Sinclair, Inc. Q2 FY2023 Earnings Call

Greetings, and welcome to the Sinclair Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Chris King, Vice President of Investor Relations at Sinclair. You may begin.

Good afternoon, everyone, and thank you for joining Sinclair's second quarter 2023 earnings conference call. Joining me on the call today are Chris Ripley, our President and Chief Executive Officer; Lucy Rutishauser, our Executive Vice President and Chief Financial Officer; and Rob Weisbord, our Chief Operating Officer and President of Local Media. Before we begin, I want to remind everyone that slides and supplemental information for today's earnings call are available on our website. Following shareholder approval and closing of our holding company reorganization, we recast our financial results on a quarterly basis for 2022 in the first quarter of 2023 to conform with the new organization structure and reporting. Those updates are available on our website for the revised segment reporting. For questions about our recast financial statements, please reach out to our Investor Relations team sometime after this call. Certain matters discussed on this call may include forward-looking statements regarding 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 our website. 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 and the ability to service its debt. The company believes that adjusted EBITDA is frequently used by industry analysts, investors, and lenders as a measure of valuation and ability to service debt. The company does not provide reconciliations on a forward-looking basis. Further discussions and reconciliations of non-GAAP financial measures to comparable GAAP financial measures can be found on our website. Any discussion of pro forma numbers as compared to 2022 will exclude Diamond, which was deconsolidated on March 1, 2022. We for actual results, including the period that Diamond was consolidated, please refer to this morning's earnings release. In addition, due to the pending Diamond litigation, we are unable to comment on any specifics regarding the legal issues surrounding Diamond's bankruptcy or any potential financial impact that may or may not occur as a result of those matters other than to say that Sinclair firmly believes that it has meritorious defenses to the allegations in the diamond lawsuit, and we plan to vigorously defend against them. Let me now turn the call over to Chris Ripley.

Good afternoon, everyone, and thank you for joining us. I'll start on Slide 4, as I would like to begin by discussing the holding company reorganization that was approved by our shareholders in late May and which closed on June 1. Under the new structure, Sinclair Inc. has become the publicly traded parent of Sinclair Broadcast Group and Sinclair Ventures. SBG holds the pure-play local media assets, while a newly formed subsidiary, Syncline Ventures, holds the company's nonlocal media assets. The intent is to provide the investor community with greater transparency of financial results and disclosures on the value drivers of the business while increasing both operational and financial flexibility for creating value within the company. In addition, we are now disclosing more financial detail about the operating results at Tennis Channel, which is now a separate reporting segment, as well as more information regarding management's estimates of fair market value for our non-media assets, including our investment portfolio. The reorganization will allow more transactional flexibility and transparency around the sum of the parts valuation analysis, which I will discuss in more detail shortly. Additionally, Ventures will now have more flexibility to potentially access additional financing, whether debt or equity, to further grow or invest in these assets. While our pure-play focused Local Media division will continue to transform and unlock overall value for the organization. Turning to Slide 5. We remain firmly committed to the local media industry, which is our legacy and core business. However, increased competition from technology companies, streaming content providers, and the networks, as well as continued regulatory constraints, means that we must transform to remain relevant and to grow impressions and revenue share. We must also embrace technology, which is why we're earmarking $75 million this year for cloud technologies, automation and ad sales platforms, data distribution, yield management, and a customer data platform. Due to a combination of timing and permanent cost savings, we now anticipate spending approximately $65 million on these efforts during 2023. Over the next 12 months, we intend to allocate capital to marketing services, multi-platform content community interactivity, next-gen broadcast and cloud technologies. Our next-gen broadcast plans remain a key focal point of this transformation. The migration of data products will allow our industry to unlock the value of our significant spectrum holdings through new revenue and cash flow streams. Despite net leverage increasing this year, in part due to our investment in broadcast and net retrans renewal timing, we believe the changes and investments we are making will drive future returns and free cash flow leading to reduced debt over the coming years. We intend to remain keenly focused on strengthening the balance sheet as we continue to execute on our business strategies in the coming quarters. Turning to Slide 6. I wanted to provide a brief governmental update regarding several key items for Sinclair as well as the broadcast industry at large. In mid-June, the Senate Judiciary Committee passed the Journalism, Competition, and Preservation Act which would allow broadcasters and other news production organizations to negotiate directly with large tech platforms for widespread content distribution. Also in June, Senator Cantwell expressed public support calling on the SEC to initiate a process to update the definition of MVPDs to address the rise of live streaming video services and to allow direct negotiation of carriage between virtual MVPDs and broadcasters. At the annual NAB Show in May, FCC Chairwoman Rosenworcel announced an NAB-led leadership group to work through the issues related to the broadcasting industry's ongoing transition to ATSC 3 panel for next-gen broadcast services. This should help facilitate the wind-down of the older ATSC standard, which will open up more spectrum capacity for future services. We are pleased with all 3 of these significant governmental developments, and we look forward to working with legislators and regulators regarding these crucial issues for broadcasters over the coming months. On Slide 7, Ventures' strategic path is about amplifying its approximate $1.25 billion portfolio with a focus on shifting from mostly minority-owned to majority-owned and consolidated growth investments. Our diversified portfolio of investment assets has delivered strong results in the past, returning an IRR of 19% over the past 10 years and our target for future investments is to have an IRR threshold goal of 15% to 20%. We look forward to sharing further developments regarding this asset portfolio in the months ahead. Turning to Slide 8. We are disclosing separate financials for Tennis Channel for the first time as part of our increased disclosure for Sinclair Ventures. During the second quarter, Tennis Channel reported $60 million in total revenue and $8 million in adjusted EBITDA. We note that there is some seasonality associated with Tennis Channel's financials, particularly on the operating expense side, largely due to production costs associated with the coverage of Roland-Garros, which occurs during the second quarter. We expect full year revenues to be in the range of $223 million to $226 million, while adjusted EBITDA is expected to be in the range of $53 million to $56 million. This includes approximately $14 million in net operating expenses to fund the growth initiatives, including direct-to-consumer, Tennis Channel International, T2, and BikoBall. As seen in Slide 9, we're also presenting greater disclosure around Ventures' investment portfolio, which excludes Tennis Channel and Compulse along with the current methodologies for calculating the fair market values of the various assets. Management's estimates of the value of these assets include the current cash position, reflecting a total portfolio value of $1.25 billion. As a reminder, these assets have generated a 19% internal rate of return over the last nearly 10 years. During the second quarter, Sinclair made investments of approximately $6 million into the portfolio of investments and received distributions of approximately $5 million. Going forward, part of the strategy in Sinclair Ventures will be reducing our minority stake investment stakes over time and focusing more on majority investments that we can operationally and financially control. Turning to Slide 10. I wanted to highlight the current valuation discrepancy between our estimation of the fair value of our assets and our current enterprise valuation. Our current total enterprise value as of July 26 was $44 billion. We signed an approximate $1.25 billion valuation of the assets held in our investment portfolio. We have signed an approximate $1 billion valuation for Tennis Channel and Compulse based on Tennis Channel's EBITDA using a 12 times trailing 12-month multiple and a 2 times gross drilling multiple for Compulse. When combined, this yields an estimated fair market value for Sinclair Ventures, assigning a 7 times adjusted EBITDA multiple for our Local Media segment, which is in line with recent trading comps on an average, 8-quarter basis yields a local media fair market valuation of $5.7 billion. Taking into account the approximate $50 million of annualized unallocated corporate expenses, this yields an estimated total implied fair market value of approximately $7.6 billion, suggesting a current equity discount of almost 80% with an implied share price of approximately $65. While we realize and acknowledge a current discount on our capital structure due to several issues, including some uncertainty related to the Diamond scores bankruptcy outcome, we believe the deep discount on the fair market values of our current asset remains unjustified. Management is keenly focused on closing this valuation gap as we continue to invest in both our local media and venture assets and businesses. One of the ways we expect to close this valuation gap is through the transformation of our traditional broadcast business. Turning to Slide 11. Work continues on our next-gen broadcast core network and platform. We currently expect to go live in the first quarter of next year. This network will create an interconnected platform to provide commercial services and solutions for national data distribution and represents what we believe to be the next step in the evolution of the broadcasting industry. Slide 12 highlights recent developments for NextGen broadcast. To date, we are live with NextGen broadcast in 41 markets, including recent launches in South Bend and Reno, which represent approximately 69% of the TV households in our licensed footprint. By year-end, Sinclair will have deployed NextGen in over half of our 86 markets covering 74% of our covered population. The industry has also committed to launching an advanced emergency formation pilot project to disseminate crucial information with enhanced broadcast features. We currently expect NextGen revenues to begin in 2024 as the technology grows towards BIA's midpoint forecast of $10 billion in industry revenues by 2030. I will now turn the call over to Rob for operational highlights.

Thanks, Chris, and good afternoon, everyone. Our commitment to our local media platform remains strong. Sinclair reaches 1 in 3 Americans on a daily basis, more than 100 million people. We are launching 25 local fast channels in addition to expanding Tennis Channel into new international markets as well as expanding the network's T2 fast channel. We continue to invest in our social media and digital content, including hiring Nicolas James, a veteran of HBO Max, Conde Nast, to head our social and digital content initiatives that drive our growth and engagement strategy. This joins Richard Cook, Vice President of Audio Programming, who was brought in to create compelling local content delivered to audio deciders. We are a premier cross-platform producer and distributor of local media on every platform, wherever, whenever, and however our viewers and listeners want to consume it. Turning to Slide 13. I wanted to take a minute to provide some color around our distribution revenues. Several weeks ago, we announced a distribution agreement with Hulu for the carriage of Tennis Channel, T2, Common, and charge to Hulu Plus Live TV beginning in January of 2024. During the second quarter, we began our new carriage agreement with YouTube TV, which now has access to Tennis Channel, P2, Chart, and TBD as of June 1. In addition, with respect to our upcoming retrans renew cycles, we have material renewals coming up during the second half of this year and into 2024, which combined represent approximately 90% of our big 4 subscribers. These renewals are expected to drive both top and bottom line growth to achieve our guidance of a 3-year CAGR of net retrans growth of low single digits. In addition, we anticipate our reverse retransmission agreements to have modestly improved terms as the industry takes into account current subscriber churn levels as well as the loss of some additional exclusivity as networks push content for their own streaming products. Churn during the second quarter was slightly better than our internal expectations. However, we continue to anticipate linear subscriber churn to continue at elevated levels for the entire industry. We still believe that broadcasters are not at parity concerning retransmission revenues and that the industry is not adequately compensated for the programming content and audience share that we consistently bring. A study conducted by the Television Bureau of Advertising earlier this year found that local broadcast needs has 8 to 12 median impression with only a fraction of the total number of programs of major streaming platforms. Local broadcast news remains a key pillar of the view and engagement across the country and is a key factor in our belief that local broadcast is not being adequately compensated for such programming today. We discuss our current core advertising trends for the Local Media segment on Slide 15. For advertisers, excluding political, fell by less than 1% in the quarter on a year-over-year basis. Auto continues to be a strong performer for us with that category up 6.5% year-over-year. We believe our drive auto platform allows us to clearly differentiate ourselves in the marketplace from a Tier 3 dealer perspective. Overall, legal services continued to perform well during the quarter, but most other service categories, led by insurance, recorded year-over-year declines. As we begin to look at early third quarter trends, advertising trends appear to be largely unchanged from second quarter trends with a notable exception of national advertising, which is improving over the past month. On Slide 16, I wanted to provide an early preview of what we believe will be a strong 2024 for political advertising. Sinclair stations are in 23 of the 34 states with Senate races in 2024, 7 of the 11 states with gubernatorial races, and 10 of 12 presidential swing states, as defined by a close 2020 presidential race in those states. This spending is also heating up with cannabis, immigration, abortion, gun control education, and sports gambling all expected to drive incremental political spend over the next 18 months. We have already booked $9 million in political revenue during the first half of 2023, including $5.5 million during the second quarter, which is almost 10% above our political revenues booked during the second quarter of 2021. Early fundraising totals and political advertising that we are already seeing suggest another record year for overall political advertising in 2024. On Slide 17, I wanted to take a brief minute to highlight our broadcast awards received in just the past quarter. This includes 23 Edward R. Murrow Awards for outstanding journalism, a Sports Emmy Award for writing long form, and 4 Telly Awards for news and news feature reporting for full measure with Cheryl Atkinson. In addition, our local Baltimore Fox affiliate WBFF was honored with two prestigious awards in the quarter, first by investigative reporters and editors for its reporting on the Baltimore County public school system, disposing how students with disabilities were denied proper education. The station also won the national Sigma Delta Chi Award for investigative reporting for its Project Baltimore reporting unit from the Society of Professional Journalists. Project Baltimore also won the prestigious Investigative Reporters and Editors Award for the fourth year. In addition, Sinclair podcasts were recognized as best in their respective regions. In total, so far this year, Sinclair has won 180 regional awards and 14 national awards for news operations. These awards underscore our unwavering commitment to providing the best in local journalism and news gathering, and we are extremely proud to be so honored. I want to congratulate all our award-winning journalists who have been disciplined, diligent, and unafraid about producing challenging stories. Turning to Slide 18. As Chris touched on earlier, Tennis Channel continues to perform well, with audiences up in key demographics across the board. Coverage of Roland-Garros in late May and early June with over 2,000 hours of coverage drove record viewership for Tennis Channel as well as viewership for T2, our live and VOD subscription service, and Channel Plus. Despite the tournament shifting a week later this year, second quarter ’23 average audience increased by 20% year-over-year in total viewers, outpacing all other English-language sports networks. Live coverage of Roland-Garros saw total viewership increase by 13% over last year's levels, and the Djokovic versus Alcaraz semifinal match was the second most-watched Tennis Channel match of all time. Tennis Channel also saw an average number of monthly subscribers increase by 17% year-over-year. Tennis also launched its e-commerce store tennis shop.com in early June during Roland-Garros with racket sports equipment e-tailer, Tennis Point. Additionally, Tennis Channel continues to invest in its growth initiatives, including Tencent and national, T2, the network's direct-to-consumer product offering, which is tentatively scheduled to launch in March of 2024 as well as PickleBall. We believe Tennis Channel is well positioned to deliver continued strong growth metrics in the months and years to come. Also of note, our Salt Lake City affiliate, KJZZ, known as Kaz, announced last month that it will be carrying all non-nationally televised games of the NBA's Utah Jazz beginning in this upcoming season. We're already seeing high engagement from this content during the summer league. I will now turn the call over to Lucy to share our financial results.

Thank you, Rob, and good afternoon, everyone. Hitting on Slide 19. On a consolidated basis, we delivered media revenues during the second quarter at the high end of guidance as distribution revenue was modestly higher than expectations and core advertising revenue met our internal forecast. As compared to last year, consolidated media revenues decreased to $761 million during the quarter primarily on the absence of political revenues and to a lesser extent, the impact of year-over-year subscriber churn and softer national core advertising. On a pro forma basis, media revenue was $762 million in the quarter, which excludes divested assets and is comparable to the $828 million in the second quarter of 2022, as seen on the right-hand side of the slide. On Slide 20, consolidated adjusted EBITDA exceeded the high end of guidance for the quarter on revenue performance and lower-than-expected expenses, driven by a focus on cost controls and timing. As compared to last year, on a pro forma basis, consolidated adjusted EBITDA in the quarter decreased from the year-ago period, with media revenues contributing most of the decline as a result of the absence of political revenues, which is not an apples-to-apples comparison as this year is not a major election year. Media expenses were up modestly in the quarter year-over-year due to annual compensation increases, production expenses, as well as investments in technology and other growth initiatives. Corporate overhead, non-media EBITDA, and other costs increased slightly year-over-year and were partially offset by lower film payments. Slide 21 shows our consolidated adjusted free cash flow results, which also exceeded our guidance for the quarter due to the favorable revenue and adjusted EBITDA results as well as lower-than-expected capital expenditures with other cash items being in line with our forecast. Adjusted free cash flow declined year-over-year on a pro forma basis primarily due to the decline in adjusted EBITDA, as just discussed on the previous slide, as changes in net interest, cash taxes, and CapEx netted against one another. Slide 22 outlines the consolidated results by segment, highlighting that the Local Media segment generated $111 million in adjusted EBITDA for the quarter, while Tennis Channel added $8 million. Slide 23 details our balance sheet metrics. The next significant debt maturity is the Term Loan B2, scheduled for September 2026. At the end of Q2, Sinclair Television Group's first lien net leverage stood at 4.1 times, and total net leverage was 5.1 times. The net leverage for Sinclair Inc. across the company was 4.7 times, accounting for all debt and cash on its consolidated balance sheet based on the trailing eight-quarter adjusted EBITDA average. Our consolidated cash position reached $728 million at the end of the quarter, with $368 million at SBG and $360 million at Ventures. During the quarter, Diamond fully repaid the $193 million outstanding balance of the accounts receivable facility and reduced the commitment to $50 million, which remains undrawn. There were 63 million shares outstanding at the end of the quarter. While we believe our equity is significantly undervalued at the current levels, no additional shares were repurchased since our May earnings report; instead, we focused on open market debt repurchases. Notably, we repurchased $32 million in principal amount of our outstanding debt in June and early July across various tranches for about $21 million in cash, representing a 35% weighted average discount to par and a 13% weighted average yield to maturity. We plan to remain opportunistic about future repurchases of STG's various debt tranches, despite the current scarcity of active sellers. Turning to Slide 24. We present our third quarter financial guidance by segment. On a consolidated basis, we expect total revenues to be between $742 million and $763 million, with total media revenues of $733 million to $752 million, which is down 10% to 12% from pro forma year-ago levels. The primary reason for the decline is due to the absence of political advertising revenues in a non-political year. In the third quarter of last year, we booked $89 million of political revenues versus $7 million to $9 million expected in this year's third quarter. In addition, a year-over-year decline in distribution revenue was estimated to contribute roughly $15 million of the decline at the midpoint of our guidance range, which is partially offset by a slight increase in core advertising revenues year-over-year. While we are not providing full year revenue guidance, we are providing an early call on fourth quarter political advertising, which we expect to be approximately $25 million. On a consolidated basis, we expect third quarter adjusted EBITDA to be $91 million to $109 million, down from a pro forma third quarter last year adjusted EBITDA level of $201 million, primarily due to the absence of political revenue and the impact of continued subscriber churn with no material distributor renewals until later this year, higher network programming fees as well as our investments in technology, infrastructure, and growth initiatives. Adjusted free cash flow is expected to be in a range of negative $9 million to positive $14 million during the third quarter versus $173 million in the year-ago period with the primary drivers of the decline consisting of the lower adjusted EBITDA, higher interest expense, and over $50 million in primarily cash distributions from investments received during the third quarter of 2022. Slide 25 represents our new full year expense and certain cash flow guidance, notably with media expenses and CapEx coming in lower than prior guidance. And with that, I'd like to turn the call back over to Chris for some closing remarks before we do Q&A.

Thank you, Lucy. Turning to our key takeaways on Slide 26, Sinclair wrapped up a busy first half of 2023 on a solid note as we met and exceeded our guidance expectations for the second quarter. While we continue to deal with increased linear subscriber churn levels, Sinclair is well positioned for the future with continued progress being made on our NextGen broadcast network and business strategies, which we believe will begin to transform the industry in 2024 and beyond as well as our ongoing investments in technology, cloud transformation and our industry-leading sales platforms. In addition, we also completed the reorganization of our business units with the separation of SBG and Ventures providing improved transparency for our investors while providing us with much greater transactional and financial flexibility going forward. We believe the current enterprise value of the company falls well short of the true value of the assets that we possess. In addition, I wanted to reiterate my earlier comments regarding our commitment to reduce debt levels over the coming quarters. We are also looking ahead to significant retransmission agreements that are coming up for renewal over the next 6 to 12 months, while preparing for what we believe will be a record year for political advertising in 2024. In the meantime, we continue to see increasing demand, both domestically and internationally for our tennis channel-related assets and programming, and we are proud to be recognized as one of the news journalism leaders in the local media industry. Sinclair is well-positioned for the future, and we remain excited about the opportunities that lie ahead of us as we enter into the second half of the year. Lucy, Rob and I will now open the call to questions. Thank you for joining us today.

And the first question today is coming from Dan Kurnos from the Benchmark Company. Dan, your line is live.

Great, thanks. Really appreciate all the incremental disclosure, guys super helpful in kind of framing the argument. Chris, I'll give you the floor just to kind of go back on a question that I know you get a lot just in terms of the sum of the parts argument and getting investors for people to recognize that value you've laid out kind of a comprehensive strategy now for how the company is going to evolve going forward? And obviously, execution matters to some extent. But if the discount remains knowing that you guys are addressing the debt side, which you've done pretty well so far here. Just how do you think about your willingness to unlock incremental value or do additional things to unlock value the way that you think it should be perceived?

Yes, that's a great question, Dan. Thanks for asking. I think what you can take away from what just happened back in June is that we're very focused on unlocking this value within the company. We backed that up with significant share repurchases now with more debt purchases. And we are very open to any and all strategies to maximize value at the end of the day. That is our number one goal here. So we think this new structure will help tremendously. And we are open to these suggestions and new ideas and always looking to get better.

And in terms of adding to the portfolio, obviously, there's a lot of rumors out there in terms of stuff that could potentially come for sale. I know you guys have to take that into consideration, which you created a vehicle for incremental financial flexibility. Is there any kind of target leverage or thoughts on size of what could be added in the majority stake components of what you talked about today?

Sure. As you can see from our investment portfolio, we now have over $300 million in cash. We understand that from a Wall Street perspective, it would be much easier and more advantageous to have consolidated financials for those investments. This is the main reason we plan to move away from minority investments, which have performed exceptionally well over the last decade, yielding over 19% IRR. However, we believe that providing our underlying financial performance in the disclosures for our various divisions would be more beneficial. We're considering how to deploy that $300 million into a new investment or division, as it would be consolidated sometime in the latter half of this year or early next year.

Got it. And that's helpful. I have a question for Rob. In terms of your comments, we've noticed that the upfront is performing better than expected. National has some strong comparisons for the latter half of the year. It seems like insurance, in particular, is improving. Can you share any insights from your discussions with advertisers, considering the current challenges with strikes and other factors? What is the overall perspective and how dynamic is the situation at the moment?

It's still month-to-month basis, but we're encouraged. We're not seeing any significant cancellations, and autos made its full cycle. So now it's returning their inventory on the Tier 3 logs. We're seeing Tier 2 money regional spending as well. Dollars committed for the upcoming college and NFL pool seasons are being committed to now. So it leads us to believe that we're robust on the return of ad revenue and also encouraged by the amount of issue and political dollars being spent right now. We have money being spent in Ohio, Pennsylvania, Rhode Island, Iowa markets right now, and we expect further markets. But we're pacing ahead of our second quarter performance right now for third quarter, which bodes well where Lucy gave the guidance earlier of $25 million for the fourth quarter. And we firmly believe going into 2024 that Sinclair will have another record presidential year. And so — with our expansion of 25 fast channels that will be news focused, local news focused — as inventory gets tight as an alternative source for the political dollars to be spent in the same genre that they buy through the broadcast wires.

Got it. That's really comprehensive. Appreciate it.

Thanks, Dan.

A couple of questions for me. I'll start with this one, and I apologize if I missed it, but could you comment on the pace of erosion in your underlying sub base for your station group? And whether recent trends have caused you to reconsider your 3-year outlook for net retrans, which I think Lucy was low single-digit growth?

The trend is slightly worse overall, but we're still seeing mid-single digits in churn. We are not changing our guidance for the three-year compound annual growth rate, which remains at 22% to 25% in low single digits. We can handle the slight decline we've observed.

Okay. And Chris, I've asked you this before, but figured I'd try again today. Any greater clarity on whether the upcoming distribution discussions you mentioned will be representing your station group solely or if the RSNs will still be a part of that? And if it is a return just at the stations, do you see some potential upside from prior terms when the RSNs were in the mix?

We will not be negotiating for Diamond in the upcoming renewals. That answers your question. I believe we are very optimistic about the outcomes for nearly 90% of our subscribers who will be up for renewal in the next 12 months.

Yes. First, to address your previous comment, Chris, the retrans guidance for Q3 indicates approximately a 2% sequential increase quarter-to-quarter, which we can annualize to around an 8% churn rate. Is this the correct way to interpret churn at this stage? Additionally, I noted in the prepared comments that there is some improvement in reverse compensation. Should we understand this to mean that the rate of price increases is lower than in the past? Lastly, we've heard that three out of the four national networks are now implementing reverse compensation as a programming fee rather than per subscriber. Can you confirm this?

Most of our deals involve fixed programming fees, which has been the case since the beginning of reverse retransmission. We are noticing a decrease in the rate of increase of these fees, which have become quite substantial overall, as major media companies shift their focus towards more streaming video on demand and other properties. As we've mentioned previously, the negotiating dynamic between us and the networks has become more balanced, allowing us to manage our programming costs more effectively. That's what you're observing.

Yes, Steven. So on the revenue side, as Chris mentioned, we're seeing mid-single-digit churn on broadcast, and that's what we've modeled into the guidance. From a revenue standpoint, don't forget there will be YouTube TV, which just launched Tennis Channel on June 1. So you'll have a full quarter of that in there for the third quarter, adding to some of the increase as well as just some escalators year-over-year.

Great. And then maybe just a couple on the ventures portfolio. So I was wondering how we think about what the balance sheet entry currently is for some of the assets that you reflect on that Slide 9. The cash and the valley stakes are easy, but just wondering how you currently carry those investments on the balance sheet. And you mentioned that you might want to deploy some of that cash. And with that, could we expect any major exits ahead? And also related on this one, would you ever consider spinning out this business because I wonder if some of the challenges just that as media investors we're a little out of our element trying to put all this together sometimes.

Sure. So what's reflected on Page 9 are the current conservative market values of the various assets. So that does not come through on the GAAP balance sheet. On the GAAP balance sheet, it's the lower of cost or market. Most of these are going to be listed at cost because their market value is well ahead of their costs. And so — in terms of spinning this off, as I mentioned before, I think that sort of goes in the bucket of what would we do to realize value that is something that it's not currently contemplated, but it's certainly something that we've discussed. And ultimately, if we can't close this valuation discrepancy, it may be something that we would do in the future. I think there was one other question embedded there that I might have missed.

Okay. I was interested in your thoughts about an event that's been put out there or the group, which is saying that you expect at some point the ESPN will go direct to consumer, maybe in some type of partnership. I'm just wondering, Chris, for your thoughts about what that means for the Pay TV ecosystem. Do you think others would respond? Do you think this accelerates subscriber erosion or not? And is there anything that Sinclair can do to prepare for that?

Well, when you take a look at what's on ESPN Plus right now, I mean, ESPN is pretty much already there. Very little that is not on SAMs that is on ESPN. When you think about what's happened over the last 5 years, to me, this is just one of the last dominoes — certainly not the first. Essentially, exclusivity has gone away. If you're a consumer, there may be some inconvenience to it all, but you can access any content on the pay TV bundle in a myriad of ways. What does that mean for the industry? It means that the pay TV bundle, which is discounted and a large wholesale content bundling when you break down the cost to the consumer is less on a per program per channel basis than anywhere else. At the end of the day, exclusivity really does not exist in the industry anymore. It's what's the value proposition to the consumer. Pay TV is now competing on a value proposition basis with all the other sources, mainly the SVODs out there. It is significant that there's a shift of major shifts in the industry away from subscriber growth and towards profitability for all the major SVOD players. Pay TV got disproportionately hurt when there was a dive for subscribers. Essentially, these other services were underpriced massively. You're seeing now the relative pricing of the SVOD alternatives is going up rapidly, which means the value proposition of buying a large wholesale discounted bundle like pay TV is becoming more attractive on a relative basis as the industry becomes more rational.

That's great. I appreciate the insightful comment. There's one other thing I wanted to ask about, which is political. Many of us have been reading in the news that some of the fundraising totals for perhaps Trump and others are coming up a little shorter than it appeared earlier. Yet your commentary about political still seems very optimistic. How do you reconcile what we're reading about fundraising and possibly securing the Republican nomination with your constructive view of political at this early stage?

It won't be just the individual seat raises, and we are in the majority of the contested states that were type races in 2020, but you're seeing an abundance of issue advertising as well. It's not just a candidate but issue as well that keeps us bullish on where the political outlook will be in 2024. We also think there's a lot of money sitting on the sidelines as the current Republican primary looks sort of uncompetitive at this point, which could be affecting fundraising. But as things change, they always do, if you get down to the stretch here, we think you'll see fundraising start to raise later in the season.

Just one for Chris or Rob. You noted the lack of programming exclusivity could cause the network in terms of reverse retransmission. You could argue, however, that same lack of exclusivity, especially on the sports side, could impact stations as they go to negotiate against the MVPDs. So I'm kind of wondering how you're thinking about that as you head into your subscriber cycle.

Yes. At the end of the day, there really isn't a service offering from the MVPDs in terms of video if they don't have key components of the programming offering, which includes our channels. While it's true what I said that there are other ways to get this content, and it's been that way for several years now for many programming types, the MVPDs, if they want to have a video service, need to have our channels. And that's what really underlines our ability to continue to get a healthy share of what is charged to the ultimate consumer.

I believe it's our unique commitment to serving our communities and the value we provide when sharing our content that sets us apart. This is why it's essential to emphasize our relevance across all platforms. When we maintain relevance on digital platforms, it effectively brings viewers back to our traditional broadcast stations. Our award-winning journalism, alongside that of other broadcasters, is a key reason why audiences choose to engage with us.

Hi. Can you guys give a little bit of color on how we should think about the incremental economic benefit stemming from your continued deployment of ATSC 3.0 next-gen TV? I know you guys have rolled it out to a meaningful part of your footprint and expect to make more progress. But how does that translate economically into results moving forward? And how do we quantify that? What should we expect?

Sure. I expect some of the first non-broadcast services to start rolling out in 2024. Things related to enhanced GPS, I think, are some of the first things that will start to roll out next year, and that should start to create a revenue stream for us and other broadcasters. It's too early for me to guess how quickly it ramps up. I think the directional midpoint forecast for BIA of $10 billion of revenues for the industry is directionally correct, and depending on a bunch of different factors, like receiver penetration when the deployment is finished, and when it gets sunsetted. Those are all things that I don't have answers on yet to really give you a more predictable ramp to that higher revenue, but things are going to start moving next year in terms of monetization opportunities beyond broadcast.

No. That's helpful. I appreciate the color. Just one more. In terms of debt repurchases moving forward, how should we think about your preference towards tranche in buying back debt? Is it going to be shifted towards the 27%? Or how are you guys thinking about that?

Yes. We want to keep our options open regarding potential purchases. The fact is we have numerous opportunities ahead of us, including debt, equity, and potential investments, and we will remain opportunistic as we have in the past. However, we cannot provide details on specific tranches that we may acquire.

There are no other questions at this time. I would now like to hand the call over to Chris Ripley, President and Chief Executive Officer, for closing remarks.

Great. Thank you, and thank you all for joining our call today. If you have any questions or comments, please call our IR team.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.