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

Okay. That's great. So back in 2022, you've got 75% of the CW. And I think maybe I have this incorrect. Is it this year at the CW is going to hit profitability? Okay, which is great because I think the loss is -- maybe I'm making this number up, like [ 250 ] or something that was like -- okay. So that's great. So you guys are making a lot of progress. One of the things that you said on the last earnings call, and this is just my own ignorance about your business, as you swapped your CBS affiliate for a CW, it became an O&O and a handful of markets. There were sort of 4 smaller markets. And I looked at that as a layman and said, even if I was only getting net retrans of the CBS number, it feels larger than getting all of the money for CW. But I guess that's wrong. Is that what's going on? Or...

Well, I think that's exactly the calculus that you have to make, particularly in some of the smaller markets, we're sports rights may not carry the same freight that they do in larger and/or NFL-specific markets in CnF we're talking about. But I mean, part of our reason for buying the CW was offensive that we saw as an underperforming asset, and therefore, our owned and operated CW stations were underperforming in the dayparts program by the network that we thought we could do it better. We thought we can introduce sports and give those stations on that network in another audience to go after. And all of that is proving out in real time, and we're very pleased with the progress. But we also bought it as a defensive measure that should we enter into negotiations with some of the big [ 4 ] networks that proved to be highly contentious that we potentially have a default alternative to provide network programming to that station to complement its local programming. And again, if you look at net retrans, as [indiscernible] used to say, it's not what you earn, it's what you keep. I think you could look at some of the smaller market big 4 affiliates and perhaps their margin is nowhere near what the margin is on retrans for CW affiliates. And so that's entirely part of the calculation. And it's also CBS in our affiliate negotiations, which are obviously now concluded, that's basically the only lever they had. You either take my offer or we start to peel stations off. And so that was part of their lever in this negotiation. But in each of the markets, we had the opportunity to step up and make the CW the primary affiliation for those stations. And that's a good thing. We -- our first -- our game on the CW, which was Ford State versus New Mexico state generated 2 million viewers, which is the largest audience for the CW for sports ever. And the largest audience CW has had in many, many, many years. So the things that we saw as opportunity are proving out now.

I watch that game. As part of the [indiscernible]. What -- can you unpack a little bit because when I think of -- when you said in the smaller markets where sports may not carry as much weight, I tend to think of a retrans payment as a dollar per household and it doesn't really matter how big or small the market is, right? The value of sports would be as valuable in Tupelo, Mississippi as it is in Manhattan. Sure, there's more people in Manhattan, but on a per household basis, why would sports be less valuable in smaller markets. That's where you've lost me.

You can't get the advertising premium per se on distribution. You're right. But I think the other piece of that is you have to look at the -- if you're paying that network on some sort of a fixed fee arrangement and subscribers go down, so your costs go up and your margin goes down. It depends on the makeup of the pay TV universe in that particular marketplace. If it is substantially satellite dependent and seeing substantial double-digit decline in top line revenue on a fixed fee basis, those lines can come very close to crossing, right? And so I think that -- so I think it's -- the revenue, you are correct, but the revenue is variable based on the number of subs, but if the expense is a fixed fee, then that figures into the equation.

No, that's super helpful. Thank you for clarifying that. So you recently announced something that I thought was interesting, which is ESPN and Roku will distribute CW Sports and CW Entertainment content. And that was sort of interesting and new to me. It reminded me a little bit of I guess it's a little different, but Peacock getting distributed through YouTube. It just feels like there's some things going on where that are a little bit novel in this sort of shift to digital that we haven't really seen in the past. So can you just talk about it? What drove your decision to...

Well, it was the classic build, buy or partner scenario, right? We want to build the distribution of the CW and sports, we could spend $1 billion trying to build something we could spend multibillion dollars trying to acquire something or we can partner with ESPN, and there was an exchange of value between the ESPN and us for us to give them the rights to distribute this programming. But again, we're the only network that doesn't have its own streaming product. So we were the free agent to be able to do that. And of the aforementioned 2 million viewers of the Florida State New Mexico state game 0.25 million of those came through the ESPN app on the very first weekend of football. So it has done what we thought it would, which would appeal to those that prefer to watch their programming through streaming. We've got our tile on the ESPN. I think ESPN would love to become the Walmart of sports over time. But it's hard to do that with NBC when they've got Peacock or Paramount with CBS. And so we were not only the test case, but a very good partner for both. And the same with Roku and our entertainment programming, it just broadens our distribution faster than we could build it or buy it on our own.

Understood. That's great. So can I ask about M&A a bit. One of the things many years ago, I used to cover the cable sector. And when we would see to cable companies sort of merge, I had this rule of thumb, which was for every 1 million subs that you added, you could sort of do the rate card math and you would say $0.50 per sub per month on your affiliate fees. And so you could go out and say if a company as 5 million and company B is 10 million and you put the 2 together and say, okay, pro forma it's 15, you could say, all right, 15 versus 5 or the small guy, he's going to save -- this scale has increased by $10 million, to is $0.50 per sub per month, he's going to save $5 and the pro forma 15 versus the 10, he's going to save $250 and you could go through and just very quickly do a pretty good job of estimating the programming synergies as there's more scale on the distribution side. When we read about Charter and Cox coming together and some people even think Comcast and Charter will eventually emerge. Are there these mechanistic things with rate cards where it immediately becomes a headwind for Nexstar at all -- or is it more -- everything is a negotiation. There are no formulaic sort of rate cards that say this is the price -- I don't know if my question makes sense. Now is the price based on your scale?

Well, it depends on the counterparties, right? And what the agreements say, but I would say that we don't have situations where party A is paying X and party B is paying half X. I mean our rates are a lot more harmonized. So there's -- the Charter Cox situation does not provide a headwind necessarily to Nexstar or TEGNA to the best of our knowledge. And so I would say it's a lot more nuanced than that. Whether it be distributor has after acquired clauses and/or does the station group, the content holder have after reuses and how those marry with 1 another. But I don't see it as a headwind per se. Certainly not right away. I mean, obviously, 1 of the reasons that we are doing M&A is because look at the counterparties that we negotiate with. Comcast. It's now charter. It is DIRECTV. It is YouTube TV and big tech and right on down the line. And so if our entire industry was 1 company that still wouldn't be as big as the smallest big tech company that we are sitting across the table from. So there is a need to continue to grow and to have more balanced negotiations with those with whom we negotiate. And so that's 1 of the industrial logic driving our M&A strategy. Also buying assets that we can run better and/or run more efficiently and then drive synergies is another tenet of our M&A strategy. But I think we've been kind of the poster child for scale M&A in our particular sector, but it has a particular sense of urgency now as those we do business with are scaling at the same time. So you can never run in place and make any progress. So we will continue to look to grow our company's size, scale, footprint, [indiscernible] for all of those reasons.

Okay. If anyone in the audience has a question, you raise your hand, we're happy to get you a mic. So can I ask about ATSC 3.0? You guys have been very kind in trying to get me up to speed on this. And then it feels like there's this new vector potentially that people are talking about as an opportunity, which is that it could end up becoming sort of low-band spectrum that could help the star links of the world get sort of in-home penetration as they sort of try and become a true wireless service. Is that sort of the -- is that a, is that in the potential use case of [ ATS 3 ] that it frees up some spectrum, and you just sell it -- and would you call it the leading sort of opportunity? Or in your mind's eye, is it sort of a lagging opportunity?

Look, I think it's definitely on the list of things that could potentially be use for our spectrum. I mean, we -- there is a very -- we have a scarce resource in terms of low-band spectrum and powerful well band spectrum. And we think -- we're looking at all of the different potential opportunities for this. I think as you probably know, we've created a joint venture with 3 of our peers, Scripps and Sinclair and Gray and it's called EdgeBeam Wireless. And EdgeBeam Wireless is -- represents effectively the spectrum of all 4 companies. And that's a huge benefit, we think, because we've got now a spectrum that is in that JV today. This is excluding TEGNA, about 7 billion megahertz pops of spectrum, and it covers north of 97% of the country. So nationwide coverage. So when you think about what a counterparty is going to want in terms of being able to lease spectrum from us, at least that excess spectrum from us, it's really going to -- it's very important to have that nationwide capability because if you just have a market here or a market there, it's not going to really be that exciting or that useful. There's a number of things that have to happen, obviously, before we can really kind of monetize this and execute on it. Right now, every single station we have has about -- has 6 megahertz of spectrum. We currently broadcast through ATSC 1.0 and that is the transmission technology that most of the television sets have that can receive our signal. We are also broadcasting in 3.0 and 3.0 has the capability of broadcasting everything that we're doing in 1.0 using less spectrum. So just rough justice, if you think about 6 megahertz of spectrum that we're utilizing today, we can do everything pretty much in maybe 2 megahertz of spectrum. And so it really would free up a lot of capacity. But in order to do that, we first have to get stop broadcasting in 1.0 to free that up and that's going to really require that you have a critical mass of people that can be able to receive the signal of 3.0 television sets converters have to be out there before we could kind of drop 1.0, free up that spectrum and then utilize it for third-party purposes -- or third-party high-speed data transmission services or whatever else we want to do. But we think it's a highly valuable asset. We believe that from our perspective, we really want to create another leg to the stool in terms of revenue, another potential for ongoing value creation rather than just kind of a one-and-done sale process, which a sale process would take a significant amount of time anyway would have to go through the government and that full process.

So you have 5G -- lower-cost 5G replacement, complementing satellite distribution of starlink our signal penetrates buildings and things of that sort. So -- all of those use cases are under studied by our EdgeBeam consortia. We meet with the CEO of EdgeBeam on a regular basis, and we continue to be very focused on monetization, but long-term monetization. I mean, digital signage we can do today and are doing some of probably wouldn't cover the cost of lunch at this convention today what we're generating in revenue, but there are proof cases out there, whether it's in-car video or navigation, fleet management, GPS, precision -- but any number of high-speed data transmission cases, and there's even some very wonky things that we're talking about that could be very -- very interesting require a higher level of coordination of spectrum partners creating spectrum payers for 2-way compatibility. But those are the things that we're talking about and thinking about. And it continues to be part of our future, and everybody wants to know when are we going to see money. And I would argue that we're making money from our spectrum today with our digital multicast that we either generate vis-a-vis distribution and advertising or somebody leases space from us for their digital multicast. But again, that's just kind of transitional use of the spectrum until we have the ability to use more of it for high-speed data casting and other services.

That's great. Lee Ann, I was maybe not paying attention or writing too fast. I missed the megahertz pop number that you gave under EdgeBeam, can you...

7 billion megahertz pop.

7 billion. Okay. All right. So advertising. So I keep reading about the K-shaped economy, and everyone seems a little bit nervous, but the economy seems to be doing reasonably well. Having said that, there was some commentary that you guys made earlier in the year and some other broadcasters made it about sort of potential political crowd out and maybe the underlying strength wasn't that healthy. And so the nonpolitical part of your advertising business feels a little bit like less -- I don't know, less strong than what we're hearing from the outdoor companies or the digital companies, is that true? Is that a fair characterization? And if so, what underpins it, do you think? Is it auto sales like we...

We, I think -- look, I think we were down mid-single digits on a nonpolitical basis in the first quarter. We've guided basically to the same in the second quarter, maybe slightly better. I think outdoor does not have anywhere near the level of political advertising that television broadcasting have. So when you think about the types of things that are impacting that nonpolitical advertising, there's really kind of 3 components. Number 1 is crowd out. right? If we sell an ad for political, we cannot sell it for commercial. So it does have a direct impact on that rate of growth. And in the strong political environment, it's a bigger impact. So that's number one. Number 2 is really just the general pressures that we're seeing in kind of advertising from the proliferation of CTV and additional advertising inventory that's available to advertisers. So that's been an impact for us. But that's something we've been dealing with for a short time. And then we are seeing some economic impacts. We are seeing some of our customers telling us, hey, we don't love the impact of the war. We don't love the impact of these tariffs. We don't we have overall sort of economic hardships that are impacting the overall business. So those are the kind of the 3 impacts. Nothing is kind of off the rocker or off the radar screen in terms of what's going on. So we feel good about the business, and we feel like we've got a good sustainable business on a go-forward basis. We did get asked a question in the first quarter because everybody is like, well, what's going on with these networks, cable network businesses that seem to be doing better. And what we discovered was Nielsen did make a change in the ratings, and that really went from -- a lot of these cable networks were having negative ratings growth to actually all of a sudden having positive ratings growth, and they were able to monetize that in the scatter market. But that's the cable network side of the business. We are primarily a local advertising-based business. There is a positive impact that's happening right now in terms of Nielsen. We'll see what the actual -- or a potentially positive impact, let me just be precise in terms of their changing in rating, where they are making some adjustments to the way that local is measured to make it more on par with how national advertising is measured. And so that could have a positive impact, but we'll have to see how that plays out.

And political is [indiscernible] right now. And what we're seeing is crowd-out used to be basically an October problem. And now it may be a Labor Day through the election kind of a problem in the highly contested markets. You probably saw we're in a press conference, the President said he was going to spend $400 million to $500 million on the midterms. He has spent almost no money out of [ Mega Incorporated ] to date. So that money has yet to get dropped in. He just released the first $10 million to support [indiscernible] Texas over the weekend as well. So if that money moves into the market, that time has not yet been reserved. And so we're seeing record levels of spending and earlier spending because early voting starts in states like North Carolina in 2 to 3 weeks here. So the election will begin. And so I think you're going to hear and see more about political here right up through the election. But starting earlier than it has certainly in the midterm before.

We got some -- I don't know if there are some news items related to this, but a handful of investor questions about this lowest unit price. From what I can read, it doesn't seem -- I mean, first of all, it's very complicated. But I would love for you to just -- what can you say about lowest unit price? Is it a big change, small change, does it matter?

Yes, something we've been already dealing with, right? So with respect to the political advertising, we must provide political candidates the lowest unit rate for the advertising that they provide. What the Supreme Court ruling allowed now is for a party money, to be also subject to that coordinate basically with the candidates and have access to that lowest up rate. Right now, the party money is about 5% of our overall political advertising revenue. And so we feel like it's a very manageable amount of money that can be managed through the system with respect to what rates we're providing. And then we also think there's a potential positive in the sense that we know that linear advertising or linear political advertising is among, if not the most effective form of advertising for politics, getting people out to the boat and then actually securing the boat. And so -- we think that parties in coordination with their candidates, there actually may be more money that could potentially swing towards our business because, hey, now we can have access to that lowest rate and access to that advertising that is actually so much more effective than what they have seen in other areas. So we're not seeing it as a negative for this cycle. We think that we'll be able to manage right through that.

And it gets just a tiny bit more wonky, its lowest unit rate by class of time. So if you have a multigrid rate card and you manage your grids accordingly and aggressively, you'll do just fine.

Okay. Well, that's great. We're out of time. But Perry, Lee Ann, thank you.

Thank you so much. I appreciate it.