Nexstar Media Group, Inc. (NXST) Earnings Call Transcript & Summary

Good afternoon. I'm Doug Mitchelson, Credit Suisse's media and cable, satellite and wireless analyst. Very pleased to have with us today the Nexstar team, Tom Carter, President and Chief Operating Officer; Lee Ann Gliha, Executive Vice President and Chief Financial Officer. Thank you both for spending some time with us today and walking through the Nexstar story.

Great. Thanks for having us.

So fireside chat format, usual stuff. I have enough questions to run through the half an hour. But if someone is interested, and maybe I could squeeze it in, feel free to e-mail me a question. I just thought we would start off with the state of the union. How do you feel about Nexstar's positioning and strategy in this ever-changing marketplace?

Well, first of all, thanks for having us. Look, we really like where we are. We think scale matters, and Nexstar obviously is the largest broadcaster. So we have scale that is difficult to duplicate. It may never be duplicated, depending on what happens from a regulatory and legislative perspective. But scale does matter in terms of facing off with some of our counterparties and our contracts, whether it be MVPDs or vMVPDs or the networks, from that perspective, or studios, from a content perspective. So all of that matters. And we're really just now, from a financial perspective, 2 or 3 quarters into being able to demonstrate financially what the Tribune acquisition did for us in late 2019. So we bought it in September of 2019 and spent 4 to 6 months integrating it, only to be hit in the face with COVID in March of 2020. And everybody turned internally focused, not only here but elsewhere, with regard to our own operations. So we really never had a chance to demonstrate to the market, I think, the power of this franchise until the last 2 or 3 quarters. And we'll stand behind our results in the last 2 or 3 quarters from a margin perspective, from a revenue perspective and from an expectation perspective, just in terms of being able to deliver on what we saw as the real power of the franchise, post-Tribune, that never really had a chance to get unveiled or shown our wares to the market until most recently. So we feel really good about where we are in the position, and that our scale does matter and it is materializing in the results.

So I think we're going to delve into sort of each of those things that scale is impacting. But I wanted to start checking the box on a couple more near-term things. First, we're about halfway through 2022, what are the execution priorities as you look into the back half of the year and into 2023? I think you already talked about the last 2 to 3 quarters going well. But I think, Tom, this is probably still in your camp.

Yes. No. Thanks very much. Look, priorities for the back half of the year, I think, are pretty clear. And we've been very pointed on this, political is going to drive results in the back half of the year and it could offset whatever weakness in the economy there may or may not be, even though we're not seeing anything, in a material perspective, from a weakness. And we have 55% of our subscribers up for renewal, with MVPDs and vMVPDs at the back half of this year, which will drive growth in '23 and '24 on those renewal cycles. So we've said before that we think the growth drivers for '22, '23 and '24 are pretty well-defined for Nexstar. And those growth drivers are in -- organic growth drivers really are political in '22 and '24 and retrans in '23 and '24 because we have 55% up in our subscriber renewals at the end of this year. And we have about a 40% subscriber renewal rate at the end of '23, which will drive '24 retrans. So we're very bullish from that perspective and think that the pathway is really clear and pretty well-defined for Nexstar over the next 2.5 years or so.

That's a lot of renewals, and we're talking about that in a bit. You say you're not seeing any sort of macro uncertainty, I guess, you said not material macro uncertainty, [ in advertising ], so if there's any immaterial play, let us know, but...

Well, no, I would say, look, it's still about auto or the lack thereof, from our perspective, and we're not seeing any sort of recovery in auto. As a matter of fact, it's a little bit less robust or a little bit less -- more declination than we had thought. Again, not material from an overall perspective, but it's just disappointing because I think we had somewhere between hope and expected there to be at least a modest recovery on auto beginning in the middle part of this year, and we're not seeing it. We don't have a silver bullet or a window into the world of auto manufacturing any more so than other people. So we just don't know when that's going to come. We believe it will come. We're just not seeing it on the near-term horizon.

One of the [ come-sees ] -- and when auto just normalizes, and let's hope TV market is normal at the same time, does auto fully come back, television, particularly local television?

I think it will come a large way back. I don't know if it will come all the way back. But quite honestly, from our business model, we've learned to live without it, to a large degree. In 2019, it was 25% or 26% of our total advertising. Now it's in the mid-teens. And so we've been able to replace some of that. Obviously, sports betting has been a great new category for us. There have been additional improvements in government spending and advertising during the pandemic, and we're still seeing some of that. We're seeing tourism now as a recovering business. We're seeing general entertainment, specifically in-person entertainment, recovering. So there are aspects of what our business -- our business mix that has offset the decline in auto, but we're not seeing anything near term that seems from a recovery perspective. And longer term, we'll have to wait and see if it comes back, but we got a long way to go until we worry about whether it's close to pre-pandemic levels.

Yes. It makes me wonder on -- a lot of crosscurrents [ that they had in the ] market relative to some of the macro clouds on the horizon. Sports betting, does that continue to grow? Or does it start to stabilize? There's a lot of concerns on Wall Street about the business model for sports betting companies.

Lee Ann, do you want to take that?

Yes, sure. I mean look, the times when we have seen a lot of benefit from sports betting is when there's been new markets that have launched. I think we said in the first quarter, the growth really was driven by the new launches in New York, Louisiana and Illinois. And so that's -- we continue to see -- well, we expect to continue to see that. And I think Ohio is going to come online in January of 2023, which is a good market for us. We're in every market in Ohio, except for Cincinnati. So I think we'll continue to see that. If you look at 3 of our top 5 markets for sports betting dollars, are in markets that have been live for more than a year. So there is some level of continued maintenance. Granted, we see the headlines, we see certain folks flipping over to the network buy from the local buy. We'll have to just sort of look at this on a quarter-to-quarter basis. But for now, it's still a good-sized category for us.

And near to your heart, political. We had, in our ad buyers panel yesterday morning, a forecast for a 50% increase in political ad spend in the United States relative to the last midterm. So that might be something that makes you happy. Like how are you positioned relative to political advertising? And can you remind us how you do in the midterms relative to the presidential years?

Sure. Sure, sure. Well, first of all, we're in 40 of the 50 states. And given our platform is the largest broadcaster, I think we're a proxy for the country kind of as a whole. And so from that perspective, we continue to be very bullish on political. We've guided to something between the 2018 and the 2020 presidential numbers that we put up, which is kind of a mid-400s kind of number. And so from that perspective, I think we had a really good first quarter, albeit a very small sample size. And I would say the trends have continued in the second quarter. But we're still not to a point, but I think we may be, on our August conference call, to comment more specifically on the trends we're seeing and maybe a reevaluation of our guidance at that point. But right now, we're not in that position just because, as you know, well over 50% of the spend comes in the last 8 weeks of the campaign, so basically after Labor Day. So that's where the game is really played. But in terms of all the preliminary numbers and kind of the precursors, which is really fundraising, fundraising continues to be very robust. And so that's the best sign for political advertising, from our perspective. So I think as I kind of led off with, it's 1 of the 2 big kind of areas of focus for us in the back half of this year. And we'll be spending even more time on it as we get closer to the first week in November.

[ A year to be ] going after political for sure.

Yes.

The -- so first political cycle since WGN America was rebranded NewsNation. Is that going to make a big difference on the political side? And who's going to carry that question forward? I mean how are you thinking about an OTT strategy relative to what you've seen from NewsNation so far? Fox Nation [ has certainly grown ]. We'll never know how CNN+ would have done over time, but what's your ambitions for NewsNation?

Sure. Well, first, on the political side, NewsNation did about $1 million in political revenue in 2020, even though it was -- it wasn't on the air until September of 2020. So I think that's a really good sign. And keep in mind that NewsNation is a national platform, right? So it's ubiquitous distribution around the country, so it really is more of a platform for national advertisers, both political and nonpolitical, than it is local. The 2022 election is much more regionally, statewide, local election. So it really doesn't have a place for advertising in this election cycle, but it does much more so in a presidential cycle. And a lot of its advertising comes around issues more so than candidates from that perspective. So we're bullish on NewsNation. I'm sure you saw there was a recent announcement, we're going to expand our news coverage to 4 additional hours beginning next year. So we'll have, I want to say, 13 hours of live local news every 24-hour cycle on that. And obviously, the goal is to make it a 24/7 cable news network over the course of the next several years, and we're well on our way to doing that. So from that perspective, we're excited about NewsNation and its political aspirations there. Specifically, as it relates to OTT, NewsNation has ubiquitous coverage. As I mentioned before, we're in a -- according to Nielsen, we're approximately 75 million homes. So it's important for us to protect that ecosystem because we get paid to be in those homes with NewsNation, much as I think some of the troubles that were foreseen or came to bear in CNN+ is not wanting to upset the existing ecosystem while really taking advantage of an OTT platform as well. So you have to have a different product, a differentiated product in order to really make that a viable alternative. And we believe we've got some options in that regard. When you combine the 5,500 news -- 5,500-person news-gathering organization we have in our local markets, with the several hundred journalists we have at NewsNation as well as The Hill in Washington, D.C., we think we've got the backbone of a news organization that can produce enough product and enough differentiated and valuable product to make an OTT platform viable. We just need to get to that point in order to be able to put together a cohesive product to do something like that. But that's definitely -- I think we'll probably -- you'll see us do more of a crawl, walk, run than a big-bang explosion, like CNN+ tried to do, in terms of rolling out some OTT or FAST channel kind of products.

Yes. It's interesting to [ explain how ] ultimately sort of your digital strategy as a whole shakes out because I think we've been waiting for really just kind of local to find a successful business model online for a long time. And no one's really quite cracked that. And there's so much local content that [ seemed ] viable, sports coverage and politics and everything else. It just hasn't -- it hasn't gelled.

Yes. The issue with kind of the backbone of our content is news has a relatively short life -- shelf life, right? And so you've got to monetize it in as many ways as you can in a relatively short period of time. But unfortunately, as we're fond of saying, yesterday's news is kind of like a newspaper and that hasn't worked out so well. So we've got to find other ways to use our news-gathering organization to create relevant content that has a longer shelf life and therefore can be monetized in better ways.

Yes. Well, it will be interesting to see how you pursue that. The -- let's hit on the retrans activity. 55% is a lot, much less, I think, [ is 30% ] here. So there's a lot of discussion, of course, out there in the marketplace, with [ Charter Communications ], in particular, pushing back and saying, retrans growth is going to start to slow. I think it's really cable folks, and the telco side, at this point, is just saying we're passing it through to consumers and kind of up to you guys to be shepherds of the industry. So I think, in some places, a little bit more price resistance perhaps than others. But how has the market for retrans changed? And what should investors expect for retrans growth kind of this year and next year from Nexstar?

Well, sure. We've guided, because we only had a modest amount of subscribers up for renewal last year, a low double-digit percentage. Our retrans growth this year is kind of mid-single digits. But if you take the equation of low double-digit equals mid-single-digit growth, the fact that we have 55% of our subscribers up at the end of this year will signal larger growth than the mid-single digits. We expect it to be somewhere around the mid-teens area in terms of net retransmission revenue growth next year because of the larger renewals and the balance of our renewals having annual escalators. So we're bullish on that. And then the same kind of math rolls forward into '24 on a slightly more muted basis in terms of the amount of renewals and therefore the amount of retrans growth in '24. So that's kind of how we see it. Look, the bundle is still valuable, and we're a big part of that. And people -- look, the pay television operators know exactly what all of us are watching all the time because they have set-top box data. And they continue to see the value in local programming, local news in particular, which is kind of our main calling card. And so we've been able to monetize that and push that viewership into better monetization for our channels.

Yes, it's interesting because where I was going to go next, and you already sort of front-ran that with a comment on local and local news, is all the content that goes in primetime and sports have started to shift to streaming services, whether it's simulcast or just outright shift like the Dancing with the Stars for Disney. Does that -- the network behavior and activity, pushing content to streaming, does that come into play when you're negotiating with MVPDs and the vMVPDs?

It absolutely does because we've been pretty clear -- well, we've been very clear with the networks that what we have historically paid for is exclusivity, whether it be sports or entertainment, anything. So exclusivity has been important, and that's what has gotten the networks the types of affiliation agreement price increases that they have historically seen. With a marginalization of exclusivity, we're pushing back and pushing back, I think, with the moral high ground that what we're paying for is less exclusive, and so we should be paying less for it. And so I think you're -- and look, I think logic is on our side. Logic doesn't necessarily always come into play in negotiations, but it's a nice place to start. And so, from that perspective, that's what we've been -- really kind of the tone of the negotiations that we've had here of late, and we expect to have -- we have ABC up at the end of this year. So I think that rings true with them with regard to them taking some historic broadcast content and moving it to the direct-to-consumer platforms.

Yes. I mean these are negotiations. I remember, it was a little bit dated because I think the market settled out, but when this was first shaking out, you had the other side thinking they deserve 75% of the revenue, and it's obviously worked out a little better than that for you.

Yes.

So it's hard to move people off of last year's price or last year's revenue share. But somewhere then, there's going to be a win-win between you and the networks as some of these digital platforms [ get built out ].

Well, look, they've got a business. They're trying to maximize their monetization, and I'm sure they factored in some degradation in affiliation fees when they knew that they were going to move more towards a direct-to-consumer platform. And I'm assuming that they're still seeing revenue growth on a totality basis even though we may not be paying them as much, or the growth in our affiliation payments becomes more moderated.

Yes. And look, they're still seeing growth, it's moderating, but they're large revenue pools that they certainly want to protect and maintain. So we'll -- so that takes us to the ATSC 3.0. I still have trouble with that one. Does...

It doesn't roll off the tongue, does it?

I mean the best thing about media is we don't have a lot of acronyms that we have to deal with, and then [ we're coming across this acronym for ]...

The consumer-facing brand is NextGen TV. So if that helps, [ remember this ]...

I understand. I should just switch over to using that one. So optimal use case for the spectrum, when do the revenue dollars start to flow, I'm sure is what investors are focused on.

Yes. I mean look, I think this is -- ATSC 3.0 or NextGen TV is it's a future item. I think if you look at the BIA report that we included in our investor deck, it shows the first revenue is really to start in the 2025 time frame and then really start to ramp in the subsequent years and really getting to kind of fruition by 2030. I think that there is probably a transition here of maybe having some of the near-term use cases being stuff that I call the boring stuff that we do every day, right, which is multicast networks and maybe some advanced advertising or items like that, that could happen kind of in the shorter term and then sort of longer term, will be the true B2B use cases, selling the high-speed data services to third parties that need the additional bandwidth.

What do you think about partnerships on that side? There's -- obviously, you've got E.W. Scripps out there. And the stat I've got is between you and them, you would have 92% reach in the United States, with a pretty sizable amount of spectrum. Is there any potential for a partnership there?

Yes. No, for sure. I mean I think that's the beauty of some of this consolidation that's happened in the industry, is that, previously, you had to get a bunch of guys together to cover the country. Now it's really just 2 guys that you have to put together to get -- to cover the country. And so creating some kind of a relationship with Scripps or someone else that could bring to bear the whole country, when you're talking to B2B -- other businesses about high-speed data transmission, I think will be really, really beneficial.

So on to M&A. You talked about investing in content, digital. What types of assets might you be interested in? And certainly, the company has had an active history in M&A. Is there other types of content or other assets you don't have today that you would like to potentially add to the platform?

Yes. No, absolutely. I mean look, we think we've -- first and foremost, if there are additional station deals to do, that would be closest to our heart and our favorite thing to do, to the extent that we've got capacity to do that and in some of the markets where we have CW affiliates or other markets where there's opportunities from a regulatory perspective. But we felt we've built this really great platform that has -- it reaches over 212 million people on a daily basis from a broadcast perspective and even greater if you add a NewsNation. And we're a top 10 news and information website, if you aggregate together all of our websites. So we've got this great distribution platform. And so to the extent that we can acquire additional content and then be able to -- or content-based businesses that we can then leverage across our great audience and utilize our 4,400 sellers to sell it, we think that that's something we can create value. And it will be beneficial for us in a couple of different ways, not only from a synergistic perspective and a growth perspective, but also from a defensive perspective, in terms of as we see the networks doing different things, this would be content that we could own and repurpose and use however we want to on our own platform. And you saw us do that a little bit with The Hill. We've got the -- that was great because it added to our digital platform, but also the content from -- inside the Beltway is going to be showcased on our NewsNation platform. And then, look, I think as I sort of just alluded to, digital is another area where we would love to grow. 7% of our overall revenue is digital. It's like 15% of our advertising revenue is digital. That's a segment that's still growing a little bit faster from an organic perspective, and we would like to have more exposure to that. So to the extent that we can do that and leverage our great advertiser relationships across more types of media, that can also be something that we would look forward to do. But we're all going to do it with an eye towards value creation for our shareholders. And if you look back at our track record over time, the deals are the ones that have created the most shareholder value. You can see it in our stock price for Media General and for Tribune. And we hope to do that again going forward with the deals that we're going to undertake.

[ So let's take ] the reverse side of that, the Food Network minority position, I think I have been waiting about a decade for that to get closed out and rolled up into the owner of the Food Network. And funny enough, given the tax position of that asset and how much cash flow it generates quarter after quarter, it makes for a -- and Warner Bros. Discovery has lots of other issues that are distracting it. What -- does the merger may get more or less likely that, that minority continues in its current form? It's an attractive cash flow asset for you, I'm sure.

I would say, in the long term, it probably makes it less likely that it continues in this current form. But you're exactly right, I think they have plenty on their plate right now. But look, there are plenty of assets inside of Warner Bros. Discovery that could be of interest to us. And there's potentially could be a tax-efficient way to move some of those assets around in exchange for our stake in the Food Network. It's just that I don't think that's going to happen anytime soon because they've got more than they can say grace over right now in terms of jobs immediately in front of them. But it's not lost on us that they have a lot of assets and that they will be rationalizing their own portfolio here in the not-too-distant future. At some point, we're counting on them wanting to get -- they're doing 100% of the work, and I'm sure they would love to have 100% of the profits of that work.

Yes. They -- I'm sure they would love to own it, and it's -- and that hasn't changed for Food Network in a long time.

Right.

It's an attractive asset. So leverage has been worked down to approximately 3.7x. So how should we be thinking about the various buckets of cash deployment? Any appetite to grow via more leverage? Or do you even think about sort of going [ probably with ] the right price? Obviously, this macro backdrop makes all of that interesting.

Yes. No, look, I think we feel good with our leverage level in light of the macro backdrop, no matter where it goes. I think that we'll -- we're not particularly interested on, at this point, taking on more leverage to do share repurchases. But to the extent that we would find a nice M&A transaction that would require a little bit more leverage, that is something that we would be open to. And it's the history of the company, add on a little leverage, do a very accretive deal for your shareholders and then deleverage over time. I think that all makes sense. From a go-private perspective, I think it would take a very big company or a very big private [ kind of company ] to accomplish that at this point. So I'm not sure that that's in the horizon. But in the interim, absent M&A or a dividend payment, we've been using that -- those -- our free cash flow to repurchase shares.

And we're onto our lightning round here on regulation. We just had a session where -- we just had a session with Andy Lippman, where he was indicating not much is going to happen with the FCC until you get that fifth commissioner. Any regulatory changes with the current FCC, whether it's this year, we have 4 commissioners, or the next couple of years, at 5 commissioners, that you're [ keeping your eye on ]?

Nothing in particular. I think we've got our eye on maybe some legislative initiatives that may give us some relief with regard to tax breaks for local journalists, some things around the local products that we produce and the value that I think a lot of politicians see in that. But in terms of specific change at the FCC, we don't think that there is anything afoot that's going to be a sea-change event in terms of regulation for us. I think the FCC has some other priorities that are probably more important than broadcast -- updating the broadcast regulations, but we don't see anything that's going to materially provide additional opportunities for us from an FCC perspective.

All right. Well, I've run us out of time. Tom, Lee Ann, thank you so much for spending some time with us today, and thank you, everybody, for listening in.

Good. Thanks, Doug.

Thank you.