Executive Summary / Key Takeaways

• Saga Communications is undergoing a strategic transformation, pivoting from traditional radio's "macro downdraft" to a "blended advertising" model that integrates radio with digital solutions (search, display, social). This strategy aims to capture a larger share of the rapidly growing digital ad market.
• Early results from this digital-first approach are compelling: clients adopting blended advertising increased their radio spend by 9% year-over-year and their total radio/digital spend by 27%, with blended orders yielding 4.3 times more revenue than non-blended.
• Despite a challenging Q2 2025 with traditional revenue declines, interactive revenue surged by 7.15% to \$4.56 million, achieving a robust 58% profit margin for the quarter, underscoring the significant potential of the new strategy.
• The company maintains a strong liquidity position with \$24.9 million in cash and short-term investments as of June 30, 2025. It is actively pursuing non-core asset sales, including tower sites, expected to yield high 7-figure to low 8-figure proceeds by Q3 2025, with a significant portion earmarked for stock buybacks and continued quarterly dividends.
• Saga anticipates a 2-3% decrease in station operating expenses for 2025, driven by in-house digital services and AI efficiencies, while Q3 2025 interactive pacing is robust at +40%, signaling a clear path to improved profitability and long-term growth in a fragmented media landscape.

The Shifting Sands of Media: Saga's Strategic Reimagination

Saga Communications, Inc., incorporated in Florida in 1986, has long operated as a media company primarily engaged in acquiring, developing, and operating broadcast properties across 28 U.S. markets. Its portfolio includes 82 FM and 31 AM radio stations, alongside 79 metro signals, offering diverse programming formats from classic hits to news/talk. For decades, Saga's business model relied on the sale of advertising for broadcast, a stable revenue stream rooted in local market presence and community trust. However, the media landscape has undergone a profound transformation, challenging traditional broadcast verticals and necessitating a strategic evolution.

The advertising industry is in a "modern ever-evolving digital age" that is "much more sophisticated," as noted by CEO Christopher Forgy. Digital ad spending is experiencing a "significant increase," with eMarketer projecting that 75% of total U.S. ad spend, or \$342 billion, will be digital in 2025, rising to 83% by 2029. In stark contrast, radio's share of total ad spend is a mere 5.6%, and its slice of the digital ad pie is a "pedestrian 0.067% or \$2 billion." This widening "cavern" between traditional and digital spend underscores an undeniable truth: "We simply cannot grow with 5.6% of total ad spend and a little more than one half 1% in the total digital ad spend. We have to do it differently."

This realization forms the bedrock of Saga's "transformational change," a strategic pivot towards what it terms "blended advertising." This initiative is not merely an incremental adjustment but a fundamental reimagining of how Saga serves its advertisers and captures value in a fragmented digital marketplace. The company views the local digital advertising market as "ripe for disruption" due to frustrated buyers, ineffective campaigns, a confusing array of providers, and a "gap where tech meets human behavior" as advertising strategies fail to keep pace with consumer journeys. Saga's response is to leverage its foundational strength – the high consumer trust in local radio – to bridge this gap and offer integrated, high-margin digital solutions.

Competitive Dynamics and Saga's Differentiated Approach

Saga operates within a competitive broadcasting industry alongside major players like iHeartMedia (IHRT), Cumulus Media (CMLS), Audacy (ETM), and Townsquare Media (TSQ). These direct competitors also vie for local and national advertising revenue and audience share. Indirect competition comes from streaming services like Spotify (SPOT) and Pandora, as well as podcast platforms, which offer on-demand content and increasingly attract younger demographics.

Saga's market positioning, particularly in small to mid-size markets, has historically provided more stability during advertising downturns compared to major metropolitan areas. Its "extreme localism" is a key competitive advantage, fostering deep community connections and trust that many larger, more syndicated competitors lack. This local trust is the linchpin of Saga's blended advertising strategy. While larger rivals like iHeartMedia and Audacy have pursued aggressive digital expansions, often with higher debt levels and complex cost structures, Saga has adopted a more deliberate, "second mouse gets the cheese" approach, learning from others' mistakes.

The company's "blended advertising" strategy is its core technological differentiator. It integrates radio, search, and display advertising, along with OTT and social media, into a cohesive, customer-focused solution. This contrasts sharply with the "product-oriented, low margin, high attrition offerings that many third-party providers deliver." Saga's methodology, dubbed "Click, Visit, Call and Search," aims to simplify the complex digital landscape for local advertisers. Radio "gets the advertiser wanted," while the digital platform "gets the advertiser found and chosen." This approach directly addresses the market's pain points: ease of understanding, ease of buying, and clear attribution metrics focused on actions that lead to sales.

The tangible benefits of this integrated approach are becoming quantifiable. A five-market snapshot comparing January-October 2023 to the same period in 2024 revealed that local direct advertisers who purchased a blended product increased their radio spend by 9% year-over-year. More significantly, their overall radio and digital spend surged by 27% year-over-year. Conversely, advertisers who did not buy a blended product saw their radio spend drop by 13%, and those never presented with blended advertising experienced a 50-55% decrease. Blended advertising orders yielded 4.3 times more revenue than non-blended orders, with blended buyers spending 96% more on radio. These figures demonstrate a clear competitive edge, allowing Saga to win business where competitors have failed to deliver, as exemplified by a single client in Columbus, Ohio, representing over \$1 million in combined radio, search, and display revenue after a competitor's poor performance.

Saga is also enhancing its operational efficiency through technological innovation. It is bringing several third-party digital expenses in-house to increase margins and efficiency. Furthermore, the company is selectively utilizing AI solutions for tasks like digital invoice reconciliation and radio station voice and imaging, realizing an annual savings of \$0.25 million from AI voice-to-voice technology alone. These initiatives are part of a broader plan to "reduce unnecessary operating expenses to be more nimble, reinvest in research and development and in our people."

Financial Performance and Operational Resilience

Saga's financial performance in the first half of 2025 reflects the ongoing industry challenges and the initial investment phase of its digital transformation. For the three months ended June 30, 2025, net operating revenue decreased 5.0% to \$28.23 million compared to \$29.72 million in the prior year. This decline was primarily driven by a \$1.88 million decrease in same-station revenue, particularly in gross local, non-spot, political, and national categories, with markets like Columbus, Des Moines, and Norfolk experiencing local revenue declines.

Despite the revenue headwinds, the company demonstrated operational discipline. Station operating expenses decreased 4.6% to \$22.23 million for Q2 2025, largely due to a \$1.47 million decrease in same-station operating expenses. This reduction stemmed from lower compensation-related expenses, digital services expenses (due to bringing some functions in-house), bad debt expenses, and advertising/promotional costs. However, corporate general and administrative expenses increased by \$70,000, partly due to expenses related to shareholder activism.

The net result for Q2 2025 was an operating income of \$1.41 million, down from \$2.14 million in the prior year. Net income for the quarter was \$1.13 million, or \$0.18 per diluted share, a decrease from \$2.50 million, or \$0.40 per diluted share, in Q2 2024. This was impacted by a decrease in other income, which included a one-time \$1.13 million gain in 2024 from the sale of an investment in Broadcast Music, Inc. (BMI).

For the six months ended June 30, 2025, consolidated net operating revenue was \$52.44 million, a 4.7% decrease from \$55.01 million in 2024. Station operating expenses decreased 3.4% to \$44.19 million. The company reported an operating loss of \$889,000 for the six-month period, compared to a loss of \$274,000 in the prior year. The net loss for the six months was \$447,000, or \$0.07 per diluted share, compared to net income of \$924,000, or \$0.15 per diluted share, in 2024.

Crucially, the interactive advertising segment continues to be a bright spot. Digital advertising revenue increased 7.15% to \$4.56 million in Q2 2025 and 9.82% to \$8.05 million for the six-month period. The profit margin for interactive revenue was 58% in Q2 2025 and 55% for the six months (excluding sales commissions). Online news initiative revenue grew 26% in Q2 2025 and 51% for the six-month period, while e-commerce revenue grew 17% and 8% respectively. These figures highlight the burgeoning success of Saga's digital pivot.

Saga maintains a robust liquidity position, with \$24.9 million in cash and short-term investments as of June 30, 2025, which further increased to \$27.3 million by August 4, 2025. The company has \$5.0 million in long-term debt related to the Lafayette acquisition and an ample \$45.0 million of unused borrowing capacity under its credit facility, which matures in December 2027. Saga has a strong history of shareholder returns, having paid over \$138 million in dividends and repurchased over \$58 million in stock since 2012. The company declared a quarterly cash dividend of \$0.25 per share for Q2 2025.

Outlook, Guidance, and Risk Assessment

Saga's outlook for the remainder of 2025 is firmly anchored in its digital transformation. Management anticipates continued improvement in revenue trends. For Q3 2025, overall pacing is currently down approximately 1%, but September is pacing up 1.5%. Excluding political revenue, Q3 is pacing flat year-over-year. Interactive pacing remains strong, projected to be up 40% for Q3 2025. While traditional broadcasting revenue categories show mixed signals (local direct pacing down 4.4%, local agency down 0.8%, national down 19.1%), management notes that national revenue is coming in later in the quarter.

The company expects political revenue in 2025 to decrease from 2024 levels due to fewer elections, with Q4 2025 facing a challenging comparison against nearly \$2 million in political revenue in Q4 2024. Capital expenditures for 2025 are projected to be between \$3.0 million and \$3.5 million, funded by operations.

On the expense front, management expects station operating expenses to decrease by 2% to 3% for 2025 compared to 2024, reflecting ongoing efficiency initiatives and the benefits of bringing digital services in-house. Annual corporate general and administrative expenses are anticipated to be approximately \$12 million for 2025, down from \$12.6 million in 2024. The effective tax rate is expected to be 27% to 30%, with a deferred tax rate of 2% to 6%.

A key component of Saga's capital allocation plan for 2025 involves the potential sale of non-core assets, specifically tower sites. These non-binding negotiations are expected to yield proceeds in the "high 7-figure or low 8-figure range" and close before the end of Q3 2025. A "significant portion" of these proceeds is earmarked for stock buybacks, alongside the continuation of regular quarterly cash dividends, demonstrating a commitment to returning value to shareholders while funding strategic growth.

Despite the optimistic outlook on its digital strategy, Saga faces several risks. The "traditional broadcast verticals that have carried us for years are challenged at best," and the degree and timing of their return remain uncertain. The digital transformation itself presents challenges related to "time, talent, training, and speed," as the company works to overcome a late start in the digital space. Market concentration in its top five markets (Charleston, Columbus, Des Moines, Milwaukee, Norfolk) means adverse changes in these areas could significantly impact results. Inflationary pressures, while not yet material, could affect costs. Regulatory uncertainties, such as the finalization of the BMI license agreement, also pose potential risks.

Conclusion

Saga Communications stands at a pivotal juncture, consciously embracing a "transformational change" to redefine its future in a rapidly evolving media landscape. The company's "blended advertising" strategy, which marries the enduring trust and persuasive power of local radio with sophisticated digital solutions, is not merely an adaptation but a bold offensive to disrupt a fragmented digital advertising market. Early quantifiable successes, such as significant increases in client ad spend and robust interactive segment margins, provide compelling evidence that this strategy is gaining traction.

While the "macro downdraft" in traditional broadcasting continues to exert pressure on top-line revenue, Saga's disciplined approach to expense management, including leveraging in-house digital capabilities and AI, positions it for improved profitability. The strong liquidity, strategic asset sales, and commitment to shareholder returns underscore a financially sound company actively investing in its future. Saga's journey from a traditional broadcaster to a "cash positive start-up" focused on speed, iteration, and technological leadership, particularly in its blended advertising methodology, offers a clear investment thesis: a resilient company leveraging its core strengths to unlock substantial digital growth, even amidst industry turbulence. The path ahead demands continued execution, but the early indicators suggest Saga is well-positioned to forge a profitable digital future.