Please stand by. Good day, and welcome to the Gray Television Q2 Earnings Call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. Hilton Howell, Executive Chairman and CEO. Please go ahead, sir.
Good morning. Thank you, Sarah. Thank you all for joining us. As our operator mentioned, I'm Hilton Howell, the Chairman and CEO of Gray Television. Thank you for joining our second quarter 2022 earnings call. With me today, as traditional, are Gray's executive officers, our President and Co-CEO, Pat LaPlatney, our Chief Legal and Development Officer, Kevin Latek, our Chief Financial Officer, Jim Ryan, and our Chief Operating Officer, Bob Smith. We will begin this morning with a disclaimer that Kevin will provide. Kevin.
Thank you, Hilton, and good morning, everyone. Gray uses its website as a key source of company information. The website address is www.gray.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, broadcast cash flow less corporate expenses, operating cash flow, free cash flow, adjusted EBITDA, 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, are reconciliations of the non-GAAP financial measures to the GAAP measures reported in our financial statements. Certain matters discussed in this call may include forward-looking statements regarding, among other things, future operating results.
Those statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those expressed or implied in any forward-looking statements as a result of various important factors that have been set forth in the company's most recent reports filed with the SEC, S-E-C, 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. I now turn the call over to Hilton.
Thank you, Kevin. We are truly excited to be with you today to discuss another quarter of record financial and operational results. With the Quincy closing now fully one year behind us and the Meredith Local Media Group closing approximately eight months behind us, we are now delivering solid results flowing from our increasingly efficient operations across a truly meaningful scale, including many of the nation's best local television stations, journalists, sales and technical professionals, and support staff. By design, and with a tad of luck, we made last year's two large all-cash acquisitions just as we entered the one year of a two-year political advertising cycle that also happens to be significantly beating all of our expectations, as we will discuss soon in this morning's call.
Overall, our total revenues for the second quarter were $868 million, which exceeded the guidance provided in our prior earnings call. On a year-over-year basis in the second quarter of 2022, Broadcast Cash Flow was $327 million, an increase of 79%. Adjusted EBITDA was $309 million, an increase of 32%. Core advertising revenue increased by 31%. Retransmission consent revenue increased by 58%. Political advertising revenue increased by 1,400%. These excellent results, combined with total lower operating expenses than previously anticipated, contributed to a 231% increase in net income attributable to our common stockholders in the second quarter of 2022 of $86 million, or $0.91 per fully diluted share.
We will add more color on the second quarter results in our forward outlook on this call. Overall, while we see some challenging environments for our clients and some slowing retrans growth and increased interest expenses, Gray Television is set for an exceptional year. On a combined historical basis, which gives effect to both acquisitions and disposition, our core revenue was flat year-over-year, with our second quarter political revenue hitting an all-time record, and we remain on track to finish the year at a record retransmission revenue level of $1.5 billion. Importantly, we continue to expect that Gray will end 2022 with a total leverage ratio net of all cash of right at 5% and likely below that, trailing four-quarter operating cash flow as defined in our senior credit facilities.
Gray's solid results produced strong cash flow that enabled us to return a significant amount of capital to our shareholders during the second quarter. In total, we returned $125 million in capital through a $54 million pay down of outstanding debt, a $50 million stock buyback in the open market, and $21 million of cash dividends paid to our preferred and common shareholders. We ended the quarter with $162 million of cash on hand and an unshaken conviction that our strong operating results and political advertising revenue will fund further significant debt paydown and our regular cash dividends during the remainder of this year and thereafter. Beyond these solid financial numbers, the second quarter included a number of big announcements about our new long-term agreement with NBCUniversal.
We announced this on the first of June, and I'm very excited about this multifaceted relationship with our partners now at NBCU. Not just what it means for Atlanta and the state of Georgia, but what it means for Gray Television and all of our stockholders. As most of you know, Assembly Atlanta is a 135-acre mixed-use real estate complex now owned entirely by Gray. It is located at the former site of the General Motors assembly plant in the city of Doraville along the I-285 Perimeter Highway, and just a few miles up the road from our offices here in Atlanta. The signature component of Assembly Atlanta and its development is our 43-acre Assembly Studios complex. That section will feature sound stages, production offices, warehouse and mill buildings, studio bungalows, event space, and multiple parking decks.
Along with the Gilbane Company as the developer and the construction manager, and with our strategic advisors at JLL, the project went vertical in the second quarter when all the walls were erected for the first new sound stages that will be used by Gray's Swirl Films. Construction will begin soon on the buildings that NBCU will utilize, and we currently expect that NBCU will be producing its first new shows at Assembly Studios in the second half of 2023, about a year from right now. In addition to reaching a long-term lease with NBCU, we also entered into additional agreements whereby NBCU will handle the day-to-day management of both Assembly Studios and our existing studio businesses at Third Rail Studios.
In other words, NBCU will bring its extensive expertise in managing studio lots around the world to maximize the leasing of our facilities, efficient scheduling across many sound stages, as well as accounting, security, and other back office functions. In this way, our partners at NBCU will retain our focus on our own video production business. Finally, having NBCU as the employer anchor at Assembly Atlanta greatly improves the visibility and the value of the entire project, which in turn makes the larger development all the more enticing for our future residents and for our businesses. Quite simply, our new partnership with NBCU is a financial and operational coup for Gray Television. We could not be more eager for the impressive construction work to finish and for the new day-to-day studio operations for Gray and NBCU to commence at Assembly Studios.
On this very positive note, I will now turn our call over to our President and Co-CEO, Pat LaPlatney.
Thank you, Hilton. Gray's television stations and production companies continued to perform well in the second quarter despite the current macroeconomic headwinds. We're very pleased with our results. In fact, on a combined historical basis, core revenue held strong, roughly flat from Q2 2021, even though political advertising revenue rose $82 million from second quarter of last year. Normally, we would expect core advertising revenue to decline when political advertising rises substantially. It takes advertising inventory normally utilized by local, regional, and national advertisers. One reason our core revenue held up in the face of skyrocketing demand from political is the scale that Gray has achieved in the television industry. As the second largest broadcast group nationally and often the largest media company in a state, Gray is earning viewers and dollars that otherwise would have flowed to other platforms and other parties.
In light of our leading positions in most markets, we believe that this scale will soften the impact of broader economic factors on Gray's advertising revenues, while also allowing Gray to bounce back more quickly when the economy generally returns to expansion. For many of these same reasons, our digital viewership and revenues are doing very well too. Total digital revenue increased double digits from last year's second quarter on a combined historical basis. We expect the digital revenue will finish the year even stronger as our digital products and approach become fully integrated into the news and sales efforts of our newly acquired stations. In June, for example, we posted our highest all-time users, highest all-time sessions, and highest all-time screen views in the company's history. Increasing digital traffic and better sales products are the right combination, and that's exactly what we have right now.
Interestingly, pure digital billing was essentially the same as national billing in Q2 2022, and in 49 of our 113 markets, digital revenue exceeded national billing. It's also worth noting that Gray stations in Richmond, Omaha, Greenville, Spartanburg, and Shreveport launched NextGen TV services in the second quarter. We now have launched NextGen in 19 markets with many more mid-sized markets to follow before year-end. We're keeping a close eye on macro developments and client sentiment. Nevertheless, given our success to date and the progress that I just reviewed, we remain confident that we have the right assets and the right people to weather any economic slowdown that may or may not come our way. Next, Bob Smith will offer additional color on our station operations. Bob?
Thank you, Pat. We have spoken on past calls about our concentrated focus on sales, and you're now seeing the results of that emphasis. We continue to see great progress developing new local direct business in both legacy and new stations every month.
Our healthcare and our travel and our tourism sales verticals are putting newfound emphasis on industries that remain strong in this economy and yet have not traditionally leveraged local television to drive their businesses. Meanwhile, although auto remains challenged, we continue to experience solid demand from the home improvement and legal categories. We continue to leverage the best sales techniques through our in-house sales training program. This year, at last, we believe we are seeing some tangible results from the years-long efforts with our fellow broadcasters to smooth out some of the friction in the broadcast buying process through our work with Matrix and other third parties. Meanwhile, this year's political races, including many primaries, have been more competitive than anyone expected. As expected, Gray stations benefit more than any other platform from the competitive political environment.
In addition to Gray's historic advantage of owning more top-rated stations in many of the most competitive political battlegrounds, Gray is now also benefiting from the scale of our new station footprint. This scale offers political campaigns a very efficient platform to reach voters across an entire state. In many cases, this is the first time that statewide campaigns have a one-stop shop to reach the local audiences that they most covet. Indeed, most competitive races this year are for statewide races for governor or the U.S. Senate, and most of those races occur in places where the top local news stations reaching nearly all the media markets are owned by Gray, including especially Georgia, Nevada, Arizona, Wisconsin, and Missouri.
Now, for the first time in many places, we are able to offer statewide scale to political advertisers, which helps to decrease their transaction costs and helps increase the shares that we receive from their advertising orders. For the first quarter, and again for the second quarter, we provided aggressive guidance ranges for political advertising revenue. Just like the first quarter, our actual results blew past all of our expectations. In particular, for the second quarter of 2022, we had guided political advertising revenue of $65 million-$70 million. Instead, we reported $90 million of political revenue in the quarter. A year ago, and even three months ago, we dismissed the notion that 2022's political revenue could rival 2020's political revenue on a combined historical basis.
Two years ago, our current station footprint benefited immensely from significant presidential general election spending, significant presidential primary spending, and significant Mike Bloomberg and Tom Steyer spending. In addition, we recorded $50 million in the Georgia runoff spending as a result of Gray's unmatched collection of television stations in this new swing state. It would have to be one banner year for 2022 to overcome all those meaningful sources of political revenues that are completely absent this cycle. In recent weeks, however, political fundraising trends nationally, combined with our own experiences and conversations with buyers, have led us to conclude that 2022 really can climb that hill.
Consequently, we announced in our earnings release this morning that we are raising our political revenue guidance for the full year 2022 from $575 million to the same $652 million that our current group of stations received in 2020. In conclusion, core revenue and political revenue continue to be very solid across Gray's superior footprint of leading local news stations. I now turn the call over to Kevin.
Hi. Thank you, Bob. As you saw in the release this morning, we completed and signed new agreements with the Fox network that renew the affiliations for all of our 27 Fox-affiliated markets. Our next major network affiliation deadline comes at the end of 2023, when our ABC and NBC agreements expire. In terms of retransmission, we posted strong second quarter retransmission revenues of $382 million. On a GAAP basis, retrans revenues increased 58% from the year earlier period, just slightly behind the 59% year-over-year gain we posted in the first quarter. On a combined historical basis, retrans revenues increased almost 9% from the year earlier period, which is also just slightly behind the 10% year-over-year gain we posted in the first quarter.
Retransmission revenues net of network compensation were $157 million in the second quarter, which marks a 60% increase over the prior year period on a GAAP basis and a 9% increase on a combined historical basis. As a reminder, Gray does not have any material retransmission agreements repricing between the middle of last year and the start of 2023. We are now modeling somewhat larger MVPD sub declines, yet still solid OTT and virtual MVPD sub gains throughout the rest of this year, and that's to reflect some macroeconomic contraction and likely slowdown in household formation. In the end, our new model continues to forecast gross retrans revenues of $1.5 billion for the full year of 2022.
At this level, gross retrans revenues will be about 43% higher than last year on a GAAP basis and about 5% higher on a combined historical basis. Looking further ahead, we anticipate that gross retransmission and net retransmission revenues will grow at mid-single digit rates in the next couple of years. Reaching $1.5 billion in retrans revenue this year will be an impressive achievement. Gray Television's total advertising and retransmission revenues only surpassed $1 billion for the first time in 2018. Consequently, even if this macro environment slows over the next year, Gray Television will be able to face those challenges as a much stronger and more diversified company than it was just three or four years ago. This concludes my remarks, and I turn the call to Jim Ryan.
Thank you, Kevin. Good morning, everyone. As Kevin mentioned earlier, the 10-Q will be filed a little bit later today. Hilton, Pat, Bob, and Kevin have covered a lot of the highlights out of Q2, so I'll keep my comments relatively short. To recap our guidance, core revenue, we're forecasting for Q3 of $345 million-$355 million. Given the volume of political advertising revenue we're expecting for Q3, our core advertising revenue will definitely start experiencing increasing displacement due to the political revenue. Also, as a reminder, Q3 2021 had $14 million of Olympic net revenue that is obviously not returning this year. Retransmission revenue for Q3 of $365 million-$370 million. Political advertising revenue of $193 million-$195 million, and that's equivalent to the combined historical Q3 2020 of $190 million.
The production companies will have between $20 million and $21 million of revenue, and our total revenue is forecast to be between $940 million and $959 million. Broadcast expenses are forecast to be $545 million-$550 million, of which $225 million is retransmission expense. Production company expenses of approximately $17 million and a corporate expenses of $30 million-$35 million. Again, we're very pleased with our Q2 results, and as many people have said already, being flat-ish in core revenue with the amazing amount of political that came in in Q2 is not surprising at all. Our services group, which includes financial, legal, and medical, is still running about 27%-28% of our total core revenue, excluding political, and we're pleased to see that category holding in.
Auto was approximately 15% of core revenue and is beginning to appear to maybe settling in finally to it you know and level off. Total operating expenses between broadcast, production, and corporate of $567 was well below expectations. We were pleased to see that. The biggest driver in expense growth still remains to be reverse comp to the networks. Turning now to debt and leverage. Our trailing two-quarter or two-year average operating cash flow at 06/30/2022 was $1.283 billion. Total debt outstanding was $6.778 billion. Our cash on hand was $162 million. Our leverage ratio, as defined in our senior credit agreement, was 5.16x , which is down from the 5.47 x at year-end 2021.
Our first lien leverage ratio was at 2.39 x. Now turning to some comments on the full year of 2022. We'll share the following forecast data we currently anticipate. We caution that these comments are as of today, and actual facts, circumstances and results may change materially in the future. Core revenue, we anticipate approximating $1.5 billion for the year. We've already said we anticipate political revenue of $6.52 million. Now, the ultimate mix of core and political is impossible to determine. We obviously expect a great political environment in the fourth quarter. But obviously, if political should skew a little higher, then you can anticipate core will skew a little lower due to the political displacement.
As Kevin mentioned earlier, our retransmission revenue for the full year, we're anticipating approximating $1.5 billion, and our total revenue, we anticipate will approximate $3.8 billion. Our total operating expense before depreciation, amortization, gain, loss, and disposal of assets is anticipated to approximate $2.35 billion, and that would include $23 million of non-cash stock compensation. Our operating cash flow, as defined in the senior credit agreement, we anticipate approximating $1.5 billion, which would put our two-year average operating cash flow at about $1.25 billion. We anticipate our leverage ratio will continue to decline from 5.16 as we move through the rest of the year to approximately 5 x, and a possibility that we may be into the very high fours by the end of the year.
We expect our free cash before common dividends, stock repurchases, acquisitions, investments, and our assembly construction costs will approximate $800 million for the year. Commenting now on free cash flow and cash uses for the full year of 2020. Again, we expect $1.5 billion in operating cash flow. We are currently estimating full-year cash interest of $340 million, which is up from our previous guide of $300 million, reflecting the rapid increase in LIBOR rates, especially since May, which is up 150 basis points or more. We have an expectation based on the forward yield curve of further increases in LIBOR between September and December of 2022. Cash taxes we're estimating for the full year of $195 million.
That is net of a $21 million tax refund we currently expect to receive from the IRS by the end of the year. As we've said on our last two calls, we believe our routine capital expenditures will be about $125 million for the year, and our preferred dividends will be $52 million for the year. Other uses of cash during full year 2022 are anticipated to be a total of common stock dividends of approximately $31 million. We've already said, we repurchased $50 million of common stock in Q2. As we announced on June 1st, our Assembly Atlanta construction costs we are anticipating to be between $130 million and $140 million for this year.
We anticipate full year acquisitions and/or investments of approximately $80 million, and that would include the $30 million of acquiring the Telemundo station here in Atlanta earlier this year. We have a required Term Loan D amortization of $15 million. Most importantly, in addition to the $50 million of voluntary debt repayment we made in Q2, we currently anticipate making an additional $450 million of debt repayment by the end of the year. It would bring the total voluntary debt repayment to $500 million in 2022.
If you include the $50 million of stock repurchased in Q2, the $15 million of required amortization on Term Loan D, and a voluntary debt repayment of $500 million, the aggregate $565 million of value transfer to our common stockholders by year-end, given 93 million shares currently outstanding, is approximately $6.08 per share in enhanced value. We are very well positioned and look forward to a very successful year. I turn the call back to Hilton.
Thank you very much, Jim. Operator, we will now open up the call to any questions anyone may have.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause for just a brief moment to allow everyone an opportunity to signal for questions. We'll take our first caller from Dan Kurnos, The Benchmark Company.
Great. Thanks. Good morning. Obviously, a solid print, guys. Yes, despite what you guys said, it was, I think, a little bit of a surprise to see, to us anyway, to see 2Q core almost flattish, given Hilton to steal some thunder here, your beaucoup buckets of political in the quarter. Can you just talk about a couple things? You know, we never usually talk about crowd out in Q2. Maybe if there were some timing or other reasons why you guys were the best performer, I think, in the space on that metric. As we head into Q3, you know, just anything you can give us.
I know there was Olympics, and some other one-timers in there, but just any color outside of auto, which I think Jim gave us just around how maybe July was pacing or underlying category strength because your full year core number is actually pretty decent, again, notwithstanding that massive political guide.
Hey, Dan. Yeah. It's Pat. I'll start. There's a lot of questions there, so I'm gonna need help with numbers three, four, five, six, and seven. But I would tell you know, as it relates to Q2 and just the general year, some of what Bob talked about was, you know, what's going on with the newly acquired stations. I think when we acquired those stations, we mentioned that we thought there was significant upside on the ad sales side with them, and I think you're seeing some of that right now. I talked a little bit about digital and I think it's actually gonna accelerate the digital piece. It's gonna accelerate through the end of the year.
I think that's a big part of it. I think, you know, and again, Bob can, you know, fill in here, but I think political crowd out. Look, we've got, you know, some of our biggest markets, very active in political right now. I think that's, you know, that tends to run that number up a bit. And but I think and then Bob also talked about the category specialists we have and the, you know, the health team and the auto team and the travel and tourism team. All that has been in the works for a long time, and we're starting to see the benefit of it. I think in general, that's what you're seeing. Bob, I'll throw it over to you for additional comments.
Sure. Thanks, Pat. I would add just a couple of things, and I've mentioned it before on past calls. In my belief, we have the best training group in the entire broadcast industry. It's a robust team of many, many people, and we spend a lot of time with our AEs on training and our sales managers. In addition, we track all local direct new business, as we call it, very carefully. We're averaging about 2,000 new local accounts per quarter. We had our biggest month ever in May on local direct and our best quarter in second quarter we've ever had on new local direct, and the new stations have greatly contributed to that.
The other thing I would tell you is that in some markets as well where we're heavy political, it does drive up the average unit rate for everyone, whether it's political or retail or core. Some of those factors also play into it. I think it comes back to we have some great stations and great personnel and they're very well trained, and we expect that to continue. Did we get you, Dan?
It looks like he has removed himself from the queue. Would you like me to pull him back?
No, that's all right. Go ahead.
Okay, thank you. Next, we'll move on to Aaron Watts with Deutsche Bank.
Hey, everyone. Thanks for having me on. I just have really one quick question probably pointed at Jim. I wanted to confirm what debt you paid down within that $54 million amount in the second quarter. As you look ahead, you spoke to another $450 million in debt repayments the rest of the year. Would that be mainly term loan debt or potentially some secondary bond market purchases as well?
As of right now, today, it's more likely than not term loan repayment. The Term Loan D has $15 million of required amortization with it. The voluntary repayment in Q2 was targeted at the Term Loan C that has the shortest maturity date coming up for us in 2024. Most likely the other $450 million will go to the 2024 maturity as well. But I wouldn't rule out the possibility if the bond market gets, you know, creates an opportunity there. I wouldn't necessarily rule it out. We've got some very long-dated paper that in the current rate environment is starting to look like pretty attractive rates.
It's a little bit of balancing, you know, long-term attractive priced paper in a rising rate market versus an upcoming 2024 maturity that we can easily deal with.
Yeah, makes sense. I apologize if I missed this. What % of your cap stack now is fixed versus floating?
It's about 50/50.
Okay. All right. Just one last one, Jim. With regards to you expecting to be at or below 5x leverage by year-end, what leverage trajectory does that put you on looking a little further out, perhaps, you know, year-end 2023 or 2024, taking into consideration some of the current macro uncertainties?
I think 2024, we're probably. I mean, you know, this is two years out, right? That's at least four lifetimes. I think conservatively we're probably in the low fours very comfortably. Maybe in the high threes, depending on macro, and also the size of political in 2024. The glide slope we see between year-end this year and the next couple of years we think is not overly dissimilar to the glide slope we had after we did the big Raycom deal a couple of years ago. You know, you get down into the low fours or high threes, for us, we would be extremely comfortable.
Okay. That's helpful context. Appreciate it. Thank you.
Thank you, Aaron.
Thank you. Next, we'll move on to James Goss, Barrington Research.
Good morning. I have a couple of questions. First, one of you I think made some reference to the streaming shifts and the impact on distribution of your stations. You tend to be lined up, being distributed in some form, and I'm just wondering if you could talk about how this has been.
Hi, Jim, this is Kevin. I'm not sure if I totally understand. I mean, streaming, there's two pieces of streaming for us. Our news content has obviously been available online forever, more on a you know, episode or story basis. Anything that streams our signal full 24/7 comes with a fee. Whether that's a you know, Paramount+ or Hulu + Live TV or Comcast or DISH Network, those are all pay fee. You know, as we've said, you know, we want our signal and our content to be as widely available as possible. We're not gonna really give it away. We monetize through advertising and through fees for the full signal.
You know, looking at our retrans in particular, as the subscribers are transitioning from cutting the cord, at least in terms of our numbers, people who are cutting the cord are then still signing up for the OTT and virtual services. Our signals are still being distributed. People are not leaving us. They may be leaving cable channels that can't get replicated in the streaming environment, but they are still getting our signal. They're leaving MVPDs and signing up for OTT is why our sub counts are largely stable and have been for many years. Economically, from a pure dollar standpoint, we would prefer people stay in the pay TV environment operated by the cable and satellite companies as opposed to the streaming environment.
I think it's a better value proposition, and certainly economically, it's a bit better for us. At the end of the day, we need our signal everywhere, and there are other puts and takes with, you know, with all these deals. We would strongly prefer to have people under contracts that we negotiate than contracts that networks negotiate, but that, you know, the world is not ideal, so we strike the best deal that we can. I don't know. Does that address your question?
Yeah. It was partly, not just the new source, but the actual full daily usage of your signal in a given market. But I think you were addressing it, so appreciate that.
Okay.
The other thing I wanted to ask about a little bit more is your studio. I don't recall exactly why you decided that would be a good idea unless you had owned the property, and Georgia has been a great market for movie production lately and TV production. I was wondering if you're going to have any usage of the studio for any local news shows of your own or even any cross-platform programming to take advantage of your increased scale. Though you did try that once with [audio distortion] of Ancestor and discontinued it. I didn't know if that was an individual thing or a broader decision.
Jim, Assembly Studios project is when we first talked about it, Gray will own and operate a few sound stages within that complex. Primarily those will be utilized for our Swirl Films, which we are the majority owner of that company, and they don't produce content. They produce some content on a third-party contract basis. Our Third Rail Studios that we already own, that's also on that same property, is purely a sound stage for lease. We don't other than using those sound stages for some of what we already are doing, we don't really anticipate any large scale content creation on the part of Gray. NBCU is a content company.
They will lease the sound stages that we've talked about on a long-term basis, and they'll generate content from those for their own use, but I don't see us getting into a large scale content production. It's just not in our wheelhouse.
No, I didn't think it was. But it would remain fairly nominal in the context of your numbers, I'm sure, or maybe off balance sheet or off income statement.
Absolutely.
Okay. All right. That's all I have for the moment.
Thank you. All right. Any other questions, operator?
Thank you. Once again, that is star one if you would like to ask a question today. Next, we'll move on to Steven Cahall with Wells Fargo.
Thanks. Maybe first, just Kevin, I think the Q3 retrans guide is a pretty big step down, and I know you've talked about seeing a little bit of a pickup in cord cutting. We've seen that across the ecosystem as well. Just the kind of pace of change seems a little bit abnormal. I was wondering if there's anything going on there, that you can help us with. Then I've got a couple of follow-ups.
Yeah. I think I'm not sure it's a giant step down, where our guide is $2 million lighter in the third quarter than what we post in the second quarter. I don't have the number in front of me, but what is it, 1% or 2%? It's not. I don't see that as significant. Remind you, we don't reprice contracts during the year, so our rate on year on January 1 is essentially the rate for the entire calendar year. As somebody loses 10% of their subs, then we're gonna get 10% less revenue from them. We're not on a constant revolving wheel of repricing contracts to keep giving a little bit of gas.
We price pretty much always on January 1st. The switches are obviously occurring, and as people switch from the contracts that we negotiate to the contracts negotiated by the networks, our net is impacted. We'd rather have the people, we'd rather have the money than not have the money. You know, again, in an ideal world, we negotiate every OTT contract, in which case we'd have higher rates that would benefit our shareholders. This is not an ideal world, so we've struck, like everyone else, the best deals that have been available at the time, and happy to have our signals available on YouTube and Hulu and the other ones. Paramount and someday Peacock. Yeah, I just don't see it as a big step down.
It's just, we've seen this, trying to think, over the last couple years where we have a big first quarter, then it steps down a little bit each quarter as sub erosion hits our revenue.
I-
Gotcha.
I'd probably just add in on that, Steven, is that, you know, a modest little correction on $1.5 billion. That's. I never thought I'd be talking about retrans at $1.5 billion.
Yeah. No, point taken. Maybe Jim, just to follow up, if I kinda understand that, you know, you're maintaining the free cash flow guidance, cash interest is up, you know, more than 10%, but political advertising is also kinda up nicely maybe versus your original base case. When you kind of think about the complexion of free cash flow for the year, has anything else changed, or are those kind of the big moving pieces that are offsetting?
I think those are the two big moving pieces that are mostly offsetting. Obviously with the big raise in political of $77 million up to get to $652 million for the full year, that just sheer displacement's putting a little more pressure on core than we would've thought of last call or the call before, right? I mean, that it just is, right? I mean, at $652, we're gonna have more core displacement than we would've at $575. I think you're right. Interest and political are the two big toggles. We've tried to bake in increasing interest rates for the rest of the year.
We can all decide whether the forward yield curve is accurate or not, but we've tried to be conservative in the interest estimate for the rest of the year.
Great. Maybe just lastly on Assembly, it's amazing what's happening there. I had a chance to see it from an Uber about a month ago. I know it's not in free cash flow, but the CapEx does kinda run through the cash flow statement. It's gonna impact leverage, or buyback. How do you kinda think about the cash profile of that whole project in terms of when it goes from consuming cash to either being neutral or generating cash for the company?
Well, obviously, it'll start generating cash once we build the sound stages and deliver them to NBCU on that long-term lease. That's, you know, that will be very positive for us, and we know NBCU is just extremely delighted to be partnering with us on this and are very eager to take, you know, get in and get going on their own productions. Also remember this is 43 acres out of about 135-ish acres. You know, as Hilton alluded to, when NBCU goes live and there are thousands of jobs up in that complex, the entire rest of those acreage is gonna be becoming much more valuable and, you know, I think it's still safe to say it's kind of a white canvas that's yet to be painted on.
I think there's a lot of opportunities for enhanced cash generation out of the remaining acreage, which is currently right now ground-up concrete and dirt.
Great.
Thank you. Next we'll move on to John Kornreich with JK Media.
Kevin, you know, previously you had been saying that you only see sub declines of 1%, so I guess you're seeing a lot more than that now.
No, John. We have for the last couple years always talked about our sub count as the total number of big four subscribers for which we get paid. That number has been hovering around ±1% for the last couple of years. That's not actually changed at all. What we're seeing is we had, last quarter, the MVPDs, the traditional MVPDs dropped, had more sub losses than we have traditionally seen on a year-over-year basis. While our OTT subs had picked up, actually had better growth than we had seen. It netted out to about -1% on a year-over-year basis. I'd have to go back and check, but the last several quarters, we've either been, you know, up 1% or down 1% on a total basis.
It's just that mix of pay TV versus OTT. Obviously, one side's gaining and one side's losing.
The side that's gaining isn't quite as profitable as the one you're losing, correct?
That's correct.
Okay. Another issue on retrans. If I'm doing my arithmetic right, the net retrans margin in the first quarter was something like 42%, and then second quarter, 40%, and the third quarter, according to your guidance, 39%. When do we reach that point in negotiations where you say to Disney, Hey, you're pulling some of your best programming away from us. We're paying for exclusivity.
I think we crossed that point, John, several weeks ago. That point's been made loud and clear to the ABC folks. Our ABC deal is out until the end of 2023. Our CBS deal ended last year, and our just completed Fox deal were consistent with what I predicted last fall on the earnings call, which was that our reverse comp fees going forward would continue to go up like everything else, but they would slow down significantly over prior step-ups that we've experienced. Our first quarter is always a bit off in terms of retrans because that's when most true-ups come through. It can typically be positive, sometimes it can be negative.
We always suggested don't take first quarter multiply times four because there's always the impact of true-ups and audits in there. Overall, our margin's about 40%. It's kind of where we think it'll probably stay. Growth will grow. Reverse comp's gonna grow. The net's gonna grow, again, probably mid-single digits over the next few years. We are definitely having the conversations with the networks, and I think all broadcast affiliate groups are having conversations with the networks about some of the best programming moving off. Some programming, frankly, we don't care about is also moving over to streaming and being replaced with somewhat better programming. Dancing with the Stars was definitely a source of very significant conversations with ABC by the affiliate groups.
When you talk about 5% or 6% gains in retrans, are you talking about gross and net?
Yes.
That's kind of a 2023-2024 guidance.
Mid-single digits and around that neighborhood for both gross and for net.
When does gross pick up again based on your cycle of renewals?
We have a significant 2023 renewal window. Most of that is the beginning of the year. Not all of it. Most of it is beginning of the year. It's a little more than half of our subs. 56% of our MVPD subbase is up next year. Again, most effectively January 1. I will say we tend to be conservative in our analysis, and given that we came in on the low side of guidance, I'd say we're definitely very gonna be very conservative on our guidance going forward. But that will be the next big pricing step up.
Your step up will affect 2023 since it's on January 1st.
That's correct.
For Jim, you bought the $50 million of stock in the second quarter. How many shares did you repurchase based on that price?
Just give me a second to look it up.
I'll look it up if you want to go to the next question. It's in the 10-Q, I think.
Yes, it's in the back of the queue.
Yep.
And, um, 2.3 , 2.5 . And-
Well, if you wanna go on, I'll put the number up.
What is the share count? Not average for the second quarter, but right now. 92 million.
Approximately $93 million, $93.1 million.
Right now? Okay.
Right now. Yes.
Okay. That's it. Thank you.
Just well, quick, as we said, we'll pull up, no, I'm trying to pull up the buyback.
Buyback spreadsheet for sure.
Yeah. Okay, now I got it. It was, John, 2,646,000 shares.
Okay. I would think that the share count would be lower than 93. All right. Anyway, it is what it is. I appreciate it. Thanks.
Thank you. Next, we'll move on to Alan Gould with Loop Capital.
Yeah, thanks for taking my question. Pat, just wondering, with the guidance of core down 6% for 3Q, is there any way of breaking out how much of that is sort of truly core versus how much of that is the impact of political ads?
Not really. The truth is, it's, you know, there's gonna be a ton of, you know, a ton of political displacement in Q3. At this point, it's just really difficult. It's really only something, and it's even difficult to do, you know, in retrospect. All we really can tell you is that there'll be significant political displacement.
Okay.
Thanks for
Jim, a quick question. As your leverage comes down, if it falls below 5x, does that actually lower the rate you pay on any of your debt?
No.
Okay. That's it.
The floating rate debt is better. The Term Loan B and Term Loan C are LIBOR 250, and the Term Loan D is LIBOR 300. We'll switch to SOFR or whatever. None of our pricing is not geared to leverage.
Yeah, it's Pat again. If this is helpful, I would say that, you know, in the absence of political, we think core would be up very modestly.
You think it'd be up without political?
Yeah, if we weren't getting displaced, right?
That's very interesting. Thanks, Pat.
Thank you. Next, we will move on to Craig Huber with Huber Research Partners.
Thank you. A macro question for you guys. I mean, there's been a lot of commentary on recent media company conference calls in recent days and other industries as well. Where do you guys come down on in terms of the economic impact on what you're seeing out there and hearing out there from your advertising clients out there?
I would say we're seeing some impact, but at the same time, we're doing a lot of things to counter that. In fact, in some of these categories like auto, we're actually seeing some of the auto guys come back, and that's filling in some of the gaps with General Motors, in particular, is strong. We haven't had any drastic moves in any market from an economic. I think we're holding up very well.
Okay. My second question-
I would add that, in the absence of this sort of political onslaught, I think we would be, you know, up slightly in core. You know, the vast majority of our stations, core is strong. Are there a few pockets of weakness? Yeah, we're seeing a little bit more monitoring it, but, you know, it's a very healthy market right now.
My second question, guys. Auto and sports betting, can you maybe just give us the percent change there in core ad revenue pro forma basis for the second quarter, and how that's trending in the third quarter?
Auto was about down off core, excluding political in Q2. It was actually about the same in Q1, excluding political. Q3 pacing, and I'd caution on the pacing because especially when we hit September with a lot of political, auto and political advertisers always love a strong local newscast. Auto will go to the sidelines in September to some extent, which would be very natural. In the big picture, it feels like the pace of the decline in auto in Q3 based on pacing is very much decelerated from what we've been seeing the last year or more. As I said earlier, it kinda feels like it's finally found the bottom, hopefully.
You know, can start climbing back out after you know, a multi-quarter period of decline especially because of supply chain issues.
I mean, heavy political could obscure what actually is going on there, particularly in September. You know, look, it's, you know, it looks like we've lapsed and the comps aren't quite what they were, and there is some new money coming back into the market.
The sports betting side, please.
Yeah, this is Bob. We're seeing the sports gambling. There's a lot of activity for September. You know, it's a little softer in the summer because football is the driver, plain and simple. We have a lot of activity in September, including Ohio, which just went live. We just got requests late last week for Cincinnati, Cleveland, and Toledo, and we think that's gonna be very impactful to finish out the quarter.
Also on the ATSC 3.0 rollout, can you just update us on, I don't know, the % of your households or % of your markets that you've rolled it out to or where you think you'll be at the end of this year, maybe by the end of next year?
Percent of households will be bigger than percent of markets. I think percent of our percent of homes. Well, we're in, I think, roughly 20, low 20s or high teens in terms of percent national coverage in our footprint for 3.0. In terms of number of stations, it's significantly lower 'cause we're gonna work our way through the, you know, the mid-sized markets into the smaller markets. You know, I don't have that number sitting in front of me, but I'm gonna guess it's somewhere on the order of markets, say somewhere on the order of, 15%, maybe 16% of the stations.
Okay, great. Thank you.
Thank you. Once again, that is star one if you'd like to ask a question. Next, we'll move on to Michael Kupinski with Noble Capital Markets.
Thank you. Just a quick follow-up on Craig's question. You know, NextGen was always heralded as the opportunity, a revenue opportunity for the broadcasters and as a opportunity to offset what might be maturing retransmission revenue growth. I was just wondering if models have, you know, revenue models have started to gel now, if do you guys have a path to where you might see some significant revenue contributions from NextGen. I'm just wondering, or is that still pretty much farther out into the future?
Look, I would say that, there's a ton of models out there, and there's a lot of, you know, very real conversation that, you know, has been going on for some time. Is it gonna be there? Yes. I cannot tell you exactly when. You know, I do think there'll be a data business. I think there'll be a business, particularly getting into the, you know, into the automotive space. And then there's other things you can do with that spectrum, but I think it's just gonna take a few years to develop. I know that's clearly not a ton different than the way we would have answered that question six months ago, but that for us is the reality.
Okay. That's all I have. Thank you.
Again.
Thank you. There are no further questions, so that will conclude our question and answer session. I would now like to hand your conference back over to the chairman for any additional and our closing remarks.
I just wanna take a moment to say thank you for all of us joining us for this second quarter, results, and we look forward to talking to you next quarter and at the end of the year. Thank you. Bye-bye.
Thank you. That does conclude today's teleconference. We do appreciate your participation. You may now disconnect.