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

Please to have Sinclair broadcasting with us today, both, Chris Ripley, CEO; and Narinder Sahai, CFO. Thank you so much for coming.

Thank you. Great to be here.

All right. Yes. So maybe can I start with a high-level question. So at the industry level, forget about Sinclair for a second, I would love to just start with the health of the broadcast industry as we sit here today. How would you characterize?

The industry trends that really drive our business are quite healthy. So I would highlight 3 in particular around net retrans. Number one is we are seeing a moderation of churn. And this is being driven by new strategies deployed by MVPDs like Charter, who are bundling in their streaming packages into their core cable offering. We think that's been really effective. We term that the great rebundling. So you're seeing this sort of bottoming out on pay TV penetration, if you will, that's been predicted for quite some time, but we're actually now we're finally seeing that in the numbers. So that's really important. The second trend I would highlight is the continued pricing power within broadcasting. So the broadcast industry as a whole still far -- takes far less out of the pay TV pie, dollar pie than the viewership that it puts in, so...

[indiscernible]

I'm talking about distribution dollars, retrans, right? So I think we account for about 45% of the viewership within pay TV, and we're around 30% of the pay TV dollars that get distributed out. So that -- and then furthermore, as we continue to try to close that gap and get to parity, there's a good argument that we deserve more than our viewing share because the premium nature of the content that we deliver like NFL sports, college football, Playout basketball, playout hockey and news. So it really is the most premium, the most must-have content on Pay TV is broadcast and increasingly so as the average cable channel has really gotten gutted by streaming. And then the third trend...

Can I cross you for a second.

Sure.

That 30% of dollars versus 45% of viewership. I thought maybe I misheard you, you said net retrans in there.

No. I was just talking about gross.

Okay, gross. Okay. Sorry.

Okay. Yes. So obviously, the churn side and then what we get paid by the MVPDs feeds into gross, both are very positive trends for gross. And then when you look at what we net down and what we pay the networks, there is also a rebalancing going on where the networks have all launched significant streaming services. They're, by and large, years into that. All of our content is available on those streaming services. But yet, those streaming services do not pay their fair share for the content that they are benefiting. And so there's a shift in terms of the cost, the content burden between what the networks allocate to the streaming service and what they demand of the broadcast channel. So that is also a positive aspect in terms of what the net cost of our content is. And those 3 trends, I think, bode really well for the years to come. in terms of our main profit driver, which is net retrans. Then you look at the advertising side.

Can I applause you there for a second. Just on the there, sorry, I keep interrupting. Is another way of saying that third one that because the content is not exclusive on your stations that the payment that you make to be an affiliate should be less, is that another way...

Is another way to look at it. And the other way, there's exclusivity component, which we used to have at [indiscernible] we do not anymore. And then when you think about the same content is going into 2 different end points, okay? Both endpoints are being monetized and the burden of the cost of that content should be shared carry between the 2.

Understood.

Then on the advertising side, we're having a banner year on the political ad front. We just raised our guidance recently up to $375 million plus. I expect that we will break new records for midterm advertising. We broke new records for the presidential cycle in 2024, and I think we'll establish a new record in 2028 with dual open primary. So the be a very strong point. On the core advertising side, we continue to manage through declines, but we continue to also grow our digital side of the business and our audio side of the business. And as that becomes a bigger percentage of our total advertising pie, we're able to bend the curve up in terms of core growth.

And when you say spot declines, you're just talking about regular linear No, understood, but that's not a function of you reducing ad load that's just a function of viewership like the engagement coming down, which means there's less spot impressions to sell that would you decline...

Correct, correct, correct. So we're able to make up for that and then some as the rest of our business becomes a bigger percentage of the whole. And then on the cost side, we specifically have made significant progress rewiring our business, putting it on the cloud, transforming our content centers automation and AI, of course. And this is going to have significant impact on the years ahead in terms of reducing the cost of delivering the content to our consumer.

Perfect. It all sounds healthy. So I want to -- can I dig into one of those? Because I admittedly get a little bit confused about the pay TV trends, which you said were sort of -- the rate of cord cutting is moderating. There's part of me that I've seen some data in fairness, I haven't seen it every year, but it implies that the majority of the cord cutting that's happened has occurred among the households that don't care about sports. And we're almost done with those. And so whoever is left, most of them care about sports and the bull case would be that's why you're going to see a moderation in cord cutting because where also you're going to get all your sports that makes me sort of pretty bullish, right, in terms of the cord-cutting trends. On the other hand, I put on the other one side the angel or the other side of the devil, I look at ESP and unlimited and FOX and I say, "Oh my gosh, this is the first time that you get all the major leagues digitally, right?" You don't need to have a pay-TV subscription, which is a new phenomenon, and that makes me nervous. And so do you have -- I guess your preference would be the former that we're not going to see consumers sign up for 6 different apps to get all their sports. They're just going to enjoy the simplicity of having 1 subscription, a pay-TV subscription.

Well, you've half answered the question. .

Okay. Great.

Because it's not just about simplicity, right? -- though that certainly is a big driver, but it's also about value and pricing. So if you're a consumer, and you're interested in sports, there is no cheaper way for you to access all those sports than having a pay TV subscription. If you were to try to piece together those 6 apps or whatever the number is, in order to get all of the NFL or college football, what have you, you ways quickly find out that your total cost to do that would massively exceed what the cost of just the average pay TV bundle is. So the value proposition is really there. And when you think about what Charter has done and others are following is that they've gone even one further, they said, okay, you're going to have this pay TV bundle, which has all the sports that you care about, and we'll give you all the most popular SVOD packages bundled in as well. So the value proposition has dramatically changed over the last couple of years. When you break down Charter's offering, just the cost of the traditional pay TV component of it, which you would be like your entertainment cable channels, ESPN and the broadcast stations amounts to about $30 a month. After you net out all the cost of all those streaming packages that they bundle in. So you went from a couple of years prior, that being around $100 to now being worth $30. So the value proposition fundamentally changed for the consumer and also made it simpler, made it easy, one portal to access all the streaming content you want and your traditional pay TV bundle, which is anchored by sports.

Understood. So can I...

Then there's, I think a couple of other points to that. I think one is, obviously, Chris mentioned value and price, but there's also fatigue, right? If you put the customer at the center of it, there is -- they have to research what platform the game is on, and that's real friction. So I read that in mind. And I think the bigger point here is also on league economics. At the end of the day, audience reach is very important. And there's nothing that rivals broadcast still in that breach. So I think that's very, very important to keep in mind. So I think streaming is probably additive reach, not a bundle killer.

That's great. Can I add one more that it gets me excited, but I don't hear as much conversation about it among investors. I don't hear as much conversation about it even among some of my peers, is the launch of this YouTube TV package that only has sports. This seems like a very big innovation to me in that it sort of gets to the terminal year where people don't care about MTV or [indiscernible] or [ Noggin ], right? They just want the sports. And for the first time, I think, you now have the simplicity of admittedly a digital MVPD sort of giving the consumer what they want. And yet I haven't I haven't seen as much talk about this. I haven't seen other MVPDs sort of follow-up...

Well, no, there has been some other DIRECTV has done a package like that. I think Comcast is on a package like that. So there was a lot of buzz around that when they put it out it was fine for us because we were included in those sources, right? So all good. But when you -- again, I think it comes down to consumer simplicity and value proposition, right? And the price point of those packages was not that different from the full package. So...

Well, I think YouTube TV is starting $65 a month. $65.99 for their sports only pack.

Right. And then [ full ] packages is $80. How many people were not going to pay the extra $15 just to get the full package.

I see.

And so if there was a bigger gap there, I think you would have seen more uptake on the sports only, but for $15 more as well have to package...

Okay. And you get all the streaming.

Then you get all the other -- and by the way, the value prop is even better if you stick with a company like Charter because YouTube isn't bundling in streaming services as well. So -- but either way, like what's important from us is that they stay within the pay TV ecosystem, whether it be pay TV, pay TV sports only -- or sorry, YouTube, YouTube sports package or DIRECTV or Charter. And what we're seeing in the industry right now is that bottoming out that I described earlier in terms of where pay TV penetration is seated.

Understood. Makes sense. So can I shift to consolidation? I've been on the phone with some clients, and they just come up and they say, "Oh, there's no more pay TV -- or there's no more consolidation among the broadcasters." And I said, "What are you talking about? Like the FCC sort of lifted the cap like -- it feels like everyone like, I'm just telling you there's no more consolidation. I'm like, wait a minute, this battle that's happening between Nexstar and TEGNA is a subset of these markets where they own 2 or more of the big 4. Like why would that just sort of stop in its tracks pay-TV consolidation. So I'm just confused about that point. I don't know if you agree with this, that we sort of all broadcaster consolidation is on ICE or if this client misspoke.

Well, look, it certainly has chilled the market, no doubt about it. but it has not stopped consolidation. We have continued to pursue big opportunities and double down on market-by-market optimization. So we announced earlier in the year doubling up in Tulsa, and we've got several market-specific or maybe a handful of market transactions in the pipeline. And then as far as large-scale M&A goes, we've learned a lot watching that transaction. And sometimes it doesn't pay to be first through the pipeline. And there's -- we think there's a lot you can do to mitigate what is going on with the state AGs and really it's all paid for and motivated by DIRECTV of course. And so we think that can be mitigated. We think the rule changes that have gone into effect with the FCC are also helpful.

The ownership cap.

Yes, ownership cap specifically, and there's also in the works, some further local ownership regulation. So we're looking forward to that. And the DOJ has never been more open for business than it is now. There was a fundamental shift in the way they viewed the market with the approval of the Nexstar, TEGNA transaction. So that can be underscored enough. And so we -- no doubt that there is a new attack vector on transactions in general through these state federal courts. And you're not just seeing it in Nexstar, TEGNA, but you're also seeing it in The Sky, Warner Bros. Deal, and Ticketmaster, I think, too. So it's an obstacle that can be overcome. And no doubt it's had an impact, but it's not [indiscernible].

I told my wife all the time the danger of doing this on the sell side for so long as you do it for so long and you think you know something and then something changes. And the state AG example would be an example of something that's just radically changed the landscape, which I was sort of not anticipated. You talked about other FCC changes that are -- that may be in the works. Can you divulge those? Or is that sort of 2 behind the curtain sort of TBD.

Well, there is the quadrennial review is undergoing right now. And it's a 2022 Quadrennial overview, but it doesn't really matter. It's 2026 now. But we're expecting that there'll be further loosening of some of the rules. There's not a lot of rules left, but there are rules that govern radio, and there's also some rules left on the books for TV broadcast. I won't get into specifics, but we expect that, that Quadrennial review will yield some further loosening. .

Okay. That's great. So are there -- so in the sort of traditional cable pay TV landscape, I used to have these like rules of thumb, which weren't perfect, but you could say, "Oh, if pay-TV company that had 6 million subs, I was merging with someone that had 10 million subs." There were enough transactions where you could begin to develop heuristics, right, to say, okay, this is how much they're going to save on their rate card and their affiliate fees and it worked pretty well. Are there similar sort of -- do you think there are rules of thumb or things that people can use, not perfect, but as a short hand for thinking about cost saves as it relates to broadcast consolidation. Or is it 2 million...