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

Great. And Nielsen revised their local TV methodology. So as they implement that into local TV currency, do you expect any impact on audience measurement and advertising demand?

Yes. So on Nielsen, I think they have made -- this would be the third measurement upgrade in 2 years from Nielsen. They move to big data and panel last September, as everyone knows, then they expanded out-of-home measurement and then most recently, co-viewing measurement, which I think these are all positive and actually really truly capturing the audiences who are viewing all of these different mediums. And I guess on magnitude, what I would say is the Nielsen's co-viewing pilot, which went into effect earlier this year showed roughly a 4% lift for marquee events in broadcast, which I think is hugely positive. But I guess they still have some work to do to satisfy all the different parties. And I will always say that it's still under counting or not measuring those. But I think what it matters for us is that advertising is clearly priced of measured audience, right? And all of this doesn't change overnight, but I think the trajectory is in the right direction. We've always felt that broadcast was undercounted. There are a lot more audiences that go to broadcast or appointment viewing your marquee sports events. So I think all of that is very, very positive. I think it's very early for us to size the impact of that, how it translates into revenue for us. But I think it's all moving in the right direction.

Great. On the retransmission side, 2 major network renewals remaining this year, I think roughly 2/3 of subs renewing next year. What do you think are the biggest drivers of future retrans growth? Is it pricing, churn, something else?

There's really 3 big trends happening as it relates to our net retrans and thankfully, they are all moving in a positive direction for the company. Number one is we are seeing churn improve and we've seen that through several quarters now, driven by new strategies rolled out by Charter and others who are bundling in more streaming packages into their base pay TV offerings to consumers, and they are very significantly changing the value proposition from a consumer perspective. I'd love to point out that if you take a look at the Charter offering, and you subtract the cost of all the bundled in streaming services, the cost of what legacy pay TV would be, which would be the broadcast channels, ESPN and in some cable channels is less than $30 a month on a net basis. You compare that to the prior offering where they didn't bundle in all these streaming platforms that was $100 so you've significantly changed the value proposition to staying with a pay TV provider like Charter, and that's why I think you're seeing other MVPDs follow suit with a similar strategy and that's why you're seeing the consumer react and saying, "Wait a second here." This is a significantly different value. And beyond the value, they are also making it easy to have all your video in one place. You can't underestimate the incentives and the -- sort of the power of simplicity and having all your video in one place. And you're starting to see that in the numbers translate through. And you're seeing this bottoming happening in the pay TV ecosystem, which has been long predicted that would happen, and now you're actually seeing in the numbers. So that's the first trend. The second is from a broadcast perspective, we are and continue to be the most important channels in Pay TV. We have the best content, be it sports or news or even our entertainment content. And we are one of only a handful of the must-haves on pay TV. So when we are up for renewal with our MVPDs, we still deliver much more audience than the percentage that we take in terms of the Pay TV payment pool and that enables us to get favorable renewals, and we're expecting that to happen next year as we come up with 2/3 of our subs. And then on the network side, all the networks now provide all of our content on streaming platforms, the last of which was Fox launched last year, FOX One. Those streaming platforms now generate significant amounts of revenue and they benefited from this implicit subsidy from broadcast, where our content moved over there, helped build those businesses up and those businesses really didn't pay for the content. And there's a rebalancing that's happening with the networks where the burden of the content cost needs to shift more towards stream. So those are the 3 big trends that are moving our net retrans in a positive direction going forward.

So you do think you'll continue to grow price or that price will continue to increase?

I do think so, yes.

And then you touched on this, Chris, as we do think about sports rights in particular and that rising cost, just thinking about it from the network side, flow through the MVPD side and how that ultimately affects you and how you pass that along for lack of a better term?

Well, it doesn't look like we're going to have to answer that question as it relates to the NFL. So the only experience that we can point to in recent history was the NBA deal with NBC, where a significant amount of fees were agreed to by NBC to bring the NBA back to broadcast. It's been a phenomenal success for the NBA and for NBC in terms of viewership and reach. And I think both sides are very happy with the outcome. But it was a big step-up in terms of what was paid to the NBA. And we lapped a renewal with NBC where our expectations were set at the beginning of the year, the renewals at the end of the year. And in between, setting our expectations and renewing with the NBC, they sign the NBA deal. . And you would think -- or sort of the natural question is the question that you're asking right now? Are they going to pass that cost through to us or an affiliate who would benefit from that content. Well, all I can tell you is that we exceeded our original expectations that were set before the existence of the NBA deal ever was known. And so in our recent history, I would point to our ability to push back on this pass-through concept of the cost. And it goes back to what I mentioned earlier, which is that same content is also on Peacock that NBA content. So the reality is where that cost got allocated was to Peacock, not to broadcast. And it is going to be the same discussion to the extent that there's more having to be paid for NFL.

Great. Turning to Spectrum. You recently highlighted that your portfolio is maybe worth up to $4.1 billion through auction, negotiated lease or sale. What are the practical steps or time line to actually extract value from your spectrum assets?

Just to put a finer point on the $4.1 billion number, which I mentioned on our last earnings call. When you take a look at the 2017 incentive auction, the average price per megahertz pop was $1. But if you take a look now at recent comps with -- in low band, it would point you to $250 million. And so the $250 million is just applying that to our total megahertz pop within all the stations that we own. And in a world where we've sunset at 1.0, which is in an MPRM in front of the FCC right now, which were the whole industry is pushing to have that happen. You only need 25-ish percent of your total spectrum to do what the core business is today, which leaves 75% to do other uses, you could obviously put out more content which some broadcasters may choose. We and other large broadcasters have formed EdgeBeam to work on data casting applications to fill that excess spectrum with more revenue-generating opportunities, and that includes things like enhanced GPS, digital signage distribution, and it also includes Market Solutions, which was spun out of NAB, which will be -- as a backup for GPS, which -- and they're working closely with DHS and DOT to get acceptance as the backup for GPS, which is sorely needed in the U.S. And there's other applications under development around automotive and autonomous vehicles. So that's another way to monetize our spectrum. And then the third way is something that was sparked by a recent Wells Fargo Research report citing that sort of dynamic that I mentioned earlier that this -- the market value of the spectrum that we have is a lot higher than what the last auction would imply and could a certain amount of our spectrum be repurposed for wireless users like T-Mobile, Verizon, one of the new LEO players on the satellite side. And the short answer to that is yes. There's certainly historical presence to that. That's essentially what happened in the 2017 auction. There is no auction authority granted by Congress around another auction for our spectrum, but something could be done on a negotiated basis and I do think there would be interest from wireless players in that sort of arrangement. And in terms of what would have to happen to get there, you would need FCC approval. You would need some amount of clearing of certain bands of broadcast stations and then you would have to have a counterparty obviously. And I don't think the industry is interested in doing another auction. And you'd have to go to Congress to get that approval. It's a bunch of uncertainty last time around, big bidders like Verizon and AT&T didn't show up, and that's one of the reasons why the outcome was not as was not what people had expected it to be. And I think there is an opportunity going forward to do something like that, but -- there are things that -- there are steps that need to happen in order to unlock that.

Probably hard to answer, but I mean, what could be a reasonable time line where we could see some form of cash flow generated from your spectrum assets.

There already is revenue being generated by EdgeBeam but it's early days. Those are new applications and new markets that are going to have to go through a development curve. A key component to really unlocking that is sunsetting 1.0, the MPRM that's currently in front of the FCC calls for a Sunset, February 15, 2028. We're hoping to get the FCC to act on that MPRM post midterms. That date probably moves around based on what the final MPRM looks like. But that is really the key unlock for a lot more revenue, be it through data casting or be it through what was talked about earlier in terms of leasing to other players for their use. .

Great. Turning to ventures how quickly could venture assets be monetized? And second, do you still prefer a venture spin to occur alongside a broader -- a larger broadcast transaction?

We've been actively monetizing ventures assets over the last several years. We're roughly $500 million cash now and $500 million of minority investments we continue to chip away at those minority investments and monetize those when opportunities become available. Some of them will just have to wait for them to naturally go through their life cycle. Digital remedy is not something we're looking to monetize anytime soon. It's growing very nicely from an organic perspective. We're looking to actually add inorganically acquisitions like we did last year that have been very accretive. So we're looking to scale that company up. And then Tennis Channel, again, not looking to monetize that either -- that's going through a whole streaming transition, much like what ESPN is doing right now. There's -- it's got a great new leader in Jeff Blackburn. He's revamping the entire digital platform to be relaunched in Q4 of this year. So we're expecting really great things out of those new apps. He's got a great rights portfolio, a lot of excitement around Tennis in terms of participation and viewership and getting that -- the streaming subs up on that business up significantly, which we think Jeff can do that will dramatically change the valuation of Tennis Channel. So no plans to necessarily do anything on those 2 big portfolio companies? And then on the minority investment side, we're always looking for opportunities to monetize those because we do think it's pretty hard to get credit for those from Wall Street. And then in terms of your question on spinning that work is still proceeding on that front. Our preference is to do a spin merge where we find a merger partner for broadcast. We've not been shy about talking about that publicly, and that is still our preference. And we're going to keep the optionality of ventures and its resources in play until we figure out what the right path is for the broadcast side.

Great. And you touched on this earlier, Chris, but what do you think is the appropriate long-term leverage target for the broadcast business?

Yes. So in terms of leverage target, what we have said is it should be kind of for us in the high 3s to low 4s over the medium term. And I would say, if you took take a look at it over the much longer horizon, I think it has to be in the 3s and the mid-3s. We obviously have taken significant steps to delever the broadcast balance sheet, as you know, Marlane. Since the start of the year, we have retired or repaid $320 million of debt. And we also have just in early July, repurchased $25 million of term loan and we fully intend to use the free cash generated in this political cycle and in the '28 political cycle to continue to delever the balance sheet. Plus, I think Chris mentioned in the M&A section, there are multiple other levers to delever the balance sheet from in-market optimizations, portfolio optimization, we have executed a significant amount of JSA buy-ins and then any large-scale M&A or any spectrum optionality will significantly delever that as well?

And Narinder, in 2Q of this year, $320 million of term loan and AR facility was paid down. So what is your preference on a go-forward basis in terms of the float versus fixed mix.

Yes. We -- obviously, fixed and floating mix is not a static number. As you know, it's a function of the rate environment. We are currently at 70% fixed and 30% variable. If you look -- if you take into account the interest rate hedges that we have on the book. So I think that mix kind of makes sense. In terms of deploying capital where we go, I think we will take a look at it, obviously, from a returns perspective and what minimizes the interest expense as well as well as we're going to place emphasis on nearer maturities. And I think if you think about it that way, I think you will see that the floating rate exposure kind of makes it to the top of the list, although there are opportunities in our second half nodes as well.

And after several years of cost initiatives, is there a meaningful opportunity for further cost optimization.

Yes, that's a great question. I don't think about cost optimization as kind of a one-off exercise. I think we continue to look at the business we are in the long-term trend lines in the business that we have discussed. And we ask ourselves the question, if we started from 0, what should the cost structure look like? How would we go to market with the top line that we have. And I think that drives a different set of conversations than just trying to optimize one department or another. And I think Sinclair and perhaps others have done a fabulous job centralizing a lot of those functions over the years. I think the opportunity now is to see how can we make these workflows, which were centralizing their silos kind of talk to each other. How do we make these workflows end-to-end and across those silo boundaries? And we are obviously working on that. And as Chris likes to say, when we think about cloud, that we have paid our tuition there, we have moved a significant amount of operations to the cloud. which obviously increases the operating expenditures, but release your CapEx on an ongoing basis, right? So I think there's significant leverage to be gained there as we've kind of gone to media cloud play out, working on significant transformation of our news operations and content centers and deploying the cloud workflows. I think there's a significant opportunity there. I think everybody talks about automation. I think, yes, that is table stakes and then artificial intelligence. I think the way I think about this is just reinventing and reimagining and rewiring our core businesses, right? How can we deploy this technology to move it speed, be better at what we do and deploy our resources in the most efficient manner. And I think we started that several years ago. We are in the thick of it. We just don't talk about it in a very visible fashion, but rest assured, the team is very, very focused on executing on those initiatives.

I just want to underscore something that Narinder alluded to there, which is that we -- it took us over 3 years and tens of millions of dollars to transition to the plan. No other broadcast or peer has done so. And once you get there, which we're just getting there, we're going to finish by the end of the year, all of our stations, it then unlocks significant amount of transformation ability for automation for AI, not only just in terms of streamlining workflows, but also getting your content into new end points and using things like AI to version it for different platforms, for instance. So I do think -- on a relative basis, you're going to see more out of us in the years to come because we pay that tuition and we spent those years and the extra money to do it, and our peers haven't done that.

Great. With one minute left, what do you think the market currently underappreciates about Sinclair?

A lot of things. Much more than a minute worth. So -- look, from an equity perspective, we're clearly mispriced. We talk about this a lot. We're either -- we don't think we're getting much, if any, credit for a minority interest portfolio on the venture side. the true value of digital remedy and antenna channels also being sort of lost in the fact that we have this holding company corporate, which ends up canceling out a lot of the EBITDA there, which is I think, a totally different valuation profile than the broadcast side. And then on the broadcast side, we really have gone through several years of heavy investment like we mentioned in the cloud, but there's been other initiatives rolling through, which we think are going to have big impacts on the business going forward. And the positive trends that I mentioned earlier around the core business on retrans, we didn't spend a lot of time talking about the advertising side, but we've done significant work on digital and audio and podcasting, which is starting to bend the curve upwards on core ad growth. So there's a lot of positive trends that have taken a while to succeed but they're going to start playing out over the years to come in the core business. And if you buy us now, you're basically getting ventures for free.

Great. Well, Chris, Narinder, thank you for the time.

Thank you, Marlane.

Thank you.