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

We're really pleased to have Nexstar management here with us. We have Perry Sook, Chairman and CEO; Lee Ann Gliha CFO and Executive Vice President, and along with me, Jessica Reif Ehrlich. I have Brent Navon on my team. So we will be tag-teaming and you guys. So hope its okay. So Perry we'll start with you. Nexstar started over 30 years ago with a single television station, but you now become the largest local broadcaster in the country, and you have other assets, including The CW and NewsNation, following the TEGNA acquisition, which hopefully we'll get into it. But anyway, how should investors think about what Nexstar is becoming over the next 3 to 5 years? Are you leaning towards a larger local broadcaster, a national media company, something else, something in between?

Sure. Well, I think it's a great question. I think I think of us as a local media company with what is approaching national scale. We have focused primarily on the local end of the media ecosystem. We think it is surprisingly durable. We also think it's the most sticky part of the media ecosystem. We have business relationships with approximately 47,000 SMBs in 80% of the U.S. We operate in 44 states. So that is approaching national scale, but we look at everything through the ends of kind of bottoms up what is good for our local stations which The CW has been for those owned and operated stations. What is -- what will benefit the stations by making changes at the network or adding NewsNation and National Service on top of what we do locally. So I think the correct way to think about it is kind of in the local media space being without peer in terms of our size and scale and balance sheet and flexibility, but also just being a local media company but with national scale, being able to do local activation at scale, I think, is our secret sauce.

Maybe just taking a step back, given the secular transition to streaming, it's easy for some investors to question whether local broadcast is a structurally declining business and how this high cash flow generating business transitions in a new paradigm. What do you think the market misunderstands about the Nexstar model and its durability?

Yes, let me -- I'll take some of that. I think first and foremost, I think it's our programming. I think people tend to overlook the fact that almost 50% of our audience comes from our local news and our other local programming that we source ourselves. So we in and of ourselves are a very important programmer for the local communities that we service and the advertisers that do business with us. I think that's number one. Number two is our distribution model. We -- there's about 20% of the audience out there today that receives their television signals over the air. So when you are thinking about any sort of third-party programmer like a sports organization, or any other kind of entertainment content you're immediately getting 20% more audience than what you would get if you were just kind of in the pay TV ecosystem on a stand-alone basis. So the fact that we -- and we've seen that time and time again, even with our own CW network when we acquired the rights for the O'Reilly Auto Parts Series for NASCAR we've seen double-digit, 20%-plus improvement in ratings that accrues to the benefit of the network and the sports team, the sports league and then also with respect to the viewers. So there's incremental value in the distribution that we bring to bear, that is very important. And then I think the evolution of this ecosystem is kind of, I think, kind of come in our favor. If you think about over time, what has been the reason that you've seen the decrease in the pay TV ecosystem and that attrition. Well, it's really been because you've had a lot of these major network companies launch these direct-to-consumer services at price points that were very, very low. And what you're now seeing is those price points are now increasing because those direct-to-consumer services were generating massive losses for these larger media companies, and that's no longer sustainable. And so as you're seeing those prices increase, you're seeing the distributors actually re-bundle some of these services into their pay TV profile, you are getting an ability to now as a consumer access whatever content you want on whatever method you want, but you're going to be paying the same price. And so that is what we think is very important is that we are -- Nexstar and our content we are available. We're available on any sort of service that you're going to want. We're available on streaming. We're on YouTube television. We are on Hulu. We are [indiscernible], We are on Paramount, we are over the air. We are on via the satellite companies, via the cable companies. And I think over time, as we see the pricing more start to equalize, you're going to start to see a stabilization in the overall ecosystem. And that's going to accrue to the benefit of the broadcasters.

So just maybe continuing on that, but there's multiple concerns about the current ecosystem, whether it's the decline of pay TV subs, advertising headwinds, advertising, transitioning from linear to digital, reverse comp, changing viewing caps. I mean the list goes on. Do you think these are overstated at this point? Or what are you concerned about? And what are you not concerned about?

Well, I think that Lee Ann addressed the distribution paradigm, which now with the average streaming service is $150 a month for the full package, that's about where the bundle is or was when people started to gravitate away from it. So it's no longer a skinny bundle. It is a very robust bundle. And if pricing is roughly the same, people might tend to stay where they are because I still think that the traditional cable or MVPD bundle offers a superior navigation tool to a la carte streaming services. So if attrition begins to level out, I think that is probably one of the primary issues that people will have had some existential dread about the melting ice cube nature of the sector. From an advertising perspective, there is no question that buying linear television is more expensive of a process than buying digital for the agencies. We have a former CFO of an agency holding company on our Board of Directors. And it is indisputable that the agencies have less of a margin placing linear than they do placing digital, which is surprising to me, we do as well as we do, if the frictional costs are higher. So we, Nexstar are attempting to address that by developing a seamless kind of pitch-to-pay system that we hope to be able to bring out and at least announce and talk about at next year's upfront that would allow an advertiser to go through the process, access customer data and go pitch to pay and basically access linear television inventory more in a programmatic fashion, which puts us then on par from a buy-sell process with digital. And I happen to believe that money will flow to the sector because people see the superior value proposition of the linear relationship that we deliver at the endpoint. So I think that from that perspective, we're trying to address the two things that I think are the kind of the biggest drag on the business. And we also -- the money has migrated to Connected TV. And so we have dramatically increased and will continue to grow our presence in the Connected TV to at least be competitive in our offer, a full suite of audience extension products in addition to our primary linear or digital products.

So as promised, let's shift gears to TEGNA. So maybe just beyond just scale. Can you talk about the strategic rationale of the TEGNA acquisition and what it brings to Nexstar?

Sure. First of all, the acquisition as modeled was substantially accretive to Nexstar shareholders. So it made it work worth doing. It increases our national footprint of local patients from roughly 70% to roughly 80% of the U.S. There were -- there are 35 markets of the 50-plus markets where we will operate or drive an economic benefit from more than one television station in the marketplace, which allows us to rationalize a cost basis across two platforms, add additional local content in markets where we had a CW and maybe TEGNA had a big fore station with a robust news organization, and [indiscernible] news for The CW now rather than us having to go out and buy that a la carte elsewhere. So there are all kinds of industrial logics and touch points, rationalizing the real estate portfolio buildings down to one in those overlap markets. We still make our money selling local content. So it's very important to us to have as robust a local market content offering. So there's no savings there, but there might be savings in housing the two different studios in one building and not having to pay to heat and cool and cut the grass of the building down the road. So there was a lot of industrial logic, a lot of synergies. But again, it's the kind of acquisition that we have made, and we feel that getting to approximately $3 billion of EBITDA puts us in the neighborhood of fast pre-Roku and Paramount Skydance pre-Warner Bros Discovery, and that's a different neighborhood than most of the rest of the pure-play broadcasters are from a financial standpoint.

Unfortunately, you're kind of stuck in the regulatory process. Can you give us an update on exactly where you were and the key time line from here?

Sure. First of all, on overall regulatory, the FCC has voted to eliminate the national cap, and we're waiting for that order to be published or released by the FCC, which will then cause it to be published in the Federal Register, which is, as we used to say in Schoolhouse Rock, how the bill becomes law. So there's that. There is also the quadrennial review of the local ownership rules, which we believe that those should be addressed this fall in attention to that rule making which would then modernize the local ownership limitations eliminate some of those limitations, modernize the rules for both television and radio. And I would say that I think if Chairman Carr is able to affect, both of those changes, those will be signature pieces of legislation and administrative rule changes that will really have modernized and given additional life to local radio and television industries. And I think those will be signature achievements of his tenure as FCC chair. So we're optimistic about all of that. As it relates to our jurisprudence issues. We will be heard in the ninth circuit in the middle of November. That is on our appeal on the whole separate order as well as attempting to determined if the states have standing to proceed in this litigation. That oral argument will be heard in the middle of November. And when we get a ruling on the results of that is anybody's guess, but we're anticipating probably sometime in early to mid-first quarter. And then the trial on the actual initial court case that was brought in the in the Sacramento Federal History Court, that trial will commence in July of 2027. And that will probably take a couple of weeks, and we'll see where they rule and whoever loses may well appeal, and we may be taking this all the way to the Supreme Court. I think the most important thing for us is that we've closed on the asset. We have the benefit of the cash flows of the TEGNA acquisition we paid down in excess $0.5 billion in debt from the March closing through close of business yesterday, and we'll pay down in excess of $1 billion in the acquisition debt between now and the end of the year on a cumulative basis. So it's not the 100% solution, but it's also not a 0% solution. So we're not -- there's no negative implications as time goes on. It's only positive as we'll continue to carve away at that dent balance.

Just maybe continue the conversation. I mean, you alluded some of the strategic rationale for the acquisition. But given the requirements to maintain independent operations, what exactly can Nexstar do to extract the economic value that underpin the deal itself right now?

Yes. So for right now, we are subject to this whole separate order. So we have in place a team, a CEO, Pat Paolini, who came on from FOX, who was running TEGNA in the interim. He's very business focused, and you probably saw, I had an interview the other day with TV News Check, where he's working on trying to invigorate the organization and continue to operate the business. So we think the business is in excellent hands with his operations. So in the interim, it's really kind of his show with respect to operating the business. But as Perry just mentioned, we do own the company, so we get to benefit from all of the cash flow of the combined business, and we are using that cash flow to repay debt, which is extracting economic value for our shareholders, the acquisition. And hopefully, if we are successful in our appeal, we'll be able to at least narrow the scope of the litigation which would potentially allow us to enact some synergies sooner rather than later.

So switching gears and let's move on to advertising. I mean the core advertising is still is a key driver of your model. How would you assess the overall health of the ad market at the moment? And as we think about the drivers of your business, where do you see the most opportunities?

Yes. I think, look, from an advertising perspective, we had -- we were down kind of mid-single digits on a nonpolitical basis in the first quarter and -- or sorry, in the second quarter and expect to be down a similar or maybe slightly -- a little bit better in the third quarter. And that really is driven by a number of factors. Number one is we're in a political year. So there is a good amount of crowd out as we are selling advertising for political, we cannot sell it for nonpolitical purposes. Number two, is we are impacted by just the general competition from increased AVOD inventory that's out there, CTV inventory. And then just general economic weakness that we are seeing a little bit of that. But having said all that, we have a number of different areas where we are very -- working very hard to grow the business. Number one is on our local digital side, just because CTV is -- there's a lot more CTV out there. It doesn't mean we can't be selling it. So we are utilizing our local sales force. We have a very large local sales force to not only sell our linear -- our core linear inventory, but then audience for our advertisers by selling third-party CTV inventory as well. And so that business has been doing incredibly well, growing at a double-digit rate, and that's really helping us kind of stem the tide of some of the impacts on the lender side of things. As Perry mentioned, we're working to transform our go market from an advertising perspective and being able to make our inventory looks more similar to advertisers as CTV inventory is, make it easier to access, but that's a longer-term sort of strategy, but something that we're focused on. And then we've got a number of really good organic business within our organization. We own the NewsNation which, from a ratings perspective, peaked at #35 in terms of the rank of all networks in the first quarter. CW Network is the #8 ranked network that's out there. And so these are businesses that we are continuing to focus on and grow the audience, which then will have a positive impact on our ability to grow our advertising revenue. So we have a number of interesting areas where we're focused, not the least of which is what we're dealing with right now with the political cycle because broadcast television is known far and wide is the best place to put your dollars toward, if you were really looking to get people out to vote and to influence, how they vote.

It's a great segue. We're heading into this robust political cycle. What are your expectations for advertising and political? And how does your footprint overlap with some of the key competitive races that we should expect to see.

Yes. I mean political is doing incredibly well this year. I think there's a third-party research firm out there named Ad Impact that I think is called for -- this is on a gross basis. $5 billion of political advertising coming into the broadcast space, which is up versus '22 and up versus '24. So we're feeling good about that. With respect to our portfolio, we have a pretty broad portfolio. And prior to the TEGNA acquisition, we were already covering 80% to 90% of the contested election markets in any given year. So we feel it -- usually what happens is you'll have a race that you think is going to be very strong and it's not strong, but then you'll have another race somewhere else within our portfolio that you didn't think was going to be strong and ends up being very strong. So when you go back and you look at Nexstar's history in terms of how much political advertising revenue we're able to achieve, and we look at it on a market share basis. And so if you look kind of pretty consistently, Nexstar is able to achieve low double-digit to low teens percentage of the dollars that are spent on broadcast for political advertising. And you have to be a little careful because the Ad Impact number is gross, and we refer to our revenue on a net basis. So there's a 15% differential there. And then TEGNA historically over time has done kind of like high single-digit market share. So we're feeling good about this year's cycle, and we've had some unusual things happen like first quarter with Texas being a very, very big number, and we're looking forward to seeing what happens throughout the rest of the year.

Overall advertising does appear to be getting more competitive. What is the path to returning nonpolitical advertising back to growth?

Again, I think if we can remove the inequities in the buy-sell process and make ourselves more user friendly, that will be a conduit. We know that most automotive advertising when you get below the Tier 1 level is done through certified OEM vendor relationships. We have worked to be -- worked with and worked to become one of those certified OEM vendors, which our automotive spend, I think, is holding up probably comparative to the rest of the industry relatively well. So I think we need to continue to do things like that, continue to make our digital offerings more robust so that we can sell nationally and locally and a total audience profile that we can offer you CTV. We can offer you apps, we can offer you other streaming opportunities, we're going offer you linear, as well as sponsorship opportunities. And we're doing that with our national sales team across all of our national inventory on our local stations as well as our national inventory on our networks, our digital network as well as our cable networks as well. So I think the one-stop shop nature is another reason yet to continue to try and scale to compete with those that sell enormous amount of advertising, Meta and others in a one-stop basis. And I think that's where we need to get to, and we are working and striving very hard to get to that point so that we have a competitive value prop because we know that from an audience delivery perspective, with a sports leagues we deal with, there is a tremendous appetite to be on broadcast to get that full potential distribution to get the audience uplift from streaming only or cable only. And so we see that as driving our sports portfolio on The CW, but also applying that kind of enthusiasm across the entire buy-sell process and all of our inventory, I think we'll -- again, if we can remove the structural impediments to doing business with us, that we'll end up doing more business.

So I mean you kind of just touched on this a bit, but search and social and increasingly Connected TV are also taking share from local advertising budgets. I guess, what are the opportunities for Nexstar to [indiscernible] some of the advertising businesses back toward some of your digital properties?

I mean we've -- one of the things that we've done is we've launched OTT apps to all of our local markets over the course of the last year. And so we've got our local news that's available OTT, CTV capabilities. So that can be a way of doing that. I think the other -- we also have The CW App and NewsNation has CTV capabilities as well. So that's part of it is creating our own content kind of driving that. And I think as I was saying earlier, part of it is not only leveraging our local sales force, leveraging third-party content and relationships that we have to add to sell that. You make it more about our local advertiser and what we can provide to those -- that service.

Perry, you just mentioned that you've beefed up your sports, CW was on this -- you're positioning it on a path to profitability. But can you talk a little bit about where you are in the transformation of the network? What opportunities still exist, including managing programming costs or building an audience and even really driving profitability.