Sinclair, Inc. Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sinclair Broadcast Group, Inc. Second Quarter 2022 Earnings Conference Call. I would now like to turn the call over to the host, Executive Vice President and Chief Financial Officer, Lucy Rutishauser.

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. I also want to remind you that today's call is a Sinclair-only call. As a result of the de-consolidation of Diamond Sports Group on March 1, separate Diamond financials will be made available in a couple of weeks and a separate quarterly public call hosted. 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. Such factors have been set forth in the company's most recent reports as filed with the SEC and included in our second-quarter earnings release. 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 and will remain available until our 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 operating performance of its assets. The company also believes that 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. Chris Ripley will now give you an update on the strategic direction of the company.

Thank you, Billie. Good morning, everyone. Over the years, Sinclair has evolved considerably from a large broadcaster that relied on advertising for the vast majority of its revenue to a far larger and more diversified company that we are today. We believe the diversity of our businesses embodies the future earnings power of our organization with revenue streams expected to come from a number of different areas, including certain investments that generate little to no revenue as of yet. In addition to the advertising and distribution revenues that make up the bulk of our current revenue generation, we believe other areas will be drivers of our business in the future. These include: wireless data revenue from NextGen/ATSC 3.0 technology that will enable us to more fully utilize our spectrum, expansion of our national networks and the build-out of our Compulse Marketing Services business, which utilizes new SaaS marketing technology that we have acquired and developed. What will not change is our company's steadfast belief in local media news and sports and the value they bring to our customers, viewers and the communities in which we operate. In regards to second quarter results, we met our revenue expectations and exceeded our adjusted EBITDA guidance. Political advertising revenues were not only strong, but they were the highest second quarter and year-to-date political revenue in our company's history. Year-to-date, through the end of June, political revenue was over double 2018's political revenue for the same period and up over 20% compared to 2020, which was a presidential election year. Rob and Lucy will talk more about the specifics and results. We expect political revenue to drive total ad sales for the remainder of the year, resulting in growth over last year. It is important to note that while we're not in a position to forecast the state of the economy through the end of the year or in 2023, we expect that a strong year in political advertising helps cushion against any possible downturn, in addition to discretionary levers on operating capital expenditures that we can pull to mitigate such weakness. More than ever, consumers have more choices to view content, whether it's on traditional TV sets, mobile devices, social media or other platforms. With our cumulative on-air and online audiences, we are poised to deliver our content, how and where audiences choose to view and consume it. While overall video viewing is fragmenting, an opportunity going forward is engaging with users of our content directly, reaching and engaging audiences on all platforms and opening up incremental revenue opportunities. Digital is a big part of that equation. Digital viewing is growing with our current average monthly unique users of 80 million to 90 million. We are well-positioned as a holder of first-party data to develop these additional revenue opportunities, especially when third-party engagement tools like cookies go away. We have the ability to engage viewers beyond passive consumption, encourage interaction and convert them to direct customers. And we can utilize our content, both newly developed and from our archives, to drive these opportunities. This includes initiatives such as podcasts, digital newsletters and other digital content as well as referring users to partner sites to make transactions. In all these cases, we are and will be able to learn more about our users through consented data gathering as a first-party provider to enhance the user experience while opening up the door to additional revenue opportunities. The creation of new content continues to be a priority for our company. On the heels of the successful launch and extension of the National Desk franchise and our widely available NewsOn platform, we are looking at other initiatives to utilize our vast resources around local news. I mentioned podcasting just a minute ago as one example. In the second quarter, we debuted the first in a new series of broadcasts titled, Missing Erica Baker, about the disappearance of a young child in Ohio. These podcasts take a deep dive into stories of local and national interest. Sinclair is in a prime position to produce such compelling storytelling, thanks to our company-wide commitment to investigative reporting and teams of talent and journalists across our expansive network of local news stations. We've been encouraged by our first broadcast performance so far with consumers giving the content favorable reviews. We are also developing new shows and series, including a debate show, a game show and a docu-series based on noteworthy events covered by our local news stations. The new content will appear on one or multiple Sinclair platforms or might even be sold to third parties. Also, we recently rolled out the National Desk weather to our local newscast at 6:00 a.m. and 6:00 p.m. and on social media, and we plan to launch a morning show that will tap into the live coverage and weather content produced over the prior 24 hours. And we're working on gamification elements for our content. Expect to hear more about all these efforts as we progress through the year. We continue to make solid progress on our marketing technology platform Compulse 360. We have built a comprehensive proprietary platform that we believe is the only entity of its kind, focused exclusively on growing local agencies and local media companies offering an omnichannel product that combines data-driven media planning, order management, fulfillment and analytics into a single SaaS-based solution. The result is an experience for the client that is efficient, transparent and more profitable as it eliminates the middle man and allows the client to keep more of the media margin. The platform offers not only broad access across Sinclair's diversified properties, but also from over 100 publishers with which we have partnerships with a reach to over 90 million unique connected TV households. We believe the opportunity here is significant as we're offering an omnichannel solution that enables our partners to compete for the $240 billion in U.S. digital advertising budgets. And by owning our technology versus licensing, like many of our chief competitors, we believe we have a competitive advantage in making significant inroads in this marketplace. On the NextGen broadcasting front, another 5 Sinclair markets launched NextGen in the second quarter, making 10 thus far for the year and 32 overall. To date, NextGen TV is available in 60% of the households in Sinclair's licensed footprint. Meanwhile, 3.0 is advancing globally. Just this week, we announced that we entered into memorandums of understanding with 2 top brand broadcast networks to collaborate on the development and implementation of NextGen broadcast models and technologies in both the U.S. and Korea. Demonstrations of use cases for the technology ongoing and include automotive video applications and enhanced GPS that takes the GPS precision from 3 meters down to 3 centimeters. We believe our joint efforts will allow for greater efficiency in developing new business models around these future monetization opportunities. And finally, we continue to look for ways to best provide value to our shareholders. In addition to growth initiatives that I've touched upon earlier in the year, we increased our quarterly dividend by 25%. And in June, we resumed our 10b5-1 share repurchase program, buying back another 500,000 shares or so through yesterday. This makes close to 39 million shares repurchased since the beginning of 2018 or 38% of our total shares outstanding. We also repurchased some of our senior notes at a discount in the open market, which Lucy will detail. And we continue to utilize our free cash flow to invest in attractive and strategic investments that we believe will enhance our business in the years ahead. Year-to-date, we've deployed $19 million in investments and received distributions of $44 million. In 2021, those numbers were $125 million of investments and $48 million of distributions. And since 2017, we have made $303 million in investments and received distributions of $269 million. And going back a bit further, these investments we have purchased since 2014 have generated an over 20% IRR to date. This diversified portfolio of investments made up of holdings in real estate, venture capital and private equity as well as strategic investments in companies has an estimated market value as of June 30 of $764 million or over $11 per share. Adding in our Bally's Holdings, the Diamond A/R facility and holding company cash, the estimated market value is over $1.2 billion or over $17 per share. On the corporate social responsibility front, we announced the annual winners of our diversity scholarships awarded to high achieving diverse students seeking careers in the broadcast industry. This year, we opened it up to applicants nationwide and awarded $50,000 in scholarships. Since 2013, we have awarded over $250,000 to help bring more diversity to news and marketing teams throughout the country. Finally, we just finished up our Sinclair Cares: Summer Hunger relief fundraising campaign to help provide meals to needy families. The campaign helped provide approximately 1.8 million meals to children and families across the U.S. With that, I will turn it over to Rob to review the operational highlights for the quarter.

Thanks, Chris. Political ad revenues were certainly a big driver during the quarter, surpassing our most bullish expectations and setting a second quarter record for political revenues, including presidential election years. As Chris pointed out, combined with the strong first quarter, political revenues year-to-date are up more than 100% compared to 2018 and up over 20% versus 2020. We continue to expect strong third and fourth quarters for political spending, which are typically the largest quarters for political ad spend. I think it is fair to say that at this juncture, political revenue for 2022 could possibly approach the record level we had in 2020. The political strength in the quarter helped media revenues grow 5% over the prior year, which was within our guidance range. Core ad sales were down low single digits coming in around the low end of our expectations on decreased revenues in the service category, particularly the insurance and the sports betting category versus a year ago. In regards to our growth networks, Comet, Charge!, & TBD, we're in the process of adding 13 million households to their combined coverage. The incremental rollout began late in the first quarter and will go through September. This will give the networks a total combined coverage of over 95 million households, a 7% increase in households over the end of last year. We expect the added audiences to drive impression-based sales. In Tennis Channel News, we are pleased with the viewing of this year's French Open, played from May 22 to June 5. The May 31, Rafael Nadal and Novak Djokovic match garnered 666,000 viewers. The most views ever for a Tennis Channel match, eclipsing the old record by 30%. Also, during the French Open on May 31, authenticated users made the Tennis Channel app the #3 paid sports app, hitting an all-time high during that Nadal-Djokovic instant classic. On the tennischannel.com website, digital users grew double digits year-over-year as viewers found the French Open on the go. Tennis Channel also had another successful year with household impressions up over 1 million this year on Tennis Channel versus a year ago, and our new 24/7 T2 linear channel on Samsung TV+ is reaching a brand-new audience with over 700 live hours of tennis since its launch. 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, the results I'm going to speak to are the Sinclair only pro forma numbers for all periods, which excludes Diamond and excludes businesses sold in the prior 12 months. You can follow along with our slide deck or our financial supplements on our website. For actual results, including the periods to Diamond was consolidated, please refer to this morning's earnings release. Media revenues for the quarter were up 6% versus the same period a year ago on a pro forma basis, driven by higher distribution and political ad revenues, and that was offset in part by the deferred management fee and lower core advertising, as Rob discussed. Digital revenues increased 17%, and the $831 million of media revenues was within the middle of our guidance range. Distribution revenue increased 4% versus last year, but fell short of our guidance range, primarily due to higher-than-expected distributor churn. Subscriber churn was mid-single-digit percent versus last year. Core advertising decreased low single digits in the second quarter compared to the same period a year ago and was close to the low end of our expectations. As Rob mentioned, we saw some weakness in the insurance category and some political crowd out. Total advertising revenues were very strong when including political, increasing 12% over last year and coming in at the upper end of the guidance range. Media expenses were 7% higher in this year's second quarter versus last year on higher network programming fees, digital expenses on the higher digital revenue and timing of tennis tournaments, but were favorable to guidance with about half of the favorability related to timing with the expenses expected to be incurred in the back half of this year in part due to supply chain challenges and the other half the result of cost controls and open positions. Adjusted EBITDA for the quarter decreased 6% over the second quarter of last year on the Diamond management fee deferral and the higher expenses, which were offset in part by the strength in political revenues and growth in net retrans. As compared to guidance, our $183 million of adjusted EBITDA more than exceeded the high end. Although adjusted free cash flow in the quarter came in lower than our guidance, this was due to a delay in a large IRS cash tax refund, which we're now expecting later this year. Excluding the delay of that refund, we were within our second quarter adjusted free cash flow guidance range. Adjusted free cash flow per share was $1.42 for the quarter, while diluted net loss per share was $0.17. Our liquidity and balance sheet remained strong with $420 million of cash at the end of the quarter, and with an undrawn revolver puts our liquidity at almost $1.1 billion at quarter end. Total debt at the end of the second quarter was $4.3 billion, and STG's first-lien indebtedness ratio on a trailing 8 quarters was 3.3x, while total net leverage due to the bonds was 4.1x. In April, we closed on $750 million of new term loans that mature in 2029, with the proceeds used to redeem our senior notes that were set to mature in 2026 and to refinance the Term B-1 loans that were set to mature in early 2024. We also extended the maturity of $613 million of our revolving credit facility to 2027. Should a downturn in the economy occur, all of our near-term debt maturities have been addressed with our next maturity not until 2026. During the quarter, we repurchased in the open market $118 million face value of our senior notes due 2027 at a $14 million discount. We also repurchased 1.6 million common shares under a 10b5-1 stock buyback program and an additional almost 500,000 shares since June 30. Year-to-date, we have repurchased approximately 6% of our total shares outstanding for $114 million. Our total share count at the end of the quarter was approximately 70 million shares. Turning to our third quarter guidance. We expect another strong quarter for political, which is the main driver for media revenues increasing approximately 10% to 12% versus the pro forma third quarter of last year. Third quarter core advertising is expected to be flat to down low single-digit percent versus third quarter of last year pro forma. The downside of the range is driven by anticipated political crowd-out, the absence of Olympics and macroeconomic factors, while the high end is driven by growth of our digital revenues. Third quarter adjusted EBITDA is expected to be between $197 million and $215 million compared to $190 million pro forma last year, with the increase primarily the result of higher political revenue, partially offset by the management fee deferral, higher network programming fees, technology and infrastructure upgrades sales costs on the higher revenues, news content and NextGen initiatives. Adjusted free cash flow for the quarter is expected to be $162 million to $182 million or $2.32 to $2.60 per share. For the year, based on current assumptions and receipt of the delayed tax refund, we expect adjusted free cash flow per share of approximately $11.90 to $12.70 for 2022, excluding Diamond's January and February results. And so with that, I would like to open it up to questions.

Your first question is coming from Dan Kurnos with The Benchmark Company.

Maybe we can just talk a little bit, I guess, maybe for Rob or Chris, just around the interplay between political and crowd-out and what you're seeing just overall? Obviously, Chris, in your prepared remarks, you mentioned, no one has a crystal ball, obviously, none of us do, that would be great. But just in terms of all of the commentary we've heard out there just around national softening, we've heard that local has held up better. But if I pull out political from both years and exclude Tennis, it looked like core was down a little bit worse just within the Broadcast segment. So maybe just kind of talk through what you're seeing there? You gave some category color, but just sort of expectations maybe on how that trends or how that holds up based on either cancellations or what you're seeing in the marketplace?

Yes. Dan, this is Rob. I'll take that. We're seeing retail and medical categories, they were strong in the first quarter and continued to hold well in the second quarter as well. As mentioned, Services, which is our largest category, saw some weakness due to the insurance subcategory within that category. Auto is now coming on a go-forward basis. Annualized, it's come full circle with the chip shortage. So we expect it to have a new normalized look until the chips supply is fixed. So that will not be a drain on our pace. Sports Betting category will be down slightly. What we're seeing is it's crossed the 50% threshold. So dollars are moving to the network and where our opportunities are is when each state opens up, and we expect Ohio to open up; that's where we'll see the money coming in. And due to the fact that we've built out a robust digital portfolio, we believe that both on-air and digital will remain the buffer to keep us strong on a go-forward basis. We will see some spot weakness on the core just due to the record political that is coming in. And for the first half of the year, it's robust. We have many races going on in our key markets that will drive our business for the rest of the year.

And I'll just add to that. So when you think about Q2 core being down low single digits but having a record political quarter, insurance going through various issues, auto still not back. We're very pleased with that outcome. And then looking forward, Q3, we'll definitely have significant crowd-out, but political will be tremendous again as we anticipate. And then Q4, we'll have a half a quarter of political but also we're going to be lapping the impact of the cyber event we had last quarter. So the year in terms of core advertising revenue in general looks very positive going forward.

And I'll add one last thing, Dan, that we've done extensive training on how to sell through a down economy with our local sellers. And so they're having those conversations on a continuous basis with our local and regional clients and how to get through a potential recession. So we think we're 4 to 5 to go forward.

Got it. And just to be clear, you're not seeing, at least at this time, any incremental cancellations or anything that would make you additionally concerned relative to what we've heard from others.

No. It's some sporadic cancellations. But on the upfront through our Sinclair Sports Group that sells the house of brands, we've seen linear at a mid- to high increase on spot and a 43% increase in our digital spend. So what was laying in during the upfront leads us to believe we will be okay.

Understood, that's useful information. Additionally, with the World Cup approaching, it might help maintain your viewership. Regarding retransmission, mid-single digits seems to be slightly better than the wider industry trend for broadcasts. Can you share any thoughts on specific sub-trends or the outlook for net retransmission for the rest of the year? I'm trying to understand where you're headed as you look into 2023.

Yes. So I'll take that one, Dan. So we continue to forecast gross retrans to grow mid-single digit percent this year. And that's assuming mid-single-digit percent subscriber churn, which is what we did see in the second quarter. And then just while it's too early to provide any outlook for '23, what I will say is we have in the fourth quarter of this year, we have our ABC affiliates, which renew. And then on the distributor side, we have about just over 30% of our big 4 subscribers that renew in the back half of next year.

All right. That does it for me. Glad to see I'm not entirely crazy when I see broadcast a little bit sticky.

Your next question is coming from Steven Cahall at Wells Fargo.

Maybe first just on political, could you add any more context to what drove such strong results in the second quarter? I assume it's a lot of primary activity, maybe some state referendums. It might be great to maybe help us think about it versus either 2018 or 2020 in terms of what was candidate money you're doing and what was issue or pack money doing? And now that we're kind of through a lot of those primaries, are you seeing the same sort of strength versus '18 or '20 kind of continue as you see the bookings come in for the third quarter? It just sounds like things are really, really strong. I just want to get as much color as we can there. And then, Lucy, I was wondering if you could just provide us with a little more color on the cash tax refund. Does that impact your NOLs at all? Is it separate? And could any of that extend? And could you see anything like that in 2023 as well?

Yes. Let me start with the cash taxes. Our forecast for this year totals $138 million in refunds. There is an additional $158 million in refunds that the IRS has approved but is currently delayed in processing. This was included in our guidance for the second quarter, but it has now been pushed to the second half of the year due to timing. As for 2023, it's too early to provide any estimates. We also have a few other audits in process with the IRS, but it's premature to predict the outcomes and timelines for those.

But those audits do lead to additional returns. They are still being processed.

And on the political side, I'll set the macro first. It was estimated $5.7 billion was spent in 2018. The cross-screen media's most recent call is for $9 billion to be spent in 2022. So first half of the year, there were many issues that were driving it as well as some of the primaries. But when we look at the issues on the ballot, we have religion issues, abortion issues, gambling issues, firearms amendments, we have abortion, marijuana for recreational, minimum wage, citizen voting, right to health and right to work. So we think all those factors are going to drive and where all the issues pop up that we don't see. And in Florida, just announced that he's raised $20 million for the rates there. So the money keeps coming in across the country. So that's why we're very robust in our estimates.

And maybe just one quick follow-up. Are you able to update us on how many Bally shares are now owned at SBGI or STG, and any progress on those performance warrants?

I will follow up on the specific number shortly, as I don't have it readily available. Regarding our performance metrics, which we consider to be very low, Bally's has a 10-year timeframe from the original deal date to meet these targets related to total users. They have now launched in six markets with their latest offering, which incorporates technology from Europe into the U.S. They are making progress towards these goals, but they have not reached them yet. We still believe they will achieve them easily within the allotted time.

The number of shares is 12.8 million share equivalents.

Yes, sorry, 12.8 million. That's the total. It's not the amount subject to performance levels.

Operator?

Your next question is coming from Aaron Watts at Deutsche Bank.

Two questions for me. I guess, first, Lucy, you were able to take advantage of discounted bond prices this past quarter. Could we see more of that? And hoping to hear your updated thoughts around leverage for the station group now. A question I ask in light of a large portion of the management fees from Diamond now being deferred that were previously paid in cash. Do you see that impacting leverage? And where do you see leverage living over the near-term horizon?

Yes. We have been strategic over time with our investments, both in shares and bonds, and we plan to continue this approach. Our liquidity at the end of the quarter was nearly $1.1 billion, with net leverage in the low 4s, which aligns with our target. As we move into the latter half of the year, coinciding with the peak of the political season and the arrival of cash tax refunds, we anticipate finishing 2022 with a robust balance sheet and liquidity. This positions us well heading into 2023, particularly as we enter a non-political cycle, and should there be an economic downturn, we believe we will be well-equipped to handle it with our strong position and leverage levels. Additionally, we have further strengthened our balance sheet by eliminating near-term maturities, meaning we won't face any debt repayments for another four years. Overall, we have worked diligently this year to achieve a strong position, supported by solid free cash flow, which will further enhance our standing as we approach 2023.

Okay. Great. That's really helpful. And then my second question, it's been some time since I've asked about Tennis Channel, but you highlighted some themes. So I thought I could follow up. With Serena seemingly close to retirement and a couple of the big 3 men's players playing less or also sadly nearing the end of their professional careers, how is that impacting viewership throughout the year for the network and then also adoption of the app? And then kind of secondly, given how competitive bidding for sports rights has gotten, can you remind us how long the key deals are locked up for at Tennis Channel? And then finally, is Tennis Channel generating positive EBITDA for you? And does it fit strategically with the station group going forward?

We have observed some declines in ratings recently as a few prominent players are participating less. However, we are optimistic about the emergence of new talent, particularly on the women's side with players like Coco Gauff and Naomi Osaka. A new generation of stars is emerging, which we believe will positively impact viewership. Additionally, the app and streaming services have seen significant growth in tennis, with authenticated streaming up about 200% this year. The subscription video-on-demand product, which does not feature the main content on Tennis Channel, is set to launch at the end of 2023 or early 2024. The extra content available on TC Plus has also seen increased subscriber numbers this year. There is a significant opportunity in streaming overall, with T2 ranking as a top 3 sports channel on Samsung TV. Once the one-year exclusivity ends, we will broaden our presence on other FAST channel platforms and expand internationally. We have already launched FAST channels in some international markets and will further grow in this area. Regarding the duration of our contracts, they vary from 2022 to 2035. One advantage of the tennis industry is its fragmentation, allowing us to secure rights from multiple parties rather than relying on a single one. This gives Tennis Channel a robust position within the value chain as an aggregator. Therefore, we are not overly concerned about any single rights agreement. Our EBITDA from Tennis Channel is positive and has more than covered its costs since our acquisition; however, it accounts for less than 10% of our total EBITDA within STG, SBG. We are enthusiastic about its various growth opportunities, particularly internationally, where we are currently in eight countries with plans to add more. We are acquiring live rights in markets such as Germany, Austria, and Switzerland, and we will also develop SVOD and FAST platforms in these regions. Our multi-platform strategy positions Tennis.com at the heart of our global digital strategy, with strong appeal for tennis across multiple languages. We anticipate launching a direct-to-consumer strategy in the U.S. for the main Tennis Channel product in the near future. Lastly, we are expanding into other sports like pickleball, which is rapidly growing in America, and we will engage more with this and other lifestyle sports to leverage our production capabilities for Tennis Channel. We are very excited about the future of Tennis Channel, which we believe has tremendous growth potential, even if it is not strategically aligned with the television group.

So Aaron, also I'll add is that there's always this cycle of generation. Serena, up until Wimbledon, hadn't played for 12 months, and you had the U.S. Open story with the British, Emma Raducanu, who's now playing in D.C. right now. You have Carlos Alcaraz, who is the next-generation Spaniard coming up and is considered to be more advanced than where Rafa was. Now Rafa has had an incredible career, so you don't know where that career is going. But even in Indian Wells, which is considered the fifth major, an American Taylor Fritz, won that tournament. So there is a next generation coming up on both sides. The women and men that people will be tuning in to, and they'll be the next idol of all the kids that are playing across the country.

Yes. I share your enthusiasm about the younger crop. I appreciate all the details and the time.

Your next question is coming from Barton Crockett of Rosenblatt Securities.

Can you provide more details about what you're experiencing in terms of pacing in the third quarter? I understand you're sharing your guidance, but how does your current outlook compare to what you're observing now? Additionally, regarding the concerns about the macro environment, you've mentioned insurance. To what extent are you encountering macroeconomic challenges in your advertising business?

Yes, I can give you some color. I mean we're pacing the outlook we're pretty confident with is again, with the extensive political and artificially will tighten up our supply, which will lead to obviously increase rates corresponding with the diminished inventory. And on the macro level, like I said, we're coming around the corner, so we'll have apples-to-apples pace with the chip shortage, so we'll have some normalized environmental pace with auto, which had been a drag for the last several quarters. And again, we're selling through this tough economy and the local advertisers continue to be strong. And in the upfront, we saw strong activity. And again, I'm not ready to call where the economy is going to go long term. But due to the strength of all our digital assets that we've built in a portfolio that sells across the platform, we feel we're in a good position.

I'll add that, despite the increase in political activity in Q3, our guidance does not indicate any significant decline in core advertising performance in Q2. I think that's a strong point. Any weakness we've observed, such as in insurance, is largely due to macro concerns; many insurance companies have faced reduced profitability due to various environmental disasters affecting their underwriting results, which is specific to the insurance industry. The automotive situation is also unique due to the chip shortage. Overall, we're not experiencing broad macro pullbacks in the advertising market; rather, the challenges are more industry-specific, stemming from supply chain issues and other sector-specific factors.

Okay. And then if I could just follow up on one category that you guys had highlighted, which was Sports Betting. It sounds like from what you're saying that the pressure there is really allocation of dollars to national networks because they are not large enough in presence and footprint for Sports Betting to do that. I just want to make sure I understood that correctly. And then it sounds like you're saying that the growth driver from here is going to be new markets opening up like Ohio, but then it sounds like over time, that that movie will be year-to-date gone tomorrow as it moves to National. So I'm just wondering because this has been seen as a big growth category, not just for openings, but overall, how should we feel about Sports Betting as a growth category for local TV from here, do you think?

Yes. I think it's flattened. The cost of acquisition has gone over $1,000. And I think we have to wait because of my subjective opinion and what's been on the street is that there'll be some consolidation because of the costs they require an active better. And so from the broadcast side, they might buy some high-profile sports, but we see it flattening. But when we get into our sports segment in a couple of weeks, it's much more robust in the sports segment.

I want to add some thoughts on Sports Betting. In a new category like this, we can expect fluctuations in volatility. However, looking at the bigger picture, this category didn’t exist a few years ago, and it's likely to grow to be between 5% and 10% of our overall mix. That’s a significant increase for something that was nonexistent just three years ago. I believe it will mature into a category that represents 5% to 10%, which is substantial. Another interesting point about Sports Betting is that it continues to grow strongly on the RSN side. The characteristics that Rob mentioned regarding National do not apply to the RSNs, which are a perfect match for Sports Betting.

The other thing to think of is as we progress through the year, we'll be adding game centers to the broadcast websites, and that will be opportunities for sponsorships and again, to increase our first-party data as well. So we believe in a lean forward strategy of broadcast and on our sports side will become prevalent.

Your next question is coming from Edward Reily at EF Hutton.

Just to piggyback on Aaron's question. I was wondering if you could give us some more color on the strength in digital by platform.

Yes. Look, we believe, obviously, our station websites with monthly averaging between 80 million and 90 million uniques gives us a huge opportunity to launch many different business opportunities from that gamification to e-commerce to marketing affiliates to launching some of our own products that will be sold directly to our core audience as well. As we said, we had record audience on tennischannel.com during the French Open. So our whole thesis is that we're going to give our audience an opportunity to receive our content where they want it, how they want it. So we feel really strongly about that. And then Compulse or SaaS business, there's a major focus on growing that business and being a dominant player in the local space.

Have you found it challenging to acquire additional customers given the macro weakness here for Compulse, specifically?

No, because we don't believe so because of the SaaS business, people will be in there. You've seen this percentage of budgets going to CTV. And so especially during the political crowd-out, we expect money to be shifting that would have gone to some of the core going to digital expenditures.

The other thing to remember about Compulse 360 is that it's unique in that it offers transparency and flow-through pricing in a marketplace that's dominated by arbitrage pricing. And so as people seek to make more transparent to be more efficient, to keep more of the media margin for themselves, Compulse answers all those questions and does so in an automated, efficient way. So that value proposition is very, very strong. I think it will only get stronger as things potentially get tighter.

Your next question is coming from David Hamburger with Morgan Stanley.

Just a couple of questions. I noticed that the DSG management fee deferral resulted in $16 million of reduced revenue in the quarter. I was wondering, is that a good run rate that we should think about going forward for that number? And then can you tell us kind of, you mentioned it also in the EBITDA results, what sort of margin should we expect on that fee?

Yes. Regarding the management fee, since we're accounting on a cash basis rather than the total, I believe you would be safe to project a similar run rate of about $10 million for each of the upcoming quarters.

And what sort of margin for EBITDA purposes should we be thinking about on that?

It's pretty much a 100% flow through.

Yes.

Okay. Great. And then just to reconcile kind of the cash, I know that the DSG A/R facility of about $400 million, it was about $163 million drawn last quarter. Can you tell us how much either a decrease or increase in that outstanding affected Sinclair's cash balances since the counterparty to the A/R facility?

It increased, I think.

It's around $200 million, I think.

The total here, about $183 million, I think. Hold on a minute, David. Just didn't have that number handy. But that number that A/R facility is not in our cash number.

No, I know. But you're the counterparty...

Yes. So it went from $163 million drawn at the end of last quarter to $193 million drawn this quarter. And again, that's going to fluctuate based on their A/R that's outstanding.

Okay. I know you usually provide some context, and the question was asked earlier, so could you elaborate a bit more? What is the remaining amount of the deferred tax asset on Sinclair's balance sheet? I understand that Diamond was deconsolidated for accounting purposes, but it seems like there are still tax implications to consider.

Sure. We can follow up, David, with what that number is. But there are still significant tax benefits coming from that ownership.

There are no further questions in queue at this time. I would now like to turn the floor back over to the President and Chief Executive Officer, Chris Ripley for any closing comments.

Thank you all for joining us today. If you should 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.