's Journal and TheStreet while accelerating upstart brands like FanNation, The Spun, Pet Helpful and HubPages. This transaction brings a diversified portfolio of assets to greatly enhance the proven business model that we've established.

Together with Bridge Media, we are creating a vibrant multi-platform video vehicle that we expect will allow us to dramatically broaden our audience. We began our expansion into video when we acquired Fexy Studios late last year, and this transaction advances our video strategy by many years and accomplishes in a single transaction what we would have spent tens of millions of dollars and many years to develop on our own.

The progress we have made in advancing our business model, including revenue growth, margin expansion and expense management made this transaction possible. With the capital infusion, debt extension and consolidation and a new experienced well-capitalized partner, The Arena Group is well positioned for further growth in the years ahead. During the quarter, we have continued to reap the benefits of our continued cost vigilance and operational discipline while allocating resources to our most promising growth opportunities.

A few key highlights. Our total second quarter revenue increased by 9% to $58.8 million, driven largely by a 19% increase in digital advertising revenue. Despite a challenging ad market, our RPMs grew by 35% as compared to the prior year quarter. We continue to see premium digital monetization as compared to our competitors, as our second quarter programmatic CPMs were 41% higher, on average, than industry benchmarks according to STAQ benchmarking, a market-norm reporting service provided by Operative.

Additionally, we began to see significant contribution from our revenue diversification efforts through e-commerce and video during the quarter. These strengths offset the impact of a decrease in monthly average page views in certain categories, according to Google Analytics.

Our second quarter operating expenses decreased even as we grew revenue, a reflection of the headcount and cost reductions we have made throughout the year. Our second quarter adjusted EBITDA was nearly breakeven, a loss of $76,000 as compared to a loss of $4.2 million in the prior year quarter, representing a significant improvement of $4.1 million even in a very tough environment. Our sports vertical, anchored by Sports Illustrated saw an overall 4% decrease in monthly average page views according to Google Analytics.

The Spun, which focuses on breaking and trending news and sports, was somewhat impacted by Facebook and Google Search and Google Discover. However, this was partially offset by strong growth in our FanNation brand. And of note, earlier today, we received word from ComScore that the Sports Illustrated network, in the sports category, on ComScore finished at number two for the month of July, our highest ranking ever.

We recently launched an F1 FanNation site, which eight months post launch is now the second largest F1 focus site according to data from ComScore and MRI-Simmons. Additionally, SI Golf rebranded from our acquisition of the Morning Read late last year saw a boost in traffic from breaking and trending news and in-depth LIV Golf and PGA Tour coverage. We anticipate strong growth in our sports vertical traffic through the remainder of the year as we kick off football season.

Our 2023 Sports Illustrated Swimsuit edition launch, traffic broke every record more than doubling traffic versus last year. The announcement of the four covers, Martha Stewart, Megan Fox, Brooks Nader, and Kim Petras, guarded an amazing 108 billion median impressions over 13,500 articles written about the release according to data from ComScore and SimilarWeb.

As we continue to evolve swim into a dynamic brand representing women's empowerment, we see growing interest from advertisers as we more than doubled the number of sponsors in this year's launch. We have also launched an SI Swimsuit Amazon storefront would deals on fashion, beauty and everything in between with promising early results.

Our finance vertical, anchored by TheStreet had a record quarter with 38.2 million monthly average page views according to Google Analytics, an increase of 31% as compared to the prior year quarter and in May reached the top 10 business websites by traffic according to ComScore.

In June, we launched our partnership with FundStrat Global Advisors and Tom Lee, expanding and diversifying the exclusive investing content that is offered in our subscription products. Also, in partnership with Tornado, TheStreet recently launched a first-of-its-kind app, TheStreet powered by Tornado, which provides users of all levels, a one-stop investing experience with personalized financial education and a comprehensive set of investing tools.

April marked a year since we acquired Parade and the property continues to see strong growth in digital, with a 33% increase in monthly average page views as compared to the prior year quarter, according to Google Analytics. We are expanding our content base by adding new publishing partners covering entertainment and astrology.

Men's Journal, which we acquired in December, recently announced our partnership with Club Random, a weekly podcast hosted by Bill Maher and featuring engaging conversations with guests like Ice Cube, Jon Hamm and John Mellencamp.

We also added publishing partnerships in specialized topics such as sneakers, wine and streaming TV to broaden our editorial coverage at minimal upfront cost. The brand continues to resonate with consumers and advertisers as we continue to execute our playbook.

Our adventure network sites, including Surfer, Powder and Bike Magazine, have dramatically increased their content acquisition and we recently signed an agreement to launch five new fast channels featuring these brands. More broadly, we continue to diversify our revenue streams across all of our verticals. If you are one of the millions of Galaxy device users, you may have seen new stories from Sports Illustrated, TheStreet and Parade across the new Samsung news app launched in April.

We continue to seek new syndication partners for our content. We have seen extremely strong growth in our e-commerce business this quarter with second quarter revenue growing 240% year-over-year. We expect that this will continue to grow through the back half of the year, particularly as we head into the holiday season.

Before we talk about next steps in our partnership with Bridge Media and our outlook for the remainder of the year, I'd like to let Doug Smith, our Chief Financial Officer, take you further through the numbers. Doug?

Doug Smith

Thank you, Ross. Let me turn to the results. Revenue in the second quarter of 2023 was approximately $58.8 million, up 9% from $53.8 million for the second quarter of last year, reflecting very strong growth in our digital advertising, e-commerce and video businesses.

Total digital revenue of $38.4 million represented nearly two-thirds of our total revenue and grew 10% versus the second quarter of last year. Digital advertising revenue increased 19% from $24.7 million in the prior year quarter to $29.3 million in this quarter. This growth was due to a 35% increase in revenue per page view, which more than offset our decline in travel.

Digital subscription revenue of $3.4 million was down $2.1 million as compared to the $5.5 million in the prior year quarter as we continue to focus most of our resources on free ad or partner supported content.

Licensing and Syndication revenue was $4.4 million, a decrease of just 1% as compared to the prior year quarter, which reflected sponsorships of the SI Swim launch that this year were extended into the third quarter as opposed to last year when they were all recognized around the launch.

Total print advertising increased 9% to $20.4 million from $18.7 million in the prior year quarter, which reflects growth in the results of both Sports Illustrated and the Athlon Outdoor properties, which were acquired as part of the Parade Media acquisition in April of last year.

Gross profit increased by 34% to $21.7 million compared to a gross profit of $16.1 million in the prior year quarter. That represents a seven percentage point increase in our gross margin to 37%. Driving this improvement was a year-over-year decrease in content and editorial costs of $1.4 million or 9% and a $4.6 million or 19% increase in digital advertising revenue. This reflects our continued efforts to manage costs and at the same time drive efficiency and growth.

Total operating expenses decreased by $0.8 million or 2% to $36 million, down from $36.8 million in the prior year quarter. Selling and marketing costs increased by $2 million or 12%, primarily due to higher cost expenses related to branded content, which has grown as a percentage of our total direct ad campaign. General and administrative expenses, however, decreased by $3.1 million or 21%, primarily due to the impact of headcount reductions undertaken through the first half of the year.

Non-operating expenses increased by $4.3 million, driven primarily by the increased interest expense of $2.5 million reflecting higher debt levels and an increase in income taxes of $1.8 million as we recognized a $1.7 million tax benefit in the second quarter of last year.

As a result, net loss was $19.5 million as compared to $22.2 million in the prior year quarter, representing an improvement of $2.7 million or 12%. 2023 second quarter adjusted EBITDA was nearly breakeven or $76,000 loss as compared to a $4.2 million loss in the same quarter last year, representing a $4.1 million year-over-year improvement.

Looking at liquidity, we ended the quarter with $5.5 million of cash and cash equivalents as compared to $13.9 million at December 31, 2020. In the first half of 2023, net cash used in operating activities was $16.4 million as compared to $7.5 million in the prior year period. We had $14.9 million borrowed under our $40 million line of credit, up slightly from the $14.1 million we had at the end of 2022.

As Ross discussed, we've signed a binding letter of intent with Simplify Inventions to acquire certain assets of their subsidiary Bridge Media Networks. As part of the transaction, The Arena Group will receive $50 million cash investment, a five-year guaranteed advertising commitment of approximately $60 million from a group of brands also owned by Simplify, including 5-Hour ENERGY and the Bridge Media Networks operations.

As consideration, Simplify will receive a $25 million of preferred stock at a 10% PIK coupon with a term of five years from the closing date and common equity, which will represent approximately 65% ownership of the combined company on a fully diluted basis at a $5 per share value. We intend to use this cash to reduce our term debt by $20 million from the approximately $102 million we currently have outstanding.

And as Ross mentioned, B. Riley has also agreed to extend the maturity of the remaining debt from December 31, 2023 to December 31, 2026, and at a fixed rate of only 10%. Due to the complex nature of this transaction, we're re-evaluating our full year guidance and will provide new estimates after the transaction has been closed and our businesses are being integrated. The transaction is expected to close in the fourth quarter of 2023.

I'd now like to turn the call back over to Ross for closing comments.

Ross Levinsohn

Thanks, Doug. Iconic brands, an innovative technology platform, strong partnerships with advertisers, a proven playbook for growth and now a well-capitalized balance sheet and an expansive video platform and opportunity.

These are the things that The Arena Group will bring to the digital marketplace in the coming months and years ahead. We believe in the future of digital and connected video, we have always been an integral part of our strategic roadmap. This transaction launches us forward along that roadmap by many years. I believe we have found an ideal partner in Bridge Media, and I couldn't be more excited to be working with them going forward.

Our discussions are ongoing and I look forward to sharing updates on our partnership as we have them. We expect the deal to close by the end of the year. And as Doug mentioned, we expect that it will take four to six months from now to fully integrate our businesses. While we execute on this transaction, we will not lose our focus on optimizing our existing business for the future. It is NFL and college football season by the way.

We continue to remain vigilant about our cost base and at the same time are making carefully considered investments and capabilities that we believe will drive the future of our combined businesses. We have recently made several key hires to expand into partnerships with the vibrant creator and influencer space.

We believe that together, brands and creators are a powerful force to connect consumers with the content they love. This is the core of our business and I look forward to sharing more with you on future earnings calls.

Lastly, I want to thank our employees for their tireless work through very choppy orders in our industry. I want to thank our investors who have supported us through the last several years and thank our newest partners at Bridge Media Networks and their founder, Manoj Bhargava, whose commitment to our future and the future of media is substantial. We can't wait to get started.

And with that I would love to answer any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is going to come from Mark Argento with Lake Street. Mark, your line is open.

Mark Argento

Hey, good afternoon guys. Thanks. Good afternoon guys and congrats on the transaction in a decent quarter as well. Just wanted to maybe better understand some of the assets that you guys are combining and where you see some of the leverage, potential leverage. I know you mentioned that they have a couple of nationally distributed networks. Are those like traditional television networks on cable? Maybe talk a little bit more in practical terms on what they have and how you can leverage those things.

Ross Levinsohn

Yes, you bet. Thanks, Mark. So at their core on the distribution side, they've been buying television stations over the last couple of years, 1.5 years or so. And they have 50 owned and operated and 50 affiliates. They're in 46 states. So you can think about that as linear terrestrial distribution. They are programming those networks with a news channel, news programming and sports programming. So there's obviously very unique integration opportunities for video there and within our web properties. They also are distributing those channels in that programming across 35 other outlets ranging from Roku to Fubo to Apple to Amazon, many, many more. They also have MVPD distribution. And so the combination of OTA and OTT and MVPD and CTV not to throw out a bunch of names, gives us really a leg up on the future of video and video distribution. We're also merging in assets in the travel space. They own TravelHost Magazine, which also has a web property and Driven, which is an automotive programming source. So we'll be growing our travel and automotive content sections dramatically sort of instantly. In addition, obviously, to solving what has been a challenge with us on the debt side, as you know, in each of our last two conference calls, we've talked about how we've been working on that solution. And our partners at B. Riley have been really great partners here to get us over the finish line and extend that debt while we reduce it a bit over the next few months and extend it out for three years. So overall this sets our company up with a very strong balance sheet, great partnership and assets with Bridge Media and the other companies that Simplify owns and is looking at owning. There's some news out on The Wire about some of that already. And a partnership with a new investor and somebody who really believes in the future of media and Manoj, who has obviously a very accomplished career, incredible career, frankly, with 5-hour ENERGY and many, many other businesses that he has started and backed. So we're pretty darn excited about where this can take us and diversify us and where this will be really in the coming months ahead.

Mark Argento

That's helpful. And I know you said you're not going to provide guidance. But maybe walk us through when you think about kind of proforma, what is the combined businesses look like? We can kind of do a little bit of the math on the balance sheet, but are those businesses that you guys are combining with? Did those have material revenues and EBITDA? Just help us maybe frame up a little bit. I know you don't want to guide, but what are we talking about here kind of a combined business?

Ross Levinsohn

Yes. We're not going to provide those numbers just yet. We have much work to do, but we believe the merger will be highly accretive to our businesses and obviously open up tremendous opportunities with marketers and advertisers. I think what's lost in all the craziness of the fragmentation and technical platforms and things like that is you have to put the consumer first and deliver them great content, and then you also have to be a great partner for marketers and advertisers. And I think we've done a very good job of that with our digital properties and now being able to expand that to video on all platforms, I think it will yield some really positive results. I'll also sort of remind you and highlight that 2024 is a political year, a pretty big one, probably be a lot of money spent there and having access to local market television and distribution on all types of digital platforms should bode really well for us. So we'll be back to you with guidance and numbers. We're not going to do it today, but we're incredibly excited about where this will bring us.

Mark Argento

Great. And then just last question. In terms of the ad guarantee, maybe just walk us through kind of what does that mean practically?

Ross Levinsohn

Yes. It's a five-year deal for $60 million. So do the math, equally spread $12 million a year, pretty low expense against that. So that should drop significant dollars to the bottom line for the combined entity.

Mark Argento

Great. And then I'm sure you put it some on the press release. But you guys anticipate, you say trying to get this closed by the end of the year?

Ross Levinsohn

Yes, for sure. I mean, again, we don't control some of it, but we have a binding LOI with them and we have a signed agreement with Riley. So we feel like we're going to hustle on it and work very quickly and get to the finish line.

Mark Argento

Great. Appreciate it. Good luck guys and congrats.

Ross Levinsohn

Thanks. Thanks, Mark.

Operator

[Operator Instructions] And our next question is going to come from Dan Day with B. Riley. Your line is open.

Daniel Day

Hey, guys, thanks for taking the questions and just congrats again on getting what looks like a really nice deal across the finish line. I've got a million questions, as you can imagine. But I just ask a couple here. So I think the two really interesting assets you just talked about that were contributed from Bridge Media. Are these two kind of live news and sports networks? So these are different in the kind of existing assets you own, primarily text-based sort of webpage dominated. So just Ross, you've been in this industry for couple of decades here. Just talk about what you think Arena Group brings to the table to -- for those assets, why they're the right owner? And just maybe how different is the playbook for those assets versus something like Parade or Men's Journal or the smaller acquisitions you've done?

Ross Levinsohn

Yes, sure. I mean this is obviously something we've been thinking about. You saw our acquisition of Fexy earlier this year, which got us into the food space on a video basis. They produce two shows that are distributed on linear television, and we were excited about that. It opened up a new lane of advertising somewhat buried in my commentary here was that we have signed a deal to launch five fast channels, Free-Ad-Supported TV around our adventure network brands. So you can quietly see or see that we have been moving in this direction. It's probably the hottest sector in all of our marketer discussions, advertiser discussions, video is a major component of it. And while we do a very good job in the space, we have a studio on the floor of the New York Stock Exchange. We do lots and lots of video programming across our other properties, sports lifestyle properties. We wanted to invest more and more in it. This gets us far away down the road, much quicker than we could have gotten there by ourselves pretty much in every single discussion we have with advertisers, they want more video. It's really where they see a lot of their money going. Obviously, if you're following social platforms, YouTube is enormous, Facebook and Instagram with Reels has become the dominant form and of course TikTok has really taken over the social world in an aggressive way and that's all video. So we felt like we needed to be in the space. On the last quarterly call, we talked a lot about the creator space, which is all video-based. So we have been moving in this direction as quickly as we could. Having linear distribution of television networks is really an amazing jump for us. I talk about the amazing value of Sports Illustrated and what we've been able to do both digitally and keep print very, very solid and stable. In every conversation I have with a marketer or really an athlete that the power of that print product is still incredible. The power of television no matter how big or small the network may be is still palatable. So getting us to be more diversified, I think, was a real goal of ours, and we've been doing it as best we can. This is just an incredible jump start. I want to highlight a couple of things, though. When I first met with the team at Bridge and listened to what they were doing, what they were building in Manjo's vision for where he's going. He brought it back to the simplest form when you think about news and sports, people in this day and age, they want the news and they want it fast and they want the highlights and they want it fast. And when I grew up in New York City, there was a and still is, a radio station called 1010 WINS and their catch phrase used to be, "You give us 22 minutes, we'll give you the world." And they were all about the news without any of the noise and commentary that we all get today on cable networks or even probably some of our local news. What they're doing with these two networks, news and sports is delivering the news in its purest form and sports highlights in its purest form. Not a lot of noise around it. And we're really excited about that, that it shows that they're in tuned with how the market wants to accept and get this type of content and we love that. So I think we bring, obviously, great digital distribution and great brands. They bring great linear and over-the-top distribution and good programming. And in addition, they bring some great brands in automotive and travel. So it really is one plus one equals a lot more than two because we're not overlapping. We're bringing relative strength from two different places to the same company. So we'll look more and more like a diversified media company with very, very strong technology at our core.

Daniel Day

Thanks, Ross. That's helpful. And just, obviously, the push in more video and sort of over-the-top kind of long-form video content. How much flexibility do you have with your licensing agreement with ABG to do a lot of things with Sports Illustrated and bring that over? Can you do long-form kind of documentary type stuff or just anything to think about there with just what you're able to do with Sports Illustrated, just given the way that the company is?

Ross Levinsohn

Yes, sure. Our Sports Illustrated agreement is very strong. They have made a real commitment to long-form programming. They launched SI Studios last year after a deal with 101 Studios ended and they've been developing properties in the long-form space. Again, we tend to stick to short-form and quick highlights and quick hits certainly on digital platforms. I do think, however, there's a real opportunity that we'll be talking to them about here. Obviously, distribution at this level in 46 states, reaching a significant portion of the population in linear, we'd like to talk to them about and obviously, across digital platforms, which we have an opportunity to play in currently. So I think it's very accretive and additive here, and I have spoken to them, and there's real excitement.

Daniel Day

Just one more quick one. Just on travel and auto being two of the new verticals you seem to launch here. Are there any travel or auto partner properties or kind of things you own that are good tuck-ins there that maybe haven't gotten shine before but are worth calling out now?

Ross Levinsohn

Yes. We do some content in travel on Parade and on Men's Journal and certainly Swim has a fair amount of travel that we've done through the years, filming when we shoot in different countries or different locations, we're always shooting really interesting travel content there, but nothing major. So this is really a jump start for us. Both automotive and travel have been on our roadmap. We're doing some content, but this will obviously greatly accelerate it. The other really interesting thing is that Bridge Media is based in Detroit and have incredible relationships in the automotive industry. So we're excited about leveraging that with them and providing a real digital footprint for those conversations to go with the linear video opportunities that exist. So really, really good for us and I think all of this will accelerate our business as a whole.

Daniel Day

Thanks, guys. I'll turn it over.

Ross Levinsohn

Okay. Thanks, Daniel.

Operator

Okay. It doesn't look like there are any more questions in queue. So I'll go ahead and turn it back over to Ross for closing remarks.

Ross Levinsohn

Yes. Thank you very much. I appreciate you all joining and it's a great day for The Arena Group and we couldn't be more excited about where we're headed with Manoj and his team and with our investors as well. So we'll talk to you on the next conference call and thank you all for attending.

Operator

Ladies and gentlemen this concludes your call. You may now disconnect.