Nexstar Media Group, Inc. Q3 FY2022 Earnings Call

Good day and welcome to the Nexstar Media Group Third Quarter 2022 Results Conference Call. Today's call is being recorded. Now, I would like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead.

Thank you, Jake, and Happy Election Day 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 the call. For additional details on these risks and uncertainties, please see Nexstar's annual report on Form 10-K for the year ended December 31st, 2021, 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 Chairman and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joe, and good morning everyone. We appreciate you joining us this morning on this election day to discuss Nexstar's record third quarter financial results. With me on the call today are Tom Carter, our President and Chief Operating Officer; and Lee Ann Gliha, our CFO. I'll start with a summary of recent highlights and developments, followed by Tom's operational review as well as Lee Ann's financial review, then we'll get to your questions. Nexstar delivered another period of outstanding financial results and shareholder returns, including all-time high third quarter net revenue, adjusted EBITDA, and free cash flow. Our record top and bottom-line performance was led by strong year-over-year growth in political advertising, distribution, and digital revenue. Our ability to deliver record results and excellent shareholder returns quarter-over-quarter and year-after-year underscore the benefits of scale, the strength and resiliency of our operating model, and our ability to consistently generate substantial levels of free cash flow. In the first nine months, and in the third quarter of 2022, we returned $730 million and $250 million, respectively, to shareholders through share repurchases and dividends. The nine-month shareholder return represents a 48% increase over last year and approximately 68% of our free cash flow. As today's election day, we have pretty clear visibility into our 2022 political revenue, excluding the impact of any potential runoff elections. I'm pleased to announce that we booked total net political revenue for the fourth quarter of $260 million, which equates to $500 million net for the year as of today, and that represents 103% of our election year 2020 as of election day. 2022 has not only been a record midterm election year for our political advertising, but it is nearing an overall record for our political advertising including presidential election years. Once again local television remains the medium of choice for candidates to reach local voters at scale. And candidates are not alone in using broadcast, as I'll talk about in a minute. Sports organizations like the NFL and team owners like Steve Ballmer, content creators, and local advertisers all see the power and the broad reach of the local television broadcast audience, something Nexstar is uniquely positioned to offer at scale across the country. As part of our earnings call today, I'll cover three areas that have been top of mind for investors. First, I'll discuss the impact of the economic environment and how Nexstar's business is positioned well to offset these challenges. Second, I'll provide an update on our distribution renewals and why we continue to be confident about our ability to grow this revenue stream. And third, I'll briefly touch on the longer-term growth drivers of our business, including our recent acquisition of the CW and why Nexstar remains one of the best-positioned media companies to succeed in today's marketplace. Our business has several distinct competitive advantages that will enable us to continue delivering the financial performance, cash flows, and shareholder returns investors have come to expect from Nexstar. We have a highly diversified revenue model. For several years, over 50% of our total net revenue has been derived from distribution revenue. This contractual and recurring revenue source has historically been resistant to periods of economic downturn. And with less than one-third of our third quarter revenue coming from core television and advertising, we are less dependent on advertising revenue than we ever have been before. Our audiences are valuable. Today broadcast television remains the only place for content creators, sports organizations, team owners, and most importantly, advertisers to access local audiences at scale. We have developed these audiences over decades by consistently providing top-rated local news, sports, and entertainment content. A great example of the power of broadcast is NFL Thursday Night Football, where we can see what audiences prefer, Amazon Prime or local broadcast. We pull the data from Nielsen for the first seven games and it shows that when NFL viewers have a choice of watching the game on Amazon Prime or watching on their local broadcast station, on average 73% of the NFL viewers are choosing to watch Thursday's games on their local broadcast station. This comes as no surprise to us. Local audiences prefer to watch via a station they have a relationship with, with shoulder and ancillary programming that resonates and via a technology that has no delay and provides seamless delivery. The attractiveness of our platform is further demonstrated by our new agreement with former Microsoft CEO and LA Clippers owner, Steve Ballmer, who is bringing the LA Clippers back to broadcast television to help reach audiences that the Clippers are currently not able to reach. Our number one LA station, KTLA, along with a number of our other California-based stations, will air 15 NBA games of the Clippers exclusively over the air this season. We have built an unparalleled competitive moat around our economically resilient local advertising business. Over the last 2.5 decades, we've developed a team of more than 1,500 local sellers and our stations have cultivated over 40,000 SMB and advertiser relationships in the 116 local markets we serve, reaching over 68% of America. On the local level, there is no one in the TV industry with greater sales resources and consumer reach than Nexstar. This isn't something the larger AVOD or streaming companies can easily replicate as it requires both local scale and meaningful investment. While some pure-play streaming companies are now embarking on an effort to replicate our business model, ours has proven consistent and continues to deliver today the results only a platform of our scale and efficiency can deliver. As I previously mentioned, we are a significant beneficiary of record-setting political television ad spend, which is not dependent on the economy. Look at the last two election cycles, and advertising revenues accounted for approximately 10% of our total net revenue on average. Our focused approach to optimizing political advertising opportunity and our scaled presence in our markets representing over 80% of contested races gives Nexstar a distinct competitive advantage in capturing leading shares of our spending. Third quarter political revenue increased 49% on a quarterly sequential basis and was up approximately 28% over pro forma Q3 of 2018. As I mentioned earlier, we are on track to deliver record midterm election year revenue in Q4. We have an efficient operating model, and we pay close attention to operating expenses and our balance sheet, with only 3.2 times net leverage is in great shape. Taken together, these factors continue to set Nexstar apart from others in the media industry and other industries, and will enable us to offset any near-term challenges while extending our strong long-term record of growth and shareholder value creation. Turning now to our distribution agreement renewals. We recently reached a comprehensive multiyear distribution agreement with Verizon FiOS to carry Nexstar local television stations in 10 markets and Nexstar's fast-growing national cable news network, NewsNation, in all Verizon markets. We remain in active negotiations with the remainder of our distribution partners, with now slightly less than half of our total subscribers up for renewal before year-end. While we did experience a slight uptick in the subscriber attrition rate in the third quarter, we continue to be confident in our ability to grow our distribution revenues, even in the face of MVPD subscriber attrition, given the continued disparity between the percentage fees the broadcasters get paid versus the continuation of our stations' total viewership, and the fact that we also get paid when a consumer moves to a virtual MVPD service. Moreover, our recent research report found that 66% of TV households and 73% of adults aged 45 or older, representing more than half of the adult population, have a pay TV service, providing us with an excellent base of entrenched consumers. Before I hand the call over to Tom, I want to briefly touch on three organic growth prospects that we believe can lead to material value creation for Nexstar shareholders over the long term, including NewsNation, the CW Network, and ATSC 3.0. Starting with NewsNation, we continue to make progress building up the nation's only unbiased national news network. NewsNation now offers 17 hours of news programming per day and remains the fastest-growing cable news network in the most-watched genre of cable television by appealing to the majority of the population looking for an unbiased source for news. According to a recent poll, over 40% of GenX and over 50% of millennials and Gen Z view themselves as independent politically, and Nexstar is building a profitable and differentiated national news network to serve those audiences. We will be a 24/5 news network in Q2 of next year, and we anticipate being a 24/7 cable news network by the end of 2024. We continue to enjoy valuable content synergies between NewsNation, our local stations, and The Hill. In the months running up to the election, several of our local TV stations hosted the only televised debates for key US Senate races in Ohio, Georgia, and Pennsylvania, and governor races in Texas and Illinois. We leveraged this exclusive content on NewsNation to drive increased ratings and awareness for the network. Nexstar Digital also launched the Hill Fast Channel, building on The Hill's success as an essential agenda-setting read for lawmakers, policymakers, and influential digital consumers from Capitol Hill to Main Street. Moving on to the CW, on September 30, Nexstar closed its previously announced acquisition of a 75% ownership interest in The CW Network. This transaction is expected to create value for Nexstar shareholders by solidifying the company's revenue opportunities as the largest CW affiliate group, diversifying our content outside of news, and establishing Nexstar as a participant in the advertising video-on-demand services via the CW app. Operationally, we're off to an excellent start. We appointed Dennis Miller to President of the network. As many of you know, prior to his appointment, Dennis served on the Nexstar Board for eight years and he's a seasoned television executive with a long-term record of success in our industry. He knows Nexstar and how we run our businesses, and we are confident in his ability and focus to improve the CW ratings, revenue, and profitability. The CW is also continuing to make personnel appointments that will support our vision and goal for reimagining the CW with a focus on entertaining and profitable programming, both on air and through the CW app. We also continue to make progress on the rollout of ATSC 3.0, and we are accelerating our discussions with potential technology and business partners for this service. We continue to believe that the revenue opportunity for applications and services using our spectrum could rival our retransmission revenues by the end of this decade. In summary, Nexstar's consistently strong results and free cash flow generation remain one of our most powerful differentiators from our peers and other diversified media companies. We feel very good about our year-to-date results and what we see for the balance of the year. Our resilient local advertising business, our ability to continue to grow distribution revenues, and a stellar political advertising year has enabled us to achieve our 2022 objectives despite market headwinds, the absence of Olympics in the quarter versus last year, and an increasing interest rate environment. Simply put, we are pacing to over-deliver on our 2022 free cash flow estimates that are embedded in our 2022 and 2023 guidance. We expect the fourth quarter to benefit from the continuation of strong political advertising trends, which we discussed earlier, while 2023 will see distribution revenue upside from renewals of agreements representing more than half of our subscribers. Looking forward, we expect 2024 to benefit from another record year for political advertising due to the presidential election, combined with the benefit of another wave of 2023 distribution agreement renewals for approximately 40% of our subscribers. With that, let me turn the call over to Tom Carter for our operational review. Tom?

Thanks, Perry, and good morning everyone. We generated another quarter of strong operating performance with all-time high record third quarter net revenue of $1.27 billion, reflecting strong year-over-year increases in total advertising revenue, distribution, and digital revenues. Total television advertising revenue growth of 18.8% was driven by record third quarter political advertising revenue, which more than offset declines in core advertising, as we, like other media companies, saw. Our 7.6% year-over-year core television advertising revenue decline was primarily driven by double-digit rates of decline in national spot advertising, which represents approximately 30% of our core TV ad revenues. The absence of Olympic and political inventory displacement also affected the quarter. Mitigating the impact of the national advertising market was our local television advertising revenue, which represents approximately 70% of our core television ad revenues. Local television advertising declined just 2% year-over-year, despite significant inventory allocations towards political during the quarter. This is in line with the historical trend, with local advertisers maintaining more consistent levels of advertising spending throughout economic cycles. In total, about half of our categories increased versus the prior year quarter, including our top-performing categories of drug stores/medication, automotive, home repair, manufacturing, attorneys, and entertainment. We're extremely pleased to see automotive, our largest advertising category in terms of dollars spent, return to growth in the quarter, increasing at a mid-single-digit percentage over Q3 of 2021. In addition, Nexstar's local sales initiatives continue to deliver healthy levels of new business and our sales teams generated new local television advertising and center program revenues of $36.1 million for the quarter, which was up 4% over the prior year. The key categories responsible for core advertising revenue decline were sports betting and gambling, which I'll talk more about in a minute, government services due to the marketing funds related to COVID-19 running out, insurance, direct response, and medical healthcare. The sports betting and gaming category declined by a mid-single-digit millions of dollars year-over-year due to fewer state launches in the quarter, a general movement by larger sports betting operators of their advertising dollars to the national market and reduced spending in more established markets. Most impactful for the quarter, however, was the redirection by sports-betting and gaming companies of television advertising dollars to voter propositions to legalize online sports gambling in California. If we include the political advertising dollars Nexstar received related to those propositions, our sports betting and gambling category would have been up. We remain cautiously optimistic about this category as states continue to legalize online sports betting. Ohio, which is a large state for us, comes online in January of 2023. Kansas came online in September of this year, and Massachusetts is expected in 2023 as well. Third quarter political advertising of $129.3 million was approximately 28% ahead of pro forma 2018 Q3 levels. Nexstar benefited from strong spending around key races and primary elections for Senate seats in Nevada, Ohio, and Pennsylvania and governor races in Illinois, Texas, Oregon, Rhode Island, Pennsylvania, New Mexico, Ohio, and Nevada. As a percentage of total political advertising, PAC issue spending accounted for 59% of revenue and candidate spending represented 41% of revenue. Record third quarter distribution revenue rose 3.7% from the prior year quarter to approximately $642 million, reflecting distribution agreement renewals in 2021 on improved terms and annual rate escalators more than offsetting subscriber attrition. While we did experience a marginally faster rate of subscriber attrition during the quarter, year-over-year subscriber growth, and our retransmission fees in virtual MVPDs and other direct-to-consumer services continue to offset MVPD decline. We also continue to have good visibility into our net distribution economics, with only our ABC affiliate up at the end of this year. With approximately half of our subscribers renewing in the fourth quarter, we continue to expect a higher growth rate from this revenue source in 2023. But taking a step back for a moment, I wanted to provide some color on how our investors should think about our distribution revenues more generally. Nexstar generates distribution revenues from linear MVPDs like Comcast and Charter, virtual MVPDs like YouTube TV and Hulu, and other direct-to-consumer platforms like Paramount Plus and Peacock. For our linear MVPD relationships, Nexstar negotiates these contracts directly to the MVPDs for carriage. This is where our scale really comes into play and matters. We are by far the largest local broadcaster and typically the number one or number two affiliate in the broadcast networks, and our stations generated a significant portion of the viewership for the MVPD services. We negotiate these contracts with the MVPDs typically once every three years. At the time of the contract renewal, we have historically seen a significant step-up in rates owing to the relatively higher percentage of viewership our content delivers compared to the relatively low share of fees paid to us by the MVPDs versus other content owners. We also typically have annual escalators in these contracts, so you will see year-over-year increases in distribution revenues, especially in years like 2023 when we have renegotiated distribution contracts with more than half of our subscribers by the end of this year. Separately, we negotiated agreements with networks to pay them affiliate fees that return a portion of the linear distribution revenues to them. With respect to the virtual MVPDs, the broadcast networks including the CW, which we now control, negotiate carriage. So Nexstar has paid a distribution fee that is net of the implied affiliation fee. On an apples-to-apples basis for our big four affiliates, the net subscriber rates we received from the virtual MVPDs are about the same as the net revenue per subscriber rates after affiliation fees we generate from our linear MVPD relationships. Given our renewal cycle, we have just over half of our subscribers renewing in 2022, which will drive distribution revenue growth even with subscriber attrition in 2023. This growth will continue into 2024 as we'll be renewing approximately 40% of our subscribers at the end of 2023. So we feel good about our growth in this line item for the next two years and beyond. Now moving back to the rest of our revenue line items. Q3 digital revenue increased 5.7% year-over-year to approximately $86 million. This increase was driven by strong year-over-year growth in our local digital advertising revenue and agency services business, and a full quarter contribution from The Hill. Our top line growth and continued expense management drove record third quarter adjusted EBITDA of $489 million and free cash flow of $294 million. Nexstar generated 39% adjusted EBITDA margins and we have converted approximately 60% of adjusted EBITDA to free cash flow. While we're executing well on our business, we continue to take a leadership role in supporting communities where we operate. Our journalism front has also been recognized; Nexstar Media Inc. stations earned a Sigma Delta Chi Award from the Society of Professional Journalists and four National Edward R. Murrow Awards from the Radio Television Digital News Association, including recognition for Excellence in Innovation, Breaking News Coverage, Digital, and Podcast. Every day our newsroom produced fact-based and unbiased content, and Nexstar's high standards of journalistic integrity enable us to develop and maintain trusted relationships with our audiences and our communities. In summary, our results reflect continued strong performance across key near-term growth areas, including distribution, political advertising, new local direct advertising, and digital, with even more opportunities to drive growth ahead of us. And while we cannot control how the economic situation evolves in the coming months, we have a well-established playbook with very clear actions we can take to preserve our cash flows and drive continued progress against our long-term growth strategy. Looking ahead, we remain focused on what we can control, maximizing our growth opportunities, maintaining our capital structure, serving our customers and communities, and delivering results for our shareholders. With that, it's my pleasure to turn the call over to Lee Ann for the remainder of the financial review and update. Lee Ann?

Thank you, Tom, and good morning everyone. We have continued to build on our progress in Q3, executing on our strategy, delivering record results, and returning significant capital to shareholders. Bob and Perry gave you most of the details on the revenue side, so I will jump to the expenses followed by some points of guidance on Nexstar's business and The CW Network. Together, third quarter direct operating and SG&A expenses increased by $28 million, or 4%, primarily as a result of higher variable costs related to higher revenues, increased programming, and other costs related to the move of NewsNation from syndicated programming to news programming, which is offset in our adjusted EBITDA calculation from reduced programming payments related to syndicated content, as well as a full quarter of expenses from The Hill. As a percentage of net revenues, our total expenses declined, given our focus on controlling expense growth and significant political revenue growth. Our corporate expense was approximately $52.5 million, including non-cash compensation of approximately $17.2 million, which grew due in part to new grants associated with the CEO's new contract and approximately $2.4 million of one-time expenses associated primarily with the acquisition of the CW and various corporate development activity. Third quarter CapEx was approximately $36.7 million. Again, CapEx was lower than expected, primarily due to delays in receiving equipment due to supply chain disruption. Third quarter total interest expense increased to approximately $89 million, lower than expected, as interest rates did not increase as much as the forward curve predicted at the time of our last earnings call. Cash interest expense was approximately $86 million compared to $67 million last year, due primarily to increasing interest rates offset in part by debt repayments and lower spreads on a portion of our debt from our refinancing in Q2. Third quarter operating cash taxes were $90.5 million. We recorded $11 million in distributions from equity investments related to our 31% ownership in TV Food Network in the third quarter, which represents a 29% decrease over the prior year quarter. These interim distributions are primarily for tax payments and are due to lower operating income this year versus last year. Looking ahead, excluding the impact of the CW, we project corporate overhead, exclusive of stock compensation and transaction costs, to be approximately $32 million in the fourth quarter, and we expect corporate overhead around $130 million for the year. Non-cash compensation is expected to be approximately $18 million for the fourth quarter and in the $62 million area for the full year, but will vary based on stock price and actual grants. For cash taxes, we used a 26.5% tax rate when calculating our estimated tax before one-time and other adjustments. We now expect that cash taxes will be around $336 million for the year before any tax benefit from losses attributable to the CW, given current expectations for the business. We are currently projecting cash CapEx of more than $51 million for the fourth quarter to get to our target of $150 million for the year. As equipment has been delayed due to supply chain issues, CapEx spend has been pushed into the fourth quarter. As a reminder, we typically spend more CapEx in even-numbered political years than in non-political years. We expect Nexstar's cash interest expense to approximate $103 million for the fourth quarter and $326 million for the full year, reflecting a continued increasing interest rate environment, net of our recent refinancing and expectations for debt repayment. Turning to the balance sheet, Nexstar's outstanding debt as of September 30, 2020 was $7.18 billion. Total net debt amounted to approximately $7 billion at quarter end, down from $7.2 billion as of December 31, 2021. Net debt for first lien covenant purposes is $4.2 billion. Our first lien covenant ratio at September 30, 2022, was 1.92 times, which is well below our first lien and only covenant of 4.25 times. Our total net leverage at quarter end was 3.18 times, down from 3.7 times at December 31, 2021, and 3.32 times in Q2. Also expected to positively impact our fourth quarter is the anticipated sale of one of our remaining real estate properties in Chicago for net cash proceeds of approximately $155 million. The transaction is expected to close later this month. We expect leverage to further decline by the end of 2022, due to a combination of allocating a portion of our free cash flow to reduce indebtedness, primarily from mandatory amortization payments and increasing EBITDA given our outlook for the year. As a reminder, the CW will be designated as an unrestricted subsidiary under our debt agreement and therefore will have no impact on our leverage ratio. The financial results of the CW will be consolidated with Nexstar's results in accordance with GAAP. We also intend to provide investors with supplemental financial presentations, including non-GAAP measures for net revenue, adjusted EBITDA, and free cash flow that reflect: one, Nexstar's operations excluding the CW, and two, the CW operations on a standalone basis. So going forward with respect to our guidance, we expect to continue to report free cash flow guidance for the business excluding the investment in the CW, which I said will be separately reported until we bring it back in. In particular, keeping in mind related to our Q4 and overall financial outlook. As we stated on our August investor call, based on our plans, we believe we can bring the CW to profitability by 2025 and we expect to invest a low nine-figure amount over this three-year period as we implement our plan. Given the network's existing programming commitments for the 2022-2023 broadcast season, the majority of these losses will be weighted towards the fourth quarter of 2022 and in each quarter of 2023. Since there was no upfront consideration for us to acquire the network, we view this amount as a proxy for purchase price or an investment made over time, rather than as an ongoing drag on cash flow. We anticipate the CW will generate revenue of just under $70 million in the fourth quarter with a comparable negative amount of adjusted EBITDA. In addition, as you have seen in the media, we are executing on our synergies and getting the right people in place there. So there will be an incremental low eight-figure amount of restructuring charges related to the CW in the quarter. Nexstar has an attributable interest of 75% in these figures and will be able to offset a portion of the losses against taxes payable at Nexstar. As we move into a more uncertain economic environment, we will reap the benefits of our disciplined financial management. We continue to focus on the DNA of Nexstar, that is free cash flow generation, and we are confident in our ability to navigate proficiently through whatever market conditions appear. At this time, we remain well-positioned to deliver strong growth in 2022 and continue to generate returns for our shareholders in the future. That concludes the financial review for the call. Operator, please open the line for questions.

And we will begin with Dan Kurnos from The Benchmark Company.

Great. Thanks. Good morning. Three, if I can, I'll keep them quick. We'll start with the easy one. You guys are the only broadcaster to report above guide on political. We had heard from everyone else that there were geographic share shifts. Obviously, you guys have done a great job and gotten a lot of very positive press around the exclusivity of the debate. I don't know if you're getting incremental dollars from that, but just any incremental thoughts you have around why you guys outperformed on political?

Well, I think Dan, if you remember back to 2016, we had a similar situation where we were the only company that achieved its political guidance for the year. I think it's because we take a very disciplined approach to our forecast model and certainly as it relates to political, the broadcast leadership team and our FP&A folks do a very deep dive into each race, each ballot initiative, how much money has been raised, who the candidates are, and what happened the last time the race was contested. A lot of work goes into it. We just don't apply a factor to the past and come up with an estimate. I'm not saying that's what other folks do, but there is a lot of work. I have a book that is three inches thick in my office that is our political buildup for 2022, and we'll have a similar one for 2024. So I think it's doing the work, doing the research, and obviously staying close to your business.

All right. Fair enough, Perry. Tom, thanks for the education lesson on retrans. Just to be clear, as we look out, it sounds like no change to your net retrans forecast, and I'm wondering if there's anything underlying. You guys obviously have scale in the MVPD side. I'm wondering if you get some incremental benefits on the reverse side that might help keep the blended average of linear and net closer to maybe the peer group?

Well, as I think you've heard us say many times, scale does matter in terms of negotiations on any one of a number of fronts. I'm not going to comment specifically with regard to any specific network or MVPD. But with regard to 2023, no change in our expectations at this time. We're evaluating 2023 going forward. Obviously, we have a number of subscriber agreements with MVPDs that are up between now and year-end. Also, as we mentioned before, we are seeing a slight uptick in attrition. All of that goes into the calculus with regard to 2023, but we're not changing our 2023 guidance at this point. As you know, we always give reiterated guidance and updated guidance in the first quarter of the year, and we'll be doing that on a more informed basis as we move through the negotiation cycle here and we have more data with regard to subscriber attrition trends.

Got it. And that was kind of my last question.

The only thing I would say, as Lee Ann mentioned, we are on track to over-deliver on 2022 free cash flow. So in terms of the 2022 and 2023 guidance, we're in a really good spot.

That's what I was going to address at the end. If we disregard the blackout and I believe the mission is still minor but dark. Excluding the blackouts and the CW, do you have any insights on the combined outlook for 2022 and 2023?

Well, the biggest impact is going to be interest rates, I think, right? We will exceed our 2022 free cash flow projections that go into the guide. And that's despite a 300 basis point increase in interest. We're still gathering information because it is a free cash flow guide. We feel very good operationally, but we want to get a handle on interest rates, and particularly interest rate increases for next year that could take a bite out of our free cash flow. But that is the primary element I think that would determine any deviation from our established guidance.

Got it. Perfect. Thanks very much. Appreciate the color, guys.

Our next question will come from Craig Huber with Huber Research Partners.

Thank you. My first question is about retransmission subscribers. Could you quantify the year-over-year percentage change for your retrans? It seems to have worsened recently, but I would like to know what you usually discuss on a trailing 12-month basis.

Well, as I mentioned, the way that we calculate it includes MVPDs, virtual MVPDs, the diginet, and the streamers that have increased approximately 1% since the June quarter end.

And year-over-year, what is it versus a year ago when we roll it all up?

Yes.

Can you elaborate on political advertising? It seems that political advertising for you and your competitors has been lower than expected. As we look towards the third and fourth quarters, what is your perspective on this situation? There are discussions about a shift to other markets and overall fundraising falling short of projections. When did you start noticing that political advertising was coming in weaker than you anticipated?

I can't speak to our competitors, but I can share our own numbers. We currently have 103% of what we had on the books at the election day of 2020. Specifically for the PAC money, in a presidential election year, the funds fluctuate based on whether races are competitive. Right now, we have more money on hand for 2022 compared to this time in 2020. In 2020, there were two runoff elections in Georgia, and depending on who you ask, there may or may not be another runoff election there after tonight. Nonetheless, our political estimate remains just over $500 million for the year, excluding any runoff activity. We closely monitor these trends, knowing that when races lose competitiveness, PAC money and other funds may be redirected to different markets. We have benefitted from this in some instances, while in others, it has led us to fall short of our expectations in certain states. Overall, we are at or slightly ahead of our political guidance.

My other question, guys, your comment earlier about LA Clippers in Los Angeles; 15 NBA games set you're going to show there on your guess KTLA TV station or assuming that goes well and I assume it will be. Are you hoping to be able to do that elsewhere? And what does that sort of mean for the regional sports networks? Is that where those games came from?

The games originated from a collaboration with the RSN, which will have the remaining games. These are exclusive broadcasts and not simulcasts. Steve Ballmer is a respected NBA owner, and we've discussed a similar approach with two other NBA owners to create a package that could attract over-the-air viewers who do not receive an RSN. This package may encourage interest in RSN subscriptions or ticket packages. I believe we'll see more of this in the future, and we've already begun preliminary talks with other teams in markets where we have local stations that can support a lineup of games.

And then my final question, guys; there's talk in the trade press about NBC potentially pulling their 10:00 P.M. entertainment programming and turning over that hour to the local affiliates. If that does happen, what do you think that means for your financials? Overall, would it be neutral, good, or bad? How do you view that whole development potentially?

It would be beneficial for us. We can generate more revenue with an hour of news at 10 p.m. than with an hour of network programming. We have ample inventory, and if NBC reduces programmed network time from 89 to 81 or 82 hours a week, we would expect to pay them less. Overall, we have several FOX, CW, and MyNetwork stations that air news during that last prime hour, and they are highly profitable.

Okay. Thanks. A couple of things. First on the CW, I was wondering if you could characterize the timeframe of the program and shift away from the Paramount and WBD content. And how big a share they might have when you get to your end game?

So this is Lee Ann. The programming for the CW is set for the 2022-2023 broadcast season, extending through the end of August or early September next year. The programming will be consistent with our historical spending through that period. Over the next year, we are focused on developing our slates, which will be available in the 2023-2024 broadcast season. We will have some ongoing commitments for the CBS and WBD programming that year, but they will be minimal by that time.

Warner's and Paramount can still sell us programming, but it needs to be a financial deal we find attractive. There might be a few standout shows this year that we want to continue into next year. I can share that Dennis Miller has brought on a talented program executive, Brad Schwartz, who, with a much smaller budget than what we have at the CW, successfully found and developed 'Schitt's Creek.' Our expectation is for him to find a couple more hits like that, and then we'll be in good shape at the CW. He has a very creative mindset, excellent deal-making skills, and a keen eye for talent. I'm really enthusiastic about the early progress we've made.

All right. Thanks. And the one other thing I was going to ask about NewsNation as we get to the end of the political season, is this a competitive benefit to you moving into sort of a post-election cycle, or do you think political will still have an important role on NewsNation as you go through the years?

In times of significant news cycles, all cable news networks tend to benefit, and we've certainly experienced that as well. However, we are still in the process of building our presence, which means we're capturing more audience and increasing our revenue as we expand. Our focus is on delivering engaging, watchable news and incorporating familiar talent into our programming as we grow. Additionally, the opportunity to stream debates held by our broadcast division in states like Ohio, Pennsylvania, and Texas on our NewsNation app, as well as airing three of them nationwide on cable, has established us as credible players in the political space. We conducted 50 debates across the country, a feat unmatched by any other broadcaster. People in Washington recognize our commitment to the political process. We present these debates candidly, allowing viewers to form their own opinions without our bias. I believe these debates have been and will continue to be significant in this election cycle. My hope is that this will further enhance our reputation as a reliable source of information that presents both sides fairly and allows viewers to draw their own conclusions.

Hi, everyone. Thanks for having me on. A couple of questions. First, nice to see auto in positive territory again. As best you can tell with the political crowd out, has that momentum continued in the fourth quarter? And is it coming from the dealer level, the OEMs, etc.? Any color there would be helpful.

Well, it's pretty much broad-based. We're seeing it across all three tiers, with both manufacturers and individual dealer spending being ahead of the prior year. So it's all supply chain based; as they have more vehicles to sell, there is still pent-up demand. And so automotive being up 5% is a great pattern, I think. Ultimately, I think as it gains momentum, as more units are delivered to dealers, this could be a tailwind for us in 2023 in terms of our core advertising.

Regarding the first point, we are currently over 60% floating and do not have any hedges in place. The historical low interest rates have positively influenced our business due to this floating structure. Looking ahead, we do not plan to implement hedges. Additionally, concerning the CW in an unrestricted subsidiary, we plan to consider bringing that back in the future once it achieves profitability.

Okay, great. Thanks very much.

We'll now take a question from Steven Cahall with Wells Fargo.

Thanks. I just wanted to go back to guidance. I was a little unclear there. In my memory, you typically give numerical free cash flow guidance most quarters. I think pretty much every quarter except COVID. So just to be clear, at the moment, are you reiterating the free cash flow guidance that you've given before excluding the CW? And the same question on retrans, because you've given a quantitative, I think, mid-teens retrans guidance for 2023. Should we assume that is reiterated as well? Thank you.

So I think with respect to our free cash flow guidance, I think what you heard Perry say is that we're on track to overachieve the free cash flow that we had in the 2022, 2023 guidance for the 2022 period. So that's what we are stating here today.

And with regard to retrans, there is no change to our guidance for 2023 at this time. We'll be reevaluating that between now and year-end as we get more information on these contract renewals and more in-depth information on subscriber trends.

Got you. Tom, with local down 2% in the quarter, including the crowd out, do you have any sense of how core next year might trend? Are you anticipating it to be flat, up, or down?

Let me take a stab at that. I think what we're seeing…

Sure.

National advertisers are showing caution and pulling back due to concerns about potential consumer weakness across broadcast and cable networks, national spot, and digital. However, local businesses, where owners interact directly with customers, are proving to be more resilient as consumer spending remains strong. In the fourth quarter, we expect a record level of political advertising, but in the first eight weeks of the quarter, there may be some crowding. We are currently in the process of finalizing our budgets and analyzing various categories. Operationally, we do not anticipate significant changes in 2023 compared to 2022. The main concern is interest rates, and we will provide more information once we have reliable data to share.

Thanks, Perry. And maybe a last one just on what you talked about with ATSC 3.0 being as big as it could be by the end of the decade. Do you at this point have any beta trials or test cases in terms of like business-to-business data casting? I would love an update on any work going on there. Thanks.

I think you can expect to see an announcement sometime from us between now and the end of the first quarter on that.

Moving on to a question from Barton Crockett with Rosenblatt Securities. And Barton, your line is open; you might be muted.

Okay. Sorry, can you hear me now?

Yes.

Okay. Sorry about that. I wanted to ask a couple of questions about the kind of near-term numbers to make sure I understand what you're seeing and what you're saying. In terms of the subscriber churn, you said one percentage point, I assume additional kind of deceleration. And I think you were talking about around a 2% kind of decline in subs. So, I think that's going to be about 3%. So I want to confirm that I'm hearing those numbers in the ballpark of correct.

I'll take the first one and then I'll let Perry handle the second. What we said on the second quarter call in August was we had a low single-digit attrition rate for all subscribers, or all areas that we're being paid for, again, MVPDs, virtual MVPD's, NewsNation, Diginet, and the streamers. And that amount has increased by approximately 100 basis points. So it would be more along the lines of low to mid-single-digits as opposed to low single digits. Is that helpful?

That's helpful. Thanks for that. Care splitting it. It's important right now. I appreciate that.

Yeah. I would just say, we have to start with the fact that we announced this morning, we have doubled the political revenue on the books in the fourth quarter than we did in the third quarter. So obviously, there will be displacement in core that will cause core revenue comparisons to the prior year to be lower than the third quarter. But you should expect that in the fourth quarter with that level of political advertising. But thematically, I don't think we see much difference in the categories that Tom reported on that are up and down. It's pretty much the same story in fourth quarter. And it will be a slightly greater order of magnitude given that we had twice the political revenue on the books than we did in what we reported this morning for the third quarter.

But in terms of after political, so from here forward, do you have any sense of the pacings? Are they still on track, still the same?

We don't usually give pacing on a month-by-month basis, but yeah, December pacing is better than October absolutely in core.

Okay. All right. Great. Thank you.

Yes. Hey, guys. Congrats on the quarter here. You matched the political ad spend or ad revenue from the prior election and just coming off the Scripps call, they had suggested that the total political ad spend is coming in around $8 billion for the year. And I don't know the source, but just curious if you agree or disagree with that statement, because obviously if true, it would suggest that you guys were able to post a flat result relative to F 2020 versus a material decline for the overall market. And then just relatedly, obviously, given your results and commentary or the results and commentary from others, it would suggest that there were some pretty weak ad spend results in some states. But again, given your result, it would imply that maybe some states experienced pretty strong growth above and beyond what they did in 2020. So just wondering if you saw that as well?

We focus on our own macro environment and don't analyze the broader political landscape, especially since we don't operate in Arizona. Currently, our top-performing station in terms of political revenue is in Nevada, driven by a highly competitive Senate race. We have also performed well in states like Ohio, Pennsylvania, and California, the latter having various events including a sports betting referendum. Texas has shown more political revenue than expected due to the governor’s race and several key House races in South Texas. Political ad spend will shift to support candidates in competitive races, and as we approach the 2024 elections, we anticipate similar movements in funding based on competitiveness. Our broadcast signals reach 68% of the country and cover over 80% of competitive races, contributing to our strong political performance. Notably, we currently have more political revenue on the books for 2022 than we did on the same date in 2020, despite the significant runoffs in Georgia that year. If Georgia has a runoff, it might have a minor impact on our stations located outside of Atlanta. Overall, being close to matching the 2020 figures during an off-year cycle is an impressive achievement, and I commend our management and sales teams for optimizing this opportunity.

Yes. No, I totally agree. Do you think that broadcast in totality was a beneficiary of any potential shifts out from outside channels? Like, do you think search and social media ad spend was diverted and maybe into broadcast? Can you see that or feel that?

No. The narrative sold each year, and the broadcast continues to capture the majority of political spending. We expect to generate less than $20 million in political revenue across our digital platforms, primarily from fundraising. The Internet has been recognized as an effective tool for fundraising but not particularly for mobilizing voters. Politicians repeatedly demonstrate that local TV is effective. Spending money on it often leads to election victories, confirming that the system works.

Got it. Last question for me. Regarding the transition from vMVPDs, this seems to negatively affect retransmission fees or revenue, even though profitability remains stable. I'm curious about how we should view the embedded impact of this transition on retransmission fees as we move forward and deal with the shift from linear MVPDs to vMVPDs. Is there a potential negative impact of around 1% or 2% on your retransmission growth attributed to this shift? I understand profitability is steady, but I'm focused on the top line. Thanks.

I haven't done that level of detail or I'm not in a position to comment on the specific calculations regarding retrans revenue. However, you are correct that it will affect retrans revenue, but it will not impact our contribution from the distribution ecosystem in that regard.

Yes. And just to put a finer point on it, I mean, it's less than 10% of our retrans revenue is coming from that source. So it's a small number.

Got it. All right. Very helpful. Thanks, guys.

Ladies and gentlemen, this will conclude your question-and-answer session. I'll turn the call back over to Perry for closing remarks.

Thank you very much and thank you all for joining us today. Underpinning our performance this quarter and every quarter is our strong financial framework and the cash-generative nature of our business, which has enabled Nexstar to consistently deliver prodigious levels of free cash flow. Looking ahead, we continue to execute against our long-term strategies taking the necessary actions and making the required investments to shape the future of Nexstar, while delivering long-term growth and outsized returns to our shareholders. Thanks again for joining us today. We look forward to speaking to you again next February, when we report on our fourth quarter results. Have a great afternoon.

Ladies and gentlemen, this does conclude your conference for today. Thank you for your participation. You may now disconnect.