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

Good day, and welcome to the Nexstar Media Group Investor Conference Call. Today's call is being recorded. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. This morning, Nexstar released its 2023 investor presentation available on its website, www.nexstar.tv in the Events and Presentations section. The purpose of this call is to allow investors and analysts to hear management's voiceover to the presentation. Please note, management will not be discussing the fourth quarter, the fiscal '22 results or its 2023 outlook until its earnings call on February 28. We hope you'll find this call informative and helpful. I'll now read the safe harbor language, and then we'll get right into the call. All statements and comments made by management during this conference call other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Nexstar cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during this call. For additional details on these risks and uncertainties, please see Nexstar's annual report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission and Nexstar's subsequent public filings with the SEC. Nexstar undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Nexstar's forward-looking statements policy can be found on Page 2 of today's presentation. It's now my pleasure to turn the conference over to your host, Nexstar Founder, Chairman and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joe, and good morning, everyone. Thank you all for joining us today. With me on the call this morning are Tom Carter, our President and Chief Operating Officer; as well as Lee Ann Gliha, our CFO. We are pleased to have this opportunity to review with you our 2023 investor presentation. Last year around this time, we posted our 2022 investor deck to our website. And this year, we thought it would be -- we would hold a call so that our investors, analysts and other interested parties could hear our voiceover and perspective on our company directly. If you're following along in the presentation, if you turn to Slide 3, you will see an overview of the assets that make up Nexstar in our financial profile. Nexstar has built a powerful diversified media platform that produces and distributes some of the most compelling local and national news, sports and entertainment content in America. As many of you know, we are by far the largest local broadcast group in America, with 200 owned and partner stations in 116 markets, reaching over 68% of all U.S. television households. Our national assets combined, including the CW, NewsNation and The Hill, today reach 100% of the U.S. population. And as we will discuss more on today's call, this platform presents us with new valuable revenue-generating opportunities. Our highly profitable operating model with an adjusted EBITDA to free cash flow conversion rate of more than 60% provides us with the financial flexibility to continue funding shareholder returns and modest debt repayments while enabling us to invest in our capabilities as well as strategic M&A. On Slide 4, we highlight some of our key financial accomplishments so far in 2022. Some have questioned whether a broadcast stock can deliver value, and it's clear from our long-term performance that the answer is yes. In 2022, Nexstar was one of the best-performing media and entertainment stocks, closing out the year with a 16% gain. In fact, in all of media and entertainment, there were only 4 stocks up in 2022. Excluding the M&A overhang of WWE and TEGNA, Nexstar and Omnicom were the only stocks up in the sector at year-end. All others, including some of the largest traditional bellwether media names, were down somewhere between 30% and 60%. We operate our business on the principles of profitability, free cash flow and a conservative capital structure. Our strong free cash flow has allowed us to return almost $900 million of capital to our shareholders through dividends and share repurchases for the last 12 months ended September 30, 2022. And last Friday, we announced a 50% increase in our dividend, the tenth consecutive increase since we started paying dividends and the largest dividend increase we've ever made, reinforcing our confidence in Nexstar's free cash flow outlook. Throughout the first 9 months of 2022, our diversified operating model has largely insulated Nexstar's revenues and cash flows from economic pressures that other companies have experienced throughout the year. We benefited from over 50% of our revenue coming from contracts with distribution sources, approximately 70% of our core advertising from the most resilient local market and broad exposure given our large station portfolio to record-breaking political television advertising spending. Despite all of this, our stock still trades to a mid-teens free cash flow yield, making our shares attractive to current as well as potential investors. Turning to Slide 5. We believe that Nexstar is a unicorn in the media and entertainment sector and the power of our platform is not something that has been seen before. With our recent acquisition of the CW, one of the few national broadcast television networks in the country and the growth of our cable news network, NewsNation, we had the same national reach as the larger-cap media companies. But what makes our portfolio unique is that we have an unreplicable local broadcast footprint of 200 broadcast stations with a reach that is 75% larger than the next largest broadcast network owner locally, reaching 68% of the U.S. population. Taken together, we can provide both national reach and activation of local audiences at scale, representing a differentiated and attractive value proposition for advertisers in an increasingly fragmented marketplace. We believe there is no other direct competitor that has the national local scale, audience reach and financial strength at Nexstar Media Group possesses. You will see Nexstar to continue to invest in and leverage our assets and expand our capabilities, which will enable us to start to monetize our assets in new ways that you haven't seen from us before. Turning to Slide 6. Our television reach is complemented by our expansive digital properties, which reached 35% of all U.S. digital audience and is a collective top 10 news and information and top 40 digital property overall in the world. Nexstar Digital offers local and national advertisers, a full suite of products and services through Stellar, our proprietary omni-channel advertising platform, including display, programmatic, mobile, social, e-commerce as well as OTT and CTV advertising. Let me now turn the presentation over to Tom Carter.

Thanks, Perry, and good morning, everyone. If you'll turn to Slide 7 in the deck, as Perry alluded, in 2022, the world began to wake up again to the benefits of the broadcast business model. As they say, what's old is new again, and we saw that adage manifest for broadcasting in 2022. First, with questionable returns on content investment related to direct-to-consumer streaming products, there is an appropriate heightened investor focus on free cash flow generation as the primary method of creating shareholder value. which favors the broadcast models. Free cash flow has always been Nexstar's primary performance metric. And today, Nexstar generates more free cash flow than many larger media companies. As a result, we saw streaming companies begin to eliminate their differentiated consumer offerings by adopting broadcast television's superior diversified model and going to market with an ad-based offering to consumers in the national market. And also broadcast has again proven to be the most important medium for engaging valuable live sports audiences. We too saw the firsthand -- that firsthand in 2022 in a number of ways. First, we saw that Amazon's Thursday Night Football product -- in their football product. Overall, NFL audiences on broadcast networks were up substantially in 2022, but not on Amazon. We saw this acutely head-to-head in the local markets where the Thursday Night football games aired both on broadcast in the markets of the teams play but also on Amazon Prime. In markets where audiences have a choice before to watch the game, 67% of the NFL viewers chose to watch their end-market game on their local broadcast station rather than on Amazon Prime. Audience prefer broadcast delivery where they can avoid technical challenges, and they have a local station, they know and trust with their shoulder programming that they prefer. Second, we saw with owners of sports team outside of football looking to maximize their local audience, fans and franchise value by returning to broadcast TV. As we reported previously in 2022, Nexstar entered into an agreement with the LA Clippers to air 15 games on KTLA and a few of our other local stations across California. What is interesting is that in the other -- in the over 8 games so far, KTLA has delivered a total audience that is 55% larger than the 29 games previously aired on the RSNs. Third, new sports leagues looking to rapidly grow audience are validating the power of broadcast. As you probably saw, the CW recently entered into a multiyear agreement with LIV Golf to broadcast their events. Turning to Slide 8. As many of you know, Nexstar is the #1, #2 or #3 affiliate for every major broadcast network. We carry the live sports, news and entertainment content these broadcast networks provide. While the premium network content, especially live sports like the NFL, is important to viewers of our local affiliates. It's actually the Nexstar-produced content that is responsible for the lion's share of our viewership and revenue. We produce over 300,000 hours of local content annually in the form of news, sports and local lifestyle shows and more than half of the viewership of our stations come from that content and other acquired and curated syndicated content. And translating that into dollars, Nexstar produced and acquired content accounts for approximately 70% of our station's core advertising revenue. Bottom line is that our local content is sought out by viewers and valued by advertisers. Turning to Slide 9. The value of and execution against our content and media platform has resulted in record-setting revenue trends for Nexstar. For 10 of the last 11 quarters, we set all-time high levels of quarterly net revenue, implying a compounded growth rate of 8.5% from the third quarter of 2020 to the third quarter of 2022 on an LTM basis. Our growth has primarily been driven by multiple factors, including continued strong performance of our local and national advertising sales teams, meticulous execution and maximizing the large and growing political advertising category, accelerating profitable growth in internally developed network businesses, including NewsNation, Antenna TV and Rewind TV, our ongoing ability to leverage the value of our content and scale to grow distribution rates in excess of subscriber attrition and continued focus on high-growth digital revenue through organic initiatives and M&A-driven opportunities. On Slide 10, you'll see, in addition to Nexstar's scale and success of our operating strategy, our top line growth has benefited from the continued diversification of our revenue streams. For several years now, over 50% of our total net revenue has been generated by distribution revenue. This contractual and recurring revenue source has historically been resistant to periods of economic downturn. Core television advertising now accounts for only 35% of our revenues and represents revenue from a broad range of industries, with approximately 2/3 of our core television advertising revenue being derived from categories which individually represent less than 5% of the total. Moreover, and most importantly, approximately 70% of our core television advertising revenue was derived from local advertisers, which tend to be much more stable in their spending. Moving to Slide 11. We have built an unparalleled competitive moat around our local advertising business with the substantial majority of our core and political TV ad revenue coming from local sources. Looking at our assets, we have the largest television station footprint and 120 local station websites that produce and distribute compelling live sports, news and other entertainment. We have the #1 or #2 rated local news viewership in 76% of our markets. And over the last 2.5 decades, we have developed a team of more than 1,500 local sellers and our stations have cultivated over 40,000 advertiser relationships. So why is our local focus most important? Local advertising is typically more stable in the challenging economic environment compared to national, which is generally more brand-focused. Local advertisers are far more focused on a call-to-action, such as did you get a DUI, call this number, and therefore, more easily see the impact of their revenues and profits if they slow advertising. And don't forget the substantial majority of the $4 billion plus in political TV advertising opportunity is spent locally. Our platform gives us the ability to deliver local audiences at scale to advertisers. You can sell local effectively with a local sales force and would be extremely difficult in an extremely challenging and a difficult long-term environment for any other company to replicate the strength and success of Nexstar's 1,500 local sales -- sellers in our markets. On the local level, there is no one in the TV industry with a greater sales resources and customer reach than Nexstar. Turning to Slide 12. With the recent acquisition of the CW, Nexstar's national portfolio has grown. Despite recent economic pressure on national advertising, it remains a very large and lucrative market that is double the size of the local ad market in the U.S. We recently announced the appointment of experienced sales and advertising executive, Michael Strober, as EVP and Chief Revenue Officer, responsible for leading the execution of the new advertising sales and go-to-market strategy for the company, focused on Nexstar capturing a larger share of the national pie. Michael has already built out a team of 3 experienced proven media sales executives. These newly created positions will enable the company to effectively leverage its sales efforts across a linear, digital, mobile and streaming platforms to deliver new levels of revenue growth. Now I'll turn it back over to Perry to talk about our longer-term growth initiatives. Perry?

Thank you, Tom. Turning to Slide 13. The thing I'm most excited about in Nexstar are multiple organic growth opportunities for outsized long-term value creation. I believe there are a few companies that have this kind of organic opportunity embedded in their business. Start with NewsNation. We continue to make progress building up the nation's only unbiased national news network to help frame the longer-term revenue opportunity for this asset. According to SNL Kagan, Fox News and CNN are expected to generate $2.9 billion and $1.7 billion of revenue in 2022, respectively. Next, the CW network. We continue to work toward our goal to make the CW a profitable broadcast network that we know it can be. On average, the big 4 networks generate $5 billion of revenue and $800 million of profit. So we continue to believe there is significant potential for our CW asset over the long term. Finally, the conversion of our stations to ATSC 3.0 technology presents Nexstar and the broadcasting industry new monetization opportunities, including high-speed data transmission and applications that could generate $5 billion to $15 billion of industry revenue in the not-too-distant future. Moving to Slide 14. We will now spend a little time with each of those opportunities starting with NewsNation. NewsNation is America's fastest-growing cable news network, and we're leveraging our core competency in news as a company to build a profitable and differentiated product. NewsNation is news for all America, and we firmly believe that the U.S. population is not as fractured as it has been for trade and that most Americans are fatigued by the constant division. The network is recognized by Watchdog groups, including Ad Fontes Media, NewsGuard and AllSides for its independent reporting and unbiased content. There are several reasons why we are very bullish about this asset. First, News Networks are among the most watched cable networks in total; second, NewsNation already has comparable distributions to the other cable networks; and third, we've been profitable since launch and recent high-profile hires are accelerating our ratings growth. We're extremely pleased with the performance of the network to date and expect to transition to a 24x5 News Network by the end of second quarter this year and 24x7 News Network by the end of '24. For with more on the CW, let me turn the presentation over to Lee Ann Gliha.

Thanks, Perry. Turning to Slide 15. In September 2022, Nexstar acquired a 75% interest in the CW Network for no consideration. We expect the acquisition will create value for Nexstar shareholders, both as an offensive and a defensive play. On the defensive side, the acquisition solidified the distribution and advertising revenue streams tied to our position as the largest CW affiliate and positions us to respond to potential future changes in the network affiliate ecosystem by owning our own network. On the offensive side, we really see the CW is instrumental to Nexstar in unlocking our national advertising opportunities. With the national advertising assets of NewsNation, our multicast networks and now the CW, we now can have conversations with the large national advertisers and brands that we weren't able to previously. This also presents us with cross-selling opportunities in terms of selling into our local assets as well. In addition, the acquisition established Nexstar more firmly as a participant in the free-to-consumer AVOD business with the widely distributed CW app. And finally, there is value creation opportunity through improved profitability. To achieve profitability, we have a 3-pronged strategy. First, we intend to improve and diversify the programming to align with audiences. As a reminder, we are locked into the programming for the 2022, 2023 broadcast season. So while we are limited as to what we can do on this front in the near term, we are already off to a great start with our recent exclusive broadcast partnership with LIV Golf. Second, we are focused on accelerating digital growth and maximizing the opportunity to monetize the CW's content and a library of third-party content available on cwtv.com and all major OTT platforms. Third, we are reducing costs and focusing on execution. We continue to expect to achieve profitability by 2025. Moving on to the ATSC 3.0 opportunity on Slide 16. We are upgrading our technology to enable us to monetize our excess spectrum capacity via B2B high-speed data transmission services and other opportunities. This is not a new business model. There are many satellite wireless and other telecom companies out there that sell in-demand high-speed data services to businesses. We plan to do the same. We expect to convert our stations to ATSC 3.0, reaching 50% of the population with consumer adoption of new standard TV sets to follow. We continue to believe the revenue opportunity for the applications of services using our spectrum could rival our retransmission revenues by the end of this decade. Turning to Slide 17. We wanted to address the concern we often get from investors and one that is embedded in our implied stock price. Investors are worried that there is not much of a future for our broadcasting business model as cable and satellite subscribers continue to churn in favor of direct-to-consumer services. But the truth is, if you look at long-term industry projections, they imply that Nexstar's business should generate long-term revenue growth and that the market perception surrounding the decline of advertising and distribution revenue is over exaggerated. The top chart of the slide shows that according to SNL Kagan, local broadcast industry advertising revenue is projected to grow over the long term. Bottom chart of the slide takes an illustrative look at what Nexstar's distribution revenue could be based on a variety of assumptions. We took the baseline SNL Kagan forecast for MVPD and vMVPD sub counts. You can see in these projections and in others out there, there is no expectation for subscribers to fall off a cliff. In fact, we believe there is a core base of subscribers, 73% of those aged 45 and above, which represent over 50% of the adult population that have a Pay TV service and are unlikely to drop that service. We have overlaid various assumptions for compound annual growth rate for our distribution fees per subscriber over the 2022 to 2026 projection period to come up with an implied distribution revenue figure. What kind of compound annual growth rate do you think we can negotiate with the MVPDs and received from the vMVPDs? 5%, 10%, 15%, 20%? We have several factors in our favor. Despite industry projections for continued subscriber attrition. First, we have viewers. Audiences are tuning into the broadcast networks for the NFL, other live sports and entertainment content and to our stations for our local news and syndicated content. Number two, the dollars the MVPDs pay broadcast are still lower than the relative share of ratings would indicate we should be paid. And three, we have our scale. We are the largest local broadcasters. So we are very important to these MVPDs, which provides us with a very strong negotiating position. As you can see, no matter your assumption, the math shows that we should be able to deliver strong revenues for the company for the foreseeable future. And coming behind all of this are the organic growth initiatives of NewsNation, the CW and ATSC 3.0 that Perry talked about, which should drive growth for us longer term. On Slide 18, you will see that Nexstar's consistently strong free cash flow generation remains one of our most powerful differentiators from not only our peers but from our larger diversified media companies as well. We returned $892 million or 64% of our free cash flow to shareholders in the LTM period and recently increased our 2023 dividend by 50% to $5.40 per share, representing a 2.6% yield. Our capital allocation priorities remain focused on value-enhancing organic investments in our business, accretive M&A, modest deleveraging and shareholder returns through a mix of dividends and share repurchases. Turning to Slide 19. While we are executing well in our business, we continue to place a strong emphasis on our ESG practices, including taking a leadership role in supporting the communities in which we operate. Environmentally, broadcasting has already has a limited impact on the environment, and we began a process of collecting data to measure our impact with the intention of establishing strategies to reduce and/or limit our impact in the future. Socially, our commitment to unbiased fact-based journalism, community involvement and DEI is focused on having a positive impact on our society through our journalism service, while also fostering positive and inclusive workplace environment. On the governance front, we have taken a number of steps to improve our practices. And this year, we are taking action with plans to declassify our Board of Directors. As a result, Nexstar was ranked #1 best ESG for mid-cap media companies in the most recent institutional investor survey and awarded an ESG rating of low risk by Morningstar. Now back to Perry to wrap up. Perry?

Thank you very much, Lee Ann. Moving on to Slide 20. In closing, we think the investment case in Nexstar is pretty simple. The Nexstar stock is one of the best short- and long-term stock price performances in media, one of the highest percentage returns of free cash flow to shareholders in media and solid long-term growth prospects and the low valuation. Year-to-date in 2022, Nexstar generated an all-time high net revenue for that period and was one of the few stocks with a positive 1-year return in all of media. We have an attractive business model that generates significant free cash flow with consensus estimates projecting that Nexstar will generate $2.9 billion of cash flow from Q4 2022 through Q4 2024. That represents almost 40% of our current market capitalization. We returned 64% of our LTM free cash flow to shareholders and increased our dividend by 50%, representing now a 2.6% yield. We have a strong balance sheet with a BB credit rating and low leverage of 3.2x. We have excellent short-term visibility and multiple long-term material growth initiatives, '23 and '24 benefit from new distribution deals and 2024 is the presidential election year. We also have multiple organic growth drivers, which we talked about, including NewsNation, the CW and ATSC 3.0, each of which could generate material growth for Nexstar. Nexstar shares represent a valuable investment opportunity for existing and potential shareholders, and we are the largest broadcast company with a top-tier operational performance record in the sector, but we trade at a mid-teens '22, '23 free cash flow yield. All of that said, thank you for taking your time to hear our story today. We look forward to seeing you in our stock and on our earnings call on February 28. And if investors or analysts have any questions, please feel free to reach out to Lee Ann, Tom or the team at JCIR. Enjoy your day, and this is the end of today's call. Thank you.