Gray Television, Inc. (NYSE:GTN) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Welcome to the Gray Television Q1 2023 Earnings Call. I will now turn the call over to our Chairman and CEO, Hilton Howell. You may begin.

Hilton Howell: Thank you, Misty. Good morning, everyone. As our operator mentioned, I am Hilton Howell, the Chairman and CEO of Gray Television. I want to thank all of you for joining our first quarter 2023 earnings call. With me today are our executive officers, our President and Co-CEO, Pat LaPlatney; our Chief Legal and Development Officer, Kevin Latek; and our Chief Financial Officer, Jim Ryan. As you all know, I’m sure, since our last earnings call, our Chief Operating Officer, Bob Smith, has retired after a long and singularly distinguished career. We wish him all the best in his next adventures and thank him for some of the extraordinary and bold initiatives that he began and that our company still benefits from. With that, we will begin with the disclaimer that Kevin will provide. Kevin?

Kevin Latek: Thank you, Hilton. Good morning, everyone. Gray uses its website as a key source of company information. The website address is www.gray.tv. We will file our quarterly report on Form 10-Q with the SEC later today. Included on the call may be a discussion of non-GAAP financial measures, and in particular, broadcast cash flow, operating cash flow, free cash flow and certain leverage ratios. These metrics are not meant to replace GAAP measurements but are provided as supplements to assist the public in their analysis and valuation of our company. Included in our earnings release as well as on our website are reconciliations of the non-GAAP financial measures to the GAAP measures reported in our financial statements.

Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Those statements are subject to a number of risks and uncertainties. Results in the future could differ from those expressed or implied in any forward-looking statements as a result of various important factors that have been set forth in the company’s most recent reports filed with the SEC, including our most recent annual report on Form 10-K and our most recent earnings release. The company undertakes no obligation to update these forward-looking statements. I now return the call to Hilton.

Hilton Howell: Thank you, Kevin. Gray Television reported an exceptionally strong start to 2023 despite strongly raising interest rates, fears of recession and the off year of the political cycle. Our total revenue of $801 million surpassed our guidance, and our core advertising revenue was even with last year’s first quarter after adjusting for the impact of the Super Bowl last year and the Winter Olympics broadcasts. Our retransmission revenue was 12% ahead of the last quarter of 2022, also beating our guidance. As noted in the earnings release, Gray’s first quarter results benefited from continued strong advertiser demand from our local market-leading local television stations and our digital products. Even as many are still telling this country that a recession is just a few months away, businesses, particularly local businesses, are still working hard with a strong demand to find customers to move their products and to sell their services.

And increasingly, local businesses are rediscovering that in this age of audience fragmentation, broadcast television and its digital channels that support it provide one of the most effective ways to achieve their goals regardless of the state of the economy and regardless of the new cycles. We, therefore, continue to be very bullish on the value proposition that our industry and in particular, our company offer to those who want to grow their own businesses. Besides our strong earnings this morning, we are happy to report by the time that we convene our next earnings call, the Assembly Studios, in conjunction with Third Rail Studios, will be opening and operating. And Gray will have welcomed NBCUniversal Studios under our long-term lease and are happy to have that esteemed company join the vibrant Georgia film and television industry.

As you will hear more from Pat, we’re extremely pleased that people are rediscovering the essential value of broadcast television from local sports teams to local businesses who we are seeing coming to broadcast for the first time ever. I also want to reiterate an outstanding fact with regard to our political advertising. For the first time ever in the year before a presidential election, we are receiving significant presidential ad buys from all major candidates and parties. This is a great sign for this year and for next year. I also want to congratulate all of our stations. They are operating at the top of their respective games, but I would particularly like to call out some stations that we acquired and have had stewardship over for the last 18 months, particularly some of the Meredith TV stations.

We have seen a dramatic improvement across the board but with particular improvements in very important markets to our company in Atlanta, Phoenix, Nashville and Greenville. Further, the top-performing stations in a portfolio that we purchased have increased their success, particularly in Las Vegas, St. Louis and Hartford. So while we predicted cost synergies from the acquisition, we are now seeing revenue synergy, not just from Meredith, but also from our Quincy acquisitions. While ’23 — 2023 may be remembered for many challenges, Gray will nevertheless continue producing local content that our audiences want and delivering the value that drives solid advertising and retransmission revenues. I believe, however, that 2023 could be the year in which the value, the tremendous reach and the efficiency of local broadcast televisions gets rediscovered by new and existing advertisers, by sports leagues and teams and perhaps even by Wall Street investors.

It should go without saying that we are tremendously unhappy with Gray’s stock price and market valuation, both personally and professionally. This company is undervalued for its current operations and its future promise. And yet, with all that and all that we have to report today, we remain very bullish on the industry and especially on Gray’s ability to prove the naysayers wrong and return this company’s valuation to its appropriate place. I would now like to introduce Pat LaPlatney to provide more color on our operations. Pat?

Donald LaPlatney: Thanks, Hilton. Gray’s television stations and production companies are executing well and seemingly better than other parts of the advertising ecosystem. Our local advertising continues to demonstrate positive results. National advertising, while softer, is a small portion of our business, and it tends to recover when the economy returns to growth. Overall, the auto category continued its recovery in Q1 and is pacing to continue improving throughout the year. Other strong categories include services and home improvement. Our local direct ad business, which has been a big priority of ours for the past few years continues to yield new leads and new contracts. In the first quarter, our new local direct broaden over 2,000 new accounts and 9% more revenue than the first quarter of 2022.

This momentum has continued into the second quarter. In April of ’23, our stations brought in nearly 11 million of new business, which is our best monthly number we had. Our April ’23 new business revenue was 17.5% higher than April ’22. What this tells us is that year after year, new advertisers are learning how our linear and digital platforms can help them drive their own business success in a brand-safe and cost-efficient manner. In some of our large markets, third-party audits of local television stations revealed that our stations are growing their core spot TV revenue. At the same time, the ad dollars in some of the markets are declined. As Hilton mentioned, we’re seeing this result quite clearly in the former Meredith markets, including Atlanta and Phoenix.

Between our core revenue performance overall, our new business success and individual market successes like these, we know that Gray has the right people providing the right solutions at the right price for local advertisers who need to grow and maintain their own businesses. First quarter also included a pleasant surprise of political ad revenue coming in at double the amount of our current television station portfolio posted in the first quarter of [indiscernible], which is the last pre-presidential year in the cycle. This is obviously a good sign. Already in the second quarter, we’ve received our first presidential political ad buys, as Hilton referenced. I’m pleased to report that we’ve done not 1, but 3 presidential campaigns already advertising on Gray stations in the early primary states.

With the presidential election still 17 months away, the size and scope of these ad buys coming this early is encouraging. Meanwhile, our digital businesses are also excelling. In the first quarter, we set new records for engagement with digital audiences. Importantly, we continue to experience double-digit growth in digital revenue. We continue to launch literally dozens of our fast channels on Samsung TV Plus, Amazon’s News by Fire TV and the news category on the Roku Channel Live TV. From long-standing advertisers like the auto industry returning to the medium and early season political campaigns to new business development, there is real momentum broadcast business. We also see enthusiasm for medium coming from the sports world that Hilton mentioned.

That’s really accelerated in the last few weeks. Since last fall, we’ve had many calls with professional sports teams seeking to explore how our stations could expand their reach and promotional footprint in their home markets and beyond. Last Friday, we announced the new broadcast rights deal with the Phoenix Suns and Phoenix Mercury that’s conditioned on the Sun’s existing RSN deal expiring. Assuming the deal proceeds, our Arizona stations will make all of the Suns and Mercury games available to roughly 3x more people than the teams have been reaching with the current RSN model. We know our business faces real challenges, but that’s nothing new for us. We’ve shifted our course repeatedly over the past few decades. Yet right now, we’re moving forward in new and creative ways with our with a growing advertiser base with new partnerships with local professional sports teams.

We also expect that our industry’s and our company’s work on the next-gen TV technology will open even more doors to growth for us in the medium term. In short, it’s a very good time for Gray in the broadcast business. Kevin?

Kevin Latek: Thank you, Pat. Today, we can announce that Gray has successfully completed another retransmission renewal cycle. We have agreements or agreements in principle with 3 very large MVPDs just since the beginning of this year. Consistent with Gray’s 3-decade history of retrans negotiations, these important new deals were reached without any consumer disruptions or public rhetoric. Equally important, due to the strength of our local content and operations, we have also managed to secure retransmission rates for our content that met or exceeded our budgets. Our next round of retrans negotiations will occur at the end of this year when we will renew with most of our MVPD partners. In related news, since first of this year, Gray has entered into the ABC opting agreement for Hulu TV and the CBS opting agreements for Hulu TV, YouTube and Fubo.

As a reminder, the big 4 networks negotiate these agreements with virtual MVPDs and present agreements for us to accept or reject. We are not permitted to negotiate to big 4 affiliates with a virtual MVPD directly. We do, however, have breaking news to report in the virtual MVPD space. Just this week, Gray reached an agreement with YouTube TV that secures carriage of 6 of Gray’s independent non-affiliated television stations that provide local news and sports-focused content in our largest markets, including Peachtree TV in Atlanta and Arizona’s family TV3 in Phoenix. This is Gray’s first-ever retransmission agreement with a virtual MVPD for the linear distribution of local television stations. Limited in scope, this deal proves that local broadcasters are, in fact, fully capable of negotiating retransmission agreements with a large sophisticated virtual distributor.

As such, we are hopeful that deals like this one with YouTube TV opens a door for similar deals with Hulu and Fubo TV to bring these independent stations to our customers and their customers and eventually helps lead to the return of our right to negotiate the carriage of our big 4 affiliated stations with all the MVPDs. The first quarter retransmission results we posted today are better than expected. In particular, retrans revenue as compared to the last quarter of 2022 grew 12% as basis and 25% on a net basis. These results benefited from higher rates in our distribution contracts with some positive true-ups and adjustments in the quarter that were related to last year’s distribution. We continue to forecast low single-digit growth in gross and net retrans for the year.

As a result, we will renew about — and as a reminder, we will renew about 58% of our MVPD sub base in the first quarter of next year or in the first — throughout next year, primarily in the first quarter of next year. At that time, we expect some improvement in reverse comp rates that with higher retrans rates will produce higher net retrans dollars in 2024 as well. This concludes my remarks, and I now turn the call back to Jim Ryan.

James Ryan: Thanks, Kevin, and good morning, everyone. I’m going to keep my remarks very brief, given Hilton, Pat and Kevin have covered the highlights. Relating to Q2 ’23 guidance, our core revenues is expected to be up over Q2 last year. We believe the revenue guidance demonstrates the company is continuing a very good start in 2023. Covering the full year, I’ll make a few comments on our expectations for the full year. And obviously, when we were talking in billions of dollars, numbers will change as progresses up or down. Our expectations have not changed significantly since our last Q4 call. Total revenue of approximately $3.3 billion, core revenue of approximately $1.55 billion, which would be up low single digits. Retransmission revenue of approximately $1.54 billion, again, up low single digits.

Political revenue of $50 million, which is an improvement from the $40 million to $50 million range we provided on our last call. And that would be including to date approximately $1 million of 2024 presidential spend. And that — obviously, that presidential spend is changing and increasing if not day by day, week by week. So that’s a bright spot going through the rest of this year. We expect total broadcast revenue of about $3.2 billion. Our total operating expenses before depreciation, amortization, gain and loss on assets of about $2.5 billion with broadcast expenses of approximately $2.3 billion, network reverse comp of about $940 million, noncash stock comp of about $5 million and noncash 401(k) expense of about $10 million. Our corporate expenses are tracking to be approximately [indiscernible] million, including $17 million of noncash stock comp.

For full year ’23, our operating cash flow is defined in our senior credit agreement. We currently anticipate of a range of about $800 million to $825 million. Continuing on for significant cash usages in ’23, cash interest we expect $420 million to $430 million. We do 5% SOFR interest rate cap on $2.6 billion of our floating rate debt. So we are insulated from further increases in SOFR. Cash taxes of about $35 million to $45 million, which is a reduction from our previous estimates and a positive for us. Routine capital expenditures of about $105 million to $115 million. The preferred dividend is $52 million, and our required amortization on our Term Loan D as in dog is $15 million. We currently estimate our free cash will be in a range of about $160 million to $170 million.

We are very well positioned starting 2023 as we look forward to a successful year and continuing into a strong 2024 with the return of another presidential cycle. I’ll now turn the call back to Hilton.

Hilton Howell: Thank you, Jim. At this point, operator, I would like to open up our call for questions from anyone in our audience.

Q&A Session

Operator: [Operator Instructions]. It looks like our first question is going to come from Dan Kurnos from Benchmark.

Operator: Our next question is going to come from [indiscernible] from Barclays.

Operator: Our next question is going to come from Aaron Watts with Deutsche Bank.

Operator: Our next question is going to come from [indiscernible] with BNP.

Operator: [Operator Instructions]. Our next question is going to come from Nick Zangler with Stephens Inc.

Operator: Our next question is going to come from Jim Goss with Barrington.

Operator: Our next question is going to come from John Kornreich with JK Media.

Operator: Our next question is going to come from Monica Liu from Onex.

Operator: Our next question is going to come from Steven Cahall with Wells Fargo.

Operator: Our next question is going to come from Alan Gould with Loop Capital.

Operator: Our next question is going to come from Craig Huber with Huber Research.

Operator: Our last question is going to come from Michael Kupinski with NOBLE Capital.

Operator: Okay. There are no more questions in queue. So I’ll turn it back to you for any closing remarks.

Hilton Howell: Thank you, operator. I’d like to say just a few things before we close up and wrap it up this. But I just want you all to know that we’re very proud of our results this morning. We candidly don’t see current signs of recession looming on the horizon. We have the best television station portfolio in the business. We’re the largest local news producer in the television industry. We have presidential money for 2024 coming in the first half of 2023. Assembly comes online next month. Sports and local businesses are returning to the broadcast model. And having said all that, I must emphasize, we’re tremendously comfortable with our liquidity. We had no near-term maturities. We have already converted our variable rate debt from LIBOR to SOFR, and we have interest rate caps in place.

Our balance sheet as well as our core television station business remains strong enough to weather any macroeconomic pressures that we may face before we begin to reap the benefits of significant amounts of political revenue, not just later this year, but fully in 2024. So the future is bright. Thank you for your time. We look forward to talking to you if you all need to have individual conversations. And thank you for your time this morning.

Operator: This concludes your call. You may now disconnect.