Gray Television, Inc. (NYSE:GTN) Q1 2024 Earnings Call Transcript

Gray Television, Inc. (NYSE:GTN) Q1 2024 Earnings Call Transcript May 7, 2024

Gray Television, Inc. beats earnings expectations. Reported EPS is $0.936, expectations were $0.54. Gray Television, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Gray Television Q1 2024 Earnings Call. [Operator Instructions] And without further ado, I will now turn the program over to Executive Chairman and CEO, Hilton Howell Jr.

Hilton Howell: Thank you, operator. Good morning everyone. Thank you for joining our First Quarter 2024 Earnings Call. With me here in Atlanta are all of our Executive Officers; Pat LaPlatney, our President and Co-CEO; Sandy Breland, our Chief Operating Officer; Kevin Latek, our Chief Legal and Development Officer; Jim Ryan, our Chief Financial Officer; and for the first time as an Officer of this company, Jeff Gignac, currently our Executive Vice President of Finance. And as you all know, on July 1, Jeff will succeed Jim as the Chief Financial Officer of Gray Television after Jim’s serving 26 years in that Chair and by my count, over 100 public earnings calls. As usual, we will begin with the disclaimer that Kevin will provide.

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 filed our quarterly report on Form 10-Q with the SEC today. Included on the call may be a discussion of non-GAAP financial measures, and in particular, adjusted EBITDA, leverage ratio denominator and certain leverage ratios. These metrics are not meant to replace GAAP measurements but are provided as supplements to assist the public in its analysis and valuation of our company. Included in our earnings release, as well as on our website are reconciliations of these financial measures to the GAAP measures reported in our financial statements. Certain matters discussed in 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. Actual 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 Quarterly Report on Form 10-Q and our most recent earnings release. The company undertakes no obligation to update these forward-looking statements. Now I will turn the call to Hilton.

Hilton Howell: Thank you, Kevin. Once again, Gray Television has begun a new year and an excellent and strong position. It is a testament to the power of our high-quality local news operations that our television stations grew core advertising revenues by 4% over the first quarter of 2023. We are extremely pleased with the superb results from our fantastic in-house sales and business development teams. Throughout our markets, we’re leveraging our intensive sales training and development efforts with our high-quality advertising platforms to deliver results for our advertisers. Our first quarter core advertising results reflect growth in categories, including Automobile and National that have been challenging in the past. We appear to be growing not only revenues but also growing our share of advertising budgets.

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Q&A Session

For the first quarter, the net income attributable to common shareholders was $75 million or $0.79 per diluted share. Our adjusted EBITDA was $197 million, an increase of 21% from the first quarter of 2023. Meanwhile, we continue to focus on debt reduction and on April 1, we used $50 million of our cash on hand to prepay portions of our term loans, as debt reduction and deleveraging remains a top priority for our company. In the first quarter of 2024, our TV stations core advertising business was higher on a pro forma basis than the first quarter of 2019. Importantly, we’re guiding to 2024’s full year core advertising revenues to beat 2019’s full year core revenue on a pro forma basis despite what we expect to be a large amount of displacement caused by a very strong political advertising revenue later this year.

Speaking of political revenue, we believe that Gray will undoubtedly, as it always has again earn more than its fair share of political advertising revenue this year. Number 1 and Number 2 stations, that are hyper local news focused, have historically over-indexed on political revenue within their markets because they — these stations deliver the audience that matters to campaigns and no one delivers that better than Gray Television. In the first quarter our political advertising revenue was slightly lower than our political advertising revenue in the first quarter of 2020 on a pro forma basis. This should not be a surprise to anyone because 2024 did not feature the same highly competitive presidential primary contest as the country experienced four years ago.

We still expect political advertising revenues for the full year to be strong and will materialize later in the year as usual. In fact, consistent with expectation, we’re currently guiding for political advertising revenue in the second quarter of 2024 to range between 55% and 72% higher than the second quarter of 2020 on a pro forma basis. Overall, of the seven most competitive presidential swing states, Gray station covers all the markets in three big states; Arizona, Georgia and Nevada and it has — and we have a very strong presence in three of the four remaining states, North Carolina, Michigan and Wisconsin. In addition, Gray has leading local news stations in nine of the 11 states, with governors races and 26 of the 34 senate races, including many of the most competitive governor and senate races in the country.

Finally, all of our markets have House of Representatives and many markets involve competitive primaries or General Elections triggered by historic wave of house resignations. All of our markets also have down ballot races and some appear likely to have very contentious referendums on the ballot this year as well. There is no — given this unparalleled exposure to competitive races we expect that our political advertising revenues will come in at a very large and healthy amount in 2024, which will support our efforts to reduce our total debt. Finally, I am thrilled to confirm that Gray has essentially completed the construction of Assembly Studios, and the larger infrastructure work for Assembly Atlanta. We began this project as many of you know, a few years ago when interest rates were low and demand for studio space in Georgia was white-hot.

We saw them and still see today immense value for Gray and owning a multiuse development close to Bucket that is anchored by world-class studio production facilities and a premier tenant under a long-term lease. By last spring, as the capital markets began to become more challenging and Hollywood strikes came into focus. We determined that it will be prudent to pause capital expenditures at the assembly side after completion of the studios portion, and that’s exactly what we did. As of the end of the first quarter of 2024, approximately 95% of our projected total of capital expenditures for Assembly Studios and Assemble Atlanta, net of reimbursements are now behind us. As you all know, late last year NBCU commenced is long-term lease for two-thirds of the Assembly Studios portion, and the studios are now contributing revenues to the totality of Gray Television.

Today, we’re still in the early innings of what we believe will be a decades-long valuable cash flow contributor to our company. We will continue to carefully evaluate strategic opportunities to unlock the immense value that the investments we have created for our stakeholders, including through collaborations with outside partners for additional development at Assembly. There is no question that the tremendous reach and efficiency of our local broadcast television industry is still getting rediscovered and reaffirmed by audiences, advertisers, sports leagues and sports teams. Wall Street, however seems to be missing this universal message. We, therefore remain personally and professionally very disappointed that this company remains so undervalued given our operational success in near-term and long-term opportunities.

We will continue to focus on executing and delivering for our viewers, our employees and our investors. Pat will now provide some more color around our successful start to 2024.

Pat LaPlatney : Thank you Hilton. Looking at our first quarter financial results, it should be clear that Gray Stations are continuing to find and attract strong advertiser demand for our market-leading local television stations and premium brand-safe digital products. Throughout our markets, local businesses are doing generally well. We believe local businesses are tuning out the political and geopolitical noise to focus on finding customers, moving their products and selling their services. In fact, during the first quarter our new local direct business, which is our local sales force finding a customer that is new to Gray, continue to break record set just a year earlier. In the first quarter of 2024, our new local direct business brought in 18% more revenue than the first quarter of 2023, which itself was 8% higher than the first quarter of 2022.

These strong results continued into April 2024 just last month, which delivered 14% higher new local direct business than April of 2023. Meanwhile, our digital businesses are also very healthy. In the first quarter, we set new records for engagement with digital audiences, as well as double-digit growth in digital revenue. As we continue to expand our connected TV and fast channel offerings, and as consumers increasingly find our content on those platforms, we are seeing significant growth in this space. In fact our station [CTV] (ph) fast revenue more than tripled over the same period last year. Our first quarter results also benefited from our successful efforts to bring professional sports back to our broadcast stations. In addition to broadcasting the full season of games for the Phoenix Suns across Arizona, our [technical difficulty] coverage in Georgia and Louisiana allowed us to bring the NBA’s Atlanta Hawks and New Orleans Pelicans games to their local fans in all of the markets located in those states and some adjacent markets.

In total, we partnered with eight NBA and three WNBA teams this season, to expand their reach while also bringing new viewers and new advertisers to our local stations. The impressive ratings that Gray’s broadcast of basketball games have generated, as well as those of our peers, confirms the reach of local broadcast television, professional — for professional sports fans, teams and leagues. And looking ahead, we’re upbeat about our core advertising guidance for the second quarter despite a range that shows modest growth against a strong comp to 2023 second quarter. It is important to remember that we are facing tough comps because Q2 of 2023 was very good. In last year’s second quarter, we posted 4% growth in core advertising revenue on a year-over-year basis compared to an average 4% decline across our publicly traded broadcast peer group.

We [had set] (ph) last year in part on having the NCAA Final Four and a couple of onetime only advertising campaigns that will not recur in our broadcast channels in the second quarter of 2024. Thinking ahead to the summer, we are excited about the Summer Olympic Broadcast from Paris on our NBC affiliates that cover about 11% of US TV households. We currently anticipate generating $15 million to $20 million of advertising revenue related to those broadcasts in the third quarter of this year. We already have approximately $6 million of advertising revenue booked for the Olympics. Our core advertising revenue consistently performs above average because we have the largest and most watched news teams in the major markets, and we intend to maintain that leadership.

Our content attracts audiences on linear television, on connected television and on virtually every other platform that exists. We are a content-first company. And for a few high-profile examples of our recent successes in this area, I turn the call over to Sandy Breland.

Sandy Breland: Thanks, Pat. Beyond the numbers, Gray has continued to deliver exceptionally well from an operational perspective. Late in March, we announced that CBS had retained Gray’s in-house News Research and Consulting Group, which we call our Strat — to provide market research and news consulting services to all 14 of CBS’ owned and operated television stations. This first of its kind partnership between a network and an affiliate group’s news research division began on April 1. We are thrilled to partner with CBS stations on this news research venture. In the past few weeks, we have also made other important announcements that I would like to highlight briefly. On January 26, the Columbia Journalism School honored Grace TV’s, InvestigateTV Unit and WANF, our CBS station here in Atlanta, among the 15 winners of the 2024 DuPont Columbia Awards for their joint multi-part investigative series The Sixth, which exposed a critical shortage of public defenders in Georgia and many other states where defendants can languish in jail for months, even years awaiting trial.

On April 8, Gray’s Local News Live, a streaming news network that provides live news coverage from Gray’s television markets and our DC Bureau streams continuous and frankly excellent coverage of the total solar eclipse from Gray’s DC Bureau and local reports for more than 20 markets along the path of totality from KGNS and Eagle Pass Texas to WAGM and [Presque, Maine] (ph), it was pretty cool. Last September, we launched a New Daily 30 minute news Magazine Investigate TV-Plus. Since then, the show built audience throughout its first season with an average of 25% growth in adults 18+ across all gray markets. This kind of ratings growth for any new syndicated program is rare in today’s world. Moreover the show is drawing higher audiences than nearly all prime-time cable news and cable entertainment programs, as well as many syndicated programs on broadcast television, even though it only reaches 36% of US households at this time.

The program clearly has found an audience, so no surprise, we are thrilled to renew Investigate TV-Plus for a second season. We also recently launched a Spanish-language version of this highly successful show in 26 of Gray’s Telemundo markets. 2024 has begun very well due in large part to the great work of our content professionals. Earlier, Hilton talked about how important it is for us to own and operate highly rated television stations. The selected accomplishments I’ve highlighted here this morning are evidence that our employees are doing what it takes for us to maintain our station’s high rankings and put us in a position to continue to over index in this year’s political advertising relative to other stations and platforms in our markets.

I now turn the call over to Kevin.

Kevin Latek: Thank you, Sandy. Our retransmission revenues and network affiliation fees were largely stable despite headwinds in subscriber trends in the pay-TV industry. Indeed we recently announced that we have completed the renewals of retransmission consent agreements with cable, satellite and telco operators who collectively represent more than 70% of the Big 4 traditional MVPD subscriber base in a three-year renewal cycle that began in the second half of 2022. For a number of reasons, including — strong and loyal viewership of our new station, we completed all of those negotiations covering roughly 400 operators without a single blackout. We remain comfortable with the guidance provided on the February earnings call for stable, retransmission revenues and network affiliation fees for full year 2024.

The other topic I want to highlight is increasing litany of positive developments involving the new transmission standard for broadcast signals called NEXTGEN TV. It was less than seven years ago that the FCC approved its first advancement in broadcast technology since the 1990s. Importantly, NEXTGEN TV deployment is already well ahead of HDTV and the DTV transition at the same seven year mark. First — the first NEXTGEN TV did not go on sale until 2020. Yet by 2026, the Consumer Technology Association projects that NEXTGEN set sales in the US, will exceed smart phone sales in the US at the same six-year mark in the product life cycle. To-date, just four years after the first set was sold, more than 10.3 million NEXTGEN TV sets have been sold in the US, and there will be more NEXTGEN channels available in 2024 than DTV channels in [2004] (ph).

Back by 2026, fully 65% of TV set shipments in the US are projected to include NEXTGEN TV receiver chips. In addition to the successes with receiver rollout, station transmitter buildouts continue, and the industry now delivers a NEXTGEN signal reaching 75% of US TV households. This milestone brings Gray and the industry much closer to being able to deliver the vastly improved picture and features for viewers as well as new monetization opportunities for broadcasters. Indeed, just this past Saturday, our NBC affiliate in Louisville, Kentucky, WAVE, the Kentucky Derby, broadcast made history as the first major sporting event broadcast in the United States using Dolby Vision HDR as part of NEXTGEN technology. The progress in NEXTGEN TV across broadcasters and technology companies is tangible and important.

We expect there will be many more impressive achievements and milestones announced over the next few months in this area. This concludes my remarks. I now turn the call to Jim Ryan.

Jim Ryan: Thanks, Kevin. Hilton and Pat covered the key highlights of the quarter. As such my remarks today will be very short. You will see a few changes in the definitions and metrics in our earnings release and 10-Q today. These changes and potentially a few other changes next quarter result from comments that we received from the SEC recently, as part of the agency’s routine review and comment process that all public companies undergo every few years. Turning to our Q1 ’24 results. Again, we are very pleased with our results, especially our plus 4% growth in core ad revenue. While the Super Bowl on our [50] (ph) CBS channels allowed us to generate $18 million of core ad revenue compared to $6 million on our then 27 Fox channels in 2023.

The quarter benefited from broad-based advertising demand with most categories being up, including services and auto. Our operating expenses, excluding depreciation, amortization, impairment and gain loss and disposal of assets were better than our initial expectations, and we will continue to monitor our expenses for additional efficiencies as we proceed through 2024. Demonstrating our commitment to debt reduction, we paid $50 million of revolver borrowings in February and prepaid an additional $1 million of term loan debt on April 1. These amounts are in addition to the routine quarterly term loan amortization of $3.75 million that we made in the first quarter. As of March 31, 2024, our leverage ratio was 5.63 times and more importantly our first-lien leverage ratio was a very modest 2.34 times, both on a trailing eight quarter basis, netting our total cash balance of $134 million and excluding the results of our unrestricted subsidiaries and our $110 million gain on sale of our BMI shares.

And again, all of that is calculated in accordance with our senior credit agreement. Turning to our full year guide. We are reaffirming the guidance of approximately $1.6 billion in core ad revenue for the year and again reaffirming our $1.5 billion of retransmission revenue for the year. We are reducing our broadcast operating expense guide for the full year to approximately $2.3 billion from the previous guide of $2.4 billion. We look forward to a very successful full year 2024 including strong political ad spending later in the year. It’s now time for me to introduce my successor as CFO. Jeff is the ideal person for this role given his very close working relationship with Gray, as a key banking partner for almost 20 years. I’m therefore very happy to turn the call over to Jeff.

Jeff Gignac: Thank you, Jim. As Jim mentioned, with my prior firm, I was the lead debt banker for virtually all of Gray’s market activity for a very long time, including the recent acquisitions of Raycom, Quincy and Meredith. Incidentally, I was also the lead debt banker to Raycom and Quincy, among others. From that long history, I’ve learned the business and come to know the talented and dedicated management team at Gray. What attracted me to Gray is the exceptional set of assets and scale of the company. As you all know, the portfolio has Number One and Number Two ranked local news stations in 102 out of 114 markets. At this time, Gray’s large-scale M&A for [foot] (ph) expansion is complete, and the asset’s key functions and people are fully integrated.