TEGNA Inc. (NYSE:TGNA) Q1 2024 Earnings Call Transcript

TEGNA Inc. (NYSE:TGNA) Q1 2024 Earnings Call Transcript May 8, 2024

TEGNA 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: Hello and welcome to TEGNA First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Kirk von Seelen, Vice President and Treasurer. You may begin.

Kirk von Seelen: Thank you. Good morning, and welcome to our first quarter 2024 conference call and webcast. My name is Kirk von Seelen, and I am TEGNA’s Treasurer. Today, our President and CEO, Dave Lougee; and our CFO, Julie Heskett will review TEGNA’s first quarter performance and results and provide TEGNA’s full year and quarter ahead outlook. After that, we’ll open the call for questions. Hopefully you’ve had the opportunity to review this morning’s press release. If you have not yet seen a copy of the release, it’s available at tegna.com. Before we get started, I’d like to remind you that this conference call and webcast includes forward-looking statements, and our actual results may differ. Factors that may cause them to differ are outlined in our SEC filings.

This presentation also includes certain non-GAAP financial measures. We have provided reconciliations of those measures to the most directly comparable GAAP measures in the press release. With that, let me turn the call over to Dave.

David Lougee: Thank you, Kirk. And good morning, everyone. I’ll begin with a summary of recent highlights and then turn the call over to Julie, to walk you through our financial results in more detail. Tegna achieved our key guidance metrics in the first quarter. We closed the acquisition of Octillion and began integrating it into Premion, made significant early progress toward our $350 million capital return commitment for 2024, and completed multiple local rights deals for local pro sports teams. Including with the Indiana Fever and rookie phenom Caitlin Clark. Also during the quarter, we returned more than $100 million to shareholders with $82 million in share repurchases and $20 million in dividends. And as we announced in this morning’s press release, our board has approved a 10% increase to our regular quarterly dividend.

This builds on our track record of dividend increases, including the 20% dividend increase last year, and reflects the confidence we have in the durability of our free cash flow from our business and the strength of our balance sheet. As we shared on our last call, our initiatives to transform our core business operating model are now underway. Today, we are announcing that we expect these initiatives to generate between $90 million to $100 million of annualized cost savings as we exit 2025, with initial benefits to be realized here in the second quarter with sequential improvements going forward. We’ll continue to update investors on our progress as we roll out additional transformational initiatives. Turning to our financial performance. Julie will cover first quarter performance in greater detail, but I’ll cover a few highlights.

First, as I mentioned earlier, we achieved first quarter key guidance metrics, national advertising has remained challenging, as it has across the media landscape and affects us in both core and Premion. But local advertising continues to improve across our portfolio of products. We’re especially seeing that at Premion, our industry-leading OTT sales platform that serves the local marketplace. We further improved Premion’s positioning with the acquisition of Octillion. We’re now beginning to leverage its technology to improve Premion’s local advertiser experience with improved workflow tools and better overall access to the connected TV market. We’re already seeing meaningful signs of success. So we’re encouraged by first quarter results for Premion, which returned to positive growth following last year’s loss of a major national account.

We expect continued sequential improvement in Q2 and throughout the year, driven by execution on local. Turning to political advertising. We’re feeling very good about the trends as they relate to our footprint. Once again, the presidential race will likely come down to the same seven states, and that’s where the spending will be. And of those seven states, we cover six of them; specifically, Pennsylvania, Arizona, Georgia, North Carolina, Michigan, and Wisconsin. In the Senate, there appear to be less competitive seats nationwide than in the past, so the spending and the large spending will be funneled to the seats that are competitive. And here again, our footprint is very, very strong. Of the seven seats currently competitive, we have markets covering five of them, including the races in Ohio, Georgia, Arizona, Michigan, and Wisconsin, and because we’re based here in the mid-Atlantic, we have a front-row seat to the Maryland Senate race, which we think will be highly competitive for the first time in a very long time, even though it’s not classified at the moment.

With former governor Larry Hogan, the likely republican nominee, he’s a very popular moderate and assuming he gets the nomination, Maryland is likely a significant and unexpected contribution to our political revenues. And because control of the Senate is up for grabs and only a few seats are competitive, we think these races will very likely reach record spending levels for general elections Senate races in their respective states. There’s less governor’s races in presidential years than during midterms, 11 to be exact, but we do have the only two races currently called competitive, North Carolina and New Hampshire. So in short, we’re in a great position to take a very strong share of linear and CTV/OTT political dollars. And one more important tailwind to highlight for all advertising spending, including political, the Summer Olympic Games this summer in Paris.

With the largest portfolio of NBC stations and in a time zone more conducive to live programming and viewing, we expect enormous levels of engagement. I’d now like to share a little context in some of the recent sports — pro sports deals we’ve announced. As I shared on our last call, our strong portfolio of stations in big pro sports markets are very well positioned for the shift currently happening in local sports distribution. Teams are learning and so many cases being reminded of the benefit of being on local broadcast and a huge increase in reach and distribution that brings compared to the pay TV only model. We recently announced a deal with the National Hockey League Seattle Kraken, as well as the Seattle Reign of the Women’s Soccer League.

We also announced an exclusive broadcast distribution deal in the Indianapolis market with the WNBA’s Indiana Fever and rookie superstar Caitlin Clark. This morning, we announced we’ve signed additional deals taking Caitlin and the Fever games to eleven additional broadcast markets, including our home state of Iowa and our Cedar Rapids and Quad City stations, as well as on stations from Gray, Sinclair, Weigel Broadcasting and Coastal television. To my earlier point about broadcast distribution and the audience it brings, the recent NCAA women’s basketball final featuring Caitlin Clark drew a record-breaking 19 million viewers on ABC stations, including our Des Moines and Quad City stations. Notably, that audience was larger than the men’s championship game for the first time ever, and just as notably, that game aired on cable.

Pro sports teams are now recognizing the difference. Obviously, the deals we’ve done to date are with teams who aren’t part of the existing Diamond RSNs. We’re watching closely the bankruptcy court developments with Diamond and are ready to explore additional opportunities that make sense. Before I turn it over to Julie, I’d like to thank and recognize our station colleagues for their tireless dedication to serving our viewers across the country in a very difficult environment for journalists. As an example, our stations in Minneapolis, Denver and Louisville were recently nominated for prestigious Peabody award for their work on a nationwide investigation into widespread sexual assault by private contractors transporting inmates over long distances.

Our station’s investigative journalism serves as the watchdog of communities, uncovering corruption, holding power to account and amplifying the voices of marginalized groups. There’s so many less players doing that today, making the role we serve all that more important. I’m so proud of the critical role our stations play. Without them vital stations would remain untold, injustices unaddressed and the public trust eroded. With that, let me turn it over to Julie.

Julie Heskett: Thanks Dave. Good morning, everyone and thank you for joining us. To start this morning, I will cover TEGNA’s capital allocation execution, then an update on our business transformation initiatives before closing out with a review of our financial results and guidance. As a reminder, in February of this year, TEGNA announced a new comprehensive capital allocation plan, which included our commitment to returning between 40% and 60% of adjusted free cash flow to shareholders over 2024 and 2025 timeframe. I am pleased to report today that we are off to a strong start on that commitment. In the first quarter, we repurchased nearly $82 million of common stock and retired approximately 5.7 million shares. Combined with our regular dividend, our total cash returned to shareholders in the first quarter was $102 million.

We are where we want to be to achieve our promise of returning $350 million to shareholders in 2024. During the quarter, TEGNA also took possession of approximately 4 million shares, which occurred upon completion of our previously announced $325 million accelerated share repurchase program that launched in November last year. The settlement of these shares is incremental to the $82 million or $5.7 million shares in the first quarter just mentioned. In addition to our share repurchase activity, our board just declared a 10% increase of our quarterly dividend to $12.5 per share. That builds on the 20% increase we announced last year. Our capital return actions through the use of both share repurchases and dividends underscore the durability and sustainability of TEGNA’s free cash flow and our commitment to shareholder value creation.

While capital return remains an important part of our story, we continue to take actions that position TEGNA for growth as well. To that end, in the first quarter we closed on Octillion Media and expect to further bolster the growth outlook for our Premion business. The acquisition of Octillion gives greater control of key technologies Premion uses and better positions us with new go-to-market product development. We continue to execute against our capital allocation framework by returning capital to shareholders, investing in the business both organically and inorganically, pursuing bolt-on adjacent acquisitions and preparing for future debt maturities. Our industry-leading balance sheet and strong free cash flow generation is a differentiator that gives us the ability to reward shareholders, grow the business and maintain our leverage at below three times.

Now turning to business transformation initiatives. As Dave mentioned, our previously announced business transformation initiatives are underway and starting to generate savings. These initiatives are expected to be completed over the next two years and generate $90 million to $100 million in annualized expense reductions as we exit 2025. This core business transformation will directly target all other operating expenses outside of programming and Premion. We will gain some initial expense benefits from these initiatives in the second quarter of 2024 and expect our run rate growth of all other expenses outside programming and Premion to improve sequentially quarter to quarter. These cost reductions are already included in our previously provided two-year adjusted free cash flow guidance.

Consistent with our prior programs, we will track our progress and keep you informed regularly over the coming quarters. Let’s now take a look at the drivers of our first quarter 2024 financial performance. My comments today are primarily focused on TEGNA’s performance on a consolidated non-GAAP basis, to provide you with visibility into financial drivers of our business trends as well as our operational results. You can find all of our reported data and prior period comparatives in our press release. Total company revenue for first quarter was down 4% year-over-year, primarily due to lower subscription revenue partially offset by higher political advertising dollars. First quarter subscription revenue was down 9% year-over-year, primarily due to net subscriber declines and the temporary disruption of service with a distribution partner in January, partially offset by contractual rate increases.

Additionally, the year-over-year comparison was affected by a year-end adjustment that benefited our results in first quarter of 2023 and did not recur in 2024. Underlying subscription revenue trends, absent the onetime impact, is down mid-single digits. We expect to renew 20% of our traditional subscribers at the end of this year and another 45% in 2025. Moving to Advertising and Marketing Services. AMS revenue was down 3% year-over-year. While national advertising continues to show signs of softness, local advertising trends in the first quarter were resilient and continued to show positive momentum, including strong performance in automotive services, restaurants, banking and finance and entertainment advertising categories. Now turning to Premion.

Premion continues to gain momentum with local advertisers by selling advertising in a converged linear and streaming television marketplace. The integration of Octillion Media with Premion is underway and will further drive innovation, new products and streamline media-buying processes. For the 2024 election cycle, Premion has expanded its programmatic selling capabilities, enabling advertisers and agencies to leverage a multifaceted programmatic and managed service approach to executing CTV campaigns and driving measurable outcomes. Premion’s total revenue has returned to positive growth following last year’s loss of that large national account. Premion’s revenue was up low single digits year-over-year, driven by strong local revenue offset by softness in national revenue.

The rate of Premion’s revenue growth is expected to grow sequentially throughout the year. Turning now to expenses. For the quarter, non-GAAP operating expenses of $568 million were up 1% compared to first quarter of 2023. Notably, programming expenses were down slightly year-over-year, partially driven by that disruption of service with a distributor. As a reminder, what we said in last earnings call, we expect the growth of reverse compensation fees to be negligible at best going forward. The majority of our reverse comp fees are variable and tied to paid subscribers. All other operating expenses for the quarter were up 2% compared to 2023, primarily due to compensation expenses. Adjusted EBITDA was $174 million and we generated adjusted free cash flow of $113 million for the quarter.

We ended the quarter with total debt of $3.1 billion and cash of $431 million. Net leverage ended the quarter at 2.8 times. We are in excellent shape to continue with our capital allocation priorities in the second quarter and beyond. Turning to our forward-looking outlook. As we noted in our press release this morning, we are reaffirming all our key full-year 2024 guidance metrics, including two-year adjusted free cash flow guidance of $900 million to $1.1 billion. As Dave highlighted, the robust political environment and our favorable portfolio, as well as the Summer Olympics this year supports our confidence of our guide. With the acquisition of Octillion Media, we are updating our guidance range for the amortization expense to be between $51 million and $55 million.

Please refer to our press release to see all full year 2024 guidance elements. In an effort to help forecast our near-term results, I’ll provide a quarter ahead financial guidance metrics as follows. We expect second quarter total company revenue to be down low- to mid-single-digit percent year-over-year due to lower subscription and AMS revenue partially offset by higher political ad dollars. We forecast operating expenses in the second quarter to be flat compared to last year. This is sequential improvement from first quarter, and you’ll see this improving trend continue in future quarters as a result of transformation cost reduction efforts. With that, as we turn to Q&A, please note Tom Cox, our Senior Vice President of Digital and Chief Growth Officer is here with Dave and I, as we take your questions.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Dan Kurnos with the Benchmark Company. Your line is open.

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Q&A Session

Dan Kurnos: Yes, thanks. Good morning. I guess maybe for Julie or if Dave, you want to pitch in too. But can we just unpack the 2Q guide a little bit more? It feels a little bit light on the revenue side, especially since you have the disruption behind you. So subscription gets a little bit more of a tailwind relative sequentially than you would normally have. And political, everybody, your Q1 political was strong and Q2 should be better than that. So is there anything more color you guys can give us around core trends or other things that could be driving the year-over-year decline?

David Lougee: Hey, Dan, I’ll make one comment and I’ll turn it over to Julie. From what I remember, though, on retrans, we don’t have any deals up in the second quarter. So once we had a deal up in the first quarter, so that from — and going forward until no deals are up, we’re just dealing off the sub-base as is. Julie?

Julie Heskett: Yep. And I would just say unpacking from an AMS perspective, we continue to see softness specifically on the national side of our business. So similar to what you saw in first quarter, that is projected to continue into second quarter. And from a subscription perspective, you heard us say first quarter, aside from those one-time only run rate of subscription revenue is down mid-single digits. And then I would just encourage you to continue to look at to Dave’s point, there’s no deals that are up in second quarter. So look at that quarterly seasonal trend with prior years in sequential second to first in history.

David Lougee: First to second.

Tom Cox: Political should be better sequentially, though, given timing, yes.

Julie Heskett: Political should be sequentially better than first quarter slightly…

David Lougee: But not dramatically.

Julie Heskett: Right. And again, the quarter variances, again, if you go back to 2020. Right. First quarter was huge. Second quarter was very small in 2022, first quarter was small, second quarter was large. This one appears to be more even, if you will. But what happens with political because of the primary calendars, Dan, it’s really about first half and second half. So first half is usually always somewhere between 15% and 16% of the total. And that we believe will be consistent through 2024. 85% of the political comes in the back half.

David Lougee: Very roughly, right.

Dan Kurnos: Yes. No, everyone’s saying it’s back-half weighted this year. I was just trying to get help in the near term. Dave, can I just ask you one high level question? You obviously got on the board with some sports deals. Love the Fever deal, obviously. I guess you guys have really done a great job on the cost side of the equation. Can we just talk about tactical investments, even beyond Octillion to help reinvigorate the top line and how we should think about kind of your guys opportunity set to sort of reaccelerate growth and where we should be looking for that?

David Lougee: Yes, actually, I appreciate the question, Dan, because I recognize, I mean, we’re not — we can’t announce until we have something to announce, right. And if we’re in spaces that we’re looking at for obviously competitive reasons, we can’t get ahead of ourselves. But just going back to what we said since the termination of the merger agreement last year, both in terms of — it’s in our DNA, right, to through bolt-on or organic investments like we did with Premion. We know how to do that, right. And so, and now at, you look at our balance sheet, as we said, along with our capital return to shareholders numbers, the other — the remainder remains available for investments, for growth. So we are in the middle of a lot of conversations around that on things that we both organic and inorganic from a bolt-on perspective. Some more to come, right. But I like the way we are positioned.

Dan Kurnos: Okay. I appreciate the color. Thanks, guys.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Steven Cahall with Wells Fargo. Your line is open.

Steven Cahall: Thank you. We’d love to just maybe ask a little bit more on retrans. So understand that it’s down mid-single digit on an underlying basis. You have a lot of renewals in Q1, not much in Q2. Should we kind of think about down mid-single digit as a decent run rate? Since I think you typically have an annual retrans cadence that’s pretty consistent. And then I know your reverse comp is more variable now. So maybe this still all pencils out to kind of flattish net retrans. Is that a good way to think about it, or is there anything that I’m missing there? And then just one on the transformation and the cost savings, are there costs to achieve associated with this? So as we think about the impact on free cash flow for 2024 and 2025, does it weigh on net free cash flow at all in 2024?

And then it becomes a benefit in 2025 or any mix there? And then lastly, this may be for Dave or for Tom after Octillion and your new go-to-market strategy. Do you see any other opportunities for bolt-on M&A that could benefit Premion? Thank you.

David Lougee: Okay, let’s take those in order. So a net retrans, just take the bottom question. We’ve said before, we look for it to be stable, Dan, going forward. So, I mean, not guiding to it one direction or the other, but with a variable comp, it will be a significant, stable number going forward. You had, let me just before I leave retrans, you had a couple. Did you have a question on top of the net retrans question?

Steven Cahall: Yes. Is mid-single digit down mid-single digit for gross retrans a good way to think about it, or are there things that could improve that revenue run rate a little bit?

Julie Heskett: Yes. From a gross top line perspective, Stephen, you’re right. It’s a function of the mix of revenues. So, right, the traditional subscriber declines, accelerating at that higher gross rate offset by growth of the virtual subscribers at that net rate. So it’s a mix. But yes, that mid-single digit run rate, which now first and is a consistent until we have deals up. We have an opportunity to reprice another 20% of our subs at the end of 2024.

David Lougee: And, Steven, I’m sorry, your expense question. Do we have investments to hit that number? Was that your question?

Steven Cahall: It’s more that with the transformation and cost savings, is there like a cost to achieve? So cash, you have to spend up front to spend upfront to realize the savings, and then you get the run rate savings afterwards. So tends to benefit EBITDA. But just trying to understand, as we think about free cash flow, whether it’s a bit lumpier and whether that’s a benefit to ’24 or not.

David Lougee: We do not — the answer is no to your question.

Julie Heskett: We do not anticipate significant upfront costs. They will be savings realized and will be a part of the free cash flow benefits in our guide.