Nexstar Media Group, Inc. Q3 FY2023 Earnings Call

Good day and welcome to Nexstar Media Group’s Third Quarter 2023 Conference Call. Today’s call is being recorded. I will now turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thank you, Shamali, and good morning everyone. I’ll read the Safe Harbor language, and then we’ll get right into the call. All statements and comments made by management during this conference call other than statements of historical facts 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 31, 2022, 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. With that, 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, Joseph, and good morning, everyone. We appreciate you all joining us today to discuss Nexstar’s third quarter results. With me today on the call are Mike Biard, our President and Chief Operating Officer, as well as Lee Ann Gliha, who is our CFO. Also here listening in and available for questions on what will be his final earnings call, Senior Advisor, Tom Carter. I’ll start with a summary of recent highlights and developments, followed by Mike’s operations review, and then Lee Ann’s financial review. Nexstar’s third quarter financial results primarily reflect the year-over-year decline in cyclical political advertising as well as the net distribution revenue impact related to our successful negotiation with DIRECTV. It was a tough negotiation for both sides, but ultimately, we reached an agreement that was consistent with our internal expectations. The agreement and all other distribution and network partner agreements reached year-to-date as well as our 2022 renewals were all completed in a manner that was, for us, business as usual, recognizing the value that Nexstar brings to its partners. We expect favorable terms of those agreements as well as other upcoming renewals to drive continued high-margin distribution revenue growth in the coming periods. As has always been the case during contested negotiations, whether ours or others, there is a lot of noise and misinformation put out to the public by those seeking to advantage themselves by talking their own book. At Nexstar, we would like to deal in the realm of facts. That’s why we published a new investor deck on our website last month, and we hope you’ll have a chance to review it if you have not already. This data-driven report details the importance of broadcast television in the current and future TV ecosystem, as well as Nexstar’s positioning as the largest company with consistently top-tier financial performance in the sector. Today, I am going to provide you with some additional facts and perspectives from recent events. First, Nexstar’s consistent record of strong operating execution and free cash flow generation is predicated on the strength of our model and our disciplined approach towards managing the business for the long term. This includes distribution negotiations. While the vast majority of our distribution renewals are negotiated without fair or disruption of service, there are times when it does happen. Nexstar has always done and will continue to do what is necessary to bring us closer to achieving fair compensation for the tremendous value our stations bring to our distribution partners. Our continued success in these negotiations is no surprise to us, which brings me to my second point. Broadcast television is the undisputed leader in viewership with the most watched programming. Each of the big four broadcast networks generates viewership roughly four times greater than ESPN. Additionally, Nexstar’s own non-network content generates about half the viewership of our stations. This adds to our leverage; Nexstar is the largest local broadcaster in the United States and the first, second, or third largest affiliate group of the Big 4 networks, the CW, and My Network TV. So, the most-watched broadcast network content, along with highly engaging local news and local content, equals a must-have for distributors who need to provide their customers with the content they spend the most time watching. Third, the broadcast distribution model is not going anywhere because we continue to command the widest reach. According to a TBB survey, broadcast television reaches 76% of the population on a daily basis versus 54% for cable-only and 36% for SVOD services. We are the only and best way to reach the biggest audience, something that sports organizations, most importantly the NFL, recognize and require in their rights agreements. This creates a virtuous cycle where sports organizations looking to maximize their audience reach, grow revenues, local engagement, and franchise value, seek out broadcast as the preferred medium, which begets viewership, which begets distribution, and so forth. This is only amplified by the significant amount of time audiences spend with our local news and other local content. The broadcast affiliate model benefits the networks by extending the reach of their content, including Major League sports, to the widest possible audience, enabling them to maximize advertising revenues and receive significant affiliation fees that they cannot match on their own. Fourth, we believe that the Disney-Charter dispute resolution supports our business model. In that agreement, the premium broadcast network content carried on ABC-owned television stations and the ESPN network got paid. The Disney+ DTC content got rebundled, which should help reduce MVPD attrition and derivative IM channels like ours. Finally, we’ve received numerous questions about virtual MVPD rates being lower than net MVPD rates. Although that’s been spun in a negative way, it’s not really consistent with how we view the world. If you look back at our conference call one year ago, we stated that our virtual rates were about the same as our net MVPD rates. Then, at the end of 2022, we renegotiated a number of our MVPD contracts and increased our rates. As a result of those successful negotiations, our net MVPD rates are now higher than our vMVPD rates. That’s not bad; that’s good. That’s progress. However, it misses the bigger picture that we have multiple agreements with participants in the ecosystem related to different parts of our business, and each agreement is on a different timetable. You can't look at this topic in a vacuum without potentially arriving at incorrect conclusions. So, I’ll reiterate, we expect to grow our net distribution revenues as contracts come up for negotiation and renegotiation. Shifting gears, our core television revenues continue to be impacted by a soft advertising market, led by weakness in national. We’ve seen some improvement on this front as the third quarter rate of decline improved sequentially from the second quarter, and we’re seeing ongoing improvement in the fourth quarter to date. We view this trend more or less as the typical impact we would expect in a cyclical economic environment rather than anything secular. We remain confident in our business model and our continued ability to generate significant free cash flow, and we’re backing that up by accelerating our repurchase activity to take advantage of our low stock price for the benefit of our long-term shareholders. In the third quarter, we repurchased $199 million worth of our stock, almost half of which was executed during September. Year-to-date, we repurchased $514 million of stock. Since December 31, 2019, when we started our repurchase program, we have reduced the shares outstanding by over 25%. Subsequent to the quarter end, we are continuing to be in the market pursuant to a 10b5-1 program, with over $700 million left on our current authorization to continue executing our repurchase strategy. Looking ahead, we remain bullish about Nexstar’s future and are pleased with the progress we’re making on our organic growth initiatives. NewsNation is the fastest-growing cable news network in primetime and has established itself as a major news network. We expect to accelerate our audience growth from here. An exciting announcement is coming up later this week, so please stay tuned. As you will hear more from Mike later, we have already begun leveraging the unique resources of the CW broadcast network to increase our audience, reduce operating costs, and drive towards profitability. Since we acquired the CW one year ago, we have secured rights for compelling sports programming with Live Golf, ACC football and basketball. As previously mentioned, WWE NXT has also joined the CW network for the upcoming season. The NASCAR Infinity Series will also join in 2025, along with related programming such as Inside the NFL, which airs currently on Tuesday nights. With our excellent slate of scripted and unscripted entertainment content, we’re setting the stage for the CW to grow ratings, advertising, and distribution. The positive ratings from ACC football on the CW have attracted new advertisers to the network. Additionally, the recent CW affiliation renewal cycle completed this past quarter improved over the previous cycle, and we’ve reduced losses at the CW year-to-date by over $75 million from the prior owner’s performance. We continue to make progress on our APSC 3.0 development, working with potential business partners on developing a test case for Spectrum use. Lastly, as we seek ways to grow revenues and leverage our scale portfolio of television assets, we’ll begin bringing the majority of our national sales efforts in-house starting January 2024. We believe we are best positioned to sell our linear and digital ads to advertisers. Nexstar has a unique portfolio, and together with our partner stations, we are by a wide margin the largest local television broadcaster, covering over two-thirds of the country, including eight of the top 10 markets as well as 17 of the top 25 DMAs. This scale allows us to effectively offer advertisers near-national reach while also providing local activation in key selected markets with our own portfolio. Coupled with our large national properties of the CW, NewsNation, Antenna TV, and The Hill, we have critical mass to engage advertisers through our own go-to-market strategies and customized advertising packages that deliver excellent ROI for our clients. Measurement is a crucial piece of our strategy, and we’re working on identifying our next-generation measurement partner or partners, which can provide us the data we need to execute our strategy. Over time, we expect to generate more revenue at a better margin than if we continued to outsource our national sales efforts. In the near term, the remainder of 2023 and 2024 will benefit from the successful renegotiation of our distribution contracts during the year, and 2024 will see a significant boost due to the upcoming political year, which we expect to be particularly strong. I’ll now turn the call over to Mike, who joined us in mid-August. Mike is a seasoned broadcast television veteran, having most recently served as President of Operations and Distribution at Fox Corporation, overseeing their multi-platform content distribution strategy, business affairs, and affiliate relations for Fox Sports, Fox Entertainment, and Fox News. His experience brings the perfect complement of capabilities to support Nexstar’s growth objectives. So, with that, let’s hand it over to Mike.

Thanks Perry, and good morning everyone. Since this is my first earnings call here, I thought it would be helpful to start with some brief comments on why I chose to join Nexstar. I have tremendous respect for what Perry and the Nexstar team, including Lee Ann and my predecessor, Tom Carter, have accomplished here. Over my career, I’ve observed Nexstar scale to become a true media powerhouse with a record of exceptional financial performance and shareholder returns. Today, Nexstar’s mix of media assets provides both national reach and local activation at a scale greater than anyone in the business. While I was very happy at Fox, I saw the opportunity to join Nexstar and participate in what the team has been building, and it was something I could not pass up. What ultimately motivated me to join the company is the uniqueness of Nexstar’s business and positioning in the industry, which I believe gives it the potential for significant growth over the medium and long term, more so than any other player in the sector. I joined Nexstar at an exciting time, as we are in the early stages of the company’s expansion into the network business and unlocking the meaningful upside potential of NewsNation and the CW. This aligns directly with my interests and what I can bring to the table, given my background and my years of executive experience at FOX. The move to convert WG in America provides a material opportunity in cable news. The growth of NewsNation will be bolstered by the strong viewership of the news genre, capturing the audience composed of the large centrist majority of Americans who want fact-based journalism and do not feel well served by the existing polarized news options. When Nexstar bought the CW, I immediately recognized and agreed with the wisdom of that strategy. Vertical integration of Nexstar’s CW stations, weather, CW affiliates, distribution, and advertising revenues are crucial. The CW’s pivot from teen-focused dramas toward compelling sports content and broad-appeal programming leverages the rare resource of a broadcast network to drive growth. We have seen this early on at FOX, and I can see it take shape at the CW. There are enormous opportunities as we approach these businesses with the same disciplined investment and execution that have always characterized Nexstar. Nexstar has a history of delivering healthy returns to its shareholders, made possible by the strong free cash flows we consistently generate. Personally, I take pride in contributing to positive shareholder returns throughout my career, and I expect my tenure here will extend that track record. Most importantly, Perry and I have done business together in various contexts throughout the years, and we share a common vision for Nexstar’s future. So, I have hit the ground running. I am fired up about being here and working closely with my colleagues to support Nexstar’s next phase of growth. I’m also looking forward to engaging with the financial community and our shareholders in the coming quarters and years, starting with today’s earnings call. Now let’s turn to the operating review. Q3 revenue was $1.13 billion compared to $1.27 billion in the prior year quarter. The net revenue comparison was primarily impacted by the year-over-year decline in cyclical political advertising and the temporary removal of stations from an MVPD related to contract negotiations, offset in part by the inclusion of the CW. On a pro forma basis, excluding political advertising revenue, the CW, and comparable periods in 2022 where we and our partners were off-air, net revenue would have increased by 2.3% year-over-year. For television advertising, which includes both our station group and our national networks but excludes digital advertising revenue, we saw a decline of 2.3% year-over-year. Excluding the CW, core advertising was down 6.8%, marking improvement from a 2023 second-quarter decline of 8.4% due to a slight reduction in the national advertising rate decline. This performance aligns with our expectations shared in the last earnings call. Our station presence in large markets tends to act more like the national advertising market. To illustrate this better, if we exclude our networks in top 10 markets and include digital ad revenue as many of our peers do, our station core television advertising revenue for the quarter would have been flat. Notably, our large market stations are some of our best and most profitable within the portfolio, with true local identities and brands entrenched in their communities, a significant achievement in top DMAs. For instance, WGN, an independent station in Chicago, and KTLA, a CW affiliate in Los Angeles, consistently hold top-rated morning news and are either number one or two rated throughout the day. Additionally, our robust presence, primarily through CW affiliations in these larger markets, makes us an ideal partner for professional sports organizations seeking to expand their audience by leveraging the reach broadcast offers. For example, KTLA announced in September that it extended its deal with the LA Clippers to air 15 games through the 2024/25 season. Furthermore, the trends in these larger markets remain favorable, with the advertising market continuing to recover. In Q4 2023, we see a slight improvement in the overall core television advertising rate of decline compared to Q3, partly due to the political displacement in Q4 of last year. Excluding the CW for comparison, our top-performing categories in the quarter were auto and home repair manufacturing. We are pleased to see the automotive sector, our largest advertising category in terms of spending, maintaining its growth trajectory for a fifth consecutive quarter, increasing by 13% over Q3 2022. We are optimistic about the ongoing rebound of this category, believing there is continued potential for growth given overall automotive spending is still below 2019 levels and automobile inventory has rebounded. However, categories contributing to our core advertising revenue decline included radio/TV cable, newspaper, gaming, sports betting, bank savings, investments, drugstores, medication, and paid programming, with about three-quarters of categories declining in the quarter. Looking ahead to political advertising, Nexstar generated $19 million in political advertising revenue in Q3, reflecting a cyclical year-over-year decline in election year spending. As Perry mentioned, we remain optimistic about our growth prospects for political advertising revenue in the 2024 election cycle, with projections estimating $11.6 billion in 2024 spend, including $5 billion expected to go towards local broadcasting. With our extensive footprint covering over 80% of contested elections, we are exceptionally well positioned to secure share and dollars both locally and nationally. In fact, recent commentary from notable super PACs and election consultants reinforces our view that local broadcasters will continue to capture the largest share of political ad dollars during the 2024 cycle. Dan Konstan, the President of the Republican Congressional Leadership Fund, stated, 'When it comes to our advertising and advocacy, broadcast is the foundation of all our efforts.' Similarly, Dave Heller, President of political consulting firm Main Street Communications, painted an equally positive picture by saying, 'As a campaign, you're going out to dinner; broadcast is steak, the entree. Streaming and digital are asparagus, broccoli, and a little salad, and radio is dessert.' Although Dave's analogy may come off humorous, he makes a fair point. Moving on to our distribution agreements, in Q3, we successfully completed distribution agreements with all of our partners up for renewal during the period. As Perry stated earlier, we are pleased with the outcomes of those negotiations. While the disruption with DIRECTV extended 17 days into September, which was longer than the market was expecting, the long-term outcome justified that approach. In simpler terms, the ROI during the dark period, based on where the deal was prior to going dark compared to where we ended up, was remarkable. On the network affiliation side, we successfully completed all affiliation agreement deals, including those with FOX, CW, and MyNetwork. Nexstar’s Q3 distribution revenue of approximately $598 million decreased by $43 million or 6.7% compared to the prior year. Distribution revenue was primarily impacted by the aforementioned removal of stations from DIRECTV for 76 days in the quarter. The ongoing removal of partner stations from certain MVPDs due to continued negotiations and ongoing MVPD subscriber attrition partially offset the positive impact of the renewal of distribution agreements in 2022, improved terms and annual rate escalators, representing more than half of our subscriber base, growth in virtual MVPD revenue, and the inclusion of the CW. Excluding the CW, our distribution revenue would have declined 8.6%. Additionally, if we adjust for the dark periods in 2022 for comparison, distribution revenue would have increased by 8.8%. Subscriber attrition remained in the low single digits, positively impacted by the increased carriage of our CW, MyNetwork TV, and independent stations on YouTube TV and the addition of new CW affiliates in large markets. Looking ahead, assuming continued removal of our partner stations from two large MVPDs, without service disruption for Nexstar stations in the quarter, we expect Q4 distribution revenues to be up mid-teens, and net distribution revenue for the quarter to be up high teens. Record third quarter digital revenue rose 15.1% to approximately $99 million. Revenue growth was driven by the CW's inclusion and year-over-year increases in Nexstar’s local digital advertising and agency services business, compensating for some weaknesses in national digital advertising revenues and e-commerce. Excluding the CW, digital revenue increased by 2.7%. Touching on the CW, which is, as I mentioned earlier, one of the exciting opportunities for the company, our CW affiliated stations are the most profitable of our network relationships, both in margin and in gross dollars. We are fortifying that performance for the long term by investing in meaningful content that matters to broadcast viewers, including live sports and acquiring additional CW affiliations for Nexstar stations. There is strong demand from sports organizations for carriage on broadcast television to deliver high ratings and wide distribution to their fan bases while promoting attendance and ancillary revenue streams at the local level. That demand for broadcast television has enabled us to enter into exclusive agreements with several major sports organizations, including our recently announced deal for WWE NXT in 2024, Live Golf, which returns in 2024, ACC Football and Basketball, and NASCAR starting in 2025. All of which are expected to boost CW viewership and the value proposition for our affiliates and distributors. Early returns on our ACC partnership have been promising, having successfully onboarded 15 new advertising partners for the first full ACC season, including Verizon as the presenting sponsor and Subaru as the halftime sponsor. The CW's inaugural ACC college football game, Cincinnati versus Pitt, delivered 617,000 total viewers, the most viewed Saturday since the network began Saturday broadcasts in 2021. Notably, same-night ratings for ACC on the CW outperformed NBC's big Saturday football in the adults 18 to 49 demographic by 3%. This remarkable achievement is a great start for a network that had previously not featured football or college sports. Looking ahead, we released our ACC basketball schedule featuring men’s double headers on Saturdays and women’s games on Sunday afternoons starting December 2. This exciting lineup begins with the 2023 Final Four participant, Miami, hosting Notre Dame, followed by Duke visiting Georgia Tech, with more marquee games planned throughout the season. The CW also celebrated several other wins during the quarter, launching new fall programming, including Inside the NFL, FitaSurvive, The Swarm, Sonova Kitch, Sullivan’s Crossing, and Spencer Sisters, among others. Additionally, the CW served as the exclusive home for the Miss USA pageant, attracting over 1 million viewers. As a result of our successes so far, we finalized negotiations for CW affiliations on improved terms with Gray, Sinclair, and Hearst in the quarter, transferring CW affiliations from Paramount-owned stations that previously paid no affiliation fees. We executed against the vertical strategy I mentioned earlier by successfully relocating CW affiliation to several Nexstar stations, benefiting both the network and our station group in markets such as San Francisco, Philadelphia, Tampa, Oklahoma City, and Billings, with more announcements imminent. In Q3, the CW generated $59 million in revenue, and $58 million in adjusted EBITDA loss, excluding $1.5 million in one-time expenses primarily for restructuring. This loss improved sequentially from $74 million in Q2. Year-to-date, we have reduced CW losses by $75 million compared to the predecessor company, and we remain on track to continue reducing losses in 2024 and moving toward breakeven in the next couple of years. With that, it’s my pleasure to hand the call over to Lee Ann for the remainder of the financial review and update. Lee Ann?

Thank you, Mike, and good morning, everyone. Mike provided many of the details on the revenue side and the CW, so I will review expenses, adjusted EBITDA, attributable free cash flow, and provide comments on our guidance, given the impact we saw this quarter. In the third quarter, direct operating and SG&A expenses—excluding depreciation and amortization—rose by $47 million, primarily due to the CW's inclusion. Increases in affiliation fees, compensation and healthcare costs, and the expansion of local news, as well as the growth of our news programming at NewsNation, were partially offset by reduced variable costs related to lower revenue and promotion expenses. In our adjusted EBITDA and free cash flow calculations, reduced programming costs at NewsNation associated with lower reliance on syndicated content provided further offsets. Q3 2023 total corporate expense was around $52 million, including non-cash compensation expenses of $16 million, compared to $52 million, including non-cash compensation of $17 million in Q3 2022. Q3 2023 depreciation and amortization totaled $220 million, versus $142 million in the prior-year quarter, primarily due to the acquisition of the CW. Note that the CW's programming costs, which are part of our adjusted EBITDA and free cash flow definitions, are attributed to this line item as amortization of broadcast rights. For more information, please refer to the schedules in our earnings release. We received $8 million in Q3 distributions from equity investments, primarily from our 31% ownership in the TV Food Network, representing a 27% decrease from the prior-year quarter. This reduction primarily reflects lower income at the TV Food Network related to reduced advertising revenue. Overall, our consolidated Q3 adjusted EBITDA was $236 million, representing a 20.8% margin. Excluding the CW, Q3 adjusted EBITDA stood at $294 million, equating to a 27.2% margin. Q3 CapEx was $36 million, aligning with our expectations compared to $37 million in Q3 last year. Year-to-date, CapEx reached $113 million, up from $98 million last year, excluding a modest amount of CapEx from repack. We have received $10 million in insurance proceeds and tenant improvement funds compared to none last year. Our CapEx is not net of insurance proceeds; we reinvest those proceeds back into our physical assets. So, when accounting for those insurance proceeds, year-to-date CapEx is $103 million, which includes approximately $10 million of carryover CapEx from last year. Third quarter net interest expenses increased to $114 million, up from $89 million in the prior quarter due to the impact of higher SOFR rates applicable to our floating-rate debt. Cash interest expenses for the quarter amounted to $112 million, slightly above our expectations due to a rising yield curve. Third quarter operating cash taxes were $21 million. All together, consolidated third quarter attributable free cash flow was $100 million, and excluding the CW, Q3 free cash flow was $136 million, totaling 46% of adjusted EBITDA. Looking ahead, we project corporate overhead exclusive of stock comp and one-time costs to be approximately $35 million for the fourth quarter. We expect total corporate overhead to be around $138 million for the year due to new executive hires and recent contract renewals. Non-cash compensation expenses are expected to be about $16 million for Q4 and approximately $60 million for the full year, but that will vary based on stock price and actual grants. For cash taxes, we will be using a 26.5% tax rate when estimating taxes before one-time adjustments. The fourth quarter includes one income tax payment. Regarding cash taxes, only about 65% of Nexstar’s book depreciation and amortization is deductible. We project Q4 CapEx at $46 million and $158 million for the full year, which includes a carryover from last year as previously mentioned. Approximately $12 million of CapEx is subsidized by insurance proceeds and tenant improvements for the year, which effectively reduces the $158 million figure to $146 million and $136 million, excluding the $10 million of carryover CapEx from last year, which was postponed due to supply chain issues that have since been resolved. We expect Nexstar’s cash interest expense to be about $114 million for Q4 and $440 million for the full year, reflecting the current forward curve and our plans for debt repayment. As a result of recent events and macro trends around advertising, subscriber attrition, and interest rates affecting our business—many of which are beyond our control—we are updating our 2023-2024 average annual attributable free cash flow guidance to a range of $1.05 billion to $1.15 billion, with the upper end positioned above consensus. This outlook reflects our current view of 2024, prior to finalizing our formal budget process at the year-end. We are only a few weeks away from 2023 being behind us. Regarding our balance sheet, Nexstar’s outstanding debt at September 30, 2023, stood at $6.9 billion, a slight decrease from the previous quarter as we made a $31 million mandatory quarterly amortization payment. As the CW has been designated an unrestricted subsidiary, the losses associated with the CW do not count against our leverage calculation for credit agreements. Consequently, our net first lien covenant ratio for Nexstar, excluding the CW at September 30, 2023, was 2.05x, considerably below our first lien and only covenant of 4.25x. Our total net leverage for Nexstar, excluding the CW at quarter end, was 3.4x. Typically, in non-political years, we expect leverage assessed on an LTM basis against a two-year average to rise this year but fall again in 2024, as EBITDA is expected to rise with the return of political advertising. Our cash balance at quarter end was $150 million, including $59 million related to the CW. Together with free cash flow generated in the quarter and cash on hand, we returned $246 million to shareholders, consisting of $47 million in dividends and $199 million in stock repurchases. This brings total dividends and share repurchases for the first nine months to $659 million, or 113% of our attributable free cash flow for that period, as we have opted to advance cash flow reserves for future purchases to take advantage of buying stock at these low levels. As we proceed, we will strategically deploy our cash consistent with our commitment to creating the greatest shareholder value.

And what’s even more interesting to consider is that our consolidated EBITDA— the metric upon which we trade—includes 100% of what we expect to be short-term losses of the CW, effectively capitalizing those losses into our valuation. The average of analysts that break out their expectations for the CW indicates that for an average of 2023 and 2024, the losses at a 6.5x multiple amount to nearly $30 per share. Despite the confluence of headwinds in 2023, we remain bullish about the fundamentals of our business, the economic outlook, and our capability to generate substantial free cash flow for the foreseeable future. As Perry mentioned earlier, we intend to continue executing share repurchases prudently, as testimony to the value we believe it will create for our long-term shareholders. Before we open the line for questions, I would like to turn the call over to Tom Carter for a few remarks on his last earnings call. Tom?

Thanks Lee Ann, and good morning, everyone. This is my 57th and last earnings call with Nexstar. I’ll miss Nexstar and its great people and work environment. Reflecting on what we’ve built and the future ahead, I couldn't be more optimistic about the future of this business and the team we have assembled to elevate Nexstar to the next level. You’ve become familiar with Lee Ann as CFO over the last two-plus years; you are in great hands with her. As you may not know, Lee Ann and I worked together at Bank of America before I joined Nexstar, so we share a long history. As she took over this seat, we aligned on virtually every decision we made. The transition to Mike Biard has been seamless; Mike’s DNA embodies the ethos of Nexstar, and his skillset will be instrumental in guiding Nexstar as the scaled industry provider it is moving forward. I have committed all of myself to this company, and today I am ready to retire and spend more quality time with my wife, family, friends, and enjoy aspects of life outside Nexstar that I have previously missed. Thank you to the investors, analysts, and the Nexstar team for an incredibly positive 14-plus years. Most importantly, thank you to my friend and colleague, Perry Sook, for this life-changing opportunity. Best of luck to you all. I’ll now open the call for questions.

And our first question comes from Dan Kurnos with Benchmark. Please go ahead with your questions.

Great. Thanks, good morning. And good to hear you on the call, Mike. Obviously, Tom, you will be missed as we said last time. I guess just maybe either for Mike or Perry, just on the deals that you guys have done, you listed them all, Mike, in your prepared remarks. Obviously, we saw the WWE NXT deal last night. I think I asked this question to a different degree last time, but how should we think about the combination—and you can take this in two parts—of both incremental local deals as we continue to see those come online and we’ve gotten some diamond news recently as well that could sort of auger more positive news on that front as well as this kind of national network push? Like how do we think about that flowing through? And I know some of the deals don’t start until late ‘24 or ‘25. But just the monetization aspect of raising CPMs across the board and expanding viewership. I guess we’d like to get a little bit of color on how impactful you expect those deals to be to the broader portfolio and then, frankly, just the impact to cash flow as you think about kind of the cadence of those deals coming online. Thanks.

Let me start, Dan, and then I’ll turn it over to Mike and Lee Ann to provide additional insights if helpful. When we conceived the acquisition of the CW, we envisioned sports in our future. If you review the cadence of Live, NASCAR, WWE, ACC, these were strategic acquisitions of content for us. Each agreement was modeled for profitability over its duration. These deals create value; as we approach affiliate bases and subsequent renewal discussions, we are meeting the desires of distributors and viewers alike, which is live sports, making up a considerable portion of our schedule. We’ve also expanded our broadcast schedule to include weekend afternoons, generating revenue and obviously, viewership. Sports enhances the entertainment programming that airs afterward; history shows that people tend to stick around after the sports broadcasts to see what’s on afterward. We acted quickly on these opportunities as they presented themselves. They’ve given us the chance to consolidate these deals under the CW brand. As for local involvement, I can assure you that when we introduced LIV Golf, local stations capitalized hard. They did exceptionally well this past summer and fall, seeking monetization that had never previously existed. They reached advertisers with a unique opportunity. From a macro perspective, we are optimistic about this entire framework. Let me turn it over to Mike for additional thoughts.

I would add that the timing of the company investing in the CW at the national level and increasing our CW affiliation at the local level aligns perfectly with the emerging industry trends. I noticed it last night in the news regarding Bally’s bankruptcy and the NBA's revised agreement with all teams to carve out a 10-game broadcast package. This illustrates the extensive search for reach that only broadcast can provide. Our position at the CW is favorable, both in terms of network ownership and owning our stations locally, allowing our affiliates to leverage this burgeoning demand for broadcast at just the right moment.

As Perry mentioned, we have modeled all of this consistently with what we’ve previously communicated. Life isn’t a straight line, but we’re working diligently and look forward to achieving our objectives.

If you want to change viewership habits, it’s a difficult task in the current environment, and sports programming is uniquely situated to achieve this. With our first game on the CW, college football fans were exposed to a network that previously offered no sports content. The remarkable ratings were achieved despite relatively limited marketing efforts. Establishing a routine for viewers to engage with the CW and expect that content is invaluable. We're excited about the upcoming sports programming, which will offer 52 weeks of WWE and 33 weeks of NASCAR. Our goal is to foster a strong connection between viewers and the CW.

Got it. Super helpful. Lee Ann, can I just ask quickly on the free cash flow guidance? Just on – I think rate curve is probably about half of the delta at the high end, a little less than that. You mentioned some other details. Is there any incremental granularity you can provide us around the remaining delta?

Yes, Dan. There are several moving pieces in this number, which I can't delve into too extensively due to complexity. But think of it encompassing the advertising market, its attrition rate, and the effect of being dark, coupled with our partners being dark. This all factors in, leading to updated outlooks, in addition to interest expenses which you highlighted.

Got it. Alright, cool, fair enough. Thanks very much. Appreciate it, guys.

Thank you.

Our next question comes from the line of Barton Crockett with Rosenblatt Securities. Please proceed with your question.

Okay. Great. Thanks for taking the question. I wanted to clarify on the CW outlook. When you acquired the CW, we discussed the losses being in the low nine figures, or around $100 million. Here, the first quarter shows free cash flows exceeding that while discussing potential future losses. I’d like to understand how those two narratives reconcile—perhaps initial losses are greater, but the timeline to profitability is shorter, or the return on investment is better than expected? Any color would be appreciated.

I would say we had indicated cumulative losses to breakeven could fall into low-9 figures, but we never explicitly stated $100 million; that was not part of the guidance. When referencing free cash flow, we focus on the per-share view since we only own 75%. Those losses are effectively multiplied by 75%, allowing us to derive tax benefits at 26.5%, further mitigating the loss. Initially, we anticipated a low-9 figures kind of strategy for those losses, and we believe profitability will improve next year as planned. We've been transparent about these expectations as shared in our earnings release.

In reviewing the developments since we announced the CW acquisition, the three separate writer strikes in Hollywood and the advertising recession or pullback have affected our advertising side. However, our acquisitions of LIV, NASCAR, and ACC represent considerable value. None of these factors were anticipated when we considered CW's initial value. My confidence in the CW has increased, especially with the sports rights continuously being captured. We took advantage of the extraordinary opportunities emerging in the first nine months post-acquisition. However, several factors are in flux—the writer's strike, the last purchase obligation from former owners of content not geared for profitability, which shifted to next season due to the writers' strike occurring. The whole picture remains dynamic, but our perspective on the CW has evolved positively. We have confidence in this path to profitability, although it’s difficult to pinpoint an exact timeline.

Indeed, investments require time to demonstrate results. The monetization of content through affiliate stations and our own direct distribution will take time to show its effects—definitely not until the earliest is 2024.

We firmly see a path to profitability for this network. While we won't name the month, day, or quarter, we initially indicated by 2025—that may shift slightly depending on these acquisitions and the economy, advertiser reactions, and the performance of our programming.

Very helpful, thank you. Sorry for any background noise. However, I appreciate your patience.

Thank you, Barton.

Our next question comes from the line of Benjamin Soff with Deutsche Bank. Please proceed with your question.

Hey guys. Thanks for the question. One of the consequences of the Disney-Charter deal you discussed was its potential to impact subscriber declines moving forward. It is early clearly to evaluate, but what is your perspective on the pace of subscriber declines going forward? Do you anticipate churn moderating in the next year or so or continuing at a similar pace? Additionally, can you parse out the impact in the quarter from the DIRECTV blackout?

From an attrition perspective, we are confident the Charter-Disney deal will assist in reducing churn, especially with the re-bundling of the DTC package into Charter's overall offering. Furthermore, we observe the costs of DTC bundles becoming more arduous as subscriber expenses continue to inflate. These combined developments are anticipated to gradually benefit the MVPD sector. The rate of change in the contract landscape will trend modestly as most of them renew every few years. Regarding the DIRECTV blackout effect, we separated that out on the call. Mike noted that in Q3, excluding the CW's impact and presuming the same time frame in 2022 when we were off-air, our distribution revenue would have increased by 8.8% in the quarter.

Okay, thanks for the insights.

Yes.

Our next question comes from the line of Steven Cahall with Wells Fargo. Please proceed with your question.

Thank you. More regarding the re-trans and distribution remarks. You commenced the year with guidance ranging from high-single to low-double digit growth. As stated, there were unexpected developments in Q3, perhaps affected by Disney-Charter. If my math holds, the guidance for Q4 indicates that, ignoring the blackout, you would indeed be almost within that initial projected growth range for the year. Correct me if I’m wrong, but it implies you might have eclipsed the rate increases anticipated. So my first question: have you found that DIRECTV and Cox helped to set a foundation heading into another substantial distribution deal in December? I’m curious whether having two major distributors finalized reduces some of the associated risks. Secondly, Mike, I appreciate your insights on the ad market in major markets. However, this morning Warner Bros. suggested they’re not noticing any improvement, and they don't expect much change in 2024. What are your expectations for the ad market moving forward? Are you seeing any initial signs of recovery or expect larger markets to maintain current trajectories for the foreseeable future?

Yes. Regarding your distribution analysis, I can confirm that your calculations align with what we’re observing. The deals we've secured thus far this year align with our original expectations. Your findings are accurate. Regarding upcoming negotiations, we can only project on what has transpired; we feel optimistic about the past. Despite various inquiries, we experienced a business-as-usual pattern, confirmed in our numbers. Similar expectations apply going forward. With regard to advertising, Warner Bros. may not encompass our local station business like we do. That represents the bulk of our advertising revenue. We observe signs of green growth as our declining rates have moderated sequentially. We saw that pattern continue from Q2 to Q3 and a similar tone moving into Q4. We're cautiously optimistic about transitioning that into future recoveries.

Thank you.

Our next question comes from the line of Craig Huber with Huber Research Partners. Please proceed with your question.

Thank you. First, more of a housekeeping question. What was your re-trans subscriber decline year-over-year? In previous quarters, you’ve indicated it was down mid-single digits. Did that hold true this time or is it a little worse?

Yes. In Mike’s commentary, we shared that our sub declines range within the low-single digits. This figure is positively impacted based on the addition of CW, My Network, and independent stations on YouTube TV, which improved our subscriber attrition metrics.

Great. Also regarding the advertising outlook, any insights on the auto category performance at both the national and local levels?

From the auto perspective, we observe positive year-over-year growth. We're entering a period that may pose tougher year-over-year comparisons as growth momentum commenced toward last year's end, though we still expect it to positively factor into our revenue.

Within the quarter, did the blackouts grant any reprieve on the network compensation side of expenses considering your major network contracts?

Yes, there was some impact.

Understood. Thank you.

Our next question comes from the line of Nick Zangler with Stephens Inc. Please proceed with your question.

Hi, everyone. I was wanting to know if you could expand a bit on the upfront commitments mentioned in the press release. We’ve heard about weaker demand in general, with advertisers seeking more flexibility. Are you receiving the same feedback or recognizing anything new within the upfront market? Additionally, do you think such demand for flexibility might signal industry trends moving into 2024?

I’d describe our upfront as successful. We added about 47 new advertisers this cycle. The increasing prominence of NewsNation as a strong, ratings-driven network contributed positively. Our upfront results aligned closely with our expectations. Although the overall upfront has faced tougher conditions, this reflects a move towards a scatter market; hopefully this means better scatter opportunities in upcoming periods.

I’d add that we were offering growth this year, which is proven beneficial to our positioning. We saw growth regarding our expectations, particularly gratifying was the new advertiser relationships we've developed, not only through the upfront but also through the sports agreements. However, I want to caution that CW, NewsNation, and other ancillary properties are not market movers. We're one of the few entities successfully selling growth and new opportunities.

Understood, thank you. Additionally, regarding your virtual MVPD commentary, is what you’re suggesting that we should not differentiate between MVPDs or vMVPDs on a net basis going forward? You anticipate similar economic outcomes regardless of the distribution channel?

Indeed, we anticipate different revenue streams influencing our distribution revenue. In this context, cash is fungible. There are various methods for us and our partners to generate profits. Evaluating them in isolation might mislead observers. Initially, the commentary regarding those lower rates stemmed from one of our peers' positive outlooks toward potential growth.

Thank you, appreciate all the details!

And our next question comes from the line of Jim Goss with Barrington Research. Please proceed with your question.

Thank you. Mike’s earlier comments about the CW resembling Fox during its developmental phase are valid and inspiring. Besides sports, what similar strategies do you see that could be replicated as you proceed? How vital is a strong primetime core lineup to anchoring the CW's platform? Lastly, are there any preemption restrictions on affiliates that you would consider implementing?

Overall, our strategy seeks to develop the CW into a robust broadcast network by anchoring the lineup with prominent programming, particularly sports, which we know historically increases viewer engagement. Our pivot towards broader appeal programming instead of solely teen dramas enables greater market access. We’re taking thoughtful steps while prioritizing disciplined programming to maximize appeal.

To clarify, regarding ownership structures, we maintain a pathway to potential acquisition of the remaining 25%. Quick call provisions exist for us to consider acquiring that stake. We are mindful of Griffith's assessment when performant timing presents itself.

Thank you very much.

We have reached the end of the question-and-answer session. I will now turn the call back over to management for closing remarks.

Thank you very much, operator. Before we conclude, I’d like to leave you with a few final thoughts. As discussed today, we believe Nexstar’s future is exceptionally promising. We have strong conviction in our business model, growth opportunities, and competitive position within the market. We do not perceive the volatility in Nexstar’s share prices as reflective of our business fundamentals. We will continue executing and delivering outcomes for our shareholders. Over the past year, we've demonstrated attributable free cash flow of over $1 billion, with 95% or over $950 million returned to shareholders through dividends and repurchases. We have a distinct set of objectives aimed at optimizing value creation for our shareholders, and as the top ten shareholder myself, I am extremely aligned with that commitment. Thank you all for joining today. We look forward to speaking with you again when we report our fourth-quarter results in the New Year.

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.