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

Thank you for joining us this morning. My name is Marlane Pereiro. I'm the High Yield Cable and Media Analyst at Bank of America. Today, we're happy to have with us, Lee Ann Gliha, CFO, Nexstar Media Group. Thank you for joining us.

Thank you. Thanks for having me.

So Lee Ann, just to start, starting kind of more on the industry side of things, just your thoughts on the big picture impact from the Disney-Charter dispute on the broadcasting industry.

Yes. I appreciate you having us here, and thanks for the question. I think we get asked this quite a bit, and I think we had a reaction right after the Disney-Charter deal that folks thought that this was potentially negative for us, but we actually think that the outcome was an absolute positive for the broadcast sector. The deal that -- the dispute that Disney and Charter had really wasn't about us. It was about 2 things. So first of all, it was about the fact that Disney had created some DTC services and was taking content and putting it outside of the bundle, which was causing some of the cord cutting that Charter was seeing. And then second of all, it was due to the fact that Charter paid Disney a lot of content fees and some of that content fee is going towards derivative cable networks that had lower viewership. So not -- you had FXX and FXM and Disney -- Nat Geo Mundo and some of these smaller networks that were just not generating significant amount of viewership yet they were getting paid. But at the end of the day, the resolution, we think, just bodes very well for our business. At the end of the day, what happened? First of all, Charter said, "Look, we definitely want to do a deal with Disney. We think their content is good content. So we're going to pay for that premium content." So they paid for the ABC O&O stations, they paid for ESPN. They paid for the Disney channel. They paid for all of that -- National Geographic, all of the content that was really premium content. And that, we think, is a good sign for us because when you think about Nexstar's content, we have the most premium content when this dispute happened, I had a ratings guy that said, "Look, can you just go back and pull the ratings for 24 hours a day, 7 days a week for all of 2022 and just tell me what are the top-rated networks?" The top 4 networks were the broadcast networks. And those top 4 networks generate over twice -- each of them generate over twice the viewership of the #5 network, which is Fox News, and they generate 4x the viewership of ESPN. So when you think about what is premium content, it's the broadcast -- it's the broadcast networks, it's the content that we bring. So the fact that Charter was willing to pay for premium content is beneficial to us. The second thing that happened was in that deal was that Charter dropped those derivative networks that we talked about. So it frees up some money that's in the system to be used to pay for that more premium content or to create more margin for Charter. The other thing that I did when we looked at sort of the overall landscape, I said, let's look at how much money is actually being paid to those sort of lower-rated cable networks. And I took that analysis, I did, of the top-rated networks, and I lined it up with the cable affiliate fees and what you can find is there's about $5 billion in basic cable fees that are paid to networks that are rated 101 and below, and there's about $16 million that's paid to cable networks that are rated 51 and below. So to the extent that some of these smaller networks get rationalized, that should free up dollars that could be paid to more premium content and we are right now under-monetized. If you look at our share of viewership versus our share of the dollars that are being paid to content, we are not getting our fair share. And so there would be an opportunity to reallocate some of those dollars to us. So we thought that second point was a good outcome for us. And then the third thing that happened was that they brought DTC, the DTC -- DTC services that Disney had back into the bundle. So if you're a Charter customer now, you don't have to churn. You've got all the content that you want within the bundle. And any reduction in future churn, we think, is going to really benefit us in our business model as well. So that will take some time to kind of filter through the system because those deals between the distributors and the content companies come up only every few years. But we think over time, that should really help reduce the amount of churn that there is in the pay TV landscape.

Great. Just following on with that, sports leagues and teams understand the value of broadcast television, yet ESPN is planning a new foray into streaming. We also know that by the terms of the Charter deal, this new service will be included in the bundle. So is there any other impact you think the launch of this service could have on the linear ecosystem? And how do you view the importance of sports to broadcast television?

Yes. I mean, look, I think that the -- there's been a general concern -- look, ESPN is a great product. People like to watch ESPN and no knock on that content at all. But at the end of the day, we just went through the numbers. The broadcast networks have the lion's share of the NFL content and have the lion's share of the viewership. So we don't think that there should be necessarily any kind of negative impact on our business as a result of this launch. I would say ESPN and I think other content companies are sort of realizing that you do get paid better by being part of the bundle, right? I mean I think Kagan has some numbers out there that say ESPN gets what? $9 or $10 a sub a month. Broadcast doesn't get that. So it's a -- the amount of price that they would have to pay or offer for customers to get that new DTC service is going to be pretty high. So we'll have to see what the success of it is, how that is -- I mean it will be a great service, but I don't think it will impact our status in the bundle, given the viewership that people are -- or given the viewership of our broadcast networks.

Great. Nexstar is best-in-class in the television landscape given its scale and diversity, so can you talk a little bit about how Nexstar is differentiated versus your broadcast peers? And can you also address its differentiation as it relates to the ability to continue to grow retransmission revenue?

Yes. I mean, I think, look, the -- we have a lot of peers. I think that the next or -- we've gotten to a scale that is just a little bit differentiated. From a revenue perspective, we're almost 50% bigger than our next largest peer. We cover -- between us and our partners, we cover 68% of the population. We are typically -- well, we are the #1, #2 or #3 affiliate of all of the major broadcast networks. We're a major affiliate of CW. We own the CW. So from a distribution perspective, we've got a huge amount of scale. And that allows us to really benefit from that in any negotiations. So if you're a distributor and you're going to have a conversation with us, it's going to be a big conversation because we are a large player in the sector and that provides us some benefits in terms of ability to continue to grow distribution revenue and the fact that we have clean hands. We are looking to benefit from that pay TV ecosystem. We're not creating our own DTC services. We've got content that their viewers want. And by the way, it's not just the broadcast network content. It's our own content. If you go back and -- we went back and we looked at all of our viewership for all of our stations over the last 12 book period and about 45% of our impressions are coming from our own content. So non-network content, so our own local news and our own syndicated content. So we have our own content that we create ourselves is actually incredibly valuable as well, which helps us drive that distribution revenue.

Great. And there has been some confusion it seems regarding the net financial contribution from MVPDs versus virtual MVPD subscribers for broadcasters, which you did address a bit on your last call. So can you provide us some clarity on how we should think about the difference?

Yes. I think this has been something that came up, I think, by one of our peers, and it was meant to be, I think, a positive thing and it got kind of convoluted a little bit. So the way that it works is when we have a deal with an MVPD, Nexstar negotiates that deal, we get paid a retransmission fee and then we will go turn around and pay our content provider, our network, a reverse comp fee or an affiliate fee. And that comes down to a net retransmission fee. When it's a virtual MVPD, typically what happens is the networks will negotiate with the vMVPD partners, and they'll just pay us a net fee, but I think that that's just putting a little bit of a simplistic spin on it because there's a variety of different relationships and a variety of different economic relationships we have with all of these different parties that all contribute to the net economics. If you just go back into the third quarter of last year when this first came up, we made a comment on our earnings call that our virtual MVPD net fees and our net retrans for MVPD fees on a per sub basis were about the same. Then at the end of 2022, we renegotiated a bunch of our retrans deals and all of a sudden, our MVPD net fees were greater than our virtual MVPD fees. That wasn't a bad outcome. That was actually a good outcome. And so at the end of the day, we really look towards our net retrans fees as a way to drive our free cash flow. And there's a lot of different components to this, right? There's the negotiation we have with the cable companies. There's the negotiations we have with the networks, not only for the vMVPDs but for our own affiliation deals. And all of that money comes in and it's all cash at the end of the day, and that's what we're driving towards is to generate the most cash we can out of all of those relationships. And if we get a little more money over here and a little less money over here, at the end of the day, we're still generating significant cash, and we want to continue to grow our net retrans numbers, and that's what we're looking to accomplish. And I don't think people should get too worked up about kind of the specifics of those numbers because at the end of the day, cash is fungible and where I get that money, it just kind of may depend on any given deal.

Great. And Nexstar historically has grown through M&A. Now that the broadcast television industry is largely consolidated, and deals are somewhat scarce. Can you discuss the growth opportunities that Nexstar is pursuing now?

Yes. I mean look, we always love to do a station deal or a content deal if they present themselves and are doable under the current regulatory environment. But I think at this point, we've got a fairly big portfolio and a nice platform that we're looking to kind of better monetize and grow. So that kind of goes down into three or four different categories. On our last earnings call, we announced that we are bringing in-house our national sales force. And we're doing that because we've got great scale now, right? We've got all of our local stations, which cover 68% of the population. We've got our cable network, NewsNation. We've got our multicast networks, Antenna TV and Rewind TV, and we've got our broadcast network, the CW. So we've got a significant portfolio of assets that are going to be interesting to national advertisers. And we really feel like there's nobody better equipped to sell that national advertising than we are. We can be more creative about providing offers to advertisers both on a local-activations perspective and then on a national-branding perspective. And so we're excited about the potential opportunity from -- maybe taking a little bit more of the very large national-advertising pie from that initiative. So that's one thing that we're looking to grow organically. I think the second thing which is obviously the CW network. We're in the midst of transitioning that network from something that was focused on the younger demographic to more of a broadcast demographic. You've seen us make acquisitions of a number of sports properties. We have LIV Golf. We've got ACC football and basketball. We announced just a few weeks ago that we signed WWE NXT. We've got NASCAR Xfinity coming in 2025. So we've got a variety of different sports properties that are coming to the network that we think is going to be much more interesting for the broadcast audience and will drive viewership and will help us drive our advertising and distribution revenues in that regard. So we're excited about that opportunity. NewsNation is another opportunity. I think when we -- when I talk to you guys about the ratings, I said the top 4 networks were the broadcast networks, well, #5 and #6 are Fox and MSNBC. So -- are FOX News and MSNBC. So we saw the opportunity there in news and are going to look to continue to grow NewsNation. We are -- we continue to be the fastest-growing news network in prime time. You probably saw we just put out an announcement that NewsNation just got the fourth Republican presidential debate that will air the first week in December. So the first two Republican debates were on Fox. The third one was on NBC and the fourth one is on NewsNation. That's pretty fabulous over just a short period of time. So we're excited about the ability to continue to grow that segment because we see that as one of the reasons why people tune into television is for news. And then the last piece is -- and this is a little bit longer term, is the development of the ATSC 3.0 technology and the ability to upgrade our signals and allow our spectrum to be used for other purposes than just transmitting our television signal, to be able to lease our excess spectrum out for high-speed data transmission and the ability to sort of generate revenue in that regard. And that will take some time to kind of deploy, but we think that could be a third leg to the stool longer term. So we're -- we've got a lot of things to look at. I mean -- that doesn't mean we won't continue to look at an M&A with the company's created tremendous value for its -- all of its constituents over time by executing on very accretive M&A, but that has been -- given the scale of the company now a little bit more scarce, especially given the economic environment we're in.

Great. And you did note seeing some improvement in the ad market heading into 4Q. So can you just discuss some of the drivers and what you're seeing and maybe even touch on some categories that are driving that?

Yes. I mean, look, I think the ad market, we've seen some sequential improvement. The rate of decline in the third quarter was less than the rate of decline in the second quarter. And we did note on our call that we saw that the rate of decline that we were pacing at was less going into the fourth quarter than it was in the third quarter. So there's some positivity in that regard. We didn't -- I think the couple of categories that we did call out is we've seen really good growth in auto year-to-date, which has been a positive for us. And that really counterbalances the declines we've seen in the sports gambling segment. It's been kind of a reversal of fortune. When auto was declining, sports gambling was increasing and now that auto is increasing, sports gambling is decreasing. But those were kind of the major categories that we call out. I think otherwise, it's been fairly broad brush in terms of the overall impact, which to us reads as just an economic impact.

Great. And then can you discuss your expectations for political ad revenue? How you think about it relative to '20? And then how your scale could provide some advantage over peers?

Yes. I mean, look, we feel that 2024 should be a nice political year. The amount of expected fundraising is very strong in comparison to '22 and '20 by any sort of prognosticator that's out there. So we're bullish about what the opportunity will be. We think television broadcasting is still going to be the main focus for candidates and for PACs in terms of where they want to put their money. Historically, if you kind of look, television is typically used for getting the messaging out there, digital is more used for fundraising, but there's plenty of money to go around to kind of all the different media. We are a pretty scaled organization at this point, covering 68% of the population. And we do an analysis every single year where we go market by market and we look at all of the potential races that are going to be contested and how we think we can benefit. And we are in -- given our footprint, we're in over 80% of the contested elections in 2024, which means that we have little sort of more minor geographic risk. So where some of our peers may be more concentrated in certain geographies, we don't really have that problem. So if like a race in one market goes cold, that PAC can move its money into a race in another market that it may be more competitive and usually that can be all taken care of within our portfolio and our footprint. So we feel good about where we're positioned and how we're going to take advantage of it in the 2024 election cycle.

Great. And then moving on to distribution. Any upcoming renewals we should be mindful of?

Oh, yes, we always have renewals. And I think in 2022, we talked about we had -- about 50% of our subscribers were renewed. In 2023, it was about 40% it's what we said we had up for renewal. And then 2024, obviously, will be the balance of that, which is a smaller percentage. But you saw we, obviously, did DirecTV. That was a big one that got announced. We did Cox, and we've got one more big one before the end of the year.

Great. The CW is an unrestricted subsidiary. And so its impact is outside the credit for the purposes of your debt. But can you explain the rationale for the acquisition and your strategy overall for the asset?

Yes. So the CW was a -- is a network that because of our acquisition of Tribune, we were the largest affiliate of. So it was a network that we were interested in making sure was as successful as it could possibly be because we had a lot of our revenues tied to the success of that network. And so when there was an opportunity to take that on, we decided that it made sense to do that. And it was partly a defensive play to make sure that we could lock in those revenue streams, but then also an offensive play in the sense that we think we could make it better. We were -- what we're doing right now is we're -- as I talked about, we're transitioning the programming from focused on the 18 to 34 demographic to a much more broad demographic by putting sports on and the like. And we think that should really help by driving our viewership, which will drive advertising revenue, which should drive distribution revenue as well. We've talked about this on a couple of earnings calls, but our CW affiliate group is our most profitable affiliate group that we have of all of our station groups. So we're excited about the potential to kind of steer the network to -- for the benefit of our stations and the benefit of our other affiliates.

Great. Your leverage is among the lowest in the broadcast peer group. You have a very strong Ba3, BB+ credit rating, your term loans are trading roughly around par. So how do you think about your leverage profile going forward and uses of cash for your significant free cash flow generation?

Yes. I mean, look, we're -- I think we feel like our leverage is in a good place. We obviously generate a significant amount of free cash flow on a yearly basis. We have very few claims on that cash. I think our dividend is less than $200 million a year. And so we have the ability to use the remaining amount of cash flow either for debt repayment, M&A or repurchases. And so we've really like look to sort of be the most opportunistic we can and sort of how we're going to create the most value for the company and our shareholders by -- we've allocated a good amount of that free cash flow to -- historically, we paid down a bunch of debt. But at this point, we've been allocating more of it to share repurchases, given that we feel like our leverage level is at a good point.

Great. And then how does the current cost of capital and/or regulatory limitations on stations, shape your current view on M&A?

Yes. I mean, look, as we all know, in a down economic environment, there's far less M&A that's available because people don't like to sell at a low valuation point. So there hasn't really been a lot for us to kind of look at or to react to. We have to look at what is our free cash flow accretion on any deal that we would do, right? And cost of debt capital does play into that and makes it much more difficult to make those deals work. But if M&A comes up, we'll take a look at it. We're going to look at it like we've done in the past. We did 2 very large and successful deals over time with the Media General deal and the Tribune deal that worked out for everybody. So to the extent that something presents itself, we're going to look at it like we normally would and make sure that it's going to be something that can be within the scope of our capabilities to generate good accretion for our shareholder group.

Got it. And then just a follow-on question. With the FCC fully staffed, being in the broadcast industry, do you envision any easing of limits on station ownership or anything of that nature?

I don't know that we have any visibility into that at this point. I think we would all be supportive of that if that were to be the case. But I don't necessarily know that that's on the horizon.

Got it. Great. We do have a few extra minutes, if we could open it up for Q&A, if anyone has any questions.

If not, I can go back. I did want to -- I did miss one point I wanted to talk about with respect to sports, which is we really think that the two main drivers of our business model in terms of the broadcast virtuous cycle or really sports and news, people -- there's not one sports league that's out there that doesn't want to be on broadcast. Broadcast is still beneficial to the sports leagues and teams because you're getting to a much broader viewership base than if you're going to be in a cable network, which is -- has much lower distribution or just be on the DTC's platform, which would even be lower distribution. We are twice the viewership or the reach of any sort of DTC platform. And so that really helps create franchise value for these sports organizations and a democracy of ability for fans to access the team and creates a desire for fans to go to the games and create ticket revenue for the teams as well. And so we think all of that is a reason that broadcast will continue to sustain because teams want to be on broadcast, people watch sports and it just creates this sort of virtuous cycle. I mean, I guess a couple of little factoids to kind of throw out there is Amazon has Thursday Night Football and you may or may not know this, but in the home and away markets, that -- those games are actually aired on broadcast television. So in those markets, everyone has a choice. If they're going to watch it on Amazon Prime or they're going to watch it on broadcast television. And it's almost 2/3 of the people choose to watch it on broadcast, it's a 1.75:1 ratio. So it's a powerful medium. People choose to do it. I mean similarly, if you look at ABC is airing Monday Night Football, forever it's just been on ESPN. And now that it's being simulcast, it's about 60% of the people are watching it on ABC, which I think is another -- it's just a couple of facts of just the power of broadcast, just -- it increases the viewership, and it creates value for these -- for the programming.

Great, okay. Well, thank you, everyone, for joining us and especially thank you to Lee Ann. It's a pleasure to have you.

Yes, thank you. Appreciate it. It's freezing in this room.