Nexstar Media Group Inc (NXST) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Nexstar Media Group 2018 First Quarter Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Joseph Jaffoni, Nexstar Investor Relations. Please go ahead, sir.

Good morning and thank you for joining Nexstar Media Group's 2018 First Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first, I'll review the safe harbor disclosure. All statements and comments made during this conference call other than statements of historical fact may be deemed forward-looking statements within the meaning of the federal securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause future results to be materially different from those expressed or implied in the forward-looking statements. Important risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements are specified in Nexstar's other filings with the Securities and Exchange Commission.

At this time, it's my pleasure to turn the conference call over to your host, Nexstar Founder, Chairman, President and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joseph, and good morning, everyone. Thank you all for joining us to review Nexstar's record 2018 first quarter operating results this morning. With the success of our 2017 integration initiatives and our commitment to localism, innovation and growth, we're excited to review our continued operating and financial results. Our return of capital and leverage reduction activities, our outlook for the 2018-'19 cycle and other ongoing initiatives to drive free cash flow growth and shareholder returns. As always Tom Carter, our Chief Financial Officer, is here with me on the call this morning.

2018 is off to an excellent start for Nexstar as the first quarter marked another period of growth across all financial metrics that exceeded expectations with record first quarter net revenue, BCF, adjusted EBITDA and free cash flow. First quarter results benefited from our expanded scale and our ongoing diversification, our ability to monetize Super Bowl and Olympic advertising through multiplatform revenue initiatives, solid political advertising spending in key markets and another quarter of double-digit retransmission and digital revenue growth. Our double-digit top line increase combined with our expense disciplines and focus on managing operations for cash flow translated into free cash flow growth of 19.8% before $1 million of transaction expenses in the quarter. And we brought about 20% of every net revenue dollar to the free cash flow line, a metric that will grow in 2018 with the return of what are anticipated to be record levels of midterm political advertising.

With over $121 million of first quarter free cash flow, we took advantage of several opportunities throughout the quarter to enhance shareholder value through our return of capital and leverage reduction initiatives, which in total amounted to approximately $78 million spread across share repurchases, quarterly dividend payments and debt reduction. We expect results to build over the course of 2018, as Nexstar will benefit from key factors, including growing levels of midterm election spending, and continued retransmission and digital revenue growth as well as the recurring free cash flow benefit from the enactment of the Tax Cuts and Jobs Act. So with record first quarter operating results, we remain confident in meeting our target for average annual free cash flow in excess of $600 million for the 2018-2019 cycle. I can't stress enough that while we endured the recent market volatility, the Nexstar nation continues to execute at a very high level. And we've anticipated and are participating in the changes in the media landscape and ecosystem. And we remain highly opportunistic in taking actions that we believe can enhance shareholder value.

In this regard, following our fifth consecutive annual dividend increase earlier this year and our first quarter repurchase activity, our board recently approved an expansion of the company's share repurchase authorization for up to an additional $200 million of repurchases of our Class A common stock, the only class outstanding. In concert with our return of capital policies, we remain focused on actively managing our capital structure as another means of enhancing shareholder value. We continue to expect Nexstar's net leverage, absent additional strategic activity and additional discretionary capital returns, to decline to the mid-high 3x range by the end of the year. As we continue to benefit from expected significant 2018 midterm political spending, the growing value of our retransmission consent agreements and the profitable operation of our digital assets, we have excellent visibility to meet our free cash flow targets in the current cycle. And we believe we forged a clear path for the continued near and long-term enhancement of shareholder value.

I'll now review the first quarter operating highlights, after which Tom will go through the finances, including an update on our balance sheet and other items of interest. First quarter core television ad revenue increased 6.5%, reflecting an 8.3% growth in local spot revenue and a 1.6% increase in national spot revenue. While auto was off the pace of last year, we believe this is primarily attributable to record-high vehicle incentives versus the prior year period. In the first quarter, auto dealers deployed aggressive financing terms to move more inventory ahead of expected interest rate increases. While these aggressive lease and financing programs directly impacted marketing budgets, we believe these trends will moderate and as incentive spending moderates and that brands seek incremental marketing support to move inventory as the year moves on. Overall, Nexstar had gains in 5 of our top 9 categories, and the story was the same when you look at the next 15 with 7 of those up. We continue to address the core TV ad markets who are focused on new business development with new to television ad revenue for Q1 of $13.9 million, which marks a 13.6% improvement over this metric in Q1 of '17.

In total, our new advertisers accounted for approximately 5.3% of total first quarter core ad revenue, an increase from 4% in Q4 and approximately 3.1% in last year's first quarter. These increases reflect the implementation of Nexstar's local sales practices across the Media General markets, and we continue to see our local sales efforts as a proven means of building share and offsetting the still weaker national spot market. As a result, we believe our core results outperformed the industry. In addition, the industry continues to advance the TIP Initiative formed late in 2017, which is focused on accelerating electronic advertising transactions for local TV broadcasters and their media agency partners. Streamlining the advertising buying and selling process, and making standardized modern transaction interfaces available are keys to driving the future growth and innovation in the local broadcast television space. To date, this collaborative effort, which includes Sinclair, TEGNA, Tribune and Hearst has released an updated framework for standard space transaction interfaces to accelerate system interoperabilities. While there is a lot more work to be done, the early alignment of agencies and broadcasters toward our common goal of creating a more efficient marketplace for local television advertising is most promising.

With the Super Bowl airing on NBC this year, we had about 10% fewer stations airing the game compared to 2017, when it aired on Fox, but we grew ad supported revenue by about 16% on a year-over-year basis. We also posted a 21.5% rise in revenue over the prior Winter Olympics, inclusive of new simulcast streaming revenue. For both events, our stations did a solid job in creating custom local vignettes, news coverage and digital content, which we were able to leverage across all 100 of the markets we serve. And our record Super Bowl and Winter Olympic revenue, again, demonstrated our ability to work across screens to drive incremental revenue.

Political was the best performer in our first quarter ad-supported revenue streams, as political ad revenue rose to approximately $9.3 million, which was a 131.5% increase over the 2014 period, the last comparable midterm election cycle. As a result, Nexstar's television ad revenue inclusive of political advertising grew 10%, as our spot inventory management strategies drove more than 5-fold increase in year-over-year political revenue. During Q1, we realized significant political spending in Illinois and Texas, and we benefited from solid early gubernatorial spending across 18 states. By category, we booked about 60% of our Q1 political revenue from candidate spending, while PAC and issue spending made up the balance. Notably, excluding political, net revenue grew 12.5% in the first quarter compared to the prior year, reflecting Nexstar's continued progress in leveraging the value of our television broadcasting operating model, our content creation capabilities and our unwavering commitment to localism. Moving down our revenue lines, first quarter retransmission fee revenue and digital media revenue were both at record levels and rose 19% and 38.4%, respectively. The year-over-year increase in first quarter non-television advertising revenue reflects the renewal of distribution agreements with MVPD's and OTT providers in 2017. It also reflects Media General revenue synergies related to our after-acquired clauses and our retransmission consent contracts as well as the January 2018 accretive acquisition of LKQD, also including the organic growth across our expanding and profitable digital operations. I will add that MVPD subscriber levels in our markets remain consistent with our expectations and those embedded in our guidance, with now potential upside from the OTT agreements that we completed last year.

On a combined basis, first quarter retrans and digital revenue was $338.7 million, and that rose 22.2% over the prior year period. Together, retrans and digital accounted for 55.5% of first quarter net revenue, marking the highest contribution to our quarterly revenue mix for the combined metric as well as significant growth of the 2017 first quarter level of 51.6% (sic) [51.3%]. Again, we believe the continued shift of our revenue mix reflects the ongoing initiatives to build scale and diversify revenue and that our success on this front has again outpaced the industry.

In closing, local core ad sales are tracking consistent with our expectations. National remains somewhat challenged, and we're already benefited -- benefiting from what we expect to see as record levels of political advertising this year. And we remain confident in our political target of north of $200 million across all of our markets for 2018. Additionally, with the ongoing renewal of our retransmission consent agreements and growth in both of our digital platform and its revenue base, we have solid visibility on delivering or exceeding our free cash flow targets. We continue to demonstrate that our capital allocation activity is directed to and focused on the enhancement of shareholder value, and we intend to remain opportunistic as we allocate Nexstar significant free cash flow over in excess of $600 million a year on average for 2018 and 2019 to leverage reduction, share repurchases, growing quarterly dividend and other actions that we see that will support the enhancement of shareholder value.

Now let me turn the call over to Tom Carter to provide further detail on our financials. Tom?

Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q1 income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance. To start, as noted on last quarter's call, effective 1/1/18, the company adopted the new revenue accounting guidance issued by the Financial Accounting Standards Board. As a result, beginning in the first quarter of 2018, the company presents local, national, political revenues as well as digital revenues net of their related agency commission. This morning's release also provided the 2017 local, national, political and digital revenue comps adjusted to net out the sales commission. In addition, we no longer recognize barter revenue and barter expense related to the exchange of advertising time for certain programming material. These changes don't impact the company's past or future income from operations, net income, broadcast cash flow and adjusted EBITDA or our free cash flow. Also effective 1/1/18, the company adopted Accounting Standards Update No. 2017-07, which requires pension and other postretirement plans cost as well as credit and other-than-service costs to be presented outside of normal income from operations.

Thus, the income from operations during the 3 months ended 3/31/17 was decreased by the pension and other postretirement plans, credit of $2.6 million, as this -- all of this was again previously announced on the last call and previously -- that $2.6 million was previously in corporate expenses.

Same-station net revenue for Nexstar was up 4%, with same-station revenue ex political up 2.5%. Core advertising on a same-station revenue basis was down 3%. Same-station retrans revenue rose 8%, and same-station continuing digital revenues were up mid-teens with the recent LKQD acquisition increasing over 30%. First quarter station direct operating expenses net of trade expense and SG&A expenses rose 27.5% and 5.1%, respectively, primarily reflecting the expanded scale of our broadcasting and digital operations as well as budgeted increases in network affiliation expense, expanded local programming and expenses for liquid. Same-station fixed expenses ex programming expenses were down 1.8% over the previous year. Nexstar's first quarter corporate expense was $26.3 million, inclusive of $6.4 million of noncash comp expense and $1.0 million of onetime transaction costs relating to the completion of the Media General and LKQD transactions. For 2018 second quarter, we project recurring cash corporate overhead of approximately $18 million to $19 million, exclusive of stock comp.

Noncash stock compensation is forecasted to be $8 million to $9 million for the quarter and $30 million to $32 million for the year reflecting the issuance of new equity incentive awards in Q1. As mentioned in our last call, for 2018 we reclassified some of the digital administrative expenses to corporate and with the adoption of the aforementioned accounting standards update, moved pension and other postretirement plans out of corporate expenses to reflect them as nonoperating items. But they are still included in our definition of EBITDA, which remains -- which will remain a treatment going forward. The 2.6 million was included in our financial reconciliation and is expected to recur on a quarterly basis for the balance of this year.

Turning to the balance sheet. I'll review a few key items as of March 31, 2018. Total net leverage was 4.96x and covenant first-lien leverage was 3.13x versus a covenant of 4.5x. First-lien debt totaled $2.77 billion, comprised of term loans and the revolver, with a decrease from 12/31/17 reflecting $47.2 million of payments against the term loans in Q1 and a $20 million increase in the revolver borrowings largely associated with the LKQD acquisition.

With expectations of significant free cash flows leading up to our first senior sub-debt maturities in 2022 and the flexibility to prepay first-lien borrowings without penalties, we feel very good about our capital structure in a rising interest rate environment and believe that the structure of the financing for last year's Media General transaction will serve us well going forward. We continue to expect Nexstar's leverage, absent additional strategic activity and discretionary capital returns, to decline to the mid-to high 3x range by year-end 2018.

Net debt for 3/31/18 amounted to $4.22 billion compared to $4.7 billion at the close of the MEG transaction on 1/1/17 -- 1/17/17, pardon me, and $4.25 billion at 12/31/17. Our total net debt reduction since the Media General transaction amounts to approximately $480 million. Our platform is generating significant free cash flow, which enables us to take advantage of strategic opportunities, reduce leverage and return capital to shareholders both on a scheduled and an opportunistic basis. As Perry noted, our record operating results, including $20 million of quarterly free cash flow, enabled us to take further action in the first quarter to enhance shareholder value through our return of capital and leverage reduction initiatives, which in total amounted to approximately $72 million. That $72 million includes $33.8 million of cash from operations to purchase approximately 500,000 shares of Nexstar stock, and we paid our 21st consecutive quarterly cash dividend amounting to approximately $17.3 million. In addition, we funded the $94 million acquisition of LKQD Technologies, our enterprise digital video advertising technology, infrastructure business with a minimum amount of cash borrowings.

Q1 total interest expense amounted to $54.6 million compared to $79 million in the previous year's first quarter, and cash interest expense was $52 million compared to $57 million in Q1 of '17. As we had mentioned before and we continue to reiterate, we expect cash interest expense for 2018 to approximate $200 million. In Q1, we had an operating cash tax refund of $1.2 million compared to $3.6 million of cash taxes in Q1 of '17. With the enactment of the Tax Cuts and Jobs Act in December, the federal income tax rate was reduced from 35% to 21%. The Tax Act was timely in terms of benefiting Nexstar as our NOLs were minimal at year end and we expect cash taxes in 2018 to continue to approximate $108 million. Nexstar's CapEx for the quarter totaled $21.1 million, of which $14.6 million was related to station infrastructure, investments, our platform and programming in digital operations, with the remaining $6.4 million for station repack and the relinquishment of the spectrum costs -- and relinquishment of spectrum costs largely associated with the MEG CVR. For the entire year, we expect CapEx from continuing operations to approximate $75 million with approximately $20 million coming in Q2.

With the passage of the Ray Baum Act in March, which provides an additional $1 billion of repack reimbursements, our FCC mandated repack cost should be fully reimbursable. For the year, we expect repack CapEx to approximate $50 million. Through March 31 of '18, we have spent $5.4 million, that amount is included in CapEx, and been reimbursed $1.4 million, which is reflected in the income statement. We will manage this cash flow item during the year to minimize any cash flow impact and, as I mentioned before, expect those expenses to be fully reimbursable at the end of the day. Our Q1 free cash flow was approximately $120 million, inclusive of the impact of $1 million of onetime transaction expenses. As such our first quarter recurring free cash flow of approximately $120 million -- $121 million compared favorably with the consensus expectations of approximately $112 million. We continue to believe that our capital structure represents an ideal balance of fixed and floating debt, an attractive weighted average cost of capital of less than 5% in both prepayment and refinancing flexibility. As noted a moment ago, we will have a staggered maturity profile with no significant maturities until 2022, at which point we will -- we expect to have made significant headway towards substantial debt reduction.

As it relates to management's focus on free cash flow generation, our positive outlook for Nexstar Media Group will follow the approach we successfully deployed in terms of building the top line, maintaining close control of fixed and variable costs, and optimizing the balance sheet and capital structure. This plan will continue to support our goals of generating significant free cash flow growth, while allowing us to reduce leverage, pursue additional selective accretive acquisitions, pay dividends, repurchase shares and take other actions that can enhance shareholder value.

In summary, Nexstar continues to execute well across all functions, including operations, integration, capital allocation, capital structure and service to our communities. As such, we are reiterating guidance for the annual free cash flow in the 2018-2019 cycle of approximately $600 million or approximately $13.10 per share on a fully taxed basis. That concludes the financial review for the call.

And I will now turn it back over to Perry for some closing remarks before Q&A.

Thanks, very much, Tom. In closing, Nexstar continues to execute on all facets of our business plan, including our continued operational improvements, additional synergy realization, further optimizing the capital structure and cost of capital, and improving service to our local viewers and advertisers. Our disciplines in these areas have strengthened the consistency and the visibility of our results, while supporting growing returns for our shareholders. We're highly confident in our strong growth prospects going forward, as we follow the successful strategies that we have established in terms of building the top line, maintaining close control of fixed and variable costs, and optimizing the balance sheet. We look forward to reporting on our continued growth and accomplishments in 2018 as the year goes on and on behalf of the more than 9,100 employees of Nexstar Nation, we thank you for your interest this morning and your ongoing support.

So now let's open the call to Q&A to address your specific areas of interest. Operator?

(Operator Instructions) We will take our first question from Dan Kurnos with Benchmark Company.

Just OTT seems to be the topic de jour, Perry. So let's start there since you have been pretty vocal about the opportunity in that space. Maybe just give us kind of an update on sort of the trends you're seeing in sub-counts and ultimately I know you and I have spoken sort of about potential for leverage in the space in terms of unit economics. I don't know if that's still a consideration in the upcoming negotiations that are likely to happen over the next 24 months, so some color there would be appreciated.

Sure. Well, first of all, I'm happy to announce that we launched our NBC affiliates on YouTube last Friday. Obviously, it took time for us to get the deal we wanted and the terms we wanted, but we have that now. So all 4 networks are launched on YouTube TV, in the markets that they have launched as of last Friday. So we won't see sub-reports probably from NBC for YouTube TV for another 60 days. But it's an important step to be all up and running on what appears to be at this point one of the larger purveyors of OTT services. All in, as of our last sub-count report and, again, they lag the current day by probably 60 or 90 days, we have a mid-6 figure sub-count number. And with the addition now of NBC, I would expect that to grow. And again, we were very deliberate in getting the deal on the terms that we wanted. So we feel confident going forward that we will participate as these services participate and continue to roll out. I will tell you that in the OTT space, there is a fair amount of churn after the pre-subscriber period. So I think it will take a few, maybe a couple of quarters this year until we have a real sense of what a steady state OTT contribution would be. But again, we're coming off of zero base in 2017 in terms of any real dollars against this. So we view all of this as plus revenue to our MVPD contributions, and look at it as another revenue source for the company.

Great, thanks. And I think I'll probably just let everyone else ask all of the core and auto questions. So just on political, Perry. Going forward here, you kind of reiterated you're above $200 million, I think you kind of imply that you see some strength in the market. So can you just give us a sense of pacing? Which markets are performing well, kind of timing of when political is going to fall if there was some shifting from Q1 to Q2? And I don't know if you're going to handicap another exact number on this, but sort of if there is any pressure from digital, which it doesn't sound like we are hearing from any of the other peers?

Well, if you follow the news, there was a primary election in West Virginia last night on the Republican side. Not surprisingly, the state contributing the highest dollars of political in the second quarter to date is West Virginia, followed closely by Ohio and Tennessee and Indiana and Pennsylvania. But listen, we look across our footprint here and of the 36 gubernatorial races to be contested this year. We are in geographies representing 31 of those and we see at least half of those being what we would call battleground competitions. Obviously, all of the house is up and much will be said about that as the year goes on. As far as senate races, there are 35 of them being contested. We represent geographies for 29 of the 35. And again, approximately half of those we see as being fairly contested. So we're very -- political is building in the second quarter. At this point, we have more political revenue on the books than we finished first quarter, and that's after literally a month and a week. So we feel very strongly that our north of $200 million guidance is solid for the year, and it's playing out at or slightly above our expectations for the first 4.5 months of the year.

We will now take our next question from Barton Crockett with B. Riley FBR.

I wanted to ask a little bit about the kind of M&A environment a little bit more because we just had a lot of divestitures kind of firmed up, I guess, by Sinclair. And I noticed that you guys are not in that. I was wondering if you can talk about what kept you out of that process and how you see the availability now and maybe if there might be little bit more kind of openness to doing deals now that we've seen this big kind of pig in the python wrapped up with Sinclair?

Well, I would say, as it relates to the Sinclair divestitures, obviously, we appraise everything and we have our walk-away prices and when prices go above our walk-away prices, we walk away. That's been our consistent practice with any acquisitions. I will tell you that we're involved in any number of swap conversations with any number of companies, some of which have reported in the last 2 weeks, some are not. We're looking at single station acquisitions from the high single-digit millions to potentially 9 figures. So there is a lot that's being looked at. It's just -- it's not as simple as seeing a stock on a screen and pressing enter and buying it. I mean, obviously contracts need to be negotiated and things just take time. As I think you saw from the rollout of the Sinclair, Tribune acquisition, mirroring our rollout of the Media General acquisition we closed on in early January of 2017. A lot of moving parts. I do expect the cadence of conversations will pick up. I think we have increasing regulatory clarity on some fronts and on others, particularly the national cap, I think you'll see additional clarity on that later this year from the regulatory agencies, perhaps in the late summer. But then that will probably provoke the inevitable court challenge. So I don't know that we ever have regulatory certainty, but at a certain point, we feel confident in moving forward in the current environment, and I think we're there now as it relates to in-market opportunities and certain opportunities that would increase our national exposure. And I think the more clarity we have, I think that once the Sinclair, Tribune merger closes, I think that will be a relief or removal of an overhang from the sector and we can get back to talking about the business of doing business.

Okay, great. And then on the auto ad environment. Just stepping back to bigger picture. I mean, I think, it's been kind of asserted that the auto ad softness on TV is really just money not being spent as opposed to being allocated away from TV to digital media. Is that your belief? And if so, is there any evidence you can site to support the idea that's it's not being yanked from TV and spent elsewhere, that it's just being pocketed.

Well our auto in the first quarter was down kind of a high single-digit amount in total. And again, Dodge, Chrysler, Jeep was down, but most of those that had negative. But then we saw a huge increase from Ford that was up against lower comps from the prior year. So it's like every other category you're going to have folks that are up and folks that are down. We do business with over 2,700 auto dealers in our company. The top 50 of those represent almost a quarter of the billing. And so Tim Busch and Brian Jones and our Regional Vice Presidents on the television side are in the midst of having sit down detailed conversations with all 50 of those top 50 dealers to talk about in great detail what is going on in the marketplace. One of the contributing factors, I think, in addition to incentives sucking money away from marketing budgets is, I think there is a continued decline or shift in co-op dollars that support the local dealers and in some cases the associations. I think, that money is being increasingly controlled at the OEM or factory level so that they may have taken some money out of local spot. I will say that, that can be cyclical as well just as we saw Ford shift money out of spot. They are shifting money back into spot in 2018. So I think there is a certain ebb and flow to that. Again, we're in conversations with the top 50 auto advertisers, and I think we're -- we will -- come away with that with very granular knowledge as to just what's going on in the auto space. But I don't see a secular change or a secular trend here, I do see the cyclicality of ad-supported businesses, and auto is certainly one of those categories.

We will then move on to Kyle Evans with Stephens Inc.

Sorry to ask you to replay something, Tom, but you were going really fast. Can you do the same store local and national core numbers again?

Sure. Total net revenue up 4%. Same-station total net revenue ex political up 2.5%. Same-station core advertising down 3%. Same-station retrans up 8%. Same-station continuing digital revenues up mid-teens. And the LKQD acquisition increased 30-plus percent.

Could you talk a little bit about -- I know, Perry, said that pacings were in line with expectations. Can you tell us what your expectations were or what pacings look like specifically?

Are you talking about for second quarter?

Yes, sir.

I think second quarter is going to be a repeat of first quarter. We have 1-month April on the books and if I look at the percentages for April and compare them to where we finished first quarter, they are right on top of one another. So we obviously are going to see an increasing cadence of political. But in terms of our bookings and where we sit right now, 5 weeks into the quarter, it looks a lot like first quarter to us.

Got you. Thanks for the detail on the OTT side of the subcount equation. Can you tell us what you saw on the traditional MVPD side for 2017 and what first half '18 looks like?

We haven't given specific numbers, but obviously you saw the fourth quarter results in retrans were down slightly from third quarter, and that was as we mentioned in the fourth quarter call, a result of lower traditional MVPD subnumbers with a lack of offset from virtual MVPD sub numbers, we have seen that -- the virtual MVPD numbers increase in Q1. And I would say that the traditional MVPD numbers, the loss has been mitigated, if not completely removed in the first quarter. And we've seen a much more steady environment there.

I'll also mention that, Kyle, that we just completed a negotiation and a repricing with a top 10 MVPD that some of their subscribers repriced on May 1, and the majority of their subscribers repriced at the end of the year. But those -- that was done on terms that were very acceptable to the company and to the MVPD.

And consistent with our growth rate indications for both gross retrans and net retrans.

Great segue. Can you kind of remind us what your kind of long-term outlook is for gross and net retrans growth?

Sure. Well, over a 3-year period, we expect gross retrans to continue to grow at double-digit as well as the same type growth trajectory for net retrans.

Thank you, sir.

And by the way you are finally going to be able to get KARK on YouTube Live and Little Rock now, Kyle.

My dad is really happy.

That's what we're here for.

We'll take our next question from Marci Ryvicker with Wells Fargo.

I am going to bug you on core. When we had your last quarter, core was expected to be sort of flat. And I just want to make sure that the down 3% includes Olympics and Super Bowl, and that's what we're comparing to the flat. And if that's the case, was it auto that took you down 3%?

I would say, again, if you break it up, local was down about a point, national was down about 7 points. And so that's what yielded the minus 3. I would say the only missing element from flat would be, we traditionally during Olympic revenue -- Olympic times have participated in unwired networks for our larger market NBC affiliates, which would be Tampa, Columbus, Austin, Norfolk along the way. That is organized by the NBC owned and operated station group and basically this is network overflow. And that didn't materialize this year. We think because there was inventory available at the network level and inventory needed for make-goods at the network level. So that was the only element and that's a mid-single digit millions revenue number that probably would be the difference between flat and the minus -- slightly less than 3 that we reported here this morning.

And when you say Q2 is trending similar to Q1, is it trending more like flat or more like close to the negative 3?

I think -- I said it was trending more like Q1. So I would say minus a low single-digit would be an operative term.

Okay. And then, with the -- with your free cash flow guidance of in excess of $600 million, what is the underlying core expectation? Is it flat, down, up?

For the second half, it's flat.

And then my last question for you. Your digital initiatives or strategy has been a little bit more successful than a lot of your other peers. Can you talk about contribution to margin today versus what you expect over the next couple of years?

Right now, I would say, our margin contribution from digital taken as a whole -- and that includes the digital website business at the station level -- is probably a 20% plus kind of number. If you just target the digital services business, that's probably closer to a high single-digit to a low double-digit percentage. Some of those businesses are high volume and low-margin business. I think we're starting to evaluate if those businesses are worth all the time and trouble. But what we focused and what we saw in LKQD is a very high-growth business with good service level margins, but not single-digit margins from that perspective. And we expect, overall, if you think about the website business at the local level should be something approximate -- approximating what the television margins are, and then the services business at Nexstar Digital LLC will be growing from a high single, low double-digit, we believe, to something into the mid-to high-teens over a period of time.

And we will now take our next question from John Janedis with Jefferies.

Perry, given your footprint, you've tended to outperform the broader market place in the advertising front. So I was wondering, are you seeing much of a difference in performance between maybe your larger and smaller size markets? And then maybe on a related topic, when you talk about the money new to TV, and as it's grown, there are a couple of categories that stand out as contributors and how far along are you in terms of driving that higher?

Well, first of all, Tampa is our largest market traditional affiliate, NBC and our management team in Tampa is just killing it right now. So I don't think I can make any comparisons, large market to small market here. Obviously, we have fewer competitors in the medium-sized and smaller markets, but there is generally less money available. It's all about how good a job you do locally. And in markets like Tampa and Austin and Norfolk and Little Rock and even on down Charleston, South Carolina and Fort Smith, Arkansas. I mean, we're -- good management teams are doing great jobs in those market places. So I don't think there is any conclusion you can draw from all of that. I will tell you that our new business development is being led by Tim Busch and his teams in the Broadcast division, and is literally, I think, the byproduct of a change in commission structure where if you don't hit your new business revenue target on a monthly or quarterly basis, you actually give back a percentage of your agency commission revenue. So if you do the same thing as you did last year, you're going to make less money. So that is driving people to develop new business. I would also say, we've introduced kind of the new business culture that we have uniformly across the platform, which includes our recently acquired stations, and I think all of that is driving our results. I will tell you that our internal target here is within 3 years that 20% of our core revenue comes from new business on an annual basis. And you saw what the number was reported in first quarter with my comments. So we think that is achievable and that's an internal goal, but it's -- I think it is more than aspirational, I think it's achievable.

We will now take our next question from Wayne Cooperman with Cobalt Capital.

Just I'm sure that isn't going to be a great question. But I mean, you're into $600 million of free cash flow each of the next few years on your numbers and the stock trades obviously, a very low multiple. Why not just buyback more shares now and the leverage won't really go up because your EBITDA is growing and the debt will be flat. Just kind of curious about debt targets, capital allocation and taking advantage of a really high free cash flow yield.

Sure, let me take a stab at, and then, Perry, can come behind me. We're not all-in on any one structure. But obviously there is some method to our madness here. Our RP basket is not unlimited at the leverage level we are at. The leverage -- the RP basket becomes less meaningful to us when leverage is below 4.25x. And so that's a target for us that does require some amount of debt reduction. But as you saw in the first quarter and that was a limited -- that was basically a 27-day window -- we bought back 500,000 shares, and we will allocate capital to opportunistic share repurchases going forward. But we're also mindful of the fact that there is benefit and shareholders do care about leverage, not only from a perspective of what it allows us to do on a return of capital shareholder basis, but also just a derisking of the balance sheet in general. So we acknowledge the share price and the high free cash flow yield on the stock. And we are buying it back, but it's not -- it's not an all or nothing strategy, either for paying down debt or for buying back stock. There is a measured approach to that, and we'd like to think there is some logic behind it as well.

I guess, my question was do you change -- given where the stock is do you go more to repurchase and less to deleverage and then adjust accordingly?

That's why we call it opportunistic.

We will now take our next question from Jim Goss with Barrington Research.

As your revenues become increasingly immune from the variability of advertising, do the rating agencies indicate that your leverage requirements to maintain desired rating level moderate, enabling greater flexibility and the use of free cash flow for your various needs?

I've never heard the rating agency say much of that anything in terms of specific changes to the business. They like the fact that we have subscription-based revenue. But they are not ones to give leverage chart targets or changes from that perspective with regard to our ratings or what it does. They run a dynamic process. I think your line of questioning is correct in that we really are less -- are more immune to advertising cyclicality. I think we believe that our business model is healthier. We think that they share that, but I'm not sure that has necessarily materialized into either higher ratings or higher leverage for the same rating kind of considerations.

Okay. One other thought. I'm sure you're aware of TEGNA's DBL programming and they're sort of working with potentially other broadcasters with that programming. I was wondering if it's appealing to you to join TEGNA's DBL or to create a similar program of your own, i.e. news focused and that scripted vehicles that I know you don't have an interest in joining?

Yes. We are evaluating their offering in real time and making value judgments on whether or not we want to participate in that. I want to go back to your earlier point, though, Jim, that if you look at the front page of our press release, you'll note that retransmission fee revenue is larger than core advertising revenue for the first time, and we also think we're probably the first company in our space that can make that statement. And so we will continue to drive, not only drive our retransmission fee revenue, but as the growth rates of that and core continue to diverge, this is going to be a story I think that is still going to be written, but I also think we're in new territory here as I think we're the first company that have skated to the park, and I think others will obviously follow. But we do see this as a continuing trend in our industry and certainly for Nexstar.

Okay, I think you have an argument to be made.

We don't disagree.

(Operator Instructions) We will here now from Barry Lucas with Gabelli & Company.

Tom, just one housekeeping question to start, the $200 million target for political this year would compare against a pro forma combined 2014 of what?

$195 million or slightly less.

Okay. And for Perry, I think you noted earlier that several companies have already mentioned that swap trade discussions are ongoing. But since these swaps and trades are kind of outside the purview of the whole Sinclair, Tribune issue and probably will require less gross dollars and the economic benefits to the parties involved are fairly manifest, why do we think we haven't seen anything on the tape yet in terms of a deal?

I think that there is any number of factors, I think they're all the situational. Some companies may be distracted by other activities right now and others are -- it's tough to find a perfect match where we're trading $10 million in cash flow for $10 million in cash flow, so somebody has got to pay [boot] and/or figure out what multiple is going to be used for an exchange ratio. Listen, we stand willing -- obviously we understand the benefits of deriving an economic benefit of more than 1 station in a marketplace. I think, we're more duopolized than literally any other broadcaster out there with owned stations and virtual duopolies. I think it's a process, I mean, if discussion started in January or February, it's the early part of May, I don't think there is any gating issue, but I think the conversations are all -- it's just somewhat situational at this point.

And that does conclude today's question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks.

Thank you all for joining us today, and thank you for your continued interest and support in Nexstar. And we look forward to reporting our Q2 results in the next 90 days. Have a great afternoon.

That does conclude today's conference. Thank you all for your participation.