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

So what type of sports content should we kind of assume to be next on the laddering here. Like if you think about like the types of sports, Live as a new sport, golf is greater from past. So what other leagues or sports should we expect -- you don't have to give a contract talks, but like is it something along the lines of like a more race car stuff like we think about like the genres you want to be in, what's our next view?

I think suffice it to say we've spoken to everybody number of conversations going on around Power 5 conferences in their television packages and conversations in motorsports as on the board of the NHRA. And so we have a lens into motorsports. And golf for us Live was kind of Mr. Right now and.

It was just free basically, right? It's like -- it just dropped in your lap, right? Yes.

Well, it didn't drop in our lap, we had to go get it and we had to do a lot of selling, but we did get it and they were willing to take a chance with us. We're willing to take a chance with them. And I think both parties are pleased at the early going here. But I would think that major sports, major sport leagues and major collegiate leagues are all interested in having conversations with us, and we have had. Now rights deals are staggered and -- there may be some things that could come our way as early as this fall. There may be things that wouldn't come our way until 2026. But we're in talking to everybody.

Yes. Sports fans have an ability to find the stuff they want to watch, where they want to watch it, right? It's not like you're going to watch golf, you'll figure out where it is, right? It's -- so there's not initial discovery risk when it comes to sport. We'll find it. Okay. Something that we've talked about in the past to is next-generation TV, I could say, ATSC 3.0, but I won't. What is -- the big push for you in this industry, this is a focal point for years now, we've been doing these conferences. What's the vision and timetable for a meaningful revenue contribution from this next-gen business?

Maybe I'll take that one. So I think meaningful revenue contribution is a ways away still, right, because we still have to get the network upgraded and everything kind of pulled out from that perspective. But the thing that we think is interesting about it now is that it's an opportunity now unlike it ever could have been before because of the consolidation in the industry. If you think about just roll back 10 years, if you wanted to try to get to a nationwide network, you'd have to cobble the other multiple different processes. Now today, we've got a partnership with Scripps. And together with our footprint and their footprint, we cover 90% of the country. And so if you were on the other side of that equation, if you're a business that's looking for nationwide network or ability to transmit data and i-speedway, all you have to do is come to 1 party. And I think on top of that, the other thing that's interesting is if you look at other guys that are trying to build new just from scratch, we already have infrastructure in place in terms of our towers. And so it's the ability to kind of get that upgraded and rolled out. But we're in lots of conversations with a variety of different businesses. We're working with HPE and with Sony on a variety of different opportunities with for applications for that spectrum that we've got. And we think that we'll have something to kind of test in the short term. And longer term, it will be an opportunity for us.

How important is deplication of 1.0, right? Is that a major gating factor here, too?

Well, it is -- it's kind of a limiting factor that we have to simulcast. So that spectrum we can't provide for ancillary use. So hopefully, the big announcement out of NAB was the Chairwoman of the FCC saying she is prepared to to support this public-private task force, much like when we converted from analog to digital, there was a public private task force that figured out kind of the rooms of the road and help to figure out how best to commercialize that and and move it along to the next generation. So an elimination of the simulcast requirement at some point in time, a sunset of 1.0, so the 3.0 becomes the standard at some point in time, would spur set adoption, additional manufacturers others than Sony to be in the business. The real opportunities -- I mean, we talk a lot, 1 of the partnerships we have with [ Herst ] is for enhanced her scripts, enhanced GPS, I think of autonomous tractors plowing their fields without somebody sitting in the -- in the cockpit or -- and really, there are a lot of people that employ or deploy 5G networks today, whether it's for video, whether it's for fleet management or whatever, we can provide those same services at a fraction of the cost with 3.0, and that's where I think a lot of our early customers are going to come from. They're going to see the opportunity. We've got a meeting with [ Penske ] here in the next month. He's got a fleet of 70,000 trucks in the country. So if you need to know where something is or it needs to know where it is, that might be a service that we can do business with. And so we've got to build out 3.0 in 100% of the country right now. It's about 60%, 70%. And then we've got to clear enough spectrum so that we can actually deploy some of these cases. But I think you'll see an announcement before the end of the year, then in our partnership with Scripps that we have a client that is paying money to test a proof of concept with us. And I think that will be the first step forward.

So as on the meaningful question. I think proof of concept is good enough to get people to pay attention, right? Because this has been long talked about, but the opportunity is to just prove it can work and let people start believing because at this point, we've been waiting. So you think in the next 12 months, [indiscernible] months, we'll start seeing proof of concept.

I think that we'll be on that track. I mean, I think we'll have -- we'll announce a commercial partnership with a client or 2 before the end of the year. I don't think the first partnerships will generate huge amounts of money, but will demonstrate that money can be generated. And I think what we have, we have a toll road, right? We don't want to design. In fact, all of our design for 3.0 is open source. Anybody with an idea, we even have a kind of a developer's toolkit that will provide free of charge to anybody. Your idea, but if you want to deploy it, you have to come talk to us about our toll road. And so we're not going to -- we're not trying to force technology or a use on the marketplace. It's what the market wants. And we'll be happy to collect the toll.

Okay. Okay. Great. You mentioned before about advertising. We're worried about the advertising outlook over the second half of the year, especially as political is lapped on a local level, right? So we're worried about that. What are you seeing across your end markets in the first half and the second quarter you're a little more optimistic than we are. So what are you guys seeing right now on the local side?

Well, I would point out, Michael, that we're paid to be optimistic. Listen, I think that if you look at core -- and let's put the political side, that core local and national. Local is performing much better than national, but I would say that both have slowed slightly from the results we posted in the first quarter. I would tell you that a bright spot that you just haven't seen yet is political advertising, we got political presidential pack money earlier in this cycle for '24 than we have at any point in the future. Our first dollars came in April of this year. So we think that is a harbinger of the quantum of money that will be spent between now and November. And we think there'll probably be more spent the balance of '23 than most folks are thinking. It will not be a game changer, but it's -- we think the trends are certainly our friends.

And an auto update, we've been talking about autonisince the pandemic to supply chain issues. Where is your conversation with the auto dealer or their commitment to coming back? How does that look versus where we were a few years ago in terms of spending?

Do you want to.

Yes. I mean, look, we're still very off of where our highs were post pandemic. But auto has been up for the last few quarters, and it's still up. I think the -- there's some impacts in terms of some of the Japanese manufacturers, don't have as much inventory on the [ launch ] as they would have liked to have had. And then we've got, obviously, the issues with the overall interest rate environment, which we think is impacting car buying. But it's recovering, and that's been nice to see that kind of coming back at this time.

So you have that as an option to have come back, right? That's we need the -- we basically -- when I asked the Disney CFO today, what will be the biggest surprise a year from now, as you said, that we'll look back and realize that things were not as bad as people worrying about 12 months ago. Digital advertising, I've asked about this in the past [ too ]. It's small, but it's an important vertical for you. If you walk us through the evolution of your digital strategy and then what role will the CW and the NewsNation play in building out more digital advertising revenues?

Well, the CW app will cross the 100 million unique user threshold before the end of the year. And that is a major engine of revenue both from CW and for the company. We are spending money to improve the [ Hill's ] digital outreach as well as our local stations. There's a huge push to develop -- we don't -- we sell the digital video that we have, and we could sell more if we would make more. And so there is a big push internally to redesign and reemphasize in our local newsrooms that we need, first and foremost, digital video. And so we think that will manifest itself as we continue to grow. Digital is 8% of our total revenue, somewhere thereabouts. Our internal goal is within 5 years, that should be 20%. And you might say that's not enough because digital revenue was greater than linear television revenue, which is true. We don't compete in a huge way in the search area, with Google and other major players. But I do think we have the ability to offer bespoke and white glove service to local advertisers. We can help them navigate through because they're as confused as many of us are trying to find things and find things that work. And we think that local service aspect, again, with our footprint, we're the seventh largest destination for news and information in the country right now. And our goal is to continue to earn our way up that list.

Cool. You've now increased the dividend pretty dramatically over the past year and continue to buy back stock. Walk us through your views on capital allocation. And there's many updates to your leverage target ratio. So the answer to your...

It's a free cash flow question earlier. I mean, I think the cool thing about Nexstar is that not only do we generate a lot of free cash flow, the shareholders actually see it. We are pretty aggressive in terms of both dividends and share repurchases. We've increased the rate of our dividend by 50% this year versus the typical 25%. So we are focused on returning that capital to shareholders. We do think our stock price is undervalued, which is why we've been allocating the lion's share of that capital to share repurchases that as you mentioned, north of 20%.

You mean [indiscernible] is not fair value?

Right, exactly. Our leverage situation, we're at 2.9x total leverage. This is obviously off of a political year, so it will tick up a little bit this year. But it's at a moderate level, we look at what's our after-tax cost of the debt. And if we were to use our cash flow to repay that versus buy back the stock. And I think the the pendulum is tilted towards the stock buybacks in that regard because we don't feel like we're at in any sort of overleveraged situation. I think we're actually pretty nicely leveraged. And so that's kind of the plan for the foreseeable is to, obviously, first and foremost, as we've always said, if we have M&A, that's how the company has built itself has created the most shareholder value, that's where cash flow will go first, but after that, and we'll look to return the capital to shareholders in the form of repurchases.

I know as an owner operator, you guys are always really thoughtful about your -- the bets you're making. If you jump ahead a few years from now, how different were the same with the future Nexstar look, right? So you have a vision, 3, 5 years out, what will be different about this company?

Well, I think the foundational elements of local and content will be -- won't change. I think if I had to fast forward, I would look -- I think there will be more opportunities in the national space to layer on to the content foundation we've already created. I think the company will continue to grow. It would be entirely boring for me and Lee Ann to do nothing, but pay down debt and buy back stock. You're probably paying me too much to do that, if that's all we do. But we had some interesting conversations yesterday and -- the art of the possible, I think our balance sheet and our leverage position is an asset of the company. And so what can we do with that? And we've always kind of ascribed to when other people are fearful as when maybe we should wait in and make some decent [indiscernible]. Take some considered risk, make some bets when other folks are either constrained or are fearful.

I think in the -- you went on to ask Lee Ann the first question, but the question I want to ask -- end with is what do you think is the biggest price in the future that investors don't believe or give you credit for today? I know what that answer is. But what's the thing that you think look, I'll be back here again next year, saying the same thing, what's that 1 thing that drives you both crazy that we on Wall Street are not not giving you credit for?

Well, if you assume that the terminal value of Nexstar 10 years from now was zero, and you did a DCF back from that. That would imply a stock price that probably is in the $400 range, right? So right now, the assumptions would be that our value is less than zero, which is counter into hard to believe, right? And so you can be a sanguine or as sober or as pessimistic about the future, right? And you look at sub declines that have happened and we believe they level out of certainly. But even if they continue to decline, they don't go off a cliff. It's like you don't lose 50% of your subs in a quarter, right? And so this company will produce prodicious amounts of free cash flow for the foreseeable future, and I just don't think we're giving credit for that. We're going to do half our market cap in free cash flow, if you add up '23 and '24. How many other companies do you talk to? We had more free cash flow than Disney last year. And we don't even talk about Paramount Global anymore because their numbers have gone negative. We obviously we will be focused on free cash flow regardless of the size of company, no matter how big we get, and I think that's what has gotten us to where we are and we'll ultimately keep us being successful.

It's time for questions from the call -- any questions from the audience? I think you guys can send me over my brownie questions. You want to raise hands, yes. I guess yes, you'd be respectful.

So I have a credit guy. So you talked about the balance sheet and leverage that being your asset. So -- and you've obviously been generating some free cash flow, buying back stock at stocks forming what it needs to do. Do you -- what's your taking leverage up higher than it is right now to accelerate the shareholder.

Yes. Look, I think it's a balancing act, right? I think, first, we've been pretty solicits of shareholders in terms of what leverage level do they want companies to be at, right? And we've been told sort of time and time again, under 4x in order to sort of maximize their shareholder base. And so that's -- we are there now in that level. I think then the other question is, what's our opportunity set, right? Do we see M&A or organic investment out there in areas that we need to reinvest in the company and do that. And because that historically if you look back that's what grew the stock price tremendously. So that's -- we want to be able to have that opportunity opportunistic opportunity. But at some point, I think you're right, you're going to have to sort of look at what's our leverage and what could we be doing for our shareholders in a different way. I don't think we're quite there yet given where we are in terms of the opportunity set and where our current leverage level is, but that is something that we definitely think about constantly.

And just as a follow-up, given that you're seeing from ownership perspective, what M&A could you guys do it in that level of flexibility in the on CW, but is there any other acquisition that we need that balance sheet?[indiscernible]

Yes. I mean, look, I think you raise an interesting point too because we are so large at this point in terms of the types of deals that we have to do that would create a need for a substantial balance sheet component are relatively small. But I think from our -- we obviously are, first and foremost, interested if there are station deals to do in the markets that they're in, we're in, we're going to go and try to do those. You probably saw we announced this acquisition of [ KSI ] in San Diego a couple of days ago, and that was fabulous. So to the extent we could find more like that, we'll do that. To the -- but then CW is a good example, right? Here's an asset that was very complementary to every piece of our business, that was content driven and is going to help us grow our overall not only our that business but will grow our stations, it will help us with our overall national footprint. So it was very interesting from that perspective to help grow it. So if there's other content type acquisitions, if there are other businesses that can leverage assets of the company, our sales force, those are types of things that we would look to do. That could be a claim on our capital, Digital, as Perry said, it's something that we're focused on as well.

So the nice thing about CW, sorry,[indiscernible].

No, I was just going to say, we're a content company, and I think assets will be content related, right, content or content adjacent but content related.

Because I think 1 of the biggest challenges in this world is a network company where you have to defend the cost of your affiliate fees like the price of [indiscernible]. And if you buy CW, the rates are so low that you can actually grow affiliate fees, right? I think it's harder if you are a company that has been in the business for a long time and you're looking at your content over the top and have to defend the value of your affiliate fees. So that's why I think CW is so smart. Anything else? Yes.

So 1 advantage is whether expanding or exist in general as your reach versus the networks. But at the same time, while there is an advantage, it's relatively limited in terms of the people who actually pick be the air side of the TV bundle. Is there an opportunity to lean on each of that? Or does that feel model.

No, I think there are creative ways that we can -- 1 of the things we have in addition to our primary stream of our stations, and we have these national gets that are fairly fully distributed that are free over the air and have at least half or more of their coverage is also duplicated on cable. And so can you do something with that and create another channel, a manning channel for something you're doing over here or an in-cockpit channel for the primary race that's on the screen and make these multiscreen experiences. And those are the kinds of -- we're looking at all the assets of the company. With our CW app, we could stream cockpit camp from every driver in an [indiscernible] race and in addition to the primary stream. And so you could make it a multiscreen experience. And so there's -- but I don't want to sleep on the reach question because it literally is [indiscernible] -- market is 35% additional circulation, the wired universe doesn't reach. So it's not -- believe me, the team owners know it. They know that they want access to that audience.

Yes. It's used a long-term problem. We have the NBA tomorrow. That's the question for the NBA, what do you guys think about reach going forward relative to your last deal. Any other questions? These are great questions. Anything else? All right. Perry, Lee Ann, thank you guys so much for being here. We really appreciate it.

Thanks for having us.

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