Executive Summary / Key Takeaways

• Saga Communications is undergoing a critical "blended digital strategy" transformation, integrating traditional radio with search and display advertising to counter a macro decline in the broadcast sector and capitalize on a fragmented digital advertising market.
• This strategic pivot is showing early success, with interactive revenue significantly offsetting declines in broadcast revenue; for Q3 2025, interactive revenue growth of 32.6% nearly compensated for the decrease in broadcast revenue when adjusted for political advertising.
• The company aims to double its gross annual revenue, primarily through digital channels, within 18 to 24 months by capturing just 5% of the available search and display advertising dollars in its markets.
• Saga maintains a strong liquidity position, with $34.2 million in cash and short-term investments as of November 3, 2025, and is committed to returning value to shareholders through ongoing quarterly dividends and planned stock buybacks funded by recent non-core asset sales, including $10.7 million from tower divestitures.
• Despite facing industry-wide challenges such as increased music licensing fees and a soft traditional advertising market, management's resolve to "sell our way out" through strategic investments in digital, rather than solely cutting costs, underpins a cautiously optimistic outlook for future growth.

The Shifting Sands of Media: Saga's Strategic Digital Pivot

Saga Communications, Inc. (NASDAQ:SGA), established in 1986, has long been a fixture in the American media landscape, operating broadcast properties across 28 small to mid-size markets. Its foundational business, rooted in local radio, has historically thrived on community engagement and direct advertiser relationships. However, the broader media industry is experiencing a profound transformation, characterized by a "macro decline in the sector" for traditional broadcast advertising and the rapid ascent of digital platforms. This shift has compelled Saga to embark on a critical "blended digital strategy," a technological differentiator designed to leverage its established local trust and radio's persuasive power to capture a larger share of the burgeoning digital advertising market.

The digital advertising landscape presents a significant opportunity, yet it remains fragmented and confusing for many local businesses. Advertisers are increasingly allocating budgets to digital, with eMarketer projecting total U.S. ad spend to reach $456 billion in 2025, 75% of which will be digital. By 2029, this digital share is expected to climb to 83%. In 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 stark reality underscores the necessity of Saga's strategic pivot. The company identifies a substantial market opportunity, estimating approximately $2.9 billion available in search and display advertising within its 28 markets. By capturing just 5% of these digital dollars, Saga aims to double its gross annual revenue, with the majority derived from digital channels, within the next 18 to 24 months.

A Legacy Forged, A Future Reimagined

Saga's journey, initially shaped by founder Edward K. Christian, emphasized deep local market penetration and community trust. The passing of Mr. Christian in August 2022 marked a pivotal moment, triggering a board refreshment process focused on integrating digital expertise to guide the company through its evolving strategy. This strategic evolution is not a wholesale abandonment of radio but a redefinition of its role. Saga's "blended advertising" model positions radio as the "star," serving as the "best, most persuasive and most efficient top-of-funnel medium" to drive consumer action. Radio "gets the advertiser wanted," while Saga's digital platform "gets the advertiser found and chosen."

This core technological differentiator, the "blended advertising" approach, combines radio's emotional power with the targeting precision of digital search and display. The tangible benefits are already manifesting. Local direct advertisers who purchased a blended product saw their radio spend increase by 9% year-over-year, with their overall radio and digital spend rising by 27% between January-October 2023 and January-October 2024. Crucially, blended advertising orders yielded 4.3 times more revenue than non-blended orders, and radio-only dollars from blended orders were 96% higher. This demonstrates that the digital integration not only generates new revenue but also strengthens traditional radio spending.

Saga's commitment to technological innovation extends to its operational efficiency. The company is bringing more digital deliverables in-house, aiming for increased scalability and margins. Furthermore, it is selectively utilizing AI solutions, such as for digital invoice reconciliation and radio station voice/imaging, which is projected to generate $0.25 million in annual savings. These initiatives contribute to Saga's competitive moat by offering advertisers a simplified, hyper-targeted, and results-oriented solution in a marketplace often characterized by "confusing, frustrating and full of attrition."

Financial Performance: Digital Growth Offsetting Traditional Headwinds

Saga's recent financial performance reflects the ongoing industry challenges alongside the nascent success of its digital transformation. For the three months ended September 30, 2025, consolidated net operating revenue decreased by 1.8% to $28.17 million, and for the nine months ended September 30, 2025, it declined by 3.7% to $80.61 million. This revenue contraction was primarily driven by decreases in gross national, political, and local broadcast advertising.

A significant factor impacting profitability in Q3 2025 was an industry-wide settlement with music licensing organizations (ASCAP and BMI), resulting in an aggregate retroactive charge of approximately $2.10 million. This charge led to an operating loss of $626,000 for the quarter; without it, the company would have reported an operating income of $1.5 million and net income. Despite these headwinds, the growth in interactive revenue is a clear bright spot. For Q3 2025, interactive revenue surged by 32.6% to $4.55 million, and for the nine months ended September 30, 2025, it increased by 17.1% to $12.61 million. Management highlighted that this "increase in our interactive revenue made up almost the entire decrease in our broadcast revenue when adjusted for political," signaling the strategy's effectiveness in mitigating traditional revenue declines. Interactive revenue also boasts strong profit margins, consistently in the 51% to 58% range (excluding sales commissions).

The company's liquidity remains robust. As of September 30, 2025, Saga held $26.3 million in cash and short-term investments, which further increased to $34.2 million by November 3, 2025. Long-term debt stood at $5.00 million, incurred for the May 2024 acquisition of six radio stations in Lafayette, Indiana. Saga also maintains approximately $45 million in unused borrowing capacity under its credit facility. This strong balance sheet provides the necessary capital to fund its digital transformation and shareholder return initiatives.

Competitive Landscape and Strategic Positioning

Saga Communications operates as a niche player in the radio broadcasting market, primarily focusing on small to mid-size markets where its local presence and established trust provide a competitive edge. This contrasts with larger national broadcasters like iHeartMedia (IHRT), which benefit from immense scale, broader digital innovation, and extensive reach, or Cumulus Media (CMLS), known for its network and content syndication. While these larger competitors have more resources for aggressive digital expansion, Saga's "blended advertising" strategy aims to exploit the "fragmented and confusing" nature of the local digital advertising market.

Saga's approach directly addresses the "frustrated buyers with unmet needs" who are "fed up with ineffective campaigns and empty promises" from other digital providers. By offering a simplified, customer-focused solution that leverages existing radio relationships, Saga differentiates itself. A compelling example is a client in Columbus, Ohio, who, after a competitor failed to deliver, returned an additional $298,000 in digital business to Saga, bringing their total commitment to over $1 million in blended radio, search, and display. This illustrates Saga's ability to build trust and deliver results where others falter. While Saga may lag in overall innovation speed compared to its larger, more digitally mature counterparts, its localized execution and cost efficiencies, bolstered by AI, allow it to compete effectively in its chosen markets.

Outlook and Forward Guidance

Saga's outlook is cautiously optimistic, underpinned by the accelerating momentum of its digital strategy. For Q4 2025, the company anticipates revenue pacing to be down approximately 11% including political, and 4.7% excluding political, primarily due to a strong political advertising quarter in Q4 2024. However, interactive pacing remains robust, projected to be up 32%. Management expects full-year 2025 capital expenditures to be between $3 million and $3.5 million, financed through operating funds. Station operating expenses for the full year 2025 are projected to be flat, though they would have decreased by 2% to 3% without the music licensing settlement. Corporate general and administrative expenses are anticipated to be approximately $12 million for 2025, a slight decrease from $12.4 million in 2024.

The company is committed to its capital allocation plan, which includes regular quarterly cash dividends of $0.25 per share. Furthermore, Saga recently completed the sale of 22 telecommunications tower sites for approximately $10.7 million. Net proceeds of $8.7 million have been received, with an additional $1.8 million in escrow. A "significant portion" of these proceeds is earmarked for stock buybacks, which may include open market purchases or block trades, demonstrating a clear intent to return value to shareholders. This proactive asset management, coupled with the growing digital revenue, positions Saga to "sell our way out of this macro downdraft" and achieve its ambitious growth targets.

Risks and Challenges

Despite the promising digital pivot, Saga Communications faces several pertinent risks. The "macro decline in the sector" for traditional broadcast advertising remains a significant headwind, requiring continuous and successful execution of the blended digital strategy to offset. Macroeconomic conditions, including inflation and interest rates, could further impact advertising spending, particularly in key categories like housing and automotive, which have a delayed reaction to Fed rate actions. The digital transformation itself is "hard, really hard," demanding sustained investment in R&D, personnel training, and technological infrastructure, which could strain resources if growth targets are not met.

Competition from new media technologies and larger, more digitally advanced players continues to intensify, potentially eroding market share if Saga's innovation pace falters. Regulatory changes and the inherent volatility of political advertising revenue also introduce uncertainty. While the company has a clear strategy, the successful implementation and scaling of its blended advertising model across all 28 markets will be crucial to realizing its long-term objectives.

Conclusion

Saga Communications stands at a pivotal juncture, strategically transforming its business model to thrive in an evolving media landscape. The company's "blended digital strategy," which ingeniously marries the enduring trust of local radio with the precision of digital advertising, represents a compelling investment thesis. Early results, particularly the robust growth in interactive revenue and its ability to offset traditional broadcast declines, provide tangible evidence that this technological differentiation is gaining traction.

With a strong balance sheet, a disciplined capital allocation strategy that includes consistent dividends and planned share buybacks from non-core asset sales, and a clear vision for doubling revenue through digital expansion, Saga is actively addressing industry headwinds. While challenges persist in the traditional broadcast sector and the digital transformation demands relentless execution, management's unwavering resolve and the demonstrated effectiveness of its blended approach suggest a promising path forward. Investors should closely monitor the continued scaling of its digital initiatives and the impact of its capital return programs as Saga endeavors to redefine its competitive standing and unlock significant long-term value.