Nexstar Media Group Inc (NXST) 2007 Q3 法說會逐字稿

Good day, everyone. Welcome to the NEXSTAR third quarter earnings results conference call. Today's call is being recorded.

All statements and comments made by management during this conference call other than statements of historical fact may be deemed forward-looking statements within the meaning of Section 21 of the Securities Act of 1933 and of Section 21A of the Securities and Exchange Act of 1934. The company's future financial conditions and results of operations, as well as forward-looking comments made during this conference call, are made only as of the date of this conference call. Management will also be discussing non-GAAP information during this call. In compliance with Regulation G, reconciliations of this non-GAAP information to GAAP measurements are included in today's news announcement. The company does not undertake any obligation to update forward-looking statements reflective of changes in circumstances.

At this time, I would like to turn the call over to your host, NEXSTAR Chairman, President and Chief Executive Officer, Perry Sook. Please go ahead, sir.

Thank you, operator and good morning, everyone. Let me say first off that Matt Devine and I are in temporary quarters this morning. There is a problem with our building's telephone service so if, at some point after the call at least for the next few hours, if you're trying to reach us to follow up, e-mail is working but the phone service is not, and we've been told that it should be restored by the afternoon. So if you are trying to reach us, e-mail would be the best bet at least for the next few hours this morning. But let me go ahead and thank you for joining us today as we review and discuss the continued strength in our 2007 operating results and our expectations for Q4 of '07 and 2008 which promises to be a banner year across the board for NEXSTAR. Matt Devine is with me, as I mentioned.

Our record third quarter net revenue and free cash flow extend NEXSTAR's performance up consistently, meeting or exceeding our financial guidance targets. The establishment of our new revenue streams is helping us to grow our business, which is very important especially during the nonelection years, whereas there's an absence of political revenues. The contributions from both retransmission consent agreements and new media initiatives were significant drivers for 3Q '07. The political impact was fairly pronounced in 3Q as last year we booked approximately $6.3 million in political advertising revenue versus $800,000 of third quarter political revenue this year. Nevertheless, net revenue and gross local and national revenue, ad revenue, rose versus last year.

Let me review the highlights of our 3Q results. Total net revenue rose 1.4% which falls squarely within our guidance range for the period. New local direct billings totaled $3.6 million for the quarter. And on a dollar basis, our top five performing markets in terms of bringing new advertisers on air during the period were Lubbock, Texas, Little Rock, Arkansas, Shreveport, Louisiana, Springfield, Missouri and Rockford, Illinois. Retransmission consent revenues were up 29% compared with 3Q of '06. Free cash flow totaled $6.6 million in the third quarter of 2007 versus $3.6 million in the third quarter of 2006.

Our new media effort is quickly emerging. We are attracting a new base of nontelevision advertisers and we are successfully leveraging our platform, demonstrating that local television, with its uniquely powerful local reach has the ability to thrive in a multiplatform world. Our goal, as you know, is that within five years approximately 30% of the company's EBITDA will be generated from our new nontraditional initiatives such as online revenues, retransmission consent agreements and other digital revenue sources. With over $6 million of high margin revenue generated in the third quarter of this year from these sources, we're off to a great start.

During the third quarter, our retransmission consent agreements contributed cash revenues of $3.1 million and approximately $1.4 million of ad spends which reflects growth of 29% above last year's levels. New media revenue during the 2007 third quarter amounted to approximately $1.7 million and in 2008 we will have a full year benefit of the conversion of our TV station websites into community portals and anticipate new media revenue to grow substantially from 2007 levels.

As far as on-air category results, our number one category, automotive, was down a slight 1.3% in the quarter. Interestingly, our factory and dealer group spending was down 7% while our local dealership advertising was actually up 10%, reflecting our continued focus in marketing partnerships at the local level. We happen to think that the decline in auto ad spend may have bottomed out based on our fourth quarter sales pacings.

Other ad categories with increases during the quarter include furniture, entertainment, telecom and legal. We saw declines in fast food, paid programming, medical, healthcare, department stores and insurance.

I'll add some brief remarks on our '08 expectations after Matt completes his financial review. And with that, I will turn the call over to Matt Devine, our CFO, to provide deeper detail on financials and our guidance. Matt?

Thank you, Perry. I'd like to review some of the income statement items which we'll follow with the key balance sheet accounts.

In the third quarter of 2007, NEXSTAR's net revenue totaled $64.5 million, compared with $63.6 million in the third quarter of last year. Operating expenses were $41.7 million versus $39.6 million last year. Broadcast cash flow was $22.8 million versus $24 million in the third quarter of last year. Gross local revenues totaled $41.3 million versus $38.7 million last year. Gross national revenues totaled $18.6 million versus $17.8 million last year. As Perry mentioned, political revenues totaled $800,000 this quarter versus $6.3 million in the third quarter of last year. New media revenues totaled $1.7 million versus $0 in last year's third quarter. Cash retransmission revenues of $3.1 million compared favorably versus $2.3 million in the year-ago quarter, and total retrans revenues in the third quarter was $4.5 million versus $3.5 million in the third quarter of last year.

I'll give you some same-station comps in just a minute. NEXSTAR's third quarter 2007 corporate overhead costs were $3.1 million, which includes $0.5 million of noncash employee stock option expense. In the third quarter of '06, corporate overhead totaled $3.2 million and included $400,000 in employee stock option expense.

Free cash flow was $6.6 million in this quarter, compared with $3.6 million in the year-ago quarter. The company incurred $3.5 million of capital expenditures in the third quarter of '07, of which 1.5 million related to our HDTV buildout, compared with a total of $7.8 million of CapEx in the third quarter of last year. We project CapEx spending to total $18 million this year, compared with $24.4 million of capital expenditures incurred in the full year of 2006. We expect to conclude our HDTV spending with an additional $30 million of 2008 CapEx next year.

Including maintenance capital expenditures, NEXSTAR's 2008 total capital spending should approximate $36 million. With some same-station comps on a same-station basis, NEXSTAR's 2007 third quarter net revenue was $61.6 million, compared with $63.6 million in the third quarter of 2006, while EBITDA was $18.6 million compared with $20.8 million in the same period of 2006.

As you know, same-station results exclude the operating results from WTAJ, the CBS affiliate serving Johnstown-Altoona, Pennsylvania, and WLYH, the CW affiliate serving the Harrisburg-Lancaster, Pennsylvania market, which were acquired on December 29th of 2006.

As far as year-to-date results for the nine months ended September 30 of '07, net revenue rose 3.9% to $195.2 million compared with $188 million in 2006. Gross local and national advertising revenues, which totaled $184.2 million this year, compares favorably with the $175.3 million NEXSTAR posted for the first nine months of 2006, demonstrating an increase of over 5%.

Retransmission consent revenues, which consisted of cash subscription payments and advertising spending, totaled $12.6 million for the nine months of 2007, compared to $9.6 million tin same period last year, and that equates to a 31% growth increase. Income from operations in the 2007 first nine months totaled $27.8 million dollars compared with $27 million in the same period of 2006.

As far as some gross revenue components go, for the nine months, gross local revenues totaled $128.9 million, compared with $120.8 million last year. Gross national revenues were $55.3 million versus $54.5 million last year. Gross political revenues for the nine months of this year total $2.5 million, compared with $10.3 million last year. Gross new media dollars total $2.8 million versus $0 last year. Gross cash retrans revenues total $8.7 million versus $6.3 million last year. Total retrans dollars again are $12.6 million for the nine-month period ended September 30, '07, versus $9.6 million last year. Total gross revenues are $218.5 million versus $211 million last year, and total net revenues again are $195.2 million versus $188 million last year.

On a year-to-date basis, the $7.8 million political revenue shortfall was offset by WTAJ's net revenue contribution and the growth in our retransmission consent and new media revenues. Operating expenses totaled $124.9 million for the nine months ended September 30, '07 versus $118.7 million in the year-ago period, thereby producing $70.3 million of broadcast cash flow for the nine months of 2007, compared with $69.3 million for the nine months of 2006.

Corporate overhead totaled $9.3 million versus $10.1 million, and EBITDA totaled $60.9 million for the nine months ended September 30, '07, versus $59.2 million in the same period of last year. Free cash flow rose 20.3% to $18.2 million for the nine months ended September 30, '07.

As far as the balance sheet goes, cash on hand at September 30 was $5.9 million compared with $11.2 million at year-end '06. Reflecting bank debt payments of approximately $6 million during the third quarter, our outstanding bank debt was $358.5 million at September 30 of '07, compared with $364.4 million at June 30 of '07 and $370.1 million at December 31 of '06.

Our 7% notes totaled $198 million, resulting in operating company net debt of $550.6 million at September 30 of '07. Leverage at September 30 of '07, as defined in our October '05 amended senior credit facilities, was 5.9x, more or less in line with the levels of the last three quarters. The October '05 amended senior credit facility covenants provide for a total leverage covenant of 7x through December 31 of this year.

While 2007 is a nonpolitical year, our growing retrans and new media contributions and the addition of TAJ have positioned NEXSTAR to end 2007 with a leverage slightly over 6x versus the 7x covenant. At the holding company level our [11 and 3/8%] notes totaled $123 million at September 30 of '07, compared with $113.2 million at year-end '06. Thus, total debt at the holding company was $679.5 million at September 30 of '07, compared with $681 million at December 31 of '06. This represents a leverage of about 7.2x at the hold co. We project that we will end 2007 with hold co. leverage of slightly over 7.5x which will position us well for further deleveraging as we enter the active 2008 political year.

As reported in this morning's earnings announcement, at year-end 2008 we are projecting total leverage to approximate 5x through the hold co. which will represent significant progress in our efforts to manage the balance sheet, as we'll have achieved a reduction from 10x at the beginning 2006 and approximately 7x at the end of 2006.

Our guidance for the fourth quarter is net revenue of between $69 and $71 million, compared with $77.2 million last year. Station operating expenses should come in between $43 and $44 million, compared with $43.3 million last year. And corporate overhead of approximately $4 to $4.5 million should compare nicely to the $4 .5 million the company posted in the fourth quarter of last year.

That concludes the financial review. I will turn the call back to Perry for some final remarks before Q&A.

Great. Thanks, Matt.

As a shareholder, I'm pleased with the progress that NEXSTAR is making in both growing and diversifying our business. I believe that success reflects two important principles that we have emphasized internally and highlighted with the investment community and these factors have, I think, positioned us well in '07 and they will be the foundation for explosive growth in 2008.

The first is that we have developed and adhered to a core set of strategies for our performance in the mid-sized markets, which is to establish duopolies where possible, develop leading local news franchises, attract overachieving local sales teams and forge relationships with local advertisers.

The second is our corporate and employee culture culture which understands that NEXSTAR is basically a local service business that happens to be television and that our goal is to concentrate on our customer needs and making local cash registers ring and that by thinking outside the box, we can drive industry innovation and generate complimentary high margin revenue streams.

Our ongoing approach to actively managing our station portfolio and appointing leading local management, developing new revenue streams and focusing on our balance sheet and capital structure will continue to build value for our shareholders. Our success by driving industry innovation is serving us well and our optimism for 2008 is predicated on the confluence of several factors that I will review now.

First, political spending is projected to reach record levels with most estimates at or north of $2.5 billion for 2008. Broadcast television is expected to continue to take roughly 70% of campaign advertising. Importantly, news content, one of our strengths, is particularly attractive to the candidates given the correlation between news, viewers and and those who vote.

Overall we've developed strategies to drive our political revenue and garner industry leading shares of political spending in our markets. These include our definitive classes of time, our five-tier rate card and our strict adherence to our political policies and continuing an ongoing tracking of each race.

Record 2008 spending will reflect presidential spending in several key early primary states for us including Missouri, West Virginia, New York, Arkansas, Illinois and Pennsylvania. This will be followed by general election spending in our markets which will host ten U.S. Senate races, four gubernatorial races, and 40 congressional races. What all these means is that our base projection for 2008 political advertising is in the low to mid $30 million range in gross dollars. That's significantly above the approximate $27 million we booked in 2004 and also in 2006. This will afford us great financial returns and flexibility in terms of free cash generation, debt reduction and, as Matt mentioned earlier, completion of our digital conversions and rollout of HD on all of our full-power stations.

Next, we are confident in further growing our high margin retransmission revenue stream in 2008. Earlier this year NEXSTAR reached a multiyear agreement with Verizon for retransmission services through Verizon's fiber optic FiOS service. The agreement grants Verizon the nonexclusive right to transmit NEXSTAR's locally produced content and carry the analog and digital signals, including high definition, of all NEXSTAR stations located within FiOS markets. As you may know, Verizon recently reported that it increased its FiOS TV subscribers nationally by 39% in the third quarter.

Verizon represents a new distribution partner that we didn't benefit from previously. Perhaps, more importantly, the majority of our first retransmission agreements were three years in length and were completed in late 2005. As such, 47% of our contract dollars are tied to contracts that expire before year-end 2008. And cumulatively 80% of our contract dollars are tied to contracts that expire before year end 2009. Given the industry's progress on this front since we first took a stand on our right to retrans fees, we expect substantial upside in our round two negotiations.

Next, our new media initiatives and the response to them from both advertisers and web users has been a tremendous success. With strong positive momentum in usage trends and full year run rates from all of our markets, we will generate an impressive level of new revenues in 2008.

In a few months we will launch our user-contributed video capability which has proven to drive traffic, as well as auto-classifieds program and a new local business search feature. These offerings will layer on new sources for driving revenue and we'll follow this by the middle of next year with custom micro sites for health, real estate, a significant expansion of our classifieds to include job and employment, real estate and personals, as well as live streaming video.

For the full year 2007, we're on pace to report approximately $5 million of new media revenues. In 2008, we will have a full-year benefit of the conversion of all of our websites, a full-year run rate and the partial year contribution from the rollout of the new features. So, as a consequence, we project that new media revenue will grow substantially over our 2007 levels.

In the core business and consistent with our approach to strategically and selectively building the platform earlier this year, we announced that we would enter into a local service agreement with Mission Broadcasting for KTVE, the NBC affiliate in Monroe-El Dorado, and the new local service agreement represents the 50th television station that NEXSTAR will own, operate or provide services to. In addition, reflecting the KTV LSA, NEXSTAR will be doubled up in 18 of the 29 markets in which we operate.

Mission Broadcasting is buying the assets of KTVE for approximately $7.7 million and NEXSTAR owns KARD, the Fox affiliate in that market, which is currently operated under a local service agreement with KTVE. The purchase price multiple is less than eight times LTM BCF, so it will be another accretive transaction for our shareholders and we will have new revenue from this source throughout 2008 as we expect the transaction to close before the end of the year.

With all of that said, let's go to the Q&A and answer any questions of your specific areas of interest. Operator?

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). And our first question is from Victor Miller with Bear Stearns.

Good morning, Perry. Just on revenue, what's the potential upside in your [Internet] and potentially for your retrans next year and how are you trying to figure out what the core business looks like next year?

Then for Matt, your hold co. leverage, can that reach below six times by year-end next year and can you actually fund the $30 million in CapEx and what looks like $40 million zero payment out of essentially free cash flow and cash on hand? Thanks.

Victor, as it relates to new media, we projected a $5 million number for 2007. Based on the run rates now in the fourth quarter, we would look for that number to ostensibly double in 2008 as we have full-year run rate, as well as additional revenue features. And as you also know, we hired a national sales manager from Belo Interactive who will be selling the platform as a platform, and we think there's seven-digit contribution there to the new media revenue line. So, we think that the number will roughly double in 2008 over 2007.

As far as our retrans revenues, we projected approximately a 30% increase on the nine month numbers over the prior year. I think, as you look into next year with the contract renewals, with the contract escalators, in our existing contracts, I think - - and we've only made a deal with one of the phone companies at this point. I think you can look for a similar percentage increase in '08 compared to '07.

I think, as we think about the core, we're looking for a kind of a low to mid single-digit growth in local revenues next year, and again a lot of that will be manufactured growth by our new business development and platform selling. I think we think of the national market as being a flat, excluding political on the core, maybe up 1% somewhere thereabouts.

Having said that, the anecdotes that I would give you for fourth quarter would tell us that it's a much better picture than that. But one quarter doesn't necessarily make a trend so we think that next year's core business on a blended basis. National and local would probably be a mid single digit grower. Matt?

Hi, Vic. Your two questions are related to leverage. At the hold co. level, were would we - - would the company be levered under 6x at the end of next year through the zero, through the hold co. notes. And the answer is yes. The company will be leveraged closer to 5x at year-end '08 and it will be at 6x.

And as far as making the payment the AHYDO payment on April 1 of this year, a $46 million payment, yes, we can fund all of that out of free cash flow for next year because the payment comes earlier in the year. We'll probably just draw down upon our revolving credit facility. Under our bank agreement, we currently have about $68 million in availability under that line. And so I envision we'll just fund it through borrowing under that credit facility and repay the facility out of free cash flow.

Thank you.

You're welcome.

And our next question is from Bishop Cheen with Wachovia.

Hi. Thank you for taking that call. This is actually [Davis Abair] filling in for Bishop Cheen. Relative to the discount payment, I just was curious, have you considered coming to the market to refinance the whole thing as an option?

Hi, Dave. This is Matt. Yes, we talk about that all the time. I think, right now, what the company needs to do is deal with this obligation related to building out our platform for HD compliance next year, and I think we want to make sure that we undertake that obligation before we tweak our debt structure. So, right now our game plan is to make that AHYDO payment and evaluate the market at that point in time to see if it makes sense to do some kind of a recap.

Okay. Thank you.

You're welcome.

And our next question is from David Bank with RBC Capital Markets.

Thanks. Good morning. A couple of questions, I guess. First, Perry, I want to get your impressions on what you've seen in terms of ratings, trends so far for the new season, what you think - - what you think about them generally.

The second is you've given us some guidance, but in percentage terms, can you actually give the absolute number that you see as like a contractual increase in retrans? That's only incremental, right? So, excluding the advertising inventory deals that sort of might have been there before, the advertising with the cable companies, [whether] they're buying. What is the absolute contractual increase in retrans payments that you're expecting in '08 over '07?

And last question, Matt, on the same-station numbers, do those same-station numbers include contributions from new media and retrans, or do they exclude it? Is that like an advertising only number?

Thanks, David. As it relates to contracted retrans payments, we have a base of business that we expect. But as you know, these are calibrated and calculated on a per subscriber basis. So, if someone moves from a cable company to a phone company or a cable company to a satellite number, the numbers move around.

I can also tell you that we just did a deal yesterday with a phone company - - I'm sorry - - with a video provider that is not a phone company that is a new three-year agreement, and in the last year of that agreement, we are going to be paid $1 a [sub.] So, as these new agreements come out and as we have the opportunity to renegotiate those - - and this is not large system by the way but it is a system with which we have leverage, so we, obviously, are going to negotiate appropriately.

But as to the contracted retransmission we have the range of those payments but they are obviously calibrated on a per-sub basis, and we'd prefer not to give specific guidance. In fact, our confidentiality agreements won't really let us break it down that fine for you.

As it relates to ratings trends, as you know, less than 20% of our revenue comes from network supply prime-time programming. We're much more focused on local news. And our progression and growth in that metric and from that perspective, the numbers that we hear about and see about and read, say that we're making progress in the number of our markets. So, I think that from our perspective, we're not directly tied to the ratings to sell what we sell, particularly if you take a customer-focused approach. So, it's not something that I pay a tremendous amount of attention to. As you know, we're in 100% [diary] market, so we really won't have a report card on the fall season until sometime around the end of the year. Matt?

Yesd. Hi, David. You asked about same-station comps and specifically about our new initiatives that are involving retrans and on-line revenues. Yes, we include those numbers in both periods. And so as I called out in Q3 of this year, our new media revenues of $1.7 million compared with $0 last year are also in our same-station comps. Similarly, the retrans revenue of $4.5 million in the third quarter of this year compares with the $3.5 million in the third quarter of last year, and those numbers are included in the same-station comps.

Okay.

And by the way, if you want to fine-tune any of these numbers a little bit, David, please send your model down to me and I'd be happy to take a look at it and give you some thoughts.

Great. I'm sorry, one follow-up, Matt. For KTVE in the fourth quarter is that kind of a material impact versus the given the same-station number a year ago?

No. On the KTVE which we're hoping to close in this fourth quarter - - and if we miss it, it will be a Q1 event - - it will have an insignificant impact on anything, whether it's leverage, purchase price multiple, as Perry called out to you, it's very favorable to us. Their BCF, the last time I saw their pacings, indicate that they're doing a little better than what we thought they would be doing, and so that is not in any of these numbers, David.

okay.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And our next question from Dennis Lebowitz with Act II Partners.

Hi. I have two questions. When you said capital expenditures will be low to mid 30s - - I'm sorry - - will be $30 million plus $6 million for maintenance, does that mean in '09 it goes to only $6 million?

And the second question is on your $2 million in political in fourth quarter, how conservative is that if you get a backup of '08 spending into the fourth quarter?

I think it's safe to say, Dennis, on the political, that we are, as we sit here on the 6th of November, about at the $2 million number, so the backup of spending into December with the early primaries would take that number up over the $2 million mark.

As it relates to CapEx, we're projecting $36 million for next year, of which $30 million would be for DT V. I think that in 2009, you probably could use a number somewhere around $10 million as maintenance CapEx because there are a couple of projects that we have postponed but it shouldn't go over $10 million for 2009.

Okay. Thanks.

And Mr. Sook, there are no further questions at this time, sir. I'll turn the call back over to you.

All right, operator. Thank you very much. I'd like to thank all of you for taking time to join us today and share in our results. We look forward to reporting the results of a banner fourth quarter early in the new year.

And a reminder that if you are trying to reach us for follow-up this afternoon, our phones should be up a little later this morning, but e-mail is currently working and we will respond however you reach out to us and look forward to talking to you the again soon. Thanks very much.

This concludes today's conference call. We thank you for your participation. Have a wonderful day.