Nexstar Media Group, Inc. (NASDAQ:NXST) Q1 2024 Earnings Call Transcript May 9, 2024
Nexstar Media Group, Inc. beats earnings expectations. Reported EPS is $5.14, expectations were $4.28. Nexstar Media Group, 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 day, and welcome to Nexstar Media Group’s First Quarter 2024 Conference Call. Today’s call is being recorded. I will now turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.
Joseph Jaffoni: Thank you, Maria, and good morning, everyone. I’ll read the safe harbor language, and then we’ll get right into the call. 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-looking 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, 2023, 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. It’s now my pleasure to turn the conference over to your host, Nexstar’s Founder, Chairman and Chief Executive Officer, Perry Sook. Perry, please go ahead.
Perry Sook: Thank you, Joseph, and good morning, everyone. We appreciate you joining us today. This morning, with me on today’s call are Mike Baird, our President and Chief Operating Officer; and Lee Ann Gliha, our Chief Financial Officer; I will start with a summary of recent highlights, followed by Mike’s operational review as well as Lee Ann’s financial review, and then we’ll get to your questions. . Nexstar’s first quarter results marked an excellent start to 2024 and what we expect will be another strong year for the company. We delivered record first quarter net revenue of $1.28 billion, driven by all-time high quarterly distribution revenue of $761 million. Adjusted EBITDA and adjusted free cash flow once again exceeded consensus expectations and more importantly, underscore the strong profitability of our business model.
Our continued outperformance in the current environment is no surprise to us. We’ve been consistently clear in our view that broadcast is the bellwether of the pay-TV ecosystem. Consumers value the bundled programming offerings provided by pay-TV distributors that are anchored by our stations. And is the largest local broadcaster and owner of 1 of the nation’s 5 major broadcast networks, as well as the nation’s fastest-growing cable news network. Nexstar’s importance to the industry is clear and further validated by our consistently strong financial execution, Free cash flow generation and shareholder returns. I recently came across a Harvard business review article on the subject of disruption, which has been a recurring theme for many years now in the pay-TV industry.
And in it, the authors note that corporate leaders have continually been told that the only way to innovate and grow is to disrupt their industries or even their own companies. But for disruption to be a success, there needs to be a clear trade-off between winners and losers. Looking at our industry, it’s now been more than 3.5 years since the majority of diversified media companies launched direct-to-consumer products, seeking to generate new value and profits in the digital world by disrupting their linear business models. To date, these products have generated billions of dollars of losses and market cap destruction. And because of the disruption, the linear business of these companies has also suffered, which, in our mind, is a lose-lose proposition.
As a result, we expect to see direct-to-consumer and pay-TV programming bundles, content spending and pricing all to be rationalized across the industry going forward. Better models are being developed with broadcast as the anchored as it always has been, given viewer demand for our must-have local and national programming, including sports and special event programming that relies on our unrivaled reach to maximize audiences. The virtuous cycle of the broadcast business, combined with the strength of Nexstar’s diversified portfolio of local and national media assets, including multiple growth drivers to support our long-term value proposition will continue to fuel our financial momentum and strong shareholder returns. Before turning the call over to Mike, let me briefly touch on some of those growth drivers, starting with the CW.
Nexstar has owned the network for just over a year, and we’re making excellent progress as we continue our march towards breakeven. The CW’s first quarter operating profit improved by $50 million year-over-year driven by a $55 million reduction in programming costs. And for the full year, we expect the CW’s operating profit to improve by over $100 million. In terms of viewership, the CW delivered sequential ratings growth in the first 2 quarters of the ’23, ’24 broadcast season, the first broadcast season where Nexstar controlled the programming lineup. And we’re confident that the positive viewership trends will continue throughout the year. In fact, if I look back to this Tuesday, the most recent night for which overnight ratings are available, CW had its highest Tuesday performance of the season in both adults 18 to 49 and in total viewers, and police 24/7 was the #1 new series premiere on the CW in the last 3 seasons.
We’re especially excited about the accelerated launch of the NASCAR Xfinity Series on the CW with the final 8 races of this season including all of the playoff races for this year, airing exclusively on the network beginning in late September as well as the WWE next launch on October 1. We’re also finding other opportunities for the CW to leverage the benefit of being part of the larger Nexstar enterprise. To date, we have added 12 CW affiliations to our station group which has led to significant additional operating profit on the station side of the ledger. And all of the work we have been doing to generate audience growth at NewsNation has begun to pay off as NewsNation has officially entered the [indiscernible]. You may have seen our network featured in the series finale of curb your enthusiasm and last month in what may have been the funniest sketch on SNL in years, a NewsNation town hall event with Ryan Gosling as Bevis and Mike Bay as Butt-Head in the audience was, as we said, one of the funniest sketches on the network in years in Saturday Night Live, if you haven’t googled it, I highly recommend it.
Significanly as of the May 2024 news report [indiscernible] NewsNation is now the second largest cable news network in pay-TV distribution surpassing both CNN and MSNBC as distributors recognize the value of NewsNation and what it brings to their consumer offering. And the consumers will get even more value for that distribution when we complete the News Nation expansion to 24/7 on June 1 of this year. We continue to make progress on our ATSC 3.0 initiative, surpassing our goal of 50% of the U.S. population served by ATSC 3.0 signals from a Nexstar owned or partner station following the conversions in Chicago and San Diego this past quarter. We believe the earliest revenues generated from this spectrum will be from business to business applications that require moving large amounts of data to multiple devices simultaneously.
We’re also developing advanced applications for the positioning and timing industry. I think GPS, if you will, where we think our terrestrial broadcast capabilities provide us some unique advantages compared to satellite-based systems. In this regard, we are seeing interest from auto manufacturers, digital signing providers device manufacturers and the Internet of Things industry and even content delivery networks, who are all looking to gain efficiency in the delivery of Internet data using our broadcast technology. To commercialize our technology, we’re pursuing new customers through our own business development activities as well as through joint ventures and with other broadcasters. Here’s where the scale of our spectrum assets is our advantage as we are able to partner with 1 or maybe 2 other broadcasters to achieve nationwide coverage of spectrum.
Looking ahead, we remain confident that Nexstar will deliver another strong year of financial results in 2024, given the successful renegotiation of our distribution contracts in 2023, significant presidential election year political advertising and reduced losses related to the CW network. We’re focused on executing our strategy and leveraging the strengths of our platform to maximize every opportunity to drive continued strong growth and shareholder returns. Our confidence in the continued strength of Nexstar’s business relative to our current valuation and our long-term growth prospects is further reflected by our capital allocation, including our recently upsized dividend as well as our now announced first quarter share for purchases. With all of that said, let me now turn the call over to Mike Baird.
Michael Biard: Thanks, Perry, and good morning, everyone. on our record first quarter net revenue of $1.28 billion, which compares to $1.26 billion in the prior year quarter, an increase of $27 million or 2.1%. Primarily due to growth in distribution revenue and partially offset by a slight decline in advertising and other revenue. All-time high quarterly distribution revenue grew $33 million or 4.5% to $761 million, primarily due to our successful renewals in 2023 on terms favorable to the company, annual rate escalators and the return of our partner stations on 1 MVPD in January, partially offset by MVPD subscriber attrition. As a reminder, Nexstar’s distribution revenue includes retransmission revenue, carriage fees, affiliation fees and spectrum leasing revenue, which in aggregate accounted for approximately 59% of Nexstar’s first quarter revenue.
Excluding the impact of the removal of partner stations from certain MVPDs, subscribers grew in the quarter in the low single-digit range, reflecting the benefit of the increased carriage of our CW, my network and independent stations on YouTube TV and other VMVPDs. The addition of new CW affiliations at Nexstar stations and recent station acquisitions. Overall, advertising revenue, which includes core television advertising, digital advertising and political advertising revenue decreased 1% or $5 million compared to the first quarter last year. reflecting a year-over-year reduction in core and digital advertising, offset in part by a year-over-year increase in election year political advertising. Excluding political, advertising declined 7% in the quarter, impacted by a continued challenging national advertising market and a slightly softer local advertising market as local advertisers and their customers show the strains of the high interest rate environment.
That negative comparison was exacerbated slightly this quarter by the Super Bowl airing on CBS versus Fox which is less favorable to us. So far, in Q2 2024, however, the trends are improving. We’re seeing a much slower rate of decline versus the first quarter as we are currently pacing down in the low single digits as advertising headwinds begin to abate. In particular, we are starting to see some green shoots on the national side as advertisers respond to the large aggregated audiences we deliver, particularly in live sports and special events. And on the local side, we are seeing improvement in core television while we continue to benefit from double-digit growth in local digital advertising. And I’m pleased to report that we completed the seamless transition of national advertising sales in all 117 of our markets from third-party representation firms to our own sales force.
We are already seeing dividends from this transition as we have an experienced, motivated sales force, creating new ways for advertisers to generate their best ROI, while maximizing revenue across diverse sales channels in the full array of our unique asset mix. In addition, we are optimistic that the big data measurement services enabled by our recently expanded agreements with Comscore and Nielsen together with additional advertising measurement services available in the marketplace will help modernize linear television measurement to better highlight the reach and reach at scale benefits our assets bring to our partners’ messaging. Turning to political. In the first quarter, political advertising of $39 million increased by $31 million over — year-over-year but was down versus 2020 when the outsized primary runs by Bloomberg and boosted revenue during that presidential cycle.
Excluding the impact of those 2 campaigns, our political advertising was up 29% in the quarter versus 2020. Overall, our market share of total political television spending was in the mid-teens, slightly ahead of our expected market share for the full year. Historically, the substantial majority of political television advertising spending comes in the 10 weeks to 12 weeks before election day. In fact, despite the relatively muted presidential primary season, in March, BIA increased its estimate for 2024 political advertising spending to over $11 billion versus the $10 billion previously projected. We’re already seeing some of this in new spending on ballot issues such as reproductive rights. In addition, a significant factor in the amount of political spending on our assets, is control of the House and Senate as both are up for grabs in this selection, driving campaigning that will benefit our bottom line.
As the saying goes, all politics is local and campaigns and packs deploy the lion’s share of their advertising spending on the media they know has proven to help them win local television. As we discussed on the last call, our audience overindexes on the actual electorate with over 60% of voters in the last election, aged 50-plus according to Pure Research. Based on the experience of our station group in the last 4 election cycles, we expect to garner a low to mid — mid-teens percentage of the political advertising spending on broadcast television. And with that, I’ll turn the call over to Lee Ann for the remainder of the financial review and update. Lee Ann?
Lee Ann Gliha: Thank you, Mike, and good morning, everyone. Mike gave you most of the details on the revenue side. So I’ll provide a review of expenses, adjusted EBITDA and adjusted free cash flow, along with a review of our capital allocation activities. Before I jump in, a quick note on our new earnings release format in an effort to make it easier for investors to focus on the key items management is focused on and since we have now owned the CWs for over a year, so comparability is no longer an issue. We have simplified our reporting and our reconciliations. We will continue to provide you with key operating data in our MD&A commentary and on this call. In addition, in an effort to create better comparisons to others reporting in our sector, in the first quarter of 2024, we adjusted our definition of adjusted EBITDA to add back stock-based compensation and onetime expenses related to restructuring actions and to subtract out noncash pension credits.
Please note that the guidance we issued for the year on our last call was based on our prior definition and the net impact of these changes is a positive $52 million. We also adjusted our definition of adjusted free cash flow, which we previously referred to as attributable free cash flow to subtract out noncash pension credits and payments for capitalized software obligations and to adjust for actual cash contributions from noncontrolling interest in lieu of adjusting for our partner share of losses in the CW, which we think gives you a better picture of our consolidated performance. The prior — the comparative prior year disclosures were also recast in the earnings release to conform with the current presentation. Turning to expenses, together.
First quarter direct operating and SG&A expenses, excluding depreciation and amortization and corporate expenses increased by $8 million, the increase was primarily due to the expansion of news programming and promotional expenses, offset by a reduction in severance at the CW by $7 million. Also included in our calculation of adjusted EBITDA but not included in direct operating and SG&A expenses above are the payments for broadcast rights of stations. That declined by $8 million in the first quarter due primarily to a reduced reliance on syndicated content at NewsNation as we continue the transition to 24/7 news. Q1 2024 total corporate expense was approximately $55 million, including noncash compensation expense of $18 million compared to $48 million, including noncash compensation expense of $14 million in the first quarter of 2023.
Q1 2024 depreciation and amortization was $190 million versus $249 million in the prior year quarter, a reduction of $59 million, due primarily to lower programming expenses at the CW. Please note — but the CW’s programming costs, which are included in our definitions of adjusted EBITDA and adjusted free cash flow are accounted for in this line item is amortization of broadcast rights. For more information on this amount, please refer to the schedules in our earnings release and in our 10-Q. We received $129 million in Q1 distributions from equity investments, primarily related to our 31% ownership interest in TV Food Network, which represents an 18% decrease from the prior year quarter. The reduced amount reflects lower income at TV Food Network, primarily due to lower advertising revenue.
The distribution amount of $129 million includes $9 million related to the amortization of a portion of the distribution that was paid to us in the first quarter of last year related to the accounts receivable securitization and not included in our definition of adjusted EBITDA then. Putting it all together on a consolidated basis, first quarter adjusted EBITDA was $542 million representing a 42.2% margin, an increase of $46 million from the first quarter of 2023 adjusted EBITDA and an increase in margin of 270 basis points from 39.5%, which included improvements in our net distribution margin year-over-year. First quarter CapEx was $44 million compared to $36 million in the first quarter of last year, an increase of $8 million primarily due to quarterly timing of capital projects.
First quarter net interest expense increased to $114 million from $107 million in the prior year quarter due to higher SOFR rates applicable to our floating rate debt. Cash interest expense was $112 million for the quarter. First quarter operating cash taxes, payments for capitalized software obligations and proceeds from disposal of assets and insurance recoveries netted to $2 million, primarily reflecting timing of payments. During the quarter, we received $19 million of cash from our minority partners in the CW, reflecting amounts required to be contributed pursuant to the LLC agreement. And putting this all together, consolidated fourth quarter adjusted free cash flow was $403 million. Together with the cash from operations generated in the quarter on hand — in the quarter in cash on hand, we returned $168 million to shareholders, comprised of $57 million in dividends and the repurchase of $111 million of stock at an average price of $166.
11, reducing shares outstanding net of equity vesting by 1.7%. Nexstar’s outstanding debt as of March 31 was $6.8 billion, slightly down for the quarter as we made our quarterly amortization payments of $30 million. Our cash balance at quarter end was $237 million, including $90 million of cash related to the CW. Because we 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 leverage ratio for Nexstar, excluding CW as of December — sorry, as of March 31, 2024, was 2.21x, which is well below our first lien and only covenant of 4.25x. Our net leverage for Nexstar, excluding CW was 3.73x at quarter end.
As a typical and nonpolitical years, we expect leverage, which we calculate on an LTM basis, versus a 2-year average default during 2024 as EBITDA will grow with the return of political advertising. As we move forward, we continue to strategically deploy our cash in a manner that is consistent with our commitment to creating the highest shareholder value. Before turning the call back to the operator for questions, I want to frame some thoughts regarding our business industry position and valuation. We continue to get questions based on the results, comments and capital structures of some of the other companies that operate in the local broadcast industry. While we understand the desire to compare notes in a sector where there are relatively small number of public companies, I know for those of you who’ve been around the sector for a very long time, Nexstar used to be just one of the pack.
But times have changed and Nexstar has changed. We are a very large company now significantly outscaling the other broadcasters. And we built our platform over the past 10 years or so, we consistently highlighted the benefits and necessity of scale, including operational efficiencies and increased negotiating leverage. And as our results continue to demonstrate, our vision was spot on. Just to put it in perspective, at the risk of stating the obvious, for the last 12 months ended March 31, 2024, we generated almost $5 billion of revenue. We have a market cap of $5.5 billion and an enterprise value of over $12 billion. Our revenue is more than 40% greater than the next largest local broadcaster. Our market capitalization is more than 110% greater and our enterprise value is more than 65% greater.
In fact, our enterprise value of $12 billion puts us on a path to approaching something like Fox Corporation, which has an enterprise value of $20 billion. Our LTM leverage was 3.7x and will be in the 2s by the end of the year. Our secured debt trades at or around par. The consensus annual free cash flow for Nexstar for the average of ’24 and ’25 and $1.1 billion could deleverage us by more than half a turn a year if we decided to do that and represents a whopping $33 per share on our stock price. Yet, we trade at only a 6.4x ’24, ’25 consensus EBITDA multiple and a 21% ’24, ’25 free cash flow yield impacted by the short-term losses of the CW. We believe this all adds up to an undervalued company, which is why we have been aggressively active on share repurchases, which deliver a substantial and tangible return.
We believe there is significant upside in our stock. Our free cash flow keeps flowing, and we are putting it to the best use to maximize shareholder returns. There is simply no comparable local broadcaster, and we will gladly put our record of operating execution and returns of capital and shareholder enhancement up against almost every company in the media telecom space. With that, I’ll open the call for questions. Operator, you can go to our first question. Thank you.
Operator: [Operator Instructions]. Our first question comes from Dan Kurnos from Benchmark.
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