Sirius XM Holdings Inc. (SSP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Scripps call. [Operator Instructions] I would now like to turn the conference over to Carolyn Micheli. Please go ahead.

Thanks, Dave. Good morning, everyone. And thank you for joining us for a discussion of the E.W. Scripps Company's sale of its Stitcher podcasting business to SiriusXM. You can visit scripps.com for more information and a link to the replay of this call. A reminder that our conference call and webcast include forward-looking statements, and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. The COVID-19 pandemic enhances the uncertainty of forward-looking statements we make about our operations and financial conditions. We do not intend to update any forward-looking statements we make today. We'll hear today from Scripps President and CEO, Adam Symson; and CFO, Lisa Knutson. Also on the call today are National Media Executive Vice President, Laura Tomlin; and Controller and Treasurer, Doug Lyons. Now here's Adam.

Thanks, Carolyn, and good morning, everybody. Thanks for joining us. This morning, we'll update you on a few important developments in the Scripps story, focusing mostly on the announcement we made that we are selling Stitcher to SiriusXM for $325 million. Late last week, we were also notified that Mission Broadcasting was exercising Nexstar's option to buy our New York City CW affiliate, WPIX. As you'll recall, that option was a part of our purchase of the Nexstar-Tribune divestitures last year. In a few moments, Lisa will provide you some additional context on the positive financial impact of that deal. And finally, we'll use this opportunity to give you a business update. We'll start with the big news, the successful sale of Stitcher. The purchase price of $325 million represents a multiple of 4.5x 2019 Stitcher revenue, which reflects the significant value Scripps has created since we entered podcasting 5 years ago. We began exploring strategic options for Stitcher early this past winter for 2 reasons. One, because we always consider how best to create shareholder value; and two, because we have come to believe that Stitcher and its employees would be best positioned to continue on its growth trajectory as a part of a larger audio-focused company. In this transaction with SiriusXM, I'm pleased we've accomplished both objectives. The announcement this morning shows again that at Scripps, we're committed to doing what we said we would do, balancing near-term results with long-term value creation. For as long as this company has been around, we have been buying and building businesses that capitalize on consumers' changing media habits. And as I've said on our previous investor calls, we're comfortable unlocking value by spinning them off, selling them or continuing to grow them organically in order to benefit the enterprise. In every scenario, we focus on maximizing the return on invested capital. Scripps was an early entrant into the podcasting industry with the purchase of Midroll Media for $55 million in 2015. Back then, only 17% of Americans listen to a podcast at least monthly. We saw the opportunity in podcasting because we tracked the development in technology, studied shifts in consumer behavior, and early on, recognized the power of the medium to satisfy both audiences and advertisers. And today, more than one in 3 Americans listens to a podcast at least monthly. Other large media companies are now following our lead in recognizing the value of the podcast industry as well. In 2016, Scripps purchased the Stitcher podcast listening app for $4.5 million, a small price for a widely distributed platform with high consumer name recognition. A few years later, we rebranded the whole company Stitcher, retaining the name Midroll for the advertising rep firm portion of the business. Today, the Stitcher Company includes 3 distinct podcast business lines: Midroll, which sells advertising for podcast producers; owned and operated podcast networks such as Earwolf; and the Stitcher listening platform. Under Scripps' ownership, Stitcher's revenue grew at a CAGR of 52% from 2016 to 2019. It has significantly expanded its catalog of owned and operated shows and has formed long-standing and successful partnerships with celebrities and top talent, including Conan O'Brien, Oprah Winfrey and the hosts of top-performing shows, including LeVar Burton Reads and Office Ladies. It has grown the listening platform's use, including through in-car systems and at-home devices and developed the ad-free Stitcher Premium subscription service. For several years, we've been telling you that Stitcher's growth strategy has been fostered by necessary investments through the P&L. Today's sale validates our thesis with an impressive cash-on-cash return of more than 2x. The successful sale of Stitcher is a strong reinforcement of our National Media strategy. As I said, this strategy includes a number of paths to value creation, exits and spin-offs and, of course, organic growth. At the Katz Networks, which we bought in 2017, we realized record 30% revenue growth in both the first quarter of 2020 and the fourth quarter of 2019. And we expect continued margin expansion at Katz as we move past the pandemic and its business disruptions and further establish Court TV. We have grown Newsy's revenue at a CAGR of 108% since it launched on OTT and we're moving it into profitability this year, pre-COVID. And Triton continues to deliver solid revenue growth and the highest margins of the segment. We remain firmly committed to these businesses and to the promise that lies ahead in over-the-top and over-the-air television as well as digital audio. For nearly 3 years, we've been telling you that this management team is committed to improving the company's short-term operating performance while creating long-term value. We have been successfully delivering on those promises. In 2019, we more than doubled the size of our Local Media portfolio and grew to be the fourth largest independent local broadcaster. Our station group today is more effective, more efficient, and operating with greater durability. We expanded our portfolio ahead of the opportunity we knew we'd have to renegotiate 40% of our retrans subs this year and ahead of what we suspected would be a contentious and profitable 2020 election. Despite the impact of COVID-19, I can affirm again our investment thesis on both fronts. We have now successfully completed the second of our 3 MVPD renewals this year, and I am very pleased with the results. On political, our expectations for the 2020 political ad season are high, now even higher than they were just months ago, bolstered by the breadth and depth of our station footprint in key battleground states. Even with a global pandemic, 2020 should affirm our enterprise-wide strategies that are creating an even more valuable Scripps. Let me turn briefly to the sale of WPIX. As you know, when we acquired the Nexstar-Tribune divestitures a year ago and doubled the size of our portfolio, we acquired CW affiliate WPIX with Nexstar, reserving the option to purchase it back for a pre-negotiated price. So this morning's announcement should not come as a surprise. It has been our privilege to own the station for the last year as we've navigated these challenging times serving the people of the greater New York market. I'd like to thank the leadership of WPIX and all of its employees. It has been a pleasure having you as part of the Scripps family and we will continue to run the station as we have until we turn over the license. Now Lisa will share the financial details of our transactions and the benefits to our debt profile as well as give a broader business update. Lisa?

Thank you, Adam, and good morning, everyone. Today, we announced the sale of Stitcher to SiriusXM for $325 million, which represents 4.5x Stitcher's 2019 revenue of $73 million. That revenue multiple accounts for the 3 business lines that Adam described, the largest of which is the advertising rep firm. The Midroll rep firm brings in well over 2/3 of Stitcher's total revenue. The sale price includes $265 million of cash upfront as well as $60 million in earnouts based on financial milestones achieved in 2020 and 2021. We developed these financial milestones in concert with SiriusXM, and they were set with the current economic climate in mind. We believe they are highly achievable. Scripps' after tax internal rate of return based on the full purchase price of $325 million falls in the mid-20% range. In addition, as cash-on-cash investors, we are very pleased to more -- to have more than doubled the value of our investments, which includes the $59 million purchase price for Midroll and Stitcher and the business losses over the past 5 years. Stitcher's annual losses were in the high teens millions of dollars that we expect to see improvement in both National Media division segment profit and in company EBITDA. Consistent with our approach on our first quarter earnings call, we will not be giving guidance on these numbers due to the pandemic-related economic uncertainty. The transaction agreement includes the move of all Stitcher employees to SiriusXM, and we expect it to close in the third quarter, pending Hart-Scott-Rodino clearance. Now I'd like to discuss the impact of our selling of both Stitcher and WPIX on our taxes, our financial reporting, our leverage ratio and our outstanding debt. Our cash payments for 2020 are expected to be about $24 million after taking into consideration the gain on each of these sales. The majority of this is expected to be paid in the fourth quarter, with the balance due in the first quarter of 2021, depending on the timing of the closing of the PIX sale. We expect that to close in the fourth quarter. For Stitcher alone, our estimated tax liability is about $70 million, assuming the full earnout is achieved. For WPIX, our estimated tax liability is around $4 million, but we have approximately $190 million of net operating loss carryforwards to offset about $40 million of tax liabilities this year. Beginning with our second quarter earnings release in August, we will report the Stitcher businesses as discontinued operations and will provide historical results for the National Media division without Stitcher's results. For WPIX, also beginning with the second quarter, we will keep the station results in our continuing results but back out WPIX in our existing adjusted combined tables. We hope those presentations give you more meaningful year-over-year comparisons for our financial results. As Adam said, the sale of Stitcher was driven by our desire to realize value from our businesses for the benefit of the company as a whole, the Stitcher business and for our shareholders. At the same time, the resulting increase in company EBITDA means we are improving our liquidity and also our leverage ratio. The sale of WPIX will improve our debt profile as well. As many of you know, when WPIX joined our company, it was only very modestly profitable so we're moving WPIX will improve the Local Media segment's margin. With the proceeds from the sale of Stitcher and WPIX, we will reduce our net leverage ratio by nearly a full turn. On June 30, our net debt was $1.9 billion. As you know, paying down our debt is our highest priority once the economy improves. As the year unfolds and the current economic situation becomes more clear, we expect to be paying down debt with the cash from the sale of Stitcher, from political ad revenue and from the sale of PIX. Finally, with all the uncertainty in the current economic climate, I thought it would take the opportunity to give you an update on our overall business. I'll touch on core local advertising, political advertising, MVPD negotiations and our National Media business performance. During the second quarter, core advertising and Local Media unfolded as we expected. May ad revenue improved from April. And in June, improved from May. We are in line with the expectations we shared with you on our May call. Political advertising surpassed our expectations for the second quarter. We had expected about $9 million of political ad revenue and came in at more than $13 million. Bookings for the third quarter are very robust, and we are now expecting to bring in north of $200 million for the year. Turning to MVPD negotiations. As Adam just shared, we recently completed the second of our 3 key distributor negotiations for the year. We now just have 10% of our household renewals to complete. We continue to be pleased with the results of these negotiations and the value we are realizing because of the investments we made in our station portfolio last year. Finally, the businesses in our National Media division exceeded our expectations for the second quarter with the division's overall revenue coming in about flat for the quarter on a year-over-year basis, including the results for Stitcher for both periods. That's a pretty impressive performance given the advertising downturn, and we can attribute a good portion of those results to the strength of ad spending and rates at the Katz Networks. And now operator, we're ready for questions.

[Operator Instructions] Our first question comes from the line of Davis Hebert with Wells Fargo.

Can everyone hear me okay?

Yes.

Great. So congrats on the 2 asset sales. And I wanted to ask quickly on what you would intend to pay down. Would you anticipate prepaying the term loan, revolver? And then second question would be, have you talked to the rating agencies about the positive credit impact here? And could you see any sort of benefit from that perspective?

David, it's Lisa. Hey, we are evaluating certainly what -- how we would approach the paydown of debt. The revolver certainly would be one of the first things that we would pay off. And your question about the rating agencies, we just announced this morning that we're in conversation with the rating agencies really later today.

Our next question comes from the line of Steven Cahall with Wells Fargo.

Congrats on the transaction. Maybe first, just wondering if there's any shared services impact? Was there any that was absorbed at Stitcher that's now going to be spread into the other segments? Or is there any shared services that you'll be able to lose with the divestiture of Stitcher? And then Triton, it's a very different but a related business. It's kind of now standing alone in the national portfolio as an audio asset. I think it's got both radio and podcast exposure, so maybe it hasn't benefited quite as much from the podcast bonanza as Stitcher has. So maybe also you could address a little bit how you're thinking about the strategic value of Triton at this point.

Yes. So Steven, it's Lisa. And I'll answer the first question and then turn it over to Adam to answer your second question. So we indicated the losses we were funding at Stitcher were in the high teens millions, and that includes some nominal shared services that were -- we've also included in that loss.

Steven, thanks for the question. Triton actually is a high-margin contributor to our National Media division. And while it does serve the radio business, it's entrance to podcasting is a little newer. We expect to continue to operate Triton to service both the podcasting industry and the digital audio streaming industry, which we expect to continue to see solid growth, both domestically as well as internationally from here on out.

Great. And then maybe just a quick follow-up on political. So it sounds like you increased your political guide. Could you just give us a little more color as to what you're seeing? Is this more congressional and senatorial races getting competitive, given some of the changing in polling? Is this more around presidential? Would just love to get a little more color on that.

Yes. I mean, I think the answer is Senate and Presidential, it's really a yes and yes. We're seeing, obviously, the presidential campaign make -- I think, further expand the number of battleground states that we see from -- in the beginning of the cycle. There's some indication obviously that Biden's campaign is being encouraged to spend in a way that could also incur -- help down ballot, further down ballot races, which we think will benefit us. Obviously, Arizona, Michigan, Florida, all very, very hot from a spend perspective. And bookings have just been stronger than we had anticipated. So it's really all good across the board. Montana, too, in particular. You remember that we own that very strong cluster of top-performing stations in Montana back during the last cycle. Those stations took $0.75 of every dollar in the Montana races. And Montana is a very hot political market right now.

Our next question comes from the line of Michael Kupinski with NOBLE Capital Markets.

Congratulations as well. The company has historically used its broad cash flow to go into other fast-growing businesses and did very well for shareholders. I was just wondering, as certainly, you pare down debt as a big focus. And as you kind of look at the landscape where you might build shareholder value from here, where do you think that you would most likely look to invest going forward? Would it be to kind of round out some aspects of where Triton is in that marketplace? Do you think that there's other programming initiatives or areas of growth there? Where would you see some opportunities?

Mike, nice to talk to you. Look, I think, first of all, we're obviously big fans of local broadcasting and continue to see significant opportunity. We're looking at a moment in time right now where consumers are relying on local broadcast more than ever before. We're serving our local communities in a way that's really, I think, unique. Other media that have historically served local markets, both with news, information, entertainment and advertising are not as well positioned as local television broadcasting. And so to start, we continue to see a lot of strength in our strategic holdings in local broadcasting. On the national side, you're right, we have a long history of investing through the P&L, taking the cash flow from our core business and growing businesses. And we'll continue to do that with our National Media division. We're big fans of what we're seeing in the renaissance and resurgence in over-the-air broadcasting. As I mentioned in my prepared remarks, the Katz Networks have seen significant growth as both that -- those businesses have done very, very well with audience and advertisers and the over-the-air marketplace has continued to grow. We had 30% revenue growth during the first quarter pre-COVID. And while there has been some dislocation as a result of COVID, we expect that business to get back to pre-COVID growth levels. So we're big fans of over-the-air. And I would tell you, Triton has been a very significant contributor. It's got good margins, and we like the business. We expect to see continuing to grow that business, both domestically and internationally, as audio streaming and podcasting continues. Remember, that's a SaaS business, with very controllable expenses. As we expand that business across the world, the expenses don't scale as the revenue scales. So we really like that kind of business in the audio streaming space as well.

And then also regarding the advertising, you indicated that they came in pretty much -- the core advertising came in line with your expectations for Q2. I was just wondering if you can maybe talk to us a little bit about somehow how maybe the ad categories are performing as you kind of look into Q3, if you're willing to look into Q3 at this point, particularly for auto at this point.

Mike, it's Lisa. Hey, we'll be giving more details on our August 8 call. We're not going to go into categories on this call just yet.

Our next question comes from the line of Dan Kurnos with The Benchmark Company.

Congrats, everyone. We had a follow through, Adam, on this one. Just a couple of things, maybe housekeeping. Lisa, I know you know you're going to pull Stitcher out, so we'll get numbers in a few, I guess, on months now. But are the losses associated with Stitcher by quarter? Are they commensurate with the revenues generated? I guess Q4 would be a less loss is what, I guess, what I'm trying to say since it's probably a more profitable quarter.

Yes. So we're going to give you quarter-by-quarter look back on 2019. And obviously, you'll see the first half of 2020. So you'll be able to see each of the quarter-over-quarter losses, Dan.

All right. I'll follow up with you. And then just on the thoughts on the proceeds, the use of proceeds. Obviously, you guys have talked about debt, debt, debt, right? And I know the leveraged position you're in. Is there any thought at least to a nominal allocation to share buyback given where the stock is trading right now?

Dan, we really have set our main priority is to pay down debt, and that's really what we're going to follow through with this year.

Okay. Fair enough. And then can you just talk a little bit about -- maybe if I can just follow-up on Mike's question just around core. I know you're not going to give categories or kind of the outlook, but is there just any way for us to kind of think about -- obviously, we've seen a rise in cases, and we've seen kind of a little bit of slowing of some of the reopenings. And that was kind of a talking point before. Is there just any view in terms of -- we've heard July as particularly strong regardless. So is there any way to kind of reconcile the 2 or just how you're overall viewing the trends, given sort of the changes in the state reopening plans?

Sure. So certainly, through the end of second quarter, which just ended a couple of weeks ago, we didn't see any impact. And as I said in my prepared remarks, June was better than May. We're not seeing any impact on the -- looking at third quarter pacings. So we're not necessarily seeing an impact at this time. And it's pretty early in the quarter, but certainly optimistic that we won't see too much of an impact from that.

Perfect. And then just the last one. I know we don't know if it's going to happen or not and I'm sure you're not baking it in, but do you have any view on what impact a Facebook blackout of political ads would mean for your political estimates?

It's really hard to know, Dan. Look, I think we've felt for a long time that local television is the best way for candidates to communicate their messages and to get out the vote, to move their base and to reach across. Technically, I think typically, social media marketing has been used for more fundraising at this point. This is such an unusual -- such an unusual campaign. We do know that there are 2 main buckets of expense for candidates. And one of them is media. And the other one is the ground operation. There is not a typical ground operation being run this year as a result of COVID-19. And so I see both no ground operation and sort of the potential for the Facebook blackout as benefiting local television.