All right, we're gonna get started here. Good afternoon, everybody. My name is Sid Garg. I hope ` having a good conference. I sit within investment banking. We have the distinct pleasure of speaking with Perry Sook, Founder, Chairman, and CEO of Nexstar. Perry, it's your first time at our conference. Welcome.
It is. Thank you. Thanks for having us.
Why don't we get right into it? So Nexstar sits in this very unique position within the broader media ecosystem. You're the largest local television broadcaster. You own The CW, one of the five major broadcast networks, and NewsNation, the fastest-growing cable news network in prime time in America. Tell us a bit more about Nexstar's platform and what differentiates your business.
We think within the television broadcasting business, we're kind of a unicorn, both in size and scale, much bigger than the peer group of pure play broadcasters that we often get compared to, but becoming increasingly more like the diversifieds with broadcast and cable networks. The thing that differentiates the company, we feel, is the 201 local television stations that we own or operate that reach about 72% of the United States population. That employs a 5,500-person journalism team and an 1,800-person local sales team that has business relationships with over 43,000 SMBs in that 70+% of the country. And so what we can offer that we think is unique in the entire industry is local activation at scale.
And so one of our organic growth initiatives is to build this one Nexstar sales organization that can look from the top down or the bottom up at all of the assets we have, whether it's you wanna be on regional television stations, you wanna be on a national network, you wanna be in The Hill, you wanna be in a digital vertical that we have built that we basically, our salespeople will become the concierge that can help national and local advertisers navigate through that. It's a couple of year build process from a technology and an organizational standpoint to get there, and we're in the early innings of it now, but we think it has the potential to pay big dividends in the business.
As you know, I spent 26 years putting this all together, and, and so now that we're approaching our 28th anniversary, we're looking at the highest and best use of our assets and how we can make everything work together.
Great. The future of pay-TV remains top of mind for investors. In your mind, what does the television ecosystem look like in the future, and how does broadcast fit into that value chain?
We think of local broadcast, the local TV stations, like KRON here in San Francisco or KTLA in Los Angeles or the NBC affiliate in Tampa that we own, WFLA, that these are the foundational elements of the bundle. You know, we obviously spend a lot of time with the virtual and traditional MVPD distributors of our content, and they know from their set-top box data exactly what channels people are watching. And without fail, the local broadcast stations, individually and collectively, are the highest watched, most viewed content in that bundle. And so it's the foundational element, and anyone that doesn't have broadcast stations in their bundle has an inferior value proposition to the consumer. And that's really what it's all about, is consumer adoption and absorption, which I know we're gonna talk about the sports JV later, you know.
But from our perspective, there is a core audience of folks that subscribe to the bundle because they like the ease of navigation, first and foremost. They like the fact that it's broadband at a discount, it's video at a discount, it's maybe home security or home telephony or mobile phones or whatever, and that you don't have to exit a program to change channels. You can, you know, seamless navigation, which is, I think, the selling point of the traditional bundle. So we don't think that the world changes much. I actually am of a mind that subscriber attrition will begin to moderate. We think there's a firewall of the almost 75% of adults over the age of 45 that have some sort of a pay service.
We're relatively indifferent as to what pay service you have, whether it's YouTube TV, whether you consume it through this new sports JV, if it gets off the ground, or whether you consume it through a traditional MVPD. If we're carried and paid to be a part of it, that's part of a pay-TV ecosystem, and, and we're okay with that.
Great. You've mentioned the sports JV, obviously a very topic that's getting a lot of attention. Most would agree that the, you know, there's been a significant overreaction to the news, which has now subsided. We also saw Lachlan come in at our conference, say, 5 million subs over five years. What do you think the impact of this offering is, is on Nexstar's business?
We don't think it's much of an impact. It's certainly not a game changer. You know, if it's 5 million subscribers over five years, which may or may not be considered aspirational at this point, it's. You know, again, if we decide to opt in with our ABC and Fox affiliates, as it's currently constituted, we will be paid to be a part of the service. So if they add 1 cord-never to the denominator, then it's a net positive for us. But, again, if you look at the pay-TV universe, our-
Mm-hmm
... pay-TV universe, as well as the industry's, you know, 5 million subscribers, I mean, God forbid, you're an AFC NFL fan, you can't get that in this bundle. You have to go to CBS. We're already. That, that's already established. So, it's an interesting concept. I understand why Discovery, you know, Warner Bros. Discovery would do it, because they had no other outside distribution outlet. But, you know, we, we, we think it is somewhere between benign and net positive at the end of the day.
Great. Sticking with sports, Nexstar has a diversified mix of sports programming, including the Big Four affiliate sports, CW Sports, and local sports. Can you talk a bit about the benefit of broadcast model to sports?
Sure. I'll use the Clippers as our example, because that was the first broadcast deal that we did with a professional team a few years ago, and we've just since renewed it. Steve Ballmer was not only an interesting guy to negotiate with and not the easiest guy to negotiate with, but he was interested in exposure outside of the pay-TV ecosystem, realizing that broadcast could give him the ability to reach every television household in the marketplace through free over-the-air or whatever ability to consume that the consumer has. So that was one. So he was missing, you know, more than 1/3 of the market with his existing distribution, vis-à-vis an RSN.
But I think as important to him or maybe even more important to him was the fact that we could invite Clippers players to come on our monster morning show on KTLA. They could do the weather, you know, they could talk about their favorite playlist they listen to in the locker room, to be able to humanize the athlete between what they see on the court or the playing field, involve them in our community events, involve our station in the Clippers community events. And that was a big part of the deal for the Clippers and for Steve Ballmer to agree to it. Those are the kinds of things that we can offer besides just a pre-game telecast and a post-game show.
Great. You've obviously seen a lot of changes to the sports rights landscape. Big tech has come in. How do you—obviously, the NBA rights is gonna be a big focus for a lot of people. How do you envision kind of where does the sports rights heading, and how does Nexstar play into that?
Well, we'll continue to look at these local opportunities, which I think, you know, every team is owned by a different family-controlled entity, and everyone's goals may not be the same. So we think that we will be able to do this as an adjunct and an add-on in several markets. I'm not sure that it's scalable, you know, this local sports endeavor. But I think, you know, as it relates to the CW, you know, we started with LIV Golf because that was what was available at the time. We've added NASCAR, the Xfinity Series, we've added ACC football and basketball. We're in the advanced discussions with another Power Five college conference about a slate of games we might be able to add.
We've now got WWE NXT, which will come to the program schedule in the fall on Tuesday nights. And so we have a variety of sports across the network, and we don't think we're done yet in kind of filling that in. Not only does that create another day part for our salespeople to sell, and our stations to sell, which are the primary beneficiary of this additional advertising opportunities, but it allows us then to have reverse compensation discussions with the affiliates and owned and operated stations, that we're bringing you more value, therefore, we need to share in that value. And that's kind of how... That will be one of the primary drivers of getting The CW to profitability over time.
That's great. Turning to the business, in 2023, you successfully completed all of your distribution agreements, representing more than 40% of your subscriber base. Your 2024 distribution revenue growth guidance is believed to be among the strongest in broadcast. Why, why do you think Nexstar continues to perform on distribution? How should we think of rate increases going forward?
Well, I think that, I would first and foremost compliment our distribution team, who I think is the best in the industry at really working to maximize not only our distribution, but the value that that distribution brings to our counterparties. So I would start first and foremost there. The fact that I'm involved in those negotiations, particularly the large ones, and particularly at the principal to principal level, you know, I hope I'm not, you know, screwing it up for them, but I'm, you know, I'm trying to be helpful and additive. And I think you get what you negotiate, and there's no question that as it relates to the local stations, which are the primary driver of our distribution revenue, scale really does matter.
When you're bringing 117 different DMAs or television markets and over 200 television stations to the table in a potential negotiation, you know, it's hard to live without that. You know, one or two stations across a few markets, you could probably live without that as a distributor, but when you're talking, you know, 200 stations or, or a subset thereof in your footprint, I mean, it's. We're generally a meaningful counterparty to the distributors. And I think all of those factors go into our ability to outperform the general industry.
As you, as you think about the two inputs that obviously just determine your distribution revenues, the MVPD rates and the subs, what are the trends that you're seeing across both?
Well, you know, the guidance that we offered obviously showed, you know, high single-digit growth on the revenue side and, moderating to declining, growth on the expense side. That's how a single-digit revenue turns into a, you know, a, a low teens, net, increase in contribution. So, you've got to-- and again, you get what you negotiate. So I think it's not only being aggressive on the revenue side, but being aggressive in reducing your expenses. And our thesis there is, you know, to those that we pay for content, we pay you for the right to air the program. We also pay you for exclusivity, and to the extent that our exclusivity is less and less exclusive, if you will, then the content is inherently less valuable to us, and, over time, we will pay you less.
And so they're all marketplace-based negotiations. None of them are easy, but we're increasingly making that point, and I think the numbers would prove that out.
Great. Let's talk about political. With the upcoming presidential election, it should be a strong year for Nexstar. What are your expectations for political advertising in 2024?
I think the guidance that we gave on our call was that the, the total dollars would be greater than both 2022 and 2020. And if you look at where Nexstar performs vis-à-vis its footprint in the country, if you look at the amount of revenue that all of broadcast, television broadcast generates collectively from political advertising, our company alone tends to take somewhere between a low- to mid-teens percentage of that revenue. And again, we report net, the industry reports gross, so you have to take the 15% agency commission out. But all of that, boil all of it off, and it should be an increase over both 2022 and 2020.
On the advertising side, you know, it seems that the television advertising market remains under pressure, although we're starting to see some constructive commentary. What do you think is... maybe break down the local versus national trends that you're seeing? And it seems like national, there's more pressure. Maybe break down why is national under more pressure.
Well, I think that if you, if you say that, national—you know, that a recession starts at, you know, a 20% decline, then national advertising, just generally, was in recessionary levels, certainly in the back half of 2023. Now, I was just in New York, Monday and Tuesday of this week, and both our national network sales organization and our national station spot sales organization are writing up their numbers for the first quarter. So, I would encourage everybody not to get too irrationally exuberant about that. It just means we suck less than we had forecast we were going to. But the arrows are headed in the right direction, and that may be an initial positive sign that both the national spot and the scatter market are gonna perform, marginally better than expectations.
On the local side, what categories are you seeing relative strength versus others?
You know, we haven't. We don't. We're far enough into the quarter, but we don't have enough data yet 'cause we only have January closed in the books and business on books at this point, so it's a small sample size. So, I would just say that it's overall. You have to remember that advertising is cyclical and tied to the economy, and so we're seeing increasing spending incrementally across a lot of categories. It's not like sports betting is driving it or sports betting is driving it down because it's not there. We saw that in 2023. But I would say it's more of a broad-based incremental spending above expectations in more categories than not.
Let's talk about CW. You continue to make meaningful progress on your strategy for CW. We touched earlier on sports, but looking at the overall business for CW, what gives you confidence that you're on the right path for your overall programming strategy, as well as where are you kind of on the profitability status for CW?
We're encouraged at the early returns and the result of our work. Obviously, we've been able to take costs out of the system. You know, there was year-over-year a better than $90 million improvement in negative EBITDA, and, you know, that was 2023 versus 2022. And if I look at the 2024 plan versus 2023, continued improvements may be even slightly better than that. So, and for those of us who read the financial statements from the bottom up... And, and so that is, you know, we, we, we have reduced programming costs by altering the mix of programming, less scripted, more unscripted, some reality shows. We now have a crime show using NewsNation source material, so kind of playing the Moneyball game there, if you will.
We still have scripted shows, but fewer of them, and then we've been able to make some pretty good deals for co-productions and even an off-network deal or two, to broaden the appeal of the network, but then also to change up the mix of the programming, which has allowed us to bring the programming costs down.
Great. NewsNation remains the fastest growing cable news network in prime time. I don't think anybody expected, you know, the network to be able to secure the RNC presidential primary debate. What do you think is a long-term opportunity for NewsNation?
Well, we will be. We're currently at 24/5, so Monday through Friday, 24 hours a day is news programming. There is no more syndication or reruns on the network. We will be at 24/7 operation, even a couple of months ahead of schedule this year, early third quarter, as opposed to late third or early fourth quarter. Those are all very positive signs. We've been able to hire well, build out our infrastructure in New York, D.C., and maintain our infrastructure in Chicago, and I'm very pleased with the work we're doing. I agree with you, getting a debate literally 3 years into our existence against competitors that have been around for 40 or 75 years, gave us a seat at the table. I think we acquitted ourselves well.
When the articles you read about the debate in the morning complimented the moderators, as opposed to ridiculed them, I thought that our preparation was spot on, and I thought our execution was very, very good. So that was a feather in the cap of the network. And we continue to, you know, there are nights when we have beaten our competitors, whether it's MS, and when there's even nights when we've beaten Fox News, you know, for an hour in prime time. And it doesn't happen every night or every week, but when it does happen, we make sure that everybody knows about it internally and externally, because it's a point of pride that we're able to see that. So it's our distribution is excellent.
We now reach more pay-TV households than MSNBC, and that's happened again in less than four years. Now it's all about building awareness, continuing to make sure the product is reliable, dependable, and something that people can talk about. We just launched The Hill Sunday, so it looks just like a Meet the Press or Face the Nation on the other networks. Now we have our own hour-long Washington Insider show that launched this past weekend with Chris Stirewalt as the host, and we wanted to get that on the air early so that we could be in place for the remainder of the political season. Now, we're going to offer that to the CW affiliates, many of which don't have any national political show that they can air.
And, and so 65% of the country is already cleared for airing this show on Sundays on The CW, and, and we just started that effort. So again, you look at the synergy and how we lay one piece on the other that lays on the other, and that's, you know, that's a good example of it.
Great. ATSC 3.0, I think a lot of people know the term, but few understand what it means for the business. What are some of the potential use cases, and how far along are you in developing these opportunities?
Spent a fair amount of time on this while I was in New York earlier this week, and we're involved in two different development efforts, one with Sinclair, the other one with Scripps. I would say that the three areas of emphasis right now are around streaming video offload, the connected car navigation and you know even updates to software systems. Then the other is in the area of enhanced GPS. I can go into each of those in greater detail, but it might quickly people's eyes might glaze over. The enhanced GPS is if think of vehicles, drones, anything. You know, we can autocorrect a satellite GPS using our terrestrial system down to a few you know less than a meter.
So that's the difference maybe between the drone dropping the package at the right house or the house next door. In terms of the video streaming offloading, we have plenty of interest and demand for that, from everything from studios to Amazon, believe it or not. And then as it relates to our third use case, which is... Did I mention distributed power? That's another area that we're looking at as well. But the third use case was what? I just spoke about it. Enhanced GPS.
Power.
Data offload. The other thing that we're involved in is an effort that could prove with the government on a backup GPS system that, you know, the United States has no backup GPS system. Russia does. China does. They're all satellite-based. This would be a terrestrial-based. You think GPS is so pervasive in our lives, it controls the timestamp on your receipt from the gas pump, it controls the ATM machines, controls power distribution. So all of these things are controlled by GPS, and we have no backup plan in the United States.
So the Department of Defense, the Department of Transportation have both said it's in our national interest to do this, and we think that our industry can provide that service with our 3.0 signal and be another opportunity to create value with our spectrum, but also create a public service with our spectrum as well.
And Perry, how should investors value this ATSC? Like, is there a framework that you would guide them to say: Okay, yes, there's a lot of use cases, there's a lot of innovation coming?
But it's gonna take a while to, you know... We expect that we, Nexstar and one of our partners, will sign a commercial contract with a company, you know, for some proof of concept this year. It won't be game-changing dollars, but it will be the first interest in that. And we get a lot of interest from the OEMs. That's the other case that I was speaking of, is that the 80% of software updates that OEMs send to cars fail, and it's because it's satellite-based, and so if your car is in the garage or under a tree, you don't get the update. If we send it terrestrial, it's just the same as your radio working in the parking garage, but your satellite radio not.
So, there's a great deal of interest from OEMs on this, and in, in addition to in-car entertainment, but just providing the mundane, you know, business of software updates and things like that. So it's—this is a lot like having mineral rights that you haven't figured out yet how to monetize. I think it's a zero call option on an asset of the company that has yet to be monetized, so probably it's appropriately priced today. But I think that once the first commercial customers are signed, a market will form fairly quickly. Interestingly enough, between Scripps and ourselves, we have an unduplicated spectrum reach of 92% of the United States. So, that's almost a national business just with our two companies.
So, I think you'll see us, hopefully with either Sinclair or Scripps or both, be in a leadership role here. I think the rest of the industry, if they realize that there's, you know, money in the ground, is going to move very quickly to not only convert but embrace these use cases.
Okay. One of the characteristics of your business is your strong free cash flow generation. Can you speak to the capital allocation strategy for the company? You've obviously returned a ton of capital. What does target leverage look like? Where is obviously room for potential M&A in the future?
Well, it, our capital allocation strategy, and Lee Ann and I talk about it literally, if not every day, at least once or twice every week. But, buying back our stock is virtually an embedded almost 20%, return, right, on that investment. So any acquisition we make has got to beat that on a risk-adjusted basis by a substantial margin. So we're not going to do an acquisition that has a 22% return if we're getting 18% by buying back our stock. It's going to be substantially above that to compensate for the risk. So, but that's been the case. It was before we bought Media General, before we bought Tribune, that we're, you know, 40% and 50% accretive to our shareholders.
Absent those compelling M&A opportunities, you know, we'll return capital to shareholders, which, you know, in the last two years, it's been in excess of, you know, $900 million per annum has gone back to our shareholders, and we bought back a substantial, just a little less than 10% of our float in each of the last two years. So, you know, it will continue in dividends, buybacks. There'll be some debt repayment because debt is not virtually free anymore. And so from an EBITDA basis, if you're valuing the company based on EBITDA, we're, you know, it's worthwhile to pay down debt.
We have no desire, nor do we think we get rewarded necessarily for being an investment-grade credit, but our leverage will, you know, tick down to a number less than 3 x in 2024 because of the increase in EBITDA due to the political year and the reset of our distribution agreement. So it's something that we actively manage, and Lee Ann actively manages on a daily basis, and we talk about it all the time. But I think that absent a compelling M&A opportunity, the capital return will continue to shareholders.
Great. Given your consistent ability to execute and generate free cash flow and the expected stability and even growth in the net distribution revenue as you've guided, what do you think is the catalyst for the sector to get rerated upward?
Historically, it's been around regulatory reform. You know, I took the company public in 2003 at 12.5 x EBITDA because of the prospect of reregulation coming in. I believe it was 107th or 108th Congress and being seated in 2004. We never got as much under a Republican administration, and it was never as bad under a Democratic administration as everybody feared. But the other thing I would say is, and we think the day is coming, that if we begin to see a moderation in the sub-attrition or sub-declines in the pay-TV traditional pay-TV universe, we think that could be a catalyst for the stock.
Because we believe that that will ultimately level out, and we're seeing early signs that that may be starting to happen. But I think if that does happen, I think you could see a substantial rerating upward, because right now, everyone's got the sector rated as a fast-melting ice cube. And it assumes basically in five years, everything goes to zero. We don't believe that happens even in a worst-case scenario. So I think if we have proof of that, I think you could see a substantial increase in investor confidence in the sector.
Great. I want to open it up if any folks in the audience have any questions.
Thanks, Perry. How would you suggest we think about retransmission revenue growth for the company over the longer term? Obviously, subscriber trends are out of your control. You just talked about the, you know, optimism that maybe the pace of erosion moderates. But when you think about the revenue you can extract out of the MVPDs relative to what you're sharing with your network partners longer term, how do you think about the growth for that overall cash flow?
Sure. There's two elements to that. Obviously, the revenue piece of it, which has got two components. It is the unit rate times number of units, and, the, the things that affect that obviously, are being able to increase the rate, which we have, and we think we still have runway to do, and then, you know, what's the level of attrition? But if you look at the guidance we offered, it was for kind of high single-digit growth, mid- to high single-digit growth in the gross revenue, and then a teens growth in the, in the net, retrans contribution, which would mean that we also think that the expenses will continue to moderate, if not begin to decline. And again, it goes back to what I said earlier.
If we're paying for exclusivity and the programming we're getting is less and less exclusive, it's inherently less and less valuable to us as time goes on. If you look at the broadcast television stations, the locals, if you will, and the percent viewing into the bundle, which approaches 35% of all aggregate viewing, goes to all local stations in the aggregate, and then look at what we get in terms of dollar proceeds from the bundle, there's still a substantial inequity, and we think that we can get to fair value before this turns. And I think in, you know, it becomes a big honking annuity at some point and not a growth vehicle, but we're still in the growth phase, and we think that's for probably another four to six years before we get to kind of parity. Excuse me.
Just one follow-up. You know, we've, Alphabet, who's, I think, presenting soon, disclosed a pretty significant YouTube TV number, I think 8.5 million at the end of last year, so they're growing rapidly. How does the growth in the vMVPDs between YouTube and Hulu and the other, you know, sort of odds and ends, impact your economics, if at all, in terms of the- with what's, what you're pulling out of each household?
Well, you know, as I said, you know, if they're in a pay-TV ecosystem, we're kind of somewhat indifferent as to how they pay us, just as long as we do get paid. And you're right, YouTube TV, if classified as a traditional MVPD, would now be the third largest. It just, you know, jumped DIRECTV and jumped Dish earlier last year. But they're not considered that, so we, you know, other than for our CW affiliates, we can't negotiate with them directly for the terms of our carriage of our station assets as well as the other assets we have. So inequity in the rules that we need to try and address in Washington.
But, again, those, those agreements get reset all the time, and so, you know, if we just reprice a bunch of traditional MVPDs, then that rate will probably be higher than the virtuals. And then when it's their turn in the cycle, I mean, they continue to be dynamic in terms of the pricing and relative value of one to the other. And I continue to believe that, they'll ultimately kind of converge around the same kinds of numbers over time as those industries mature, you know, to the same point.
Thank you.
Anybody else? Okay. Well, great. Thank you, Perry, for the time, and hope to see you next year.
All right, thank you for having us. Appreciate it.
Great.
Thank you.
Thank you.