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

Okay, we're going to get started. We are pleased to have back at the conference. Perry Sook, Founder, Chairman and CEO of Nexstar Media Group; along with Lee Ann Gliha, Executive VP and CFO. Guys, thanks so much for being here.

Thank you.

Thanks for having us.

So maybe I'll start with the high level. So the future of the pay-TV business has been top of mind for investors. You've been very clear in your view regarding the continued importance of broadcast in the television ecosystem. I thought maybe you could speak a bit more to your viewpoint, what would your pitch be to investors skeptical around the future of your core broadcast business?

Yes. Maybe I'll start with that. I think there's -- I think, first of all, the important thing to know about the broadcast television business is that from a content perspective, we have the most watched content that is available that's out there. We did an analysis last year that looked at all television networks and the broadcast networks were the most watched content by a significant factor. In fact, each of the broadcast networks generated 4x the viewership of ESPN, which is pretty powerful. And on top of that, we've got great local content. We also looked at our overall viewership and we said, well, how much of that content is related to network content versus our own content? Turned out about 45% of our viewership is from our own content. So again, very, very powerful content that people like to engage with. So that's point number 1. I think point number 2 is demographics. When you think about the firewalls that exist within our business, demographics is one of them. There was a study that was done a couple of years ago that said, about 73% of the population that's aged 45 and up, which is more than half of the adult population has a pay-TV subscription. And those people are less likely to churn off. They're more likely to have it, habit of having a pay-TV service. And in fact, they'll have every other service as well because they've got the wealth to do it. And so that's the first firewall in terms of thinking about what the longevity of our businesses is that demographic firewall. I think the second firewall when you think about it is our access to sports content. When you think about what is driving the viewership of the broadcast networks, a good portion of it is the NFL content and the sports content. And if you are a sports fan, you're going to continue to subscribe to Pay Television to have access to all of that content. So that's the second piece of the firewall. I think the third piece of the firewall is really when you look at the overall ecosystem and what is making money from a media company perspective, the only thing that's out there that's making money is the linear ecosystem. So ultimately, if you're a company and you're looking to kind of grow and make money, which I think most public companies are, you're going to have to lean back into that linear ecosystem in order to continue to make money, which is going to mean that there's going to be continued investment in that side of the business that's going to perpetuate the growth of our business over time. And then I would say the last couple of things are more just about our company. We are the largest company in the local broadcast space. We have a moderately to lowly leveraged balance sheet, and we generate a significant amount of free cash flow. And if you just take the average of the analyst consensus estimates for the average of '23 and '24 -- or sorry, '24 and '25 for free cash flow, it's over $1 billion of free cash flow, which means that if you just look at our stock price, we could generate our entire market cap in less than 5-years. And we are using that free cash flow to buy back stock, which is incrementally accretive. So I think those are the things that I would kind of point to in terms of the elevator pitch of why our business has legs and kind of makes sense to invest in.

Great. It was a good start. Maybe just staying on the ecosystem for a second. If we look at some of the recent trends in DTC, we're seeing a bit of a reversal for the past few years, right? There's price increases, more ads, some retrenchment around content spend marketing. I guess with that backdrop, would you expect to see at some point an easing in some of the subscriber attrition that we've observed recently?

I think we're about to begin the great rebundling in some way, shape or form. You see the new entrants beginning to raise prices because of the amount of money they're losing and they realize that they can't sustain a business with those kinds of losses. And I think you're seeing people now look at the traditional bundle and saying, I get the video content, particularly if certain MVPDs are going to incorporate the streaming options as part of their bundled offering to the consumer. And we're relatively indifferent as long as we're paid to be there. We're part of that bundle and broadcast stations by franchise agreements are in the basic tier of every piece of the distribution of a traditional MVPD. So one of the things you get from a bundle is seamless navigation. And if you try to change channels during Thursday Night Football, you've got 3 clicks to back out of an app and 3 more clicks to get back into whatever else you want to watch on another app. And I just changed channels. I went back and forth between Knick game and the Golf yesterday, and it was literally -- I had a button for last. So it was just one button back and forth the entire afternoon, which is how I spent my day. But I do think that, as Lee Ann said, there is kind of a firewall of the high percentage of people over the age of 45 that are -- that have a pay-TV subscription. And even those under that age now, we're saying, okay, my broadband on an a la carte basis is going to cost more than if it's in a bundle. If I all of a sudden buy all of these a la carte services, I now owe them more than the cost of the bundle, arguably with less video choices may not have every streamer I want, but it may be a matter of time. And I think that Tom Rogers was on CNBC last week and he was talking about streaming service and saying, okay, Netflix is #1. You probably would have to put Amazon because of the strength of Prime, maybe as #2. Maybe Disney #3. And if people are going to pay for 3 or 4, that means everybody else is trying to crowd into the last car on the train, right? And so I think by definition, there's going to have to be a bundling of those services into a service if it wants to have anywhere near the scale to compete. So we didn't chase streaming because we're already available as a service free over the air. So we had ubiquitous reach without that. We also are allergic to losing money. So that's the other reason we didn't chase streaming. But we do think that you will see sub declines in the traditional pay-TV universe begin to moderate over time.

Yes. And to your point, we see not one but 2 bundles now get announced in the last 2 weeks on the streaming side.

Exactly.

Yes. Maybe just going back to consumer choice, pay-TV, right? What type of rationalization or changes do you think need to happen on your side of the ledger, on the pay-TV side to make that more attractive for consumers?

Well, I think what you're going to see is the streaming side have to continue to raise their prices because if I look at what's being offered to the consumer retail is at a price below what I'm selling it to the distributors on a wholesale basis, that prices will, I think, ultimately, we'll have to equalize and everything old is new again, right? And so Michael Wolff wrote a book called, "Television is the New Television". If you read it, it just talks about the powerful gravitational pull of the existing ecosystem for content creation and distribution. And as I say, a lot. Our basic business is a local service business, right? We provide local content to consumers that is relevant and increasingly the unique way for them to receive local news and information, not available through radio or newspapers to any depth. And then the other thing we do is we help local businesses sell stuff. Well, that's a good business to be in that local service business. And that is at the core, the lion's share of the revenue and profits of what we do. And while technology might change the way we distribute our signal, it's basically just changes in distribution. It's not going to change our base service mission, which is the relationship we have with 43,000 SMBs and 70% of the country and the 310 hours a year of local content that we produce. And that's really the core of what we do. And if there's a moat around our business, it's that it's very expensive to try and replicate that.

Got it. Maybe bring the focus back to Nexstar. So when we look historically, debt finance [ situation ], acquisitions have been a hallmark of your strategy to drive returns at scale. How important is M&A to your future growth? What opportunities do you see just kind of given some of the regulatory limits out there?

Well, M&A has been a big part of our story for the first 27 years of our almost 28-year existence and has driven value. I think we have a very well put together and well-used playbook as to how to integrate and realize synergies. And there will be M&A in our future. It's just in this current regulatory environment, Lee Ann and I are of the mind, well, why spend time and money on something that we think has almost no chance of getting done through the regulatory agencies. So I think when that changes, we'll lean in more now. Listen, we're in conversations on a couple of one-off station opportunities that will create duopolies, perhaps new CW affiliates that have an immediate financial benefit to us. And we'll still do those as we have in the past, San Diego and other one-off duopoly creation. But I think in terms of scale M&A, cost of capital is a factor economic outlook is a factor. But more than anything, it's the chances of getting through either the DOJ, the FTC or the FCC and all of those are real tough puts right now for any industry, not just ours.

And adjacencies, anything there, right? You did purchase The Hill, the other things that are adjacent to news or the content you're getting into your own sports that would be interest.

Well, I think that's an important point. Most all of our content acquisitions historically and on a going-forward basis will be content-related or content adjacent to what we're doing now. We're not particularly good at buying ad tech companies and making them better. And so you've seen us, our foundation is local news. We've added national news with our cable network. We've added political news with The Hill with the CW, that was distribution and a programming source not only for our stations, but we see an opportunity to run that business more like a business than it has been before. But through that, we've now added 500 hours of local sports to the CW. And if you look at what drives the needle, what moves the needle is local news, local sports, live news, live sports, live events. And so I think we're into that as a portfolio in a fairly significant way.

Got it. Scale is something that you've highlighted that it differentiates you versus some of your local broadcasting peers. Maybe you could talk a little bit about the benefit of size as it relates to distribution, advertising, your network relationships?

To me -- It's Okay. I'll -- I would say that it's important to be important, right, to every vendor you do business with, and I would count the big 4 networks into that, right? We're a #1 or #2 distribution platform domestically for the big 4 networks. And so I think it's important. I think you can -- the nuclear option really stings when you talk about divorce. And we're not talking about divorce, but if the threat of that is there and it's a viable alternative, then it becomes a credible threat in the negotiations. So other companies of smaller scale probably don't have that same impact or could be easily replaced. We can't be easily replaced. So that gives us, I think, more leverage in the negotiations to make sure that we get fair deals. But I would say on the other side of that, bringing all of our advertising sales under one umbrella, we go to market now as one. Nexstar has gotten us further up the food chain and the agency holding companies of having the conversations of, geez, you really like college sports, well, we have it on the CW, but then we also have it via other networks locally in the 30 states in the country where you do your business. So we -- it's local activation at scale with a network overlay, and that's a pretty unique concept because no one else can do it to the scale that we do. I think those are 2 of the most important reasons why our scale differentiates ourselves from our peer group.

It's a good segue to political. I imagine your scale gives you a pretty wide reach over not just the Presidential race, but Senate, Governor races. Expectations for political this year? And then I'm curious, how do your kind of national assets play into that at all?

Well, to the extent that we can produce political content, we hosted the fourth Republican Presidential debate last year, aired it on both NewsNation and the CW. The political dollars that flow would only be national dollars, a Presidential race, a valid initiative that was in multiple states. Someone trying to influence Supreme Court justices ahead of a big decision, they would use our -- The Hill or NewsNation to potentially do that. But as Tom Monaghan said, all politics is local. And so it is. If you look at our station footprint, we operate in 40 states. We are important. We're in all the battleground states that potentially will come up in the Presidential race, but that's less than 30% of our total revenue. The other statewide race is the Senate race in Ohio and Pennsylvania and Montana, the ballot props in California and Nevada will really drive our political revenue this year. We're in almost 90% of all contested House and Senate races and Gubernatorial races. So we have historically, as a company, taken a low to mid-teens percentage of all political advertising spent on television, and we see no disruption of that trend. All of which points to what we've said will be a record year.

You mentioned the debate. It's kind of interesting that one of the 2 debates is scheduled for June. Traditionally, a quieter period for political spend is having a debate in June, maybe stimulate some Presidential spending that you would normally have seen if everyone is trying to put ads around that content?

I think it's very interesting, the first debate occurs before either of the political conventions. I'm wondering if there's a read-through there, right? But historically, a lot of money has been raised, leading up to and based on the results of the debate. I don't know how many fundraising e-mails you get on your phone every day or text messages, but I would expect that to multiply as we get closer to the debate. And then again, based on the outcome, the message will be recalibrated and they'll be back again. So I don't know if that will pull forward any spending to speak of. But I do know that historically, 80% of the money that we've taken in for an entire year has come in the back half of the year, and with the concentrated portion of that, Labor Day forward to election day. So those 6 or 7 weeks depending on the calendar. And so that's really where the rubber meets the road. First quarter political is interesting, but as I like to say, not really meaningful in the scheme of things.

I think there was a period of time when investors had concerns around social media, taking a certain amount of share in political. That never really panned out. Maybe the social media firms decided that wasn't a place they wanted to be. Now the concern seems to have shifted to CTV, right? There's a lot of CTV inventory out there that could be targeted locally. What's the potential kind of impact that you see to that in terms of market share?

Well, social media might be effective in -- as a fundraising mechanism. It's not really a get-out-the-vote mechanism. And CTV may be interesting, and they will probably take some money out of the entire pie this year. But if your goal is to get out the vote on election day, no other medium comes close to reaching the populist the way that broadcast television does. And if you look at the people who do vote, who are predominantly 50-plus, I mean, that lines up almost perfectly with the demographic of what linear television delivers. So there might be some activity around the edges, but I don't think it will affect our mid-teens share of what we expect to be a record political spend this year.

Got it. I want to circle back to sports. So live events or live games continue to generate great audiences on broadcast TV. The leagues do appear keen though on adding more streaming partners. We saw that last week with Netflix and the NFL, that could be coming with Amazon and the NBA. How do you think league strategies are evolving? What's the long-term impact to Nexstar broadcast?