Sinclair, Inc. Q1 FY2022 Earnings Call

Ladies and gentlemen, welcome to the Sinclair Broadcast Group First Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Lucy Rutishauser. The floor is yours, ma'am.

Thank you, operator. Participating on the call with me today are Chris Ripley, President and CEO; Rob Weisbord, President of Broadcast and Chief Operating Officer; and Steve Zenker, Vice President of Investor Relations. Before we begin, I want to remind everyone that slides and supplemental information for today's earnings call are available on our website, sbgi.net, on the Investor Information page and on the earnings webcast page. Now, Billie-Jo McIntire will make our forward-looking statement disclaimer.

Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors, as set forth in the company's most recent reports filed with the SEC. The company undertakes no obligation to update these forward-looking statements. The company uses its website as a key source of company information which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website until the next quarterly earnings release. Included on the call will be a discussion of non-GAAP financial measures, specifically adjusted EBITDA, adjusted free cash flow, and leverage. The company considers adjusted EBITDA to be an indicator of the operating performance of its assets and believes adjusted EBITDA is frequently used by industry analysts, investors, and lenders as a measure of valuation. These measures are not formulated in accordance with GAAP and are not meant to replace GAAP measurements and may differ from other companies' uses or formulations. The company does not provide reconciliations on a forward-looking basis. Further discussions and reconciliations of the company's non-GAAP financial measures to comparable GAAP financial measures can be found on its website, www.sbgi.net.

Good morning, everyone, and thank you for joining us today. Two weeks ago we notified the investment community via an 8-K filing that we would be deconsolidating Diamond from our financials. This is a consequence of Diamond's new financing which dictated how Diamond's Board of Managers would be selected and which significant operating decisions would be approved. While on the surface this may seem to add complexity, we believe it will result in a more simplified, transparent, and focused valuation and credit story for our various stakeholders. While Diamond will no longer be included in Sinclair's financial results beginning on March 1, 2022, Sinclair continues to own nearly 100% of the equity of Diamond and the deconsolidation is not intended to indicate a change in our commitment to Diamond's success or a change in Diamond's future business plans. I'll turn it over to Lucy to speak more about the mechanics and implications of the deconsolidation.

Thank you, Chris. The deconsolidation of Diamond is a required GAAP accounting treatment and all impacts from it are non-cash in nature. The date of deconsolidation was March 1, 2022, which was the date the Diamond first lien financing closed. The deconsolidation of Diamond resulted in a non-cash gain of approximately $3.4 billion, which was primarily driven by the fact that Diamond was in a net liability position at the time of deconsolidation. Post-March 1, Diamond is accounted for under the equity method of accounting. As a reminder, DSG is a separate debt silo, which is nonrecourse to Sinclair. In addition, Marquee will be deconsolidated from Diamond's financials as of March 1 and will be accounted for under the equity method of accounting. Later today, we will file a Form 8-K which will contain pro forma financial statements for the year ended December 31, 2021, reflecting Sinclair as if deconsolidation of Diamond occurred as of January 1, 2021. On our website, we've included supplemental and historical pro forma numbers for Sinclair so you can align your models. If you have any questions, please reach out to our Investor Relations department. Because of the deconsolidation, our earnings releases will no longer include guidance for Diamond as you saw in this morning's release. However, our website will include some high-level estimates as well as Diamond's quarterly and annual financials, which we will continue to post each quarter. Lastly, the format of our earnings calls will change. Today, we will bifurcate the call and do a Sinclair-only portion addressing Sinclair's pro forma results followed by a Diamond portion of the call. Next quarter, we will have two separate calls. We remain committed to continuing to provide financial information and commentary regardless of the format.

I'll let Rob and Lucy go over the first quarter operating and financial results in just a moment. But first, I would like to give some strategic comments. Over the last few quarters, I have talked about the value of our investment portfolio, which we estimate is over $18 a share. The portfolio is made up of investments in real estate, venture capital and private equity holdings, and direct strategic investments in companies. One comment we've heard from investors is whether we can or are willing to monetize that value. The answer is, of course, we are, which is clearly evidenced from the monetization of our investments even in recent years. For example, in 2022 year-to-date alone we've monetized approximately $40 million of investments, generating an annualized return of 30% and a multiple on invested capital of 1.8 times. All three of these investments were acquired within the last three years. Not only do we continue to be opportunistic in monetizing these investments above just a simple return, but our initial thesis to enter into them is often steeped in how they can strategically benefit us and the future direction of the organization. Saankhya Labs is one such example that I will talk about in a moment. Keep in mind our investment portfolio as a whole has generated an approximate 24% average rate of return since 2014. One of the recent holdings, which we've agreed to monetize a portion of, was Saankhya Labs. In March, it was announced that Saankhya, an entity in which we had held a 49% interest, was being acquired by Tejas Networks, an Indian-based technology company which produces optical and data networking products and is majority owned by Tata Group. Saankhya is a valued partner of ours that is developing chips for mobile devices for use in receiving ATSC 3.0 broadcast signals. Tejas will first be acquiring a large portion of Saankhya followed by a merger with the rest of Saankhya in the future. The result will be an initial cash payment to Sinclair of $22 million monetizing a portion of Sinclair's ownership, with Sinclair eventually expected to hold 1.5 million shares of Tejas Networks after the merger is completed. Tejas Networks is publicly traded on the National Indian Exchange and the 1.5 million shares would have a value of about $9 million at current price and exchange rate. This is an IRR of over 30% over the 2.5-year investment period. An additional value for the transaction is that Saankhya gains a new parent company, Tata, which has significant resources and is committed to driving continued progress and innovation, especially around NextGen's potential in the Indian market and globally. We look forward to continuing to work with Saankhya, Tejas and Tata in the future. The hidden value in our company goes beyond our investment portfolio. Other assets like Tennis Channel, NewsOn, and Compulse360 carry meaningful upside that should be valued above the standard broadcast multiple. You can expect to hear more about these important assets going forward with increased transparency around both their operating results and their growth potential in the years ahead. For those not familiar with Compulse360, it is our marketing technology business that offers a SaaS platform, combining sales enablement, order management, fulfillment, and analytics into one consolidated solution for local media companies, agencies, and small businesses. Compulse360 has grown significantly over the last three years aided by acquisitions and organic client additions. Its revenue is expected to surpass $100 million this year, driven by the rollout of incremental capabilities including a new planning tool, streaming integrations, location-based advertising, and a self-serve OTT solution which will increase its appeal and broaden its market potential. The key takeaway is that we have significant value in our company beyond our broadcast business. We remain committed to monetizing our holdings through a number of different avenues with an eye towards adding value for our shareholders either directly or indirectly. I would now like to point out a couple of our ESG initiatives we are working on around reducing our company's and our viewers' impact on the planet. We launched our battery recycling pilot at a number of our locations in April and also ran a public service campaign with all of our TV stations and RSNs for Earth Day in April, encouraging viewers to recycle their batteries by dropping them off at Batteries Plus, a partner of ours for the campaign, or in other recycling locations. We also switched to notice and access for our annual report this year, reducing our printed paper accounts by approximately 90%, which reduced our annual report and proxy costs by almost 50%. Also, we are honored that Dr. Ben Carson, an experienced Board Director and former Secretary of the US Department of Housing and Urban Development, has agreed to stand for election to Sinclair's Board of Directors in June as we continue to seek out those with diversity of thought, experience, and skills to strengthen our company. On the NextGen front, we had a very exciting NAV conference. ATSC 3.0, or NextGen, was the main attraction and we had announcements and demonstrations around its many use cases including precision GPS. Just a couple of weeks ago we announced an important partnership with USSI Global. Together, we are offering a pilot of the first commercial data casting use of NextGen in the U.S. USSI Global will utilize NextGen technology to bring curated content and targeted advertising to its electric vehicle charging stations, while allowing for the collection of audience data and impression-based analytics. This is the first step in a new area of business for us: data delivery as a service. We expect this will be an attractive source for revenue generation in the years ahead. While this technology can be utilized in many ways across many different industries, the electric vehicle opportunity alone is significant. The U.S. Department of Transportation has earmarked $5 billion towards the goal of 500,000 EV charging stations nationwide by 2030 to meet the surge in production and demand of electric vehicles, which has already commenced. On a higher level, this is a significant announcement that validates the digital promise that there are ancillary services that can generate incremental dollars for broadcasters. This is a first small step to opening that door to future possibilities in many different use cases. Another aspect of NextGen that will be critical to its success is the development of the tools to allow the merging of broadcast and broadband services. Sinclair has contributed significantly to the creation of a solution that all broadcasters will be able to utilize. This technology will allow efficient use of channels to maximize data business opportunities. We have invested a great deal of time and effort to develop the technological tools to enable consumers to access broadcast or Internet content through both fixed and mobile devices and at the same time leave space to deliver other content or data. We are committed to ensuring that this access is available to all parts of the ecosystem. This explains why we've decided to develop and deploy a broadcast app open to all via a free open source license. A common approach utilized across the entire broadcast industry will be the most efficient and effective way to promote consumer adoption and help all parties monetize the significant opportunities NextGen offers. I'd now like to turn it over to Rob Weisbord, our Chief Operating Officer, who along with Lucy will go over Sinclair's first quarter results.

Good morning, everyone. Our commentary in this section will strictly be related to our broadcast and other businesses only. The year started strong with first quarter pro forma Media revenue up significantly over the prior year and at the top end of our guidance range. Political is tracking above our expectations and we look forward to 2022 having a record mid-term election spend. On the content front, we continue to build our viewership for The National Desk with its 36 hours of programming each week. We recently launched an hour-long weekend edition and we will be debuting a daily T&D weather program, which will start on our digital and social platforms before expanding to linear later in the year. Our award-winning news programming continues to garner recognition, winning 60 awards so far this year including its fourth consecutive year of being honored with the prestigious IRE Award for Outstanding Investigative Reporting. This year it was WBFF/Fox45 which won for its reporting on Baltimore's public school system. WBFF has won three IRE awards since it created its investigative news team in 2017. On a cumulative basis, Sinclair has won over 1,000 awards over the last three years. Everyone at Sinclair is proud of our news team and their dedication and results to serve in the public interest. In our Tennis business, our standalone FAST channel T2 launched on Samsung TVs during the quarter, putting a new tennis channel product in front of a platform that's been reported to reach 25 million to 30 million viewers. All Samsung TVs made since 2017 carried the channel to viewers, and during big events like the French Open and Miami Open, T2 is given prominent position at the front of Samsung's FAST channel lineup. T2 carries unique live court coverage year-round that is not covered on the Tennis Channel and Tennis Channel Plus. Tennis Channel Plus streamed hours more than doubled and authenticated streaming of linear Tennis Channel was up 170%, as viewers increasingly watch tennis on a cross-platform experience. In April, we rolled out our second tennis predictor game, a free-to-play game in conjunction with the Indian Wells tournament, and we will be adding new features for future tennis gamification efforts. We will continue our work on integrating game centers and game zones across all our platforms, including our websites, encouraging participation and creating incentives like earning points that can be used for prizes and exclusive content and experiences not available anywhere else. I'll conclude my remarks by noting how pleased we are with the renewal of our multiyear distribution agreement with Charter, which includes our local broadcast stations, the Tennis Channel, the 19 Bally Sports RSNs, Marquee, and the YES Network. I'll now turn it over to Lucy, who will delve deeper into the Sinclair financials.

Thank you, Rob. Given the deconsolidation of Diamond on March 1 of this year, and in order to have a meaningful discussion around comparative results and trends, I'm going to speak to the Sinclair-only pro forma numbers for all periods, which excludes dispositions made in 2021 and does not include Diamond or any intercompany transactions with them. For actual results, including the two months of this year that Diamond was consolidated, please refer to this morning's earnings release. After the deconsolidation of the Local Sports segment, Sinclair will now be synonymous with what we have called Broadcasting, Corporate, and Other on recent earnings calls. There are supplemental slides and pro formas posted on our website to assist in your modeling and analysis. As mentioned earlier, this portion of the call is only for the Broadcast segment and Other and Corporate. Media revenues for the quarter were at the high end of our guidance range and up 9% versus the same period a year ago on a pro forma basis, driven by higher distribution and political ad revenues. Distribution revenues increased 7% versus last year and beat the high end of our guidance range, primarily due to more favorable revenue from the virtual distributors. Core advertising increased 3% in the first quarter compared to the same period a year ago and was in line with our expectations, while total advertising revenues increased 7% over last year. Although media expenses were 7% higher in this year's first quarter versus last year, they were favorable to our guidance on both timing of expenses and lower news and G&A cost. Adjusted EBITDA for the quarter grew 14% over the first quarter of last year and more than exceeded the high end of guidance. Earnings per share for the quarter, excluding Diamond for the two months, the non-cash deconsolidation gain, and other adjustments was $1.23 per share. Adjusted free cash flow of $176 million in the quarter, or $2.40 per share, also came in stronger than our expectations and grew over last year by $48 million. In short, this was a very strong first quarter for us. As Chris pointed out, with the investor focus on Diamond for the past two years, it's easy to overlook that this is the 14th of the last 16 quarters where Sinclair met or exceeded media revenue and adjusted EBITDA guidance. The two outlier periods were due to the cyber incident and the initial impact of COVID in Q1 of 2020. Meeting or exceeding expectations for all but two quarters out of the last four years is a strong track record of delivering on expectations. Our liquidity and balance sheet remain strong with $521 million of cash at the end of the quarter. With an undrawn revolver, our liquidity was almost $1.2 billion at quarter end. Total debt at the end of the first quarter was $4.4 billion and Sinclair's first-lien indebtedness ratio on a trailing eight-quarter basis was 2.9 times on a covenant of 4.5 and 4.3 times on a net leverage basis through the bonds, which continues to be in our target range and better than many in our peer group. Of our $176 million of free cash flow generated during the quarter, $7 million was allocated to debt repayments and $18 million to common stock dividends. If you recall, in our last earnings call, we announced a 25% increase to the quarterly dividend rate per share. We also resumed our 10b5-1 stock buyback program during the quarter, repurchasing since our February earnings report another almost 1.5 million shares. Year-to-date we have repurchased a total of 3.5 million shares at an average price of $26.60, or $94 million of buybacks. Our repurchases were almost 5% of our 2021 shares outstanding. So, when you consider our first quarter free cash flow, over 65% of it has gone towards debt repayment and shareholder returns. Turning to our second quarter guidance, we expect another strong quarter for political, which is the main driver for media revenues increasing approximately 4% to 7% versus pro forma second quarter last year. Second quarter total advertising revenue is expected to be up high-single-digit to low-teen percent versus Q2 of last year. Second quarter adjusted EBITDA is expected to be $153 million to $170 million compared to $193 million pro forma last year. While total advertising and net retrans are expected to grow in the quarter, the lower amount is primarily the result of technology and infrastructure upgrades, management fee deferral, and marketing, content, and NextGen initiatives. Free cash flow for the second quarter is expected to be $246 million to $266 million, or $3.46 to $3.74 per share for the quarter. With that, I would like to open it up to questions related only to the Broadcast and Other segments.

Ladies and gentlemen, the floor is now open for questions. Thank you. Your first question is coming from Aaron Watts of Deutsche Bank. Aaron, please pose your question.

Hi, everyone. Thank you for having the call. I have a couple of questions. I wanted to start on the advertising side. Lucy, did you say what core was pacing in the second quarter? And then beyond that, are you seeing any signs that inflation or other concerns around an economic slowdown or a recession looming are impacting advertiser spend or commitments or buying decisions from your partners?

Yeah, Aaron, this is Rob. I'll answer it. We are watching inflation, but we haven't seen evidence of softening at this point. We are factoring in what we're seeing to ensure that we're covering our bases in case inflation sets in. And the core guidance will be that we will exceed what our revenues were in 2018 and 2019.

Okay, got it. And then secondly, Chris, on the last call you commented that net retransmission fees for the station group were expected to grow in the low single-digit context for 2022. With the Charter renewal now completed, can you update us on that metric? Is that low single-digit net retrans growth rate impacted for this year? And if you're comfortable, maybe what you're expecting for net retrans growth next year as well?

Sure. We did exceed our expectations on the Charter renewal. That being said, the overall net retrans guide for this year will still be low single digits.

Aaron, if I could just come back to one thing Rob talked about: the total ad revenues are expected to exceed 2018 and 2019 second quarter levels.

Which is particularly important, Aaron, as those are both pre-pandemic quarters and 2018 was a political year as well. Political is coming in very strong, as we mentioned, and setting up for a great year.

You should note that both issue and candidate money is very strong since the beginning of the year, which may cause some crowd-out. But we will have rates increasing due to the demand for our inventory.

Okay. That's encouraging. Lucy or Rob, is what you said about core still true that it should still be up versus those prior periods?

Aaron, it probably will be a little bit down versus those periods because political in the second quarter is running a lot hotter than it did in 2018, which is causing some crowd-out in certain dayparts. But that's positive overall because total ad revenues are pacing up.

Got it. Okay, less about the ad environment and more about the political crowd-out. Thank you, I'll get back in the queue.

Thank you. The next question is coming from Dan Kurnos of Benchmark Company. Dan, the floor is yours.

Thanks. Can we dive a little bit deeper into the core commentary around category strength and what you guys are seeing? It doesn't sound like any of the March national weakness has filtered over into local, and given some of the strength in sports ratings, sports betting is still pretty healthy. Maybe just some category color from what you're seeing would be helpful. I have a follow-up as well. Thanks.

Yes. As we've stated over the last several calls, our reliance on auto has been mitigated by our focus on service, retail, and food categories. Those remain strong and bode well for when auto returns. We expect auto to return once the chip shortage is resolved, with expectations toward the end of 2022 into 2023. Political crowd-out increases our viability into 2023.

Got it. On retrans, Lucy mentioned virtuals drove upside in Q1. There's a substantial upside in Q1 — was there any resetting of prior deals, escalators on Jan 1, or other noise? Also, with the Charter deal timing, should there be a true-up? Help us think why there would be a step down in Q2 after significant upside in Q1.

We did have estimates in for the Charter renewal in our Q1. We saw strength in some of the virtuals in Q1; however, some traditional MVPDs have reported a little softening in their churn and we've taken that into account in our estimates.

Then, Lucy, can you remind us of the cadence of the year — what else is up for the rest of this year?

There is nothing major for the rest of this year or really for the next 18 months that would materially change the cadence.

Okay. I'll get back in queue and ask questions on the second half of the call. Thank you.

The next question is coming from Steven Cahall. Steve, the floor is yours.

Thank you. Thanks for giving the free cash flow number for the quarter. Curious if that's something you might guide to for the year along with the rest of your guidance. Peers usually give annual or two-year free cash flow. Now that it's not co-mingled with Diamond, is that something you might provide to help value the standalone broadcast business? Also, could you comment on the state of your NOLs now that you're deconsolidating Diamond?

On the NOLs, there is no change. The Diamond deconsolidation is an accounting treatment only and has no tax impact. On free cash flow guidance, Steven, we'll take a look at providing an annual or forward range. We used to provide that pre-pandemic and will reconsider it.

Great. And on the relationship between Diamond and Sinclair: Diamond benefited from affiliate renewals and ad sales along with Sinclair. Now that you don't have the same control of Diamond's Board, does that change the strategy or push the TV group to act more independently, or do you still expect to share strategy?

This doesn't change the operating relationship between Sinclair and Diamond. We own nearly 100% of the equity and there is a management agreement between the two, which is the important relationship. We don't expect this accounting change to change the way we operate at all.

Thank you.

The next question is coming from David Karnovsky of JPMorgan. David, please pose your question.

Hi, thank you. Chris, regarding the data casting opportunity for your spectrum, what do you think the timeline is from here in terms of completing the tech rollout, signing up business partners to new models, and then ultimately having this be a material amount of revenue for Sinclair stations or for the industry?

Some of the most promising applications we saw at NAV came from precision GPS and demand response for utilities. As utilities rely more on renewable energy, balancing supply and demand is becoming increasingly hard. We think our technology that enables negotiating with millions of end users simultaneously is a great application. Enhanced GPS has many uses from managing e-scooters to enabling autonomous vehicles to know exactly where they are. Normal GPS can have an error rate of up to 10 meters, which we can significantly improve through ATSC 3.0 technology and correction data. Those applications along with our trial with USSI Global should start to yield revenue for the industry next year and I expect it will ramp quickly as people realize how NextGen brings significant advantages beyond broadcast. As that happens, the developer ecosystem around NextGen will proliferate and more use cases will be developed.

Your next question is coming from Barton Crockett of Rosenblatt Securities. Barton, over to you.

Thanks. A smaller question: In 2021, other revenue within the television group was $176 million, of which $111 million was services provided to Diamond that were eliminated on consolidation. With the deconsolidation, is that no longer eliminated? How should we think about that and what would it mean for equity and JV accounting for Diamond going forward?

You're correct that those management fees were eliminated between the entities when Diamond was consolidated. Now, that will not happen. The Sinclair silo will recognize the cash portion of the management fee and that will run through revenue. Diamond will reflect the full contractual expense amount before its adjusted EBITDA adds back the deferred portion.

Were those $111 million of fees in 2021 the portion that's now been deferred with the refinancing, or is there still more to come?

For the full year, the total management fee is approximately $140 million. Of that, about $60 million is paid in cash and $80 million is deferred.

Okay. With the deconsolidation, how does that impact your capacity and interest in share repurchase? Will you be more active or is appetite the same?

It's just an accounting change and doesn't change the fundamentals of the company economically. I do think it makes the story simpler and gives us an opportunity to retell our story. Regarding buybacks, we have tremendous appetite; we think the stock is undervalued. The sum-of-the-parts story is the same or stronger, and our appetite for repurchases remains.

Your next question is coming from Lance Vitanza of Cowen. Lance, please ask your question.

Hi, thanks. Are you getting any feedback from advertisers that would lend credence to the recession fears that seem to be gripping markets over the past few weeks?

We continue to monitor and speak with clients daily. Right now they're still spending. We will continue to monitor and present contingency plans in case fears intensify. Historically, those that advertise during tough times come out in stronger positions, so we're having those conversations and are prepared if the situation worsens.

Your next question is coming from David Hamburger of Morgan Stanley. David, over to you.

Hi, thank you. A quick question: You stated Sinclair remains owner of nearly 100% of DSG. In the past you've said you own more than 90%. Can you remind us exactly how much you own and whether minority shareholders, including Byron Allen and others, still hold stakes?

Yes, David, that's correct. The one minority shareholder is Byron Allen and it's a very small amount, which is why we say nearly 100%.

Notwithstanding the $3.4 billion non-cash gain in your sum-of-the-parts analysis for Sinclair, how are you valuing the DSG equity ownership stake?

In the sum-of-the-parts we've discussed, we have not included any credit for the equity of Diamond. However, there is certainly value there and anyone analyzing that should attribute at least option value to that position.

There appear to be no more questions in the queue. I will now hand over to Chris Ripley, President and CEO. Sir, the floor is yours.

Thank you. I want to start the Diamond portion of the call by thanking Diamond stakeholders for their support around Diamond's recent capital structure activities. We are pleased to have closed the $635 million refinancing which, along with Sinclair's deferral of management fees, meaningfully enhances liquidity by approximately $1 billion. We believe these steps allow Diamond to be self-funding for the next several years and enable the launch and ramp-up of its local sports direct-to-consumer efforts, a significant initiative that is important to Diamond's future. As you may have seen this week, we announced Diamond's new Board of Managers, which was required in conjunction with the refinancing. This is an impressive slate of seasoned executives from the world of sports, media, streaming, and related industries. The five-member Board consists of myself and four independents, including Randy Freer, former CEO of Hulu and longtime President of Fox Sports Media, who will serve as Chairman. The other members of the Board are Mary Anne Turcke, former Chief Operating Officer of the NFL; Bob Whitsitt, a 30-year senior executive previously with the NBA and NFL; and David Preschlack, former President of NBCU RSNs. The Board's experience will be invaluable, especially around Diamond's direct-to-consumer efforts and building future partnerships. Regarding Diamond's D2C plans for Bally Sports, we expect to do a soft launch later this quarter. The initial launch will validate the quality and reliability of the product prior to the full D2C rollout of the Bally Sports RSNs planned for September. The initial D2C product will offer an experience similar to what viewers now see on the TV Everywhere platform and the price point is expected to be attractive compared to other similar professional sports D2C offerings: $189.99 for an annual subscription and $19.99 for a month-to-month subscription, resulting in an expected ARPU of $18.50. In the months after launch, we expect to roll out an enhanced D2C product incorporating additional functionality, content, and features with incremental ways to monetize the viewer through a more personalized and interactive experience. Now, I'll turn it over to Rob.

From an operations standpoint, the MLB resolved their collective bargaining lockout. While the regular season was delayed, the league is scheduled to play the full season of games. In terms of our gamification efforts for Diamond, we continue to move forward with our business plan to initially roll out predictive games for all the teams we represent. In the first quarter, we debuted Bally’s Baller and Bally Breakaway games for our basketball and hockey leagues. Bally’s Home Run Blast is expected to debut in June and will run throughout the remainder of the baseball season, with chances to win monthly prizes. Our partnership with Bally’s and other gaming companies will continue to help drive our RSN gamification efforts going forward. I also want to touch on RSN viewership, which for the 2021-2022 NBA season was up from both a ratings and household perspective. MLB viewing trends have started favorably and remain above the year-ago level. We continue to be encouraged by viewership trends and we have recently launched two new programs to air on the RSNs: The Rally and Live on the Line. Later this year we will debut a new show called The Rivals, and we are working on short-form and long-form programming development for the launch of our D2C app and our TBD app. As mentioned on the Sinclair portion of the call, we renewed our multiyear distribution agreement with Charter, which included our 19 Bally Sports RSNs, Marquee, and the YES Network. I'll now turn it over to Lucy to go over the quarterly financials in more detail.

Thank you, Rob. A reminder that Marquee also falls under deconsolidation and equity method accounting within Diamond's financials as of March 1. We are in the process of getting an appraisal to book the non-cash accounting adjustment based on the asset disposition trigger for Marquee and expect to have that valuation later this quarter. We will not be giving Diamond pro formas due to confidentiality around deconsolidating Marquee from Diamond's results. On our website, however, you can find Diamond's first quarter actuals and guidance for 2022. Note that today's earnings press release for Sinclair consolidated company reflects two months of Diamond in the local sports segment table due to the March 1 deconsolidation. The Q1 results for Diamond that I will discuss here and which are posted on our website are for the full three-month period for Diamond, which includes three months of the Bally Sports RSNs and two months of Marquee's results due to its deconsolidation. Diamond media revenues were $709 million in the first quarter. Distribution revenues of $630 million continue to be based on high single-digit percent subscriber churn while advertising revenue on a per-game basis is growing. Diamond's media expenses for the first quarter were $650 million. Adjusted EBITDA for the first quarter, excluding $11 million for nonrecurring items and deferred management fees, was a negative $155 million. As a reminder, the first quarter is typically the lowest EBITDA quarter for the year due to timing of rights payments. We have strengthened Diamond's future liquidity position and enabled it to build, launch, and grow its D2C offering. On March 1, Diamond closed on a new $635 million first lien loan which matures May 2026. Sinclair also agreed to defer a portion of its management fees over the next several years. Together, the new money raise and the management fee deferral provide Diamond with about $1 billion of liquidity enhancement over time. Diamond's cash at quarter end was $572 million and its $228 million revolver was undrawn for liquidity of $800 million as of March 31. Total debt at the end of the first quarter was $8.6 billion and the AR facility was $163 million. Looking ahead to the second quarter, media revenues are expected to be $759 million to $766 million and distribution revenues are expected to be $621 million to $623 million. Included in the estimate is continued subscriber churn of high single-digit percent, which is offset by $28 million in distribution revenue recognized from a one-time audit settlement amount from a distributor. Advertising revenues are expected to be $130 million to $135 million on almost 300 fewer games expected in this year's second quarter versus last year. For the full year, media revenues are expected to be $2.88 billion to $2.90 billion. Second quarter adjusted EBITDA is expected to be $132 million to $138 million, which includes fewer games, the D2C cost, and continued subscriber churn, offset in part by lower management fees and the one-time distributor audit settlement. Full year adjusted EBITDA is expected to be $221 million to $239 million. Compared to our February outlook for full year adjusted EBITDA of $266 million to $297 million, some changes are the result of the deconsolidation of Marquee, timing of the D2C launch within the second quarter, and slightly higher subscriber churn — still high single digits — offset by the audit settlement benefit and slightly better ad revenues and expenses. With that, I would like to open it up to questions related solely to the sports business for Diamond. Operator?

The floor is now open once again for questions. Thank you. Your first question is coming from Dan Kurnos of Benchmark Company. Dan, over to you.

Can you guys hear me? Sorry about that. Lucy, thanks for the color on all of that. I assume the difference in the monthly average for the two months is because of Marquee in Q1. Chris, maybe high-level given the noise in the marketplace around SVOD saturation, Netflix being at a different stage than RSN products, how are you thinking about marketing expense and other costs as you build toward the D2C launch and how the market will bear the product given everything out there?

That's a great question. Recent developments within the streaming landscape are favorable for what we're doing because the market is rationalizing. Momentum stories eventually cycle and the market is becoming more rational. Our plan for Bally Sports was never about subscriber growth for growth's sake; it was about producing incremental profitability for Diamond Sports. The market is catching up to our thinking. Regarding pricing comparisons, I expect the entertainment value equation will be favorable to us as some SVOD prices increase in the current environment. Marketing to gain subscribers should get easier as people become more rational about their own marketing. We're quite bullish on the change in the market environment. For the soft launch we'll keep marketing modest, but as we approach the full launch we will be much more aggressive.

Dan, the teams have embraced the D2C launch. We'll see joint marketing efforts between Bally Sports and the teams. Teams have significant email traffic asking when we'll launch, so there's pent-up demand and we look forward to joint marketing with the teams.

Also, a key point: we'll be the first mover with real premium sports in the direct-to-consumer marketplace. Comparing this to entertainment SVOD is too simplistic. Sports has generational appeal, built-in fan bases, and team partners with strong incentives to get fans on the service. That's fundamentally different from general entertainment.

Second question given the Charter renewal: any commentary on long-tail impacts, the D2C integration, and how those conversations went with distributors around the D2C product and what it might mean for distribution revenues?

We have confidentiality provisions in agreements which limit specific disclosures. We are very pleased with the outcome with Charter; relative to market expectations, which were fairly negative, we massively exceeded those. We met or exceeded our internal expectations. That's about as much detail as I can give without breaking contract provisions.

Your next question is coming from Steven Cahall of Wells Fargo. Steven, over to you.

Apologies for the delay. A housekeeping question on the Valley performance shares and warrants: can you talk about whether the new Board would change how those warrants or performance shares might be treated? I think those are still held by Sinclair.

Those are held at Sinclair. There will be no change in treatment.

When companies pivot from linear to direct-to-consumer, there's typically a period of peak EBITDA losses for tech, subscriber acquisition, and marketing costs. When do you think the peak burn from the D2C initiative will happen and how do you think about the EBITDA shape as pressure on linear continues?

Our earlier cleanse provides detailed five-year models for both the base business and D2C. There will be a burn in the beginning, which we're seeing in 2022 and which will persist into 2023. The number one cost of any SVOD is content; we have much of that cost already paid, so our model looks different and is more profitable relative to other SVOD services because we don't bear the same content costs. Subscriber acquisition, marketing, and technology costs will drive the initial losses.

Your next question is coming from Avi Steiner of JPMorgan. Avi, please ask your question.

Thank you. On the full year outlook change, was Marquee the largest factor? Did the Charter renewal play a role? Also, you have five MLB teams signed up for D2C — what's gating signing more teams, and could Diamond pursue balance sheet or strategic alternatives now that it has a new Board and is deconsolidated?

Marquee is an important factor in the guidance change, but there are other factors: timing within the second quarter of the D2C launch, the $28 million audit settlement, and slightly higher but still high single-digit churn that we have taken into account. Those contributed to the change versus our February outlook.

To confirm, the Charter renewal had no impact on the change in guidance. Regarding signing more MLB teams, we have been successful securing off-renewal additions and Marquee secured its D2C rights. We are having constructive discussions with the remaining teams. There's not a huge timing rush given our launch status, but discussions are constructive. On balance sheet remedies or strategic alternatives, Diamond has always been a self-contained silo with flexibility to pursue deleveraging, exchanges, or mergers. The accounting change doesn't materially change that. We are actively evaluating options and expect more transactions or recapitalizations could occur.

Your next question is coming from Lance Vitanza of Cowen. Lance, over to you.

Follow-up on the guidance change and the D2C launch timing: I would have thought the launch was always in 2022, so any expense pulled forward from 2023 to 2022 would be modest. Is that fair? Also, with the balance sheet addressed, how comfortable are you Diamond has the resources to make it through the D2C launch, and what would a 2023 recession do to your confidence level?

On timing, the change is within the second quarter. The soft launch will be toward the back end of Q2 versus earlier, so it's timing of both revenue and expense within Q2 rather than a material change to the year. It is a fairly modest impact.

We are confident that we have set Diamond up with ample liquidity for the foreseeable future. Diamond's revenues are mainly contractual subscription-based, which fare better through recessions than the ad market; it's roughly 80-85% subscription and 15-20% ad. That should give some resilience in a recession. It is hard to predict how a recession would impact D2C uptake, but hardcore fans seeking value will likely adopt the service regardless of the economic backdrop.

When you look at the value proposition versus the cost of a ticket, it's a huge value for fans, in recessions and in good times.

When you think about the opportunity cases for distribution and adoption, are you thinking the market ends up between case two and case three in five years, where you get most linear teams on D2C and benefits from betting and other monetization? Is that fair?

We avoid definitive speculation, but what you described is reasonable. Today we're in a case one world, but the future looks more like case two or case three where D2C penetration and alternate monetization increase.

Your next question is coming from Barton Crockett of Rosenblatt Securities. Barton, please ask your question.

Wanted to ask about the high single-digit subscriber churn trajectory over coming quarters. That has in the past been influenced by drops in major distributors that you're probably lapping. How should we think about that? Also, with D2C subscriptions rolling out, some suggest that traditional pay TV carriage might be adjusted. Any thoughts now that the Charter renewal is done?

The high single-digit churn guide is not impacted by distribution drops; it's been status quo long enough that the comparison is apples-to-apples. The difference in churn between Sinclair and Diamond is because only DirecTV Stream among virtual MVPDs carries RSNs, while other virtual MVPDs do not, which causes variation in churn between broadcast and Diamond. Regarding Charter, we dealt with these issues in the negotiation and are pleased with the outcome. Distributors want flexibility, but they need content, so it's always a push-and-pull in negotiations.

Thanks.

Your next question is coming from David Hamburger of Morgan Stanley. David, please ask your question.

If you had not deconsolidated Marquee this quarter, would you have hit your prior guidance range of $266 million to $297 million of adjusted EBITDA?

Yes, for adjusted EBITDA I believe we would have. The deconsolidation of Marquee makes it a bit harder to answer off the cuff, but yes.

At the end of 2021 you had $479 million of cash and now you disclosed $572 million of cash. You raised $635 million of new debt, part of which was used to take out high-cost notes. You mentioned D2C cash burn may have been front-end loaded. Also, Lucy, you've disclosed rebates that will be paid to distributors. Can you help reconcile these numbers and provide more detail on liquidity and cash flows in the quarter?

For modeling this year, consider the new money raise and added interest expense, and any forward rate increases on debt that's not fixed. Regarding rebates, we've updated numbers with the audit settlement: For 2022, total net rebates Diamond would pay are $105 million. For 2023, $62 million. For Q1 2022, Diamond has already paid $24 million of the $105 million. This should help you spread rebates across your models. Also, factor in the deferral of the management fee.

How much of the $105 million will be paid over the course of 2022?

We paid $24 million in Q1. Roughly $49 million will be paid in Q2, about $17 million in Q3, and $16 million in Q4.

Can you quantify the cash burn for the D2C launch and how that's impacted the quarter?

We're not going to break that out at this time, but refer back to our prior disclosures where we provided modeling. The view hasn't materially changed.

What I would say, David, is we've given you a full year adjusted EBITDA number, so you have that. To get to free cash flow you adjust for interest and CapEx, which is minimal at about $30 million for the year.

One follow-up: can you give a sense of the timing for the next big distributor renewals, such as DirecTV and Comcast?

Those are both in the back half of 2023.

There appear to be no more questions in the queue. I will now hand back over to Chris Ripley for closing remarks.

Thank you all for joining us today. Should you need more information or have additional questions, please don't hesitate to give us a call.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.