Gray Television, Inc. (NYSE:GTN) Q3 2023 Earnings Call Transcript

Gray Television, Inc. (NYSE:GTN) Q3 2023 Earnings Call Transcript November 8, 2023

Gray Television, Inc. misses on earnings expectations. Reported EPS is $-0.57 EPS, expectations were $-0.27.

Operator: Welcome to the Gray Television Third Quarter 2023 Earnings Call. I will now turn the call over to today’s speaker, Chairman and CEO Mr. Hilton Howell. You may now begin.

Hilton Howell: Thank you, operator. Good morning, everyone. As our operator mentioned, I am Hilton Howell, the Chairman and CEO of Gray Television. And I want to thank each and everyone of you for joining our third quarter 2023 earnings call. With me today in Atlanta are all of our executive officers, Pat LaPlatney our President, Sandy Breland, our Chief Operating Officer, Kevin Latek, our Chief Legal & Development Officer and Jim Ryan, our Chief Financial Officer. We will begin as usual with the disclaimer that Kevin will provide.

Kevin Latek: Thank you Hilton. Good morning everyone. Gray uses it’s website as a key source of company information. The website address is wwwgray.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 a reconciliation to 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. Actual results in the future could 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. And now I return the call to Hilton.

Hilton Howell: Thank you, Kevin. Gray Television began 2023 by predicting that we would continue to operate prudently and to grow our business positively. With three quarters behind us and another strong guide for the fourth quarter, it is now abundantly clear that Gray Television is delivering for 2023. In the first half of this year, we posted year-over-year growth in core revenue and in retransmission revenues and in growth in political advertising revenues over 2019, the last year before a presidential campaign. The third quarter of 2023 continued this trend with strong year-over-year growth in core revenue and retransmission revenue and a four-year growth in political revenue. Our guidance for the fourth quarter illustrates that we currently anticipate that these trends will continue throughout the rest of this year.

In fact, our guidance today increases the full-year political advertising total to $80 million from the $60 million full-year guide that we offered in early August. We announced a number of exciting developments in the third quarter that Pat and Sandy will address in a few minutes. However, I am personally pleased to share 2023’s singular most historic achievement for our company. That occurred in September when Gray Television turned over to NBCUniversal all of the sound stages, offices, mill space and warehouses, parking and security facilities in the Assembly Studios project that we constructed. The facilities are world-class and impressively constructed in less than 16 months from the announcement of our long-term lease and management agreement with NBCUniversal.

We anticipate the actor strike, which we hope will end soon, and our venues, which will host their first film and television series and live television productions, should begin shortly. We do not know exactly what productions will be coming to Assembly Studios, but we are certain that the thousands of creative workers who soon will be working at Assembly Studios will prove to all what a wise investment this project will be over the years and decades to come. In 2024, Assembly Studios will no longer require significant capital investments by us. Instead, Assembly Studios will be generating cash revenues from our leases to both NBCU and to other parties of our sound stages and related facilities that Gray retains. As we now look ahead to completing 2023 and beginning a new political cycle in 2024, we could not be more excited about our company’s future.

Our TV stations continue to perform at the top of their game, while our value is reaffirmed daily by audiences, clients, political campaigns, sports teams, fans, broadcast networks, and distributors. Next year will see us continue to build on the consistent and stable and prudent management that Gray has demonstrated before, during, and now after the pandemic. I would like now to introduce Pat LaPlatney, who will add more color to our operations. Pat?

Pat LaPlatney: Thank you, Hilton. Gray’s Television Stations continued executing well in the third quarter of 2023. We again grew year-over-year core revenue, and expect that momentum to carry us through to the end of the year, as Sandy will explain next. We’re continuing to see strong growth in our digital platforms and digital sales. In the third quarter, we set a new all-time record of 225 million video plays across Gray Digital Properties, which was a 45% increase over the third quarter of 2022. In September, we passed 630 million video plays on Gray-owned digital platforms for the year, which is the previous record for a full calendar year that we set in 2022. While we do not break out digital sales in our financial results, I’m pleased to report that our stations are continuing to grow digital revenues at an annual double-digit rate.

Meanwhile, Gray continues to expand its connected TV footprint. We currently have a few dozen fast channels of our local TV stations carried across Samsung TV+, Tubi, Xumo Play, and Vizio Watch Free. In the coming weeks, additional channel launches that are in the works now could nearly double the total number of fast channels that our stations have on CTV platforms. The broadcasting industry continues to make progress rolling out next-gen technology. During the third quarter, the main broadcast stations in New York, Philadelphia, and Minneapolis began broadcasting their programming in the ATSC 3.0 standard. Other large markets, including Chicago, will soon follow. While Gray does not operate in those markets, we are continuing to roll out the new technology in our markets, too, including, most recently, Reno, Nevada.

As of today, Gray has participated in next-gen launches in 27 markets. The industry’s full commitment to next-gen including by the network O&O stations in the largest markets will allow the industry to deliver programming and services to over 75% of U.S. households within the next few months. We believe that milestone is actually a tipping point. We should begin seeing apps and innovative uses of next-gen technology rolling out next year. We continue to pursue local broadcast packages for professional basketball, hockey, and baseball. This fall, we’re broadcasting local games to the Phoenix Suns throughout our Arizona footprint. We’re also broadcasting games from the Atlanta, Las Vegas, and Portland, Oregon NBA G League teams on our local stations in those markets.

If and when the Diamond Sports Bankruptcy Court permits additional teams to negotiate with local broadcasters, we’ll be ready in several markets to provide compelling opportunities for teams to expand their reach and grow their fan bases by partnering with their strong local TV stations in their home market and beyond. We’re cautiously optimistic that Gray will have some exciting announcements in this space prior to our next earning call. In the meantime, we’ve launched Peachtree Sports Network on our stations in Georgia. We’ve also launched similar state wide sports channels across our stations state-wide in Arizona, Connecticut, and Nevada. These channels offer live local and regional professional college and high school level sports from their respective states along with other sports themed programming owned by our production companies, Raycom Sports and PowerNation Studios.

We believe these networks and a couple of others that we may launch in the near term also provide a foundation for Gray to secure more professional sports packages as they become available over the next several months. Yesterday, Circle Network, which is a 50-50 joint venture between Gray and Opry Entertainment Group, announced that it will shut down at the end of this year. The Circle Network’s country lifestyle content was very good and it was well supported by the country music industry. Each week, Circle provided more original programming than nearly all other cable and multicast entertainment networks. It also achieved significant broadcast and MVPD clearance throughout the country. Unfortunately, for a variety of reasons, Circle did not have a clear to meet the financial expectations that our partner and we require for the venture.

Accordingly, we took an 8.3 million pre-tax charge in miscellaneous expense line of the income statement in the third quarter of 2023 for the pending shutdown of Circle. In a related development, a new multicast company launched yesterday that will fill essentially all of Gray’s channels that currently carry the Circle Network. The new company, Free TV Networks, or FTN, is founded and led by Jonathan Katz. Jonathan is a pioneer of multicast networks who partnered with Raycom to launch Bounce Network and other DigiNets before Scripps acquired Katz Networks. With FTN, Jonathan is partnering with Warner Brothers Discovery, Lionsgate, and Gray Television to launch this business. The first two networks will go live on New Year’s Day and we are particularly excited to reunite with Jonathan Katz and the DigiNet business.

I’ll close with a quick follow-up on our Telemundo initiative. Recall that we acquired Telemundo Atlanta in the spring of 2022 and soon thereafter announced that we would launch the first ever local Telemundo affiliations on Gray’s TV stations in 22 markets. We have Telemundo affiliations in a total of 42 television markets with an estimated Hispanic population of nearly 4.5 million people. These stations, especially in Atlanta, work closely with our existing local news and sales operations to expand the audience for our news and sales opportunities. In terms of sales, our Telemundo group of stations are performing well. The group, led by Atlanta Telemundo Station, collectively posted double-digit increases in ad revenues in the first three quarters of this year compared to the first three quarters of last year.

We have high hopes for our local Telemundo affiliates and they’re off to a strong start with very talented leadership. I now turn the call to Sandy.

Sandy Breland: Thank you, Pat. Across Gray, we see the current advertising environment as particularly stable. Our core revenues continue to grow and our political revenues continue to impress. In terms of our core business, the automobile advertising category continued improving in the third quarter with an 18% year-over-year increase overall and a 26% increase in the national automobile ad category. Home improvement also continues to do very well. The biggest decrease came from sports gambling, which was expected as that category cycles through heavy market share spending at launch and then steps down to maintenance-level spending. New businesses from local customers who previously did not advertise on our platforms continue to exceed our expectations.

In the first quarter, new local direct grew 9% on a year-over-year basis. In the second quarter, new local direct grew in excess of 15%. And in the just-completed third quarter, new local direct grew 16% over the third quarter of last year. As we said on prior calls, we believe that new local direct business is our best leading indicator of the economic health of our markets. And we are thrilled to see local businesses clearly exhibiting real signs of strength. Political advertising has been very strong the first three quarters of 2023. As mentioned previously, our guidance for full-year political revenue is now $80 million, which is up 33% from the $60 million full-year guide from our August earnings call. This strong result reflected significant spending in the governor’s races this year in Louisiana, Kentucky, and Mississippi, which we believe will exceed presidential primary spending this year, as was all case in 2019.

We also had a good deal of spending on Virginia’s statehouse races, Wisconsin’s Supreme Court races, and a number of ballot initiatives. Our strong political revenue flows from our leading news operations, and Gray won five National Murrow Awards in September. The impressive achievements were attained by our news professionals in St. Louis, Missouri, Bryan, Texas, Augusta, Georgia, Baton Rouge, Louisiana, and Roanoke, Virginia. Gray’s stakeholders should be particularly impressed with the incredible work that our Hawaiian News Now team demonstrated in the aftermath of the horrible wildfire this summer, and especially the tragedy of the fire that destroyed the town of Lahaina in Maui that personally impacted many members of our Hawaii team. In the three weeks after the Lahaina fire, Hawaii News Now aired 450 unique linear hours of dedicated news coverage and seven fundraisers.

The team also produced an amazing 33 hours of Maui-focused specials for broadcast television, CTV, and podcasts. Hawaii News Now demonstrates again the critically important and valuable service that local broadcasters provide to local communities throughout the country. In terms of programming, we launched a new daily news show called Investigate TV Plus on September 11th. The program leverages one of the largest collections of investigative journalists in the nation to provide even more investigations that not only uncover problems, but reveal and often lead to solutions. The initial ratings from the first few weeks are impressive, and many markets exceeding the ratings of syndicated talk shows and court shows that previously aired in those time periods, which confirms that local audiences are looking for something different and something impactful from their local stations.

We made a big investment this year to fill out Local News Live, which is our 24-7 OTT news network that originally aired curated news content from across our 113 markets. This year, we have added exceptional talent and began programming premier news hours out of our Washington, D.C. Bureau. This fall, several of our stations replaced syndicated programming with the LNL on their broadcast schedule, and the response from the audience has been just as encouraging as our initial success with Investigate TV Plus. The lesson from both of these initiatives is that Gray can leverage its leading local news and investigative teams into standalone properties that better serve broadcast and OTT audiences while further reducing our dependence on third-party content providers.

I now turn the call to Kevin.

Kevin Latek: Thank you, Sandy. In the third quarter, our retransmission revenue grew 3% on a year-over-year basis as a result of contract repricings at the first half of 2023. Our total subscriber trends continue to be consistent with the broadcast industry as a whole, which makes sense given that Gray’s portfolio is now more or less evenly split between large markets and medium-sized markets. Our network compensation expense in the third quarter was essentially the same as both the first and second quarters of 2023. It is projected to remain flat in the fourth quarter despite this summer’s new network affiliation with CBS for the former Meredith markets, plus the Fox annual escalator hitting, as well as the renewal and repricings of all of our CW affiliation agreements in the legacy Gray markets.

We will be renewing the bulk of our traditional MVPD retrans contracts next year, covering about 38% of our MVPD subscribers in the first quarter and 23% of those subscribers in the second half of 2024. Last month, we provided our views on the network and retransmission landscape in an investor deck that attempted to dispel what we frankly believe was unfounded negativity in some quarters. In that deck and in a number of investor conferences and meetings since early September, we have explained why we believe that broadcast retransmission rates remain significantly undervalued and have new momentum for growth going forward. Our main themes support this conviction. First, broadcast programming, especially local news and professional sports, remain tent-pole programming.

Viewer impressions are clearly increasing on streaming platforms, but those impressions are mostly coming from cable channels, leaving total broadcast ratings generally stable over the last few years. Broadcast programming is not only very popular, but broadcast stations also have among the most intense and loyal viewers of any programming channel available anywhere. Second, broadcast affiliates are aligned with the broadcast networks in protecting the network affiliate distribution model and our collective stations’ abilities to grow retrans revenue. Networks, in short, need their affiliates to survive, succeed, and flourish in order to profit from the unparalleled reach provided for the network’s advertising business and to profit from the affiliates’ own retransmission revenues.

Third, the Charter Disney deal structure confirmed that most premium content, such as ABC and ESPN, will continue to be key drivers of value for distributors. That deal also provides new ways to help lessen pay-to-be-subscriber churn through DTC offerings and apparently additional flexibility on distributors’ ability to tier cable channels, both of which should make the basic cable bundle more attractive to more households. Finally, secondary cable networks and regional sports networks are experiencing the undeniable decline in ratings, fees, and industry support. As they collect fewer fees and lose distribution, premium content can be better compensated by simply reallocating distributors’ programming budgets away from the main channels in favor of the increasingly important premium content, and especially to broadcasters who are still paid a fraction of the value that we deliver to them as the pay-to-pay TV bundle.

These industry-wide trends have been highlighted by our peers recently, and we believe these trends will be validated by all broadcasters as we continue to successfully negotiate traditional MVPD retrans agreements in the coming year-end crunch. In terms of Gray in particular, I encourage all of you to review the last two pages of our recent investor deck that was posted on our website and was distributed via a press release last month. Therein, we demonstrated through ComScore ratings data the incredible popularity of Gray’s Local Newscast during a recent ratings week in September 2023. The data illustrates that Gray’s Local Newscasts deliver more household viewership in the market than the total of all network prime viewership on NBC, CBS, ABC, and Fox combined.

Gray’s Local Newscasts deliver more viewership than the total of all NFL games on ABC, for Monday Night Football, CBS, Fox, and NBC combined. Gray’s Local Newscasts deliver more viewership than the total of all three major cable news networks combined. And finally, Gray’s Local Newscasts, by a factor of nearly six times, deliver more household viewership than the total of all 15 top cable sports networks in their markets. In conclusion, our local community as well as our network relationships remain mutually strong. Meanwhile, retransmission revenue is continuing to grow and its prospects for future growth remain as bright as ever. This concludes my remarks. I now turn the call to Jim Ryan.

James Ryan: Thanks, Kevin. Jim, Pat, Sandy, and Kevin have covered the key highlights for the quarter and year-to-date. And as such, my remarks will be very short. First of all, for Q3 2023, again, we’re very pleased with our Q3 results, especially with our core revenue up 1% in the third quarter. For our fourth quarter guidance, we are again very pleased that we’re seeing continuing strong performance demonstrated in our core advertising, and we expect that to be up low single digits. We’ve heard some chatter that some people thought the expense guide for Q4 was a little heavy, so let me address that. On the broadcast line, there’s about $15 million to $20 million of discretionary compensation expense. We don’t actually accrue for that until we’re confident that it’s going to be paid out.

And so that expense falls into the fourth quarter of the year. So you can think of it more as a timing difference. Actually, if you look at our full year guidance for broadcast expense going all the way back to our February call when we first gave out 2023 full year guidance, we said broadcast expenses would be about approximately $2.3 billion. As of today, based on our year-to-date results in our Q4 guide, it would say that our broadcast expenses are tracking to end up somewhere around $2.275 billion. So all in, we’ve been very consistent. Same with the Q4 corporate expense guidance. There’s about $7 million to $10 million of professional fees that were falling into the fourth quarter. Again, if you look at our full year guidance going back to February, we said corporate expenses for the full year would track to be about $120 million, and that’s consistent with where we’re tracking again today.

Moving on to the rest of the full year expected results, our total revenue will be approximately $2.75 billion. I’m sorry. Let me clarify that. I misspoke. Total revenue of approximately $3.275 billion. Again, it’s expected to be approximately $3.275 billion. Core revenue of about $1.51 billion. Retransmission revenue of approximately $1.53 billion. And again, both of those line items are up in the low single digit area, and we’re very pleased with those results. Political revenue, we’ve moved up to $80 million for the year from our previous guide of $60 million. Our total broadcast revenue, again, is still approximately $3.2 billion, which is consistent with what we’ve said every quarter since February. Broadcast expenses will be approximately $2.275 billion, with network compensation of about $938 million, non-cash stock comp of $5 million, and 401k non-cash expense of about $10 million.

And I’ve already mentioned the corporate expenses for the year, somewhere between $115 million and $120 million, consistent with our original guidance at the beginning of the year. And in that number, there’s about $14 million of non-cash stock comp. Our operating cash flow, as defined in our senior credit agreement, we are expecting approximately $800 million, and that’s consistent with what we’ve said over the last couple of quarters. Full year uses of cash, full year cash interest expense, about $435 million. I’ll remind everybody again that we have 5% SOFR interest rate caps on most of our floating rate debt, and currently about 95% of our debt, including that which is on the rate caps, is at fixed rates. Cash taxes of about $50 million this year.

That does not include a pending refund of $21 million that we have had pending from the IRS for a while now, and we’re hopeful that we will be coming in sooner than later. Routine CapEx of $110 million. Of course, our preferred dividends are $52 million, and we have $15 million of required amortization on our term loan D. So our free cash as we define it, we still expect approximately $150 million before any acquisitions, investments, and our common dividends. We’re very well positioned three quarters to 2023. We think we have a very good fourth quarter shaping up, and we’re looking forward to a strong political in 2024. I’ll turn the call back to Hilton.

Hilton Howell: Thank you, Jim. Operator, at this time, we’d like to open up the call for any questions that anyone may have.

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Q&A Session

Operator: Okay. [Operator Instructions] It looks like our first question is going to come from Aaron Watts with Deutsche Bank. Your line is open.

Aaron Watts: Hey, everyone. Thanks for having me on. I just had two questions. I guess first one, most of the local broadcasters have painted a picture of relatively stable core advertising revenues, perhaps even some green shoots of turning a corner to improvement rolling into 24. That’s a bit of a contrast from commentary some of the more large market national focused media companies have talked to. Do you see the bifurcation between national and local continuing? Any warning signs that local confidence is wavering? Anything you’re seeing or hearing that makes you feel better on the core ad outlook rolling into 2024?

Pat LaPlatney: Yes. Thanks, Aaron. It’s Pat. Local is strong and it’s been strong. The national ad market has struggled pretty much the entire year. We see no weakness locally in that setting. Sandy covered that. With the automotive category coming back with a vengeance, that’s been huge, not just in local, but also national spot, which is different than national advertising. We think we’ll have a good fourth quarter and feel like we’re in very good shape going forward.

Aaron Watts: All right. Thanks, Pat. That’s helpful. And then just secondly, maybe this is pointed at Jim, saw the commentary in the release that you don’t anticipate any material capital projects at assembly in 2024. That said, can you remind us what additional cash capital will be required for assembly near term? And with regards to the evaluation of opportunities to unlock value of the real estate, could any of those opportunities happen over the near or medium term horizon to help you accelerate your deleveraging process?

James Ryan: So for the fourth quarter, actually, on a net cash basis, we expect to receive cash. We do have a cash outlay, but we are expecting cash in from the quasi-governmental agency that’s paying for the public infrastructure. As we’ve said before, those funds are in a trust account at U.S. Bank. It’s just a case of very slow, but paperwork to get the cash in. So on a net basis, we actually expect to receive money in the fourth quarter and not have to outlay anything, which is the good news. I’ll let Hilton take the second half of your question.

Hilton Howell: Well, on this call, I’m not going to commit to anything publicly that we intend on doing. But, Aaron, let me emphasize something. We start getting revenue from what we have built at Assembly Studios in three weeks. And it will turn out to be, if it is not already, the single largest and most important asset that this company owns. The way I look at it, it’s as if we had simply purchased a mid-market television station that will deliver about four times the free cash flow that that station would have otherwise provided. But yet, it does it through film and television productions. So I know that you and our company are viewed based on our cash flow, not necessarily on the inherent value of the assets that we own.

But this particular asset has a huge inherent value and will begin within a short period of time, before I can blink, generating revenue at a larger percentage capacity than any individual TV station that we own in our portfolio. And that’s actually saying a lot. And, Aaron, I will tell you, I’m exceptionally proud of that. One of these days, everyone on this call, I would love to host you as an investor day at Assembly Studios. We do not anticipate large capital expenditures. I’m sure during the course of 2024 there may be some that arise. But the demand for the real estate that is not yet developed, that Gray Television owns, debt-free, is stunning. And so we will see what comes from that. And so on this call, I don’t want to commit the company or to evidence to others what we are willing or not willing to do.

But we have an asset that few companies have. And we’re very proud of it.

Aaron Watts: I appreciate those thoughts, Hilton. Thank you.

Hilton Howell: You bet, Aaron.

James Ryan: Aaron, just as a quick follow-up to just kind of put a little bit better number on the net impact in Q4, you’ll see in the queue when it gets filed a little later today that our outflow in Q4, we expected in the range of $20 million to $25 million. But we’re still expecting approximately $85 million to $90 million inflows primarily from the quasi-governmental entity for the public infrastructure. And again, that inflow from that entity, a lot of the public infrastructure is done. But the paperwork involved and the red tape involved to get it out, getting multiple municipal entities to check off the appropriate boxes is, I would just say from my standpoint, it’s frustratingly slow. But the good news is the money is in the bank, and we just got to keep processing the paperwork.

Aaron Watts: Okay. Thanks, Jim.

James Ryan: Thank you, Aaron.

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

Steven Cahall: Thank you. So, Kevin, I think retrans revenue is going to be up around 2% this year based on the Q4 guide. It’s slowed down quite a bit from the last couple of years. I know there’s a lot of timing in there with fewer renewals. It’s a lot more complex these days between the mix of streaming and traditional, and you just have higher rates overall. But as we look out into 2024 between some of the constructive view on what’s happened with Disney Charter, plus I think just more subscribers up for renewal, is it reasonable to expect that retrans revenue should accelerate next year versus this year? And then, Pat, just want to go a little deeper into the core ad outlook that you talked about. Things sound pretty positive.

I was a little surprised that the guidance isn’t a little higher. I think that there’s probably a fair amount of crowd out benefit in Q4 on the core side, and the guidance isn’t a lot higher than Q3. So can you just maybe help me understand, is that just a bit of conservatism, and there could be some upside there, or anything else in the core guide? Thank you.