Nexstar Media Group, Inc. (NASDAQ:NXST) Q1 2023 Earnings Call Transcript May 9, 2023

Nexstar Media Group, Inc. beats earnings expectations. Reported EPS is $2.97, expectations were $2.67.

Operator: Good day, and welcome to Nexstar Media Group’s First Quarter 2023 Conference Call. Today’s call is being recorded. And now I’ll turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Joe Jaffoni: Thank you, Kyle, and good morning, everyone. Let me read the safe harbor language, and then we’ll get right into the call and your questions and answers. All statements and comments made by management during this conference call other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Nexstar cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward statements made during this call. For additional details on these risks and uncertainties, please see Nexstar’s annual report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission, and Nexstar’s subsequent public filings with the SEC.

Nexstar undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Thank you for your patience. With that, it’s now my pleasure to turn the conference over to your host, Nexstar Chairman and CEO, Perry Sook. Perry, please go ahead.

Perry Sook: Thank you, Joe. Good morning, everyone. We appreciate you all joining us today to discuss Nexstar’s first quarter results. With me on the call today is Tom Carter, our President and COO; and Lee Ann Gliha, our CFO. I will start with a summary of our recent highlights and developments, followed by Tom’s operations review and Lee Ann’s financial review. Nexstar’s first quarter financial results mark a very strong start to the year for the company. Record first quarter net revenues were driven by all-time high quarterly distribution revenue and the benefit of the CW acquisition, which more than offset the cyclical year-over-year decline in political and Olympic advertising. Net revenue, adjusted EBITDA and attributable free cash flow all came in ahead of consensus estimates, extending our long-term record of exceeding expectations.

We returned nearly 60% of our attributable free cash flow or approximately $6.25 per share, to our shareholders in the form of dividends and share repurchases in the quarter. While economic uncertainty and rapidly changing expectations regarding monetary policy are contributing to the turbulent markets, the scale and the financial success and strength of our highly diversified and profitable operating model combined with our focus on execution drove excellent results and strong shareholder returns in the quarter. Looking ahead, we remain positioned to perform well in the current environment, with over 50% of our net revenue derived from contractual and recurring high margin distribution revenue, and two-thirds of our core advertising revenue comprised of more resilient local advertising.

During the quarter and subsequent to quarter end, Nexstar successfully reached new multiyear agreements with two of the largest virtual MVPDs, YouTube TV and Hulu. In addition to extending carriage of our big four network stations, which were up for renewal, both operators are now carrying Nexstar’s MyNetwork and independent stations as well. In addition, Hulu will continue to carry Nexstar’s owned and operated CW stations and YouTube TV will initiate carriage of our CW affiliates this year. These agreements again validate what we already know to be true, consumers and distributors value Nexstar’s local content. As America’s largest local broadcasting company and one of the nation’s largest producers and distributors of local and national news, sports and entertainment content, our television assets reach over 210 million Americans.

As such, our stations networks and cable offerings continue to represent an attractive value proposition to virtual MVPDs seeking to enhance the competitiveness of their video offerings. Given recent volatility in our share price performance, driven by misplaced speculation surrounding distribution agreement and some negotiations, it’s important to step back for a moment and separate the reality from the noise. First and foremost, we stand behind our guidance of distribution revenue growth to be up in the high single to low double-digits for 2023, excluding the benefit of the CW. In the first quarter, our distribution revenue increased 9% over last year despite the impact of the removal of our partner stations on certain MVPDs related to ongoing contract negotiations.

Second, since the first dollar of retrans revenue that we generated almost 20 years ago, distribution negotiations have always been hard fought by both parties. There have been several cases in the past when typically private negotiations are played out publicly, or Nexstar or our partner stations have been forced to go dark until we reach a fair agreement. For us, this is business as usual, whether Nexstar is negotiating directly or indirectly through our network affiliation boards. We remain confident in the value that we bring to our distribution partners and with approximately 40% of our subscribers up for renewal this year, we expect continued growth throughout 2023 and beyond. In addition to posting another strong quarter of financial results, we continue to execute our strategy focused on leveraging our linear, digital and mobile and streaming assets in new ways to drive increased monetization and growth across our portfolio.

We’re also driving strong momentum across our organic growth initiatives. First, we’re making significant progress on our operating plan for the CW, having executed the lion’s share of our corporate overhead savings and making our key personal ML appointments all by the end of the first quarter. We also launched new sports and sports-related programming, including LIV Golf on the CW and 100 Days to Indy, a motor sports docuseries following the drivers and teams from IndyCar racing leading up to the Indy 500. We’re extremely pleased with the early results of our LIV Golf partnership despite being a completely new sports league and sports for the first time on the CW, our ratings performance to date has been significantly exceeding previously aired programming on those stations during the time period.

LIV Golf audiences are also increasingly engaging with Live Golf on the CW app. For the most recent LIV Golf event weekend in Singapore, the CW app audiences watched for 96 minutes on average over the three-day event. And on the final day, they watched for over two hours on the app. On the advertising front, our CW affiliates are already benefiting from increased local revenue, and we expect national revenue on the network to grow over time as we air more events and establish a ratings track record. With the upfronts quickly approaching, you have seen and can expect to see a variety of new programming announcements for the CW’s 2023-2024 season. Consistent with our plan, our programming lineup will feature a more diversified mix of scripted and unscripted shows, which we anticipate will drive ratings growth.

Several of the highly acclaimed new scripted series included in our summer and fall schedules have already been written and produced and are, therefore, not affected by the current writer strike. Second, NewsNation continues to build and grow with the first quarter achieving the highest audience delivery to date. During the quarter, we launched all new NewsNation connected television apps on a variety of major OTT and CTV platforms. We added key journalists and expanded our roster of political, legal, national security and medical contributors. In April, NewsNation marked a major cable news milestone by becoming a 24/5 news network with the debut of new expanded daytime programming as well as the launch of the networks political ensemble show, The Hill, and evening news program Elizabeth Vargas Reports.

Overall, our strategy to leverage our core competency in news to build a profitable, differentiated and highly valuable national cable news network is delivering results. We remain the fastest-growing cable news network and the most watched genre of cable television, with content that continues to be rated as unbiased and trustworthy by the leading watchdog groups. We’ve all seen the major changes that are taking place at the incumbents in this space, and we believe that this activity only strengthens NewsNation’s ability to build awareness, audience and profits. Finally, we continue to make progress on our deployment of NextGen TV or ATSC 3.0. In Q1, we launched three additional markets, and as of today, we’ve completed the transition of stations covering 37.5% of the U.S. population.

And we are well on our way to achieving our near-term goal of reaching 50% of the country. As discussed previously, Nexstar partnered with Scripps to leverage the combined power of our station portfolios, which together reach over 90% of the country. As part of our partnership, we’re collaborating with Hewlett-Packard Enterprise and Sony to create powerful new, high speed data solutions for businesses that are planning use cases and simulations with a variety of applications for vehicles utilized by agricultural businesses, logistic companies and first responders. The partnership and nationwide scale of our combined coverage demonstrates why the ATSC 3.0 opportunity is more actionable now than ever before. Thanks to the industry consolidation over the last decade, we’re now in a position where just two broadcast operators working together can cover the majority of U.S. television households, while before it would have required the collaboration of many operators.

And aiding our effort last month at the NAB show, FCC Chair, Jessica Rosenworcel, announced the future of television initiative, a new effort designed as a public-private partnership to ensure a smooth transition to ATSC 3.0 for broadcasters, associated industries and the public. We view this initiative as an important step forward as regulatory support for the transition helps expedite our time to market. We’re also happy to have announced yesterday the acquisition of KUSI, an independent station in San Diego, the nation’s 30th largest television market. The station is already a powerhouse local news organization. And together with our O&O station in the market, FOX affiliate KSWB-TV, we will offer more local news and information programming than all the other local stations in the market combined.

The acquisition will be instrumental in expediting our transition to ATSC 3.0 in San Diego and we’ll benefit economically from recapturing the CW affiliate on a primary signal when the affiliation becomes available in the market. We expect the transition to close later this year and to be accretive once we’re able to reprogram the asset with the CW program. In summary, we remain confident in our strategy and ability to continue to generate significant free cash flow. Consistent with our capital allocation priorities and focus on enhancing shareholder value, in January, the Board of Directors increased Nexstar’s quarterly cash dividend by 50% to $1.35 per share per quarter, substantially increasing our historical compound annual dividend growth rate of 25%.

Our strong free cash flow enables us not only to increase the percentage of capital returned to shareholders in the form of dividends, but also to continue to opportunistically repurchase shares as well as reduce debt and pursue other strategic opportunities to further enhance value for our shareholders. With all of that said, let me now turn the call over to Tom Carter for the operations review. Tom?

Tom Carter: Thanks, Perry, and good morning, everyone. We generated another quarter of strong operating performance, with all-time high first quarter net revenue of $1.26 billion, a 3.9% increase from the prior year. Results were driven by the benefit of the CW acquisition and record quarterly distribution revenues, partially offset by a decline in television advertising, primarily due to the absence of midterm political and Olympic advertising, as well as continued advertising softness, primarily in national, which is a smaller part of our ad revenue mix. Excluding the results of the CW, net revenue was essentially flat from the prior year quarter. Core television advertising decreased 2.6% year-over-year. Excluding the CW, core advertising was down approximately 8.5% primarily driven by double-digit rates of decline in national spot advertising, which accounts for nearly 30% of our core TV ad revenues.

Nexstar’s local television ad revenue, which represents approximately 70% of our total core television ad revenues, excluding the CW, continues to meaningfully outperform national, declining low single-digits. This performance is consistent with our guidance we provided on our last call. So far in Q2 2023, we are seeing similar results in the national market to what we saw in the first quarter, with a modestly softening local market, driven in part by a slowing rate of growth in automotive and by our unique exposure to local markets in the top 20 DMAs, notably New York, Los Angeles, Chicago and Tampa, where local advertising markets behave more like national markets. Excluding the CW, our top performing categories in the quarter were automotive, home repair, manufacturing, attorneys, entertainment and travel.

We’re extremely pleased to see automotive, our largest advertising category in terms of dollars spent, maintain its growth trajectory for the third consecutive quarter, increasing 12% over Q1 of 2022. While overall automotive spending remains below 2019 levels, we’re encouraged by the continued rebound in this category. The categories primarily responsible for core advertising revenue softness were gaming, sports betting, radio, TV, cable, newspaper, medical, healthcare, insurance and telecom. The sports betting and gambling category decline was due to fewer states launching in the quarter and reduced spending in more established markets. Turning to political. Nexstar generated first quarter political advertising revenue of $8 million, reflecting the cyclical year-over-year decline in election year spending.

In April, we experienced the earliest spending for a presidential race in the company’s history with early bookings from the Trump, DeSantis and Biden Pax. As a result, we remain very optimistic about our growth prospects for political advertising revenue in the 2023, 2024 election cycle. Nexstar delivered record quarterly distribution revenues of approximately $728 million, marking a 9% increase over the prior year. Revenue growth was driven by the renewal of distribution agreements in 2022 on improved terms and the annual rate escalators, as well as growth in virtual MVPD revenue and the inclusion of the CW. Our growth was achieved despite MVPD subscriber attrition and the ongoing impact of the removal of some of our partner stations carriage related to continued negotiations with certain MVPDs. Estimated year-over-year subscriber attrition was in the low to mid-single digits, which improved during the last quarter due to the positive impact of increased carriage of our CW, MyNetwork and independent stations on YouTube TV.

Excluding the CW, our distribution revenue was up 6.8%. As Perry mentioned, including the benefit of the CW affiliation fees given our 2022 contract resets, we continue to expect distribution revenue to be up high-single-digit to low-double-digits for 2023. Depending on the outcome of distribution contracts we have up for renewal, the outcome of our partners ongoing negotiations with a couple of the MVPDs on which they’re currently dark and trends in MVPD subscriber attrition. CW distribution fees will have a slight positive impact on our overall year-over-year growth rates as we lap the acquisition date at the end of the third quarter. We continue to expect our affiliation expenses will increase in the mid-single-digit rate this year, giving a double-digit rate of increase of net retran – of net distribution revenue for 2023.

Record first quarter digital revenue increased 16.5% to approximately $92 million. Revenue growth was driven by inclusion of the CW and year-over-year increases in Nexstar’s digital advertising and agency services business. These were more than offset some weakness in e-commerce overall. Including the CW, digital revenue was down low-single-digits. On a consolidated basis, the first quarter adjusted EBITDA was $491 million, representing a 39.1% margin, and first quarter attributable free cash flow was $383 million. Excluding the CW, the first quarter adjusted EBITDA was $566 million, representing a 47.2% margin, and the first quarter free cash flow was $438 million, amounting to 77% of adjusted EBITDA. In preparation for Nexstar’s 2023 Proxy and Annual Meeting, we conducted an extensive outreach to our shareholders during the first quarter to update them on the company’s recent ESG initiatives, which we outlined in our last earnings call and to solicit their feedback on these matters.

We’d like to once again thank our top shareholders for participating in our annual shareholder outreach initiative and for your candid feedback. The input and recommendations of our shareholders who elected to engage with the company were presented the Board of Directors for consideration, and the summary of these efforts was included in our 2023 proxy filed at the end of April. We remained focused on evolving our ESG policies and disclosures in a thoughtful manner that supports our employees and communities as well as our goals for growth in the enhancement of shareholder value. In this regard, during Q1, we published Nexstar’s first ESG report, a document that communicates the company’s efforts, performance and goals in ESG. It’s available on our website for everyone to access.

With that, it’s my pleasure to turn the call over to Lee Ann for the remainder of the financial review and update. Lee Ann?

Lee Ann Gliha: Thank you, Tom, and good morning, everyone. As always, Tom and Perry gave you most of the details on the revenue side, so I’ll provide a little color on the CW financial results, our TV Food Network distribution, and then jump to expenses followed by some discussion – further discussion on our guidance. In the first quarter, the CW generated $61 million of revenue and $75 million of adjusted EBITDA loss from $7 million of one-time expenses comprised primarily of restructuring charges, all of which was in line with our projections and expectations. As a reminder, the CW generates revenue primarily from national television and digital advertising, distribution fees from affiliates and virtual MVPDs, as well as some short-term periodic continuing revenue from licensing content to an SVOD player.

Since the CW programming schedule is locked in for the 2022, 2023 broadcast seasons, you’ll be able to see the Nexstar playbook start to fold only in the fourth quarter of this year. Moving back to our consolidated expenses. Together, first quarter direct operating and SG&A expenses increased $65 million, primarily due to the inclusion of the CW, which including the one-time restructuring expenses of approximately $7 million I mentioned a minute ago, accounted for $37 million of the difference. With the remaining amount due to increased affiliation fees, due to increased distribution revenues, and the expansion of local news at our Washington, D.C. Bureau and other local markets, as well as the expansion of our news programming at NewsNation, which was partially offset in our adjusted EBITDA and free cash flow calculations by reduced programming costs at NewsNation related to reduced reliance on syndicated content.

Q1 2023 corporate expense was approximately $48 million, including non-cash compensation expense of $14 million compared to $47 million, including non-cash compensation expense of $13 million in the first quarter of 2022. Q1 2023 depreciation and amortization was $249 million versus $145 million in the prior year quarter due primarily to the acquisition of the CW. Please note that the CW’s programming costs, which are included in our definitions of adjusted EBITDA and free cash flow are accounted for in this line item as amortization of broadcast rights. For more information on this amount, please refer to the schedules in our earnings release. First quarter CapEx was $37 million and in line with our expectations compared to $28 million in the first quarter last year.

Last year’s first quarter CapEx was artificially low given supply chain constraints and the Q1 2023 CapEx increase also reflects some carryover CapEx from Q4 2022 that was paid in the quarter. First quarter net interest expense increased $107 million from $69 million in the prior year quarter due to the impact of increasing LIBOR and SOFR rates applicable to our floating rate debt. Cash interest expense was $104 million for the quarter, slightly lower than our expectations due to actual versus estimated interest rates and interest income. First quarter operating taxes were $2 million as we only have a few state tax payments in the quarter. We received $226 million in Q1 distributions from equity investments related primarily to our 31% ownership in the TV Food Network, which represents a 17% increase over the prior year quarter.

Our TV Food Network distribution included $69 million related to our attributable share of the net proceeds from an accounts receivable securitization program at Warner Bros. Discovery. Because this securitization is one-time in nature, we have excluded these proceeds from our definitions of adjusted EBITDA, attributable free cash flow and free cash flow. Over time, TV Food Network may increase or decrease its securitization program. If it chooses to reduce the program in the future and build back up its receivables balance, we will amortize the proportional amount of this cash securitization distribution back into adjusted EBITDA and free cash flow, accordingly. Excluding the securitization distribution, our distributions from equity investments were lower by $36 million or 19% in the quarter versus last year, of which approximately 60% was due to weakness in the national advertising market at TV Food Network, and the remaining 40% was related to a working capital investment in content.

Looking ahead, we project corporate overhead exclusive of stock comp and transaction costs to be approximately $35 million in the second quarter, and we expect corporate overhead around $138 million to $140 million for the year. Non-cash comp is expected to be approximately $16 million for the second quarter and in the $67 million area for the full year, but will vary based on stock price and actual grants. For cash taxes, we use a 26.5% tax rate when calculating our estimated taxes before one-time and other adjustments. The second quarter includes two income tax payments. We are currently projecting net cash CapEx of $42 million in the second quarter and $145 million for the full year, including a portion of carryover CapEx from last year.

We expect Nexstar’s cash interest expense to approximate $110 million for the second quarter and $425 million for the full year, reflecting the current forward curve and our expectations for debt repayments. The forward curve currently shows interest rates peaking in June and following thereafter. Turning to the balance sheet. Nexstar’s outstanding debt at March 31, 2023 was $6.92 billion, down slightly for the quarter as we made mandatory quarterly amortization payments of $31 million. Because we have designated the CW as an unrestricted subsidiary, the losses associated with the CW are not accounted for in our calculation of leverage for purposes of our credit agreement. As such, our net first-lien covenant ratio for Nexstar, excluding CW at March 31, 2023 was 1.73x, which is well below our first-lien and only covenant of 4.25x.

Our total net leverage for Nexstar, excluding CW at quarter end was 2.92x. As is typical in non-political years, we expect leverage, which we calculate on our last 12 months basis versus a two year average, but not our quantum of debt to slightly tick up in 2023, but to fall again in 2024 political year. In 2023, we plan to allocate a portion of our free cash flow to reduce indebtedness, primarily from mandatory amortization payment. Our cash balance was $413 million, a seasonally high level given timing of cash inflows and working capital requirements, and includes $49 million of cash related to the CW. For the quarter we generated $383 million of attributable free cash flow. We returned $225 million or 59% of this attributable free cash flow to shareholders paying $50 million in dividends and repurchasing $175 million of stock, which together mark a 15% increase over levels in the first quarter of 2022.

As we move forward, we will continue to strategically deploy our cash in a manner that is consistent with the commitment to creating the highest shareholder value. On our prior call, we issued our guidance for our average annual attributable free cash flow for the 2023, 2024 period. If we see a need to change this either up or down in the future, we will comment on that at that time. Nexstar’s consistently strong free cash flow generation remains one of our most powerful differentiators and mechanisms for shareholder value creation. While you probably think we’re broken record saying this, at our current stock price, Nexstar’s shares are significantly undervalued. Our current stock price implies over a 3% dividend yield and over a 20% free cash flow yield.

Our 2023 and 2024 attributable free cash flow equates to over 40% of our current market cap. Meaning at this rate, we generate cash flow equivalent to our entire market cap by mid-2027. Not only do we have belief in the consistency of our core cash flows, we have multiple organic growth drivers that will help us in the outer years, the CW, NewsNation and ATSC 3.0. So if you want to learn more, I’m available to get you up to speed. This concludes the financial review for the call. Operator, can you please open the line for questions?

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Dan Kurnos with Benchmark. Please go ahead.

Operator: Our next question comes from Craig Huber with Huber Research Partners. Please go ahead.

Operator: Our next question comes from Jim Goss with Barrington Research. Please go ahead.

Operator: Our next question comes from Benjamin Soff with Deutsche Bank. Please go ahead.

Operator: Our next question comes from Steven Cahall with Wells Fargo. Please go ahead.

Operator: Our next question comes from Barton Crockett with Rosenblatt Securities. Please go ahead.

Operator: Our next question comes from Nick Zangler with Stephens. Please go ahead.

Operator: Our next question comes from Alan Gould with Loop Capital. Please go ahead.

Operator: There are no further questions at this time. I would now like to turn the floor back over to Perry Sook, Chairman and Chief Executive Officer, for closing comments.

Perry Sook: Well, thank you very much for joining us today. We continue to execute against our plan, taking the necessary actions and making the required investments to shape the future of Nexstar and to continue to deliver long-term growth and industry outperformance. In the face of economic uncertainty, we believe that Nexstar remains an attractive investment with higher quality factors, including stable earnings, robust free cash flow generation, return of capital to shareholders and higher credit quality at a reasonable valuation. Thanks, everyone, for joining us today. We look forward to speaking with you again when we report our second quarter results in about 90 days.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.