Sinclair, Inc. (SBGI) Earnings Call Transcript & Summary

Good morning, and welcome back to the JPMorgan TMC Conference. We are thrilled to have Sinclair here with us today. We have Chris Ripley, the CEO, joining us this morning. Thank you so much, Chris, for giving us your time and your insights and participating in our conference.

Thank you, Alexia. A pleasure to be here.

[Operator Instructions] And I'll try to check from time to time throughout this chat and include your questions into our Q&A. But why don't I kick it off, Chris, with some questions on the sports side and then move over to broadcast, if that works with you. On the earnings call, Chris, you emphasized plans to take the RSN content direct-to-consumer sometime in the first half of 2022. I think it would be great if we can start off by sort of sizing how you see the incremental market is for local sports OTT product.

It's a good question. When you break down our current service offering, what really sticks out is we have 50 million current subscribers on the RSNs through MVPDs today. It's only 35 million unique households in a total service area of over 70 million households. So there are over half of the market in markets we have rights for these teams are not receiving the RSN content. So when you look at that plus the growing fandom of people outside of the pay TV bundle, which our research finds to be quite significant, the TAM here for a direct-to-consumer offering, quite large.

And should investors view the DTC product as a full slate of games or something more limited to start?

We're working out the details right now, Alexia, of how the product will exactly be constructed. Certainly, a full slate of games is a distinct possibility, probably the most likely outcome in terms of what's offered here. And -- but the details of how do we price and monthly versus annual, things like that, exact game makeups in markets will be something we'll announce as we get closer to launch date.

Okay. And you've previously noted that distributors have given you the go ahead to launch the RSN's DTC. I guess how do you think about having this content available on OTT impacting your MVPD negotiations in the future, if at all?

Well, we have really moved into a [ hyper ] environment as a media industry overall. And pay TV bundle is modernizing. It's becoming a multi-platform app experience across many distributors. And then you've got your direct-to-consumer experience, which is natively app-based and modern in terms of the user experience. And that type of environment is really where we're going to move to on both sides of our business over time. And the key component of how we view pay TV -- the pay TV bundle and direct-to-consumer is really a pricing difference. There will be substantial difference in price of what the distributors buy on a wholesale basis versus what the retail cost would pay for direct in an unbundled offering.

I have a question already from the audience, which I think is on this topic, so I'm going to jump into it. Were there any incentives given to MVPDs to get them to green light DTC products such as a revenue split? I guess what kind of pricing would be required?

Well, I can't get into the details of our agreements as they are protected by confidentiality, but we will give pricing protection to the distributor to preserve the concept of wholesale pricing into bundled offering versus retail pricing. So there will be significant difference there in terms of what the value proposition is for the distributors.

And maybe you can discuss the response of teams and leagues to DTC? I guess how much buying is there for the idea versus interest from your partners in launching their own over-the-top services at some point?

It's very positive. The teams are really -- and the leagues are really focused on getting more streaming options into the hands of fans. It's a huge focus for them. There really is no practical way for them to do it on their own. We are their partner, and so we have to do it. And at the end of the day, I think everyone realizes that it's a scale game. Media has become a scale game and ever more so on the direct to consumer side because it's not just about putting the games over the top, it's about the platform that you create around that. It's about the other opportunities for engagement, when you get people off of a linear experience and onto a digital experience, where you know who they are, you have their payment information, you can rent other engagement opportunities for them around ticketing, merchandise, social and gamification. And when you really think about where this is headed, there's a lot of talk in the [ video game ] industry about creating a metaverse around various game experiences. This is no different. The winner here on direct-to-consumer sports will have a sports metaverse. And one team and one league is way too small to compete in that arena with the best-in-class offering.

That makes sense. We have another one coming in from the audience. Is there any step-up in rights expected for in-market streaming for the NBA or NHL?

Step-up in rights payments? No, I don't -- we're not expecting any material changes there.

Okay. You've had the Bally Sports app in the market for around a month now. Can you discuss early insights in terms of engagement relative to the old FOX Sports Go app and how viewers are interacting with some of the novel features you've introduced?

So we've had a good launch on the Bally Sports. We had a very significant installed base on the Fox Sports Go app developed over the years. So getting that converted over and not having consumers needing to redownload, just having an update automatically was very important to make it seamless for consumers. And so far, so good. We've seen more than 4.5 million unique devices since launch actually use the app. And we've had about 9 million [indiscernible]. So we're happy with the engagement. And do remember this is TV Everywhere right now. You have to be a pay TV subscriber. And of course, most of our subscribers watch on the pay TV, not on the app. So this is in addition to. But the engagement so far has been good. And we preserve [indiscernible] from Fox Sports Go. And now we're seeing them actually consume a mix of not only the linear streams, VOD content, editorial content that we've added. And that really supports this thesis that we have around making a destination for the sports fan where they've come for the games to watch them, but giving them so much more to do. And that we're at the beginning stages of that with the app that we just launched.

I guess to that point, I guess given the extensiveness of the Bally-Sinclair partnership, I guess, how do you frame the incremental opportunity for sports betting-related revenue at the RSNs? And then what type of content do you think you and Bally can partner?

Yes. Look, I think the opportunity around sports betting specifically and gamification more broadly is going to be huge. And specifically, we are working with Bally on a watch-and-play experience. So that you can be -- you'd be gaming either for money or not for money while watching the sport of your choice. And that ultimately -- when I play this out over the next several years, as sports betting sweeps [indiscernible] and as people get off linear experience on the digital experience, as interactivity can be added, latencies reduced, you -- it adds up to what I think will be the third major prong of monetization for sports rights. And I think that source of monetization will be far greater than advertising is today and may even come with subscriptions. The day where sportsbooks are actually subsidizing subscription fees for those who want a gamified experience, and it will be a major component of the monetization as we develop this new consumer behavior.

Chris, do you have a sense of the time frame for that? I mean how far off that might be?

Well, we're working on gamification right now as we speak. And I think you'll start seeing earlier versions of gamified experiences next year. And the overlay of sports betting depends on how the states roll out. But I think in 4 or 5 years, you're going to see many, many markets where you can have a real-time gamified experience while you watch playing the game within the game. And when that is widespread, that's when the real economic opportunity becomes quite significant.

And it sounds like the way you've set yourself up, you've got a bit of a competitive advantage in terms of garnering a lot of those potential opportunities? Is that fair?

Absolutely. In terms of tonnage, no one has more premium sports rights than Sinclair. And that's day in and day out. And they're targeted at loyal fans, and so those are the fans that -- the most. And they're also the fans that are the most profitable in a sports betting perspective. So we think that's the ideal sports rights for that gamification opportunity.

How about Tennis and Stadium? The Bally's partnership covers these assets, but it does seem like you've left some key sponsor material on the table like naming rights. Is there something you can monetize?

We did think about doing naming rights deal with Bally and Tennis. We decided, at least for now, to set that aside given the strength of the Tennis brand and its ambitions to go global. And in fact, it's already going global. It's live in Germany and Austria. And so -- but what I think is more important for Tennis than the naming rights is gamification, watch and play. Watch and play will likely be first implemented on Tennis because of the volume of availability of matches that it has. Tennis channel has over 95% -- all the live match rights in the U.S. And every single day, there is a match going on for the most part. And then there's matches with people that you would recognize and be interested in betting on. So the volume of matches at Tennis is so huge that we're going to end up having a certain number of matches that are free. No [ pole ] need to be crossed. Certain numbers -- it will be behind a pay wall, and that actually lends itself to a conducive environment for watch and play. So that's actually where we're focused on implementing watch and play first because of the rights situation -- the volume, the right. And then also, this is the second most betted on sport in the world. Just isn't really that popular bet on in the U.S. And so we think that's a huge opportunity for tennis and has a very clear path.

How about leagues, including ATP, be of gamification? Are there concerns on integrity and presentation being so focused on gaming?

Well, leagues have really embraced gaming in a big way, have -- they get a piece of the handle related to their sports. They have official partners, all sorts of sports books. And they really see it as a key component in the [indiscernible] for the audience. And we -- when you take a look at all the data, it points -- the demographic curve of interest in sports betting is an inverse line to the viewing of traditional sports and -- which is really interesting. And so if you really -- if you want to get the younger generation involved, you need to give them an interactive lean-forward experience. That's what's that's telling you. It's not just about having skin in the game. It's about having interactivity. And for the long-term prospects of the sport, that is an absolute necessity. I think the leagues will fully acknowledge that. We're all in, in terms of making that happen for them for the benefit of not only [ ALS ], but also for the sport long term. And as you create more gamified experiences, which you're going to see, is that they will be far more luck based than skill based. And there -- in terms of the game, the integrity of the game, as you start betting on our gaming and smaller increase of time or events, the issues around game integrity become so improbable that they really shouldn't be on anyone's minds.

And how should investors view the potential for carriage of the RSN on DISH? You've noted success in negotiating with other MVPDs across the entire Sinclair portfolio of stations and networks. I guess how does that inform your view of the DISH talks?

So we have been quite successful with additional MVPDs and incentivizing them to take a broader package of content. And we'll have that opportunity coming up soon this summer with DISH. So we're optimistic. We'll have to see how negotiations play out. And we also think it's interesting that they've partnered with DraftKings and are doing sports-related -- sports betting-related directly on the DISH system. This just again points to this extra prong of monetization around sports, which we're directly pursuing, but DISH is also directly pursuing and enhances the value of the offering that we have to give to DISH. So we'll have to see how it turns out, but there's definitely hope there.

I've got another question coming from the audience. What do you believe is the biggest challenge for OTT platforms entering the market today?

I assume they're talking about direct-to-consumer...

Yes.

Offerings, not like virtual MVPDs. And look, the -- in terms of the biggest challenge is content, right? As you think about direct-to-consumer, having premium content with appeal is the recipe for initial success. Then I would argue on the entertainment side, it's everything. But on sports, it's everything else that you're going to have like gamification, like fandom-based community, et cetera, which will determine the winners in the space. But if you don't have access to premium content, you're not even going to pass go. And then the second-largest challenge would be subscriber acquisition. And that is, obviously, is back to the quality of content that you have but [ in earnest ]. And one of the interesting things I would say about this -- our opportunity on the direct-to-consumer side is there's -- we have a huge promotional platform already supporting all of our rights. And it would be -- there's the ideal spot to be cross-promoting into our direct-to-consumer strategy. So we have these huge advantages here at Sinclair in locking new direct-to-consumer platform versus someone coming in cold.

That makes a lot of sense. Any update you can provide on some of the virtual MVPDs? How should investors read into marquee gaming coverage of fubo but not the wider Bally's RSNs.

So we don't have any specific updates to share with you at this time. In terms of fubo, I do think when you take a look at what they're doing, again, I don't have a particular insight into their business, but are trying different business models that you can see. And so I wouldn't be surprised if you see them picking up more RSNs as they [ lower ] different business models or monetize them.

And on your earnings call, you indicated you were in talks with a large portion of your capital constituency. Can you define, I guess, the key goals for Sinclair? Are you mainly looking to raise new financing to delever?

Yes. We always continue to consider all of our options. We are in active dialogue as we noted in our call with several groups within our cap structure. And we're really looking to optimize our cap structure, delever, provide funding for future needs in terms of liquidity and growth opportunities.

And there's still seems to be some notable RSN groups that could come up for sale over the next 2 years. I guess what is Sinclair's interest in getting bigger in the RSN space?

Well, as I said earlier, scale is very important in this space, and that's just becoming ever more true. We are the largest scale operator in local sports. So we like our position, but we think the consolidation of the industry is inevitable. And it's inevitable because of the direct-to-consumer opportunity because you need to have a scaled offering, you need to have a multisport offering, you need to have a year-round entertainment to have year-round subscribers. And we will definitely be a part of that consolidation.

Just jumping over to broadcast for a bit. Your Q2 forecast indicated a very significant rebound in core advertising. Can you discuss what you're seeing in local markets? What is the level of demand now relative to 2019?

It's been -- rebound from COVID. When contrast what happened in the marketplace through COVID versus, say, the Great Recession, it's night and day. Things bounced back incredibly strong. Many categories are at or above 2019 levels. And even earlier in there, we had some weakness in auto last year of '20 because of factories being closed and having supply constraints. But auto came back hard in Q4 and Q1. Now we got some new supply constraints with chips. But having dealers focus on used car sales and service and other aspects of their business and now further restrictions being lifted on COVID, you're seeing other business and other categories that were being held back start to come back. So overall, I would say, recovering fairly even across the country. And certain categories have been stronger based -- ones that would be -- the obvious ones like services, for instance, which really haven't really been hurt by COVID or restricted by COVID. But when you -- what I believe will happen is when we get out of all of these COVID restrictions, we've got every category sort of unhindered. You're going to see a very strong growth trend versus '19 across the board.

Are there still some laggard categories that haven't fully recovered, and so that's an opportunity for further growth ahead? Or do you feel that most of them at this point are getting back close to normal? And then just following up on auto, I don't know if you can answer this, but any sense of when the supply issues will sort of correct themselves and you might see a stronger growth in the auto category?

Yes. Look, there's been some other categories like pharma that is starting to come back now. I mentioned auto came back, and now it's weakening a little bit. And when I take a look at how long it took for the supply issues to be rectified, last year, it was about a 2-quarter issue. Again, hard to say on the chip issue. But generally, people figure things out and make adjustments. And 3 to 6 months has been sort of our experience of what happens. And so we're hopeful that is what happens here. So that is -- and then you've got other categories, like services, like sports betting. Sports betting really didn't exist for the most part until mid last year and has been just growing at an [ torrent ] pace. So it's -- that's really making up for some of these older, large categories that are still hampered. And when things normalize for those and plus the new categories that have come on like sports betting, you're definitely going to see growth.

Is there a way of sizing how significant the sports betting is going to be to the local ad market? I know it has to continue to roll out across the country, but I'm wondering if there's any way you can kind of size it for us a bit.

Well, look, we -- it's hard to say because it hasn't gone across the entire country. And just for us, for instance, we're looking -- we're probably going to triple what we did in 2020 and 2021. And so -- and that's with a very, very even set of markets that are legal. And so I think it's going to be a big category. Just where casinos are legal in a lot of markets, they are steady category now that are quite significant. And there's no reason you couldn't see sports betting being of that similar level of importance in terms of sort of a 5%, 10% category.

The states generally are legalizing sports betting with different structures, as you know, including the number of operators permitted. Is there a minimum number of [ OSP ] companies in any given market that you think is [ destined ] to drive significant increases in local ad spend?

Look, it's a theoretical question. So hard to really answer with much precision. But more is obviously better, right? You'd like to see more competition on the advertiser side. But even in markets where you have limited competition, there is still a need to get out your awareness of your products to consumers. Even if you're not fighting for share per se, you are fighting for mind share within the consumers. And so as markets roll out, we're not that concerned with markets with limited competition. And the, I think, awareness is one of the key factors there.

And I know we have -- we're talking about it rolling out across the country, legalizing sports betting that is. I guess what's the likelihood in your view that sports betting is legalized in places like Texas and Florida?

I'm not a politician, but -- or nor do I have a crystal ball. But from everything I'm seeing, hearing, I think Florida and Texas are very high in terms of probability. Texas probably won't be in for 2 years because they don't meet every year. And then Florida, Florida was a state that I think wasn't sure was going to happen, but recently, there's been a lot of movement there. I think there's still a decent time to figure out in terms of how many players and how the licensing will work. But when you add up the key problems the states are having with their budgets that COVID put a hole in and you add up adjacent states that are essentially taking revenue out of the state, and so it's almost like the more it is -- the more states that legalize them, likely every state will legalize. It's a self-fulfilling prophecy. And these bigger states like Florida and Texas, a, they need the money; and b, they hate seeing their revenue go to other states as their residents go there to bet.

That makes a lot of sense. Can you update on subtrends in your core broadcast markets to remind us your net retrans forecast for the year?

So we're -- there's no change in our guidance. Our guidance is and continues to be mid-single digits for broadcast and upper single digits for RSNs. And we did see some improvement in Q1 but not enough to really change our guidance. And net retrans is projected to be down mid-single digits this year on the [ broadcast ] side and mainly attributable to about 1/3 of our big 4 subscribers having significant stops at the -- at or near year-end 2020.

The Supreme Court basically ruled in favor of the FCC on its changes to ownership rules. Do you expect this to open the door to some consolidation at the local market level?

Yes. Well, I do. We need to have the permanent FCC pointed and figured out for that to really unlock activity. But it was a huge win for the industry at the Supreme Court, got us out of a multi-paid spin cycle with the Third Circuit. There really was no path for -- to move forward as an industry and then really give power back to the FCC to actually do what it has been mandated to do, which is to deregulate the industry over time as environment changes. And so it really -- underestimate right now what that means because there's no permanent FCC. There's no real ability of companies to act on the new rules until we have stability at the FCC. And we have a 3-to-2 situation in terms of commissioners. But as that does happen, I think you're going to see activity start to pick up.

And we're just about out of time. I'm going to squeeze one more in. If you could discuss how you're currently thinking about capital allocation at the holding company level.

Well, growth continues to be a top priority. And investing in growth opportunities like new programming, our National Desk just launched earlier this year, has been a great success. ATSC 3.0, we continue to invest in that. It will put our spectrum, which is a hidden asset on the balance sheet. We think it's worth at least $0.7 billion in terms of spectrum value. And ATSC 3.0 will unlock latent hidden spectrum value. So we're investing there. And then, of course, M&A investments in other growth companies is a top priority. And we are, at the same time, our debt over time. You'll see our leverage has been coming down. And we like to be opportunistic in terms of repurchasing our securities.

All right. I discuss the warning that we're out of time. Thank you so much, Chris. This has been fantastic. We really appreciate it.

Thank you, Alexia.