E W Scripps Co (SSP) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Scripps third-quarter earnings call. (Operator Instructions) As a reminder, today's call is being recorded.

With that being said, I will turn the conference over to Ms. Carolyn Micheli, Vice President, Corporate Communications and Investor Relations. Please go ahead.

Thanks, John. Good morning, everyone, and thank you for joining us for a recap of The E.W. Scripps Company's third-quarter results. A reminder that this conference call and webcast includes forward-looking statements, and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. You can visit Scripps.com for more information, such as today's release and financial tables. You also can sign up to receive emails anytime we disclose financial information, and you can listen to an audio replay of this call. A link to the replay will be up there this afternoon and will be available for a week.

We will hear first this morning from Scripps' CEO, Rich Boehne. Then CFO Tim Wesolowski will recap our third-quarter results for television, radio and digital as the new Scripps. Then you will hear from our Senior Vice President of Broadcast, Brian Lawlor, and from Adam Symson, head of our digital division. Also in the room are radio chief Steve Wessler, and Controller and Treasurer Doug Lyons. Rich?

Thanks, Carolyn. Good morning. Thanks for joining us for this recap of the quarter. And we will also take a look ahead as we get ready for the big opportunities approaching in 2016.

As we talked about in the release, both the Company as a whole and the television division delivered third-quarter results in line with what we expected, and it looks like a little better than the sell-side estimates out there as well.

The TV group more than doubled its retransmission revenue, and the integration of the former Journal station is right on track both operationally and in realizing the synergies we identified when we designed the merger. For example, look soon for some of the Scripps-produced and -owned programming to hit the air in former Journal markets.

In those Journal markets, as in all Scripps markets, the focus on local news ratings is essential to capitalizing on the approaching surge of political advertising. The good people of America will choose the candidates. It's our job to offer them the biggest and best-qualified audience of eyeballs in many of the most critical swing states and local markets.

Just a reminder, the political revenue wave next year will be coupled with another sizable jump in retransmission revenue, projected to be up 50% over 2015. Both political dollars and retransmission dollars are high margin, deploying efficiently to the bottom line. In both cases, we're laying the groundwork now for the best possible performance in 2016.

In the third quarter, we also made two important moves among the businesses in our digital segment, and both moves take advantage of the fast-evolving over-the-top marketplace where new brands are building value.

To take advantage of growth in the audio over-the-top -- among audio over-the-top audiences, we purchased podcast industry leader Midroll Media, a strong brand and a growing business with an experienced management team and an awful lot of momentum. Adam will talk about that in a few minutes.

The other move we made was an opportunistic pivot in the strategy and business model for our video over-the-top network, Newsy. We took an already popular millennial news brand and repositioned it for the growing over-the-top television audience. That now includes adding a live stream of the latest news videos in addition to the on-demand segment that Newsy already offers. In recent weeks alone, we've announced a series of OTT carriage deals for Newsy with Comcast Watchable, PlutoTV, Zumo and, just last week, Apple TV, and there's more to come.

But, as you saw, the investment required to capitalize on the OTT opportunity, combined with slower growth in Newsy's other revenue streams from Web and mobile products in production from third parties, reduced the near-term cash flow and triggered an impairment of goodwill on a non-cash charge. This, however, is a really important pivot. Newsy's clear traction with the OTT audiences and providers led us to an acceleration of the business in that direction. And, again, Adam will talk more about the business in a few minutes.

Also in the third quarter, we conducted a lump-sum pension payout designed to reduce the size of our plan while putting some money into beneficiaries' pockets. And we used our strong balance sheet to make the Midroll acquisition as well as to invest in ourselves by buying back shares.

Now here's Tim with more on the quarterly results.

Good morning. Thanks for joining us today as we report a second full quarter of operating the former Journal TV and radio stations. As Rick said, our third-quarter operating results were very much in line with our guidance, and we're off to a good start assimilating the Journal properties.

In the third quarter, excluding acquisition and integration costs for the Journal transaction and our non-cash charge, we earned $0.02 per share. Our net loss from continuing operations was $24 million, or $.29 per share on a GAAP basis. Costs related to the Journal transaction accounted for about $4 million, or $0.03, of the loss. The impairment charge in the digital business was $25 million, or $.28 per share.

As I talk about our third-quarter results, I will be comparing them to our 2014 adjusted combined numbers to help you better understand the underlying trends in our business. The adjusted combined numbers give a picture of our last two years as though we had merged in the Journal and Granite Broadcast assets at the beginning of 2013. The 2014 quarterly adjusted combined results are in today's earnings release tables. Our assumptions and disclosures are also included in the supplemental information that begins on page E7 of today's press release tables. I encourage you to read those carefully.

So today, we will use those to compare third-quarter results on an apples-to-apples basis. And meanwhile, you can find the as-reported results in today's press release. Of course, most of the year-over-year changes in the as-reported results are driven by the addition of the Journal and Granite properties as well as a loss of political advertising from the third quarter of 2014.

And after I discuss those results, I will spend a few minutes on our cash position, debt status and the share buyback program. And finally, I will share fourth-quarter guidance.

First, let's start with third-quarter operating results in comparison to the adjusted combined results for the third quarter last year. Operating revenues decreased 1% to $190 million. We saw 50% increases in both retransmission revenue and digital revenue. Those increases were offset by the $17 million decline in political advertising from the 2014 election year. Costs and expenses for segments, shared services and corporate were $167 million, up 7% over the 2014 quarter. That increase is mostly due to higher programming (technical difficulty).

Now turning to our three reporting segments, television revenues were down 3% in the third quarter of 2015 over the adjusted combined results to $157 million. Political revenue generated $4 million in the quarter compared to $21 million last year. Retransmission revenue was up more than 50% to $36 million. That increase reflects the renewal last year of retransmission agreements that covered about a quarter of our subscribers. Local advertising revenue was flat and national revenue was down about 2.5%.

Expenses for the television division increased about 9%, driven by an increase in programming fees that includes our ABC affiliation agreements covering ten of our stations and a CBS agreement for our national station. Those agreements will renew within the last year.

Television segment profit was $32 million, down about a third due to the loss of election-year political advertising; and also our transition year in which we are paying higher fees to the networks but still waiting for the reset of $3 million of our table subs to market rates on January 1. Just a reminder, we anticipate a 50% increase in both gross and net re-trans revenue in 2016 because of those contracts and a few other renewals.

Radio operating revenues of $20 million were down $400,000 from the third quarter of 2014. Radio expenses were flat at $16 million, and segment profit of about $4 million for the quarter was slightly below last year.

And now let's turn to digital, which became a reporting segment for us in the second-quarter results. This new digital segment includes revenue from our local markets as well as from national brands such as Newsy, WeatherSphere and, as of July 22, our new podcasting business, Midroll.

Digital revenue for the quarter was nearly $11 million. That's up about 50% from the adjusted combined results for Q3 of 2014. Without Midroll, digital revenue would've been up 25%. Digital expenses were up $1.7 million over the same quarter last year to $14.5 million. That's about 13%. We had guided digital expenses being up in the mid-20% range, but we held employee costs down. The segment loss for digital was $3.6 million.

Now I would like to share our fourth-quarter guidance. Again, in comparison to our adjusted combined results, we expect television revenue to be down low to mid-teens largely because of the loss of political dollars. Last year, we booked $44 million in political advertising in the fourth quarter. TV expenses are expected to increase about 10%, mostly due to higher programming fees. We expect radio revenue to be down mid-single digits and radio expense to be down low to mid-single digits.

For the fourth quarter, we expect digital revenue to be up in the mid-30% range and digital expenses to be up nearly 30%. Those results include the impact of acquiring Midroll in late July.

We expect expenses for shared services and corporate to be about $11 million.

And finally, I would like to cover a few capital allocation matters. We closed the quarter with $81 million in cash, down $20 million from the end of the second quarter mostly because of the Midroll acquisition. Our total debt was $404 million, so that's net debt of $323 million, or net leverage of just over 2 times on a two-year blended basis.

We reinstituted our share repurchase program halfway through the second quarter, and, since then, we repurchased about 680,000 shares. We have about $87 million of remaining authorization. And remember, we paid a dividend of nearly $60 million in the second quarter as part of the Journal transaction. That means we returned almost $75 million of capital to shareholders so far this year.

And now here's Brian to talk about our broadcast business.

Thanks, Tim. Good morning. We reported a third quarter that was about what we expected. The core was down slightly with local flat for the quarter and national down 2.5%. Automotive, as you'll remember, was down 10% in the second quarter but rebounded in the third quarter, finishing flat, and we're seeing good momentum so far in the fourth quarter. Our services category was up 5%, in addition to home improvement category showing nice growth for us and has now moved into a top-five category.

I certainly hope by now you know, but one of our big strengths of the Scripps footprint is our presence in Presidential election swing states. We already own stations in Ohio and Michigan, Florida, Colorado, Missouri and Arizona, and that footprint only got stronger with the Journal deal last spring. We added Wisconsin and Nevada, as well as a few counties in Iowa that are part of our Omaha market. We're well-positioned to capture considerable campaign spending next year. Although the election seems far away since we just voted on Tuesday, the presidential primary cycle is already in full swing in Iowa and New Hampshire. Most of the candidates from both sides and their super PACs are active in both states.

The anomaly right now is that the Republican candidates leading in the polls, Ben Carson and Donald Trump, are spending the least. In addition, the lower polls for the remaining Republicans are making it difficult for them to raise more money. So what we should all be rooting for is a quickly thinning crowd of candidates to start raising and spending money.

In addition to the presidential election next year, we have five big US Senate races in our markets as well as two governors' races and more than a dozen US House races. As Rich mentioned, one of our best ways to capitalize this political opportunity is by growing ratings, and Scripps has made this a priority in the coming months.

Before I turn to radio, one more thing on the TV division. We've begun negotiations on the 3 million households in our markets that are Time Warner and Bright House customers. As we have often discussed, those households are at a very low market rate at the moment because of the deal we made related to former cable networks. As Tim said, these contracts renew as of January 1, and we expect the new rates as well as a few other key renewals to help us grow to a 50% increase in both our net and growth re-trans revenue in 2016. That would take us from about $145 million this year to about $220 million next year on a gross basis. Such an increase in retransmission revenue combined with the opportunity for political ad revenue should put our broadcast group in line for the strongest cash flow year we've ever seen.

And now, before you hear from Adam, I would like to talk for a minute just about our radio division. Our new country station in Milwaukee, KTI Country, is off to a solid start. There are a lot of country fans up there along the lake. And in Milwaukee, we also announced the renewal of our Milwaukee Bucks NBA play-by-play agreement at WTMJ AM, further solidifying our dominant position as Wisconsin's sports station. On that station, we're home of the Green Bay Packers, the Milwaukee Brewers and, once again, now the Milwaukee Bucks.

Our strategy in radio is to use local talent, promote local events and offer formats of local appeal, which serves both our audiences and our advertisers as well. It also allows for good synergies in the five markets where our TV and radio stations overlap.

And now here's Adam.

Thanks, Brian. Hello, everybody. This is our second full quarter of reporting digital as a segment. And just a reminder, Scripps's digital division is a collection of businesses gathered into one division. Roughly 80% or so of the digital division's revenue today comes from our local market-related digital product such as TV station, websites and ad sales. The rest of it comes from our national businesses, such as Midroll and Newsy.

Third-quarter total digital revenue was up more than 50% over the third quarter of 2014 on an adjusted combined basis. Our results were buoyed by the contribution of Midroll as well as gains by our strategies in the local digital businesses tied to advertising sales, passes and direct-from-consumer revenue streams. Those included our efforts in programmatic advertising and video syndication. The division expense growth was slower than we projected, as Tim mentioned.

During the third quarter, Scripps's local market served 376 million page views. These local digital brands served an average of 25 million unique users during the quarter. And we crossed the 1 million mark with monthly active users of our local, mobile and tablet app, up about 12% over last year. Growing monthly active users comes from driving our new audiences to download apps and by getting existing downloaded apps used more often.

For more than a year, we've placed a big emphasis on growing our video views. That's because of the strong demand we see for the pre-roll advertising inventory and the high rates those ads command. Our local websites and mobile products delivered more than 30 million video views. Speaking to video, now I would like to turn to Newsy.

As you know, the over-the-top television marketplace is rapidly evolving, with new platforms and products springing up on a regular basis. We were fortunate to have formed relationships with Roku and then Amazon Fire TV earlier this year, and we immediately began to demonstrate how drawn millennials were to Newsy. Roku users, for instance, spend an average of over 27 minutes watching Newsy, an enormous amount of time for on-demand video. That engagement time has grown five minutes over the last few quarters as we have continued to fine-tune our content and delivery style.

The success on Roku and Amazon's Fire TV led other emerging OTT providers to seek us out. And we've now announced a series of deals in recent work weeks with brands that range from Comcast's Watchable to the venture-backed and fast-growing PlutoTV. These distribution deals secure valuable shelf space for Newsy in front of a fast-growing audience.

You probably saw our announcement last week that on the very first day it went on sale, Apple TV began to feature Newsy as one of its best new apps. This recognition led to a really nice plug from well-known technology writer Walt Mossberg and gave it high visibility with new Apple TV users. Apple analysts have estimated that the Company will sell more than 20 million Apple TV units next year, so this is amazing exposure for Newsy. And the early data indicates Newsy is resonating with that young, high-end audience.

The non-cash write-down was difficult, but we believe Newsy has a bright future in the OTT market. We are just getting started in the OTT space, with a lot more work ahead to build that audience and monetize it. But we see over-the-top television as one of those platforms with high organic growth worthy of the Company's focus and investment.

Let's turn now to our newest acquisition, Midroll. Since we closed our deal, Midroll has continued to lead the industry, launching high-profile new shows, expanding its podcast advertising network and broadening its advertiser base into new categories, all signs this business is headed where we want it to go.

As a reminder, Midroll has three areas of its business: podcasts it owns and operates; podcasts it represents in the advertising market; and direct-from-consumer revenue through subscriptions to its Howl premium podcast app. In order to accelerate growth of its owned and operated network, Midroll has made key hires in Los Angeles and New York meant to support Midroll's expansion into some content areas beyond comedy, including journalism, sports, parenting and businesses, categories where we see high audience and advertiser demand.

In the non-owned and operated network, Midroll continues to lead the ecosystem with the most and best shows under representation. During third quarter, the business development team acquired podcasts that added 1.4 million weekly downloads through the addition of 16 new podcasts. And that doesn't even include the Bill Simmons podcast which launched last month. Bill Simmons is the former sports commentator who launched ESPN's Grantland. He has an enormous following. And now Midroll is selling each episode of his new podcast, which relaunched just a few weeks ago and has already garnered a large audience and advertising base.

Finally, Midroll launched the Howl app and subscription service in the third quarter to its most loyal audience of comedy fans. While it's still very early, we are seeing strong conversion and retention. In the coming months, we will scale up marketing efforts; add additional subscription content and product development.

And now, operator, we are ready for questions.

(Operator Instructions) Marci Ryvicker, Wells Fargo.

You talked about auto coming back in the third quarter, but local was still flat and national down. So what is just dragging your core business? That's the first question. And secondly, can you talk about Q4's spot in terms of auto and just overall piecings for local, national relative to Q3? Thanks.

Good morning, Marci. I will let Brian take this question.

Good morning, Marci. A couple of things. I think national was obviously disappointing, down 2.5 and it really dug into what the case with that was. We had several markets that performed really well. But as we started to really look at our footprint, something jumped out at us, and maybe just a one-quarter anomaly.

But the northern part of the Midwest, national was very soft. So as we look across -- as you know, we've got a really heavy footprint up there. Nashville market was minus 10, Indy was minus 10, Cleveland was minus 9, Buffalo was minus 5, Detroit was minus 3, Green Bay minus 4, Lansing minus 8. And I think we have other markets that were up, and they were up nicely. But, for whatever reason, our footprint played into the fact that national was affected in that one region. We didn't see any other trends as it really related to national.

As you mentioned, in terms of categories, auto performed well. Services was up five, as they said. Home improvement had a great quarter, up double digits. And retail was minus 1. So, really as we look at it, I think the impact of national really had just that northern Midwest footprint in some (technical difficulty) right there.

Brian, can I interrupt you for one second? The numbers you gave us, is that your numbers or was that overall market numbers?

Those are total market, Marci, not ours. We performed fine in our markets relative to our audits. Those were the total markets of national spending. Okay?

Yes, so as we are looking at fourth quarter, we see auto performing better. In fact -- obviously, we've got October in the books. All five of our top five categories showed growth beyond -- growth, period, and even beyond what they had in the third quarter. Obviously, we had a fair amount of political in the last fourth quarter, but our pacing looks very strong, and our categories and national and local look good as we look at the first half of fourth quarter.

I have one more follow-up on digital, though. The expenses were lower in the quarter. You talked about employee cost savings, but then you talked about investment. So were the cost savings in Q3 a one-time event? How should we think about going forward for the digital segment?

No, Marci, I think we've given guidance, and I think we intend to hit that guidance. I think that the cost savings for the third quarter were as a result of some hires we didn't make in some of our local markets as well as our national side. We are always managing to the expense line as well as looking at the upside opportunity, so we intend to do the same thing moving forward.

Thank you.

Dan Kumos, Benchmark Company.

Marci hit my TV questions and a little on the digital side, so I will take the radio question. Obviously, we haven't heard great things from radio outlook going forward. CBS obviously had some pretty negative things to say. And just it looks like your outlook is getting a little bit sequentially worse. Just curious how you view the overall health of that business. And then obviously the obvious follow-up there is how you guys are thinking about either acquisitions or, alternatively, divestitures within radio.

Good morning, Dan. It's Rich. We will let Steve Wexler talk about the radio business.

Thanks, Rich. Hi, Dan. Actually, our fourth-quarter guidance -- it's early in the quarter, obviously, but we feel actually fairly positive about where we are. When you exclude the political, we are actually facing on and probably above last year. So our guidance is down mid-singles -- is solid; we're confident in that. But actually the trends for us in our local markets are pretty good. We are also having a very, very good year in Milwaukee on our Green Bay Packers radio network.

Dan, you had a question about acquisitions or divestitures? Yes?

Yes, I was just curious how you guys -- there are obviously a lot -- similar properties have come into the market. Shures decided not to go forward with the radio piece of that with Gray. And, obviously, I know you guys have been speculating with a few other names. So, just curious how you are thinking about if you want to roll up the space and leverage Midroll or if you want to keep what you have.

It's always nice to be speculated about, I guess. As you probably know, we have a couple of focuses on the radio side. One is where we also have television stations. That's a strategy that we picked up from Journal, and they did a nice job with it and we will continue to do that. So, if there were opportunities to add a few stations where we already have TV, I think we would think of that where we already have clusters. But I don't think you should expect us to be one of the new roll-up players in the second phase for radio. We really like what we have today. Like I said, we might do some -- a little bit of work on the portfolio. But, like I said, don't look for us to be a big roll-up player.

Got it. That's really helpful. And then since you brought up Journal, now that you've kind of worked through some of the -- a couple of clean quarters, can you just give us an update maybe overall on how synergies are pacing versus your expectations and maybe some -- whether or not you've uncovered some new revenue synergies with some of the -- as you said, some of the cross ownership and TV radio markets, or just how we should think about that from your perspective?

Sure. Here's Brian. He can talk about it.

Hey, Dan. Look, I think from a cost synergies -- I think we are well in way of -- underway of implementing all of those. A lot of the standardization of some of our processes and technologies are already done or will be done by the end of the year. And so really our focus is twofold. Number one, taking the scale and leverage of our strong news brands and being able to integrate those across many of our new television stations. On the radio and television side, we see that as a great opportunity, as Rich just said. And we have been working very closely in those markets with bringing the teams together, trying to figure out how do we use the digital, the mobile, the social, the radio, the television assets that we all have on one market to lift all boats. And so we've had a couple of examples of significant upside as a result of us working together on the advertising front. Promotionally and branding, we think we're getting more heft than we had been.

So I think we are really pleased with where we're at. And I think next year is going to be a big year and (technical difficulty) especially in the TV and radio markets. I think those synergies will add some significant dollars to the bottom line.

Great. And then just one more for me. I guess maybe for Adam, although obviously anyone can chime in. Can you give us a little bit more granularity on the difference between the economics going the OTT route versus what was historically more of a direct-distribution model? And then just to sort of follow-up on what Marci asked, next year, I think we are anticipating breakeven-ish in digital. Could you achieve that sooner given some of the cost savings or avoidance as you've seen thus far?

Sure, Dan. I'll take the first part of your question. The economics in OTT right now -- first of all, the space is fairly immature and nascent. But I will tell you the one thing we really like about the space is, unlike in mobile Web -- in mobile and Web, which is fully democratized and anybody out there can be a player, there are barriers to entry in the OTT space. And so one of the things we're excited about is the fact that we have breached some of those barriers to entry and are working really aggressively right now to own shelf space in front of that fast-growing audience on all these new platforms. And so I think it provides a real rosy look years down the line or ahead relative to where the audience is going in the OTT space.

You'll recall that the Midroll acquisition -- or, I'm sorry, the Newsy acquisition, originally most of that business was based on both video product that the business produced for our partners and syndicated as well as news videos that were distributed into Web and mobile. And that's a fairly democratized space. There's lots of inventory there, which is not true right now in the OTT space.

Dan, it's Rich. I guess you had a question about this segment in 2016. We're not done budgeting. We are actually quite a long way from being done. But if you sort of pull the segment apart and try to spin forward to next year and think of it in the pieces, Adam talked about the local -- that's the websites and mobile businesses associated with the TV stations where 80% of the revenue is -- that business was essentially cash flow positive prior to the newspapers coming out. It's well on its way to being a net cash producer.

We think building those local brands is essential to long-term success in local markets. We could turn some expenses and make it profitable today very quickly. But, again, we think a little bit more investment there is warranted. But it's well on its way. And, as Adam said, there's very good revenue growth.

And then if you look at the newest piece that we just folded in, Midroll, as you know, that's profitable today and a contributor. And then we talked about Newsy where we've made the pivot. So when you roll all that together in this quarter, you lost about a little over $3.5 million. Or we invested about $3.5 million back through the P&L that we think is producing real value today and certainly will in the future.

If you look to next year, obviously we are putting some money into Newsy, and we think we have an important pivot there. But if your fear is that the results for that segment will change somehow dramatically next year because of what we're talking about with Newsy, I don't think that will be the case. But those are the pieces -- I'm sorry, go ahead Dan.

No, it's okay. It certainly wasn't a fear. I actually thought you were ahead of pace. And I should've been more clear that I was talking about the non-local businesses, which we know are profitable. So that's good color on your balance between investments and profitability, which is really what I was getting at. So thanks for that. Appreciate it.

In that case, Dan, you are a very smart man, and I thank you for that question. Yes, we are -- we think we are on a -- obviously, we think we are building a lot of value, and our goal was profitability in that segment as well.

All right, appreciate all the color guys. Thank you very much.

Craig Huber, Huber Research.

A couple housekeeping questions. First, what is the underlying CapEx annualized spend right now for your Company?

In the $25 million range or so.

Okay. And then your corporate expense came in lower than expected. What was the reason there, please?

There were -- it really was just sort of a combination of a few things. I think our healthcare costs were a little lower than what we had anticipated them to be. That was one of the main reasons.

It wasn't incentive compensation or anything like that?

No. It was a variety of items like healthcare costs and sort of normal operating thing.

Okay. And then also, can you remind us the annualized synergies for your Company that you originally were expecting to put in place? And then what's that annualized number running at right now?

I think we said it was $35 million between the two companies. And then I think later we said we about split them in half between the two. Our expense synergies are largely in place or largely in flight. I think Brian talked about some of the centralization -- standardization activities. Some of that is done; some of that is underway. And there will be some other cost-saving synergies that will come in over time as we were able to take our programming and replace syndicated programming that's under contract now. But, hey, we're off to a great start assimilating these properties, and the synergies are right where we thought they would be.

Just to ask a question -- I assume not much, though, was in the third quarter because I'm looking on your page 9 here. In the TV division, for example, the employee costs were down 1.3%. Other expenses up almost 7%. On the radio side, employee costs up 1.4%, other expenses down 5%. It was only $200,000. Where were we or where are we seeing those synergies at? This roughly $17.5 million on an annualized basis? Or is it more to come in the fourth quarter and beyond?

Lots of places where that comes. One of the things that's happening in here is that you are seeing some increases in programming costs with the network affiliation agreements that we've done. So that's something that is hitting in the P&L. So we've got -- in that programming line, we've got network costs. We've also got syndicated, so the network is seeing an increase. The syndicated has gone down. That's really one of the places that we are seeing kind of an offset to that $17 million number that we have talked about.

Trying to push back a bit. When I look at the employee lines for both subdivisions and then the other expense lines, I'm not honestly seeing it here in the third quarter. Maybe it's on the come still? I'm just not seeing these non-programming lines.

Hey, Craig. It's Brian. Tim touched on this, but the biggest -- obviously negative variances, the significant boost we have to pay the networks that offset some of this. But we do have a significant decrease in syndication expense that we have in some of that. We have been able to roll out our station -- or our programming into a couple of the new markets. Some of the synergies we are looking for in news costs have been able to come out. Employee costs have been able to come out. And research and consulting and things like that have been able to come out. So I think the problem is it's just overshadowed by the significant increase in what we're paying to the networks.

I'm sorry to keep asking this, but do you think these employee costs would have come down more than this 1.3% you saw in the third quarter on a pro forma basis?

Yes. And, Craig, and one of the things as you look at how those adjusted combined numbers were put together, we had included the synergies in the 2014 adjusted combined numbers. So the synergy comparisons that you will see will be -- were not going to be obvious from the 2015 versus the 2014 adjusted combined numbers that were already in there. There is a GAAP to non-GAAP reconciliation in the supplemental materials that we had provided, and you can see those amounts that are in there.

Okay, that's helpful. Thank you.

Michael Kupinski, Noble Finance.

First, congratulations for overachieving our numbers. The biggest variance in the television side, it looks like, was in the political. And I would assume that's Ohio, but I just wanted to make sure that that's where it was coming from or if there was something else.

Hey, Mike. It's Brian. Third quarter was interesting on the political side. We had some good momentum early. And then once the Iran deal was done, all that money that was targeting Senators there really dried up. So we did get some Colorado and Ohio issue money. In Ohio, we had a marijuana vote, but it wasn't all that significant. And so we continue to see a little bit of money in those states around the 2016 Senate races. But there was a little bit of off-cycle election stuff. We had the Kentucky gubernatorial and some other small races. But once the Iran thing was done, really that was significant over a bunch of more markets. And after that dried up, it wasn't enough in any particular place to make a difference.

Okay. And in terms of the digital revenue outlook, it seems like a little lighter than what I was expecting for the guidance for the fourth quarter. Maybe I had a little seasonality built in there, but it is a deceleration from the rate of growth in the third quarter. I was wondering is that coming from Midroll or is that Newsy, or where are we seeing a least slower growth?

Good morning, Mike. It's Adam. Well, last quarter -- last year and fourth quarter, we really began to see the uptick in the success with our direct-from-consumer, passive and programmatic strategies. So in essence, right now we are really facing tougher comps in the fourth quarter of this year.

And in terms of these new platform deals that you guys have done for Newsy, how impactful are those in terms of revenues and, I guess, improved profitability for Newsy? I guess I'm just trying to gauge when you guys announced another platform deal, how significant that is to achieving your goals in moving that business forward.

Sure. Well, obviously, we think that the ecosystem in the space is going to evolve pretty quickly. And our job right now is to really focus on trying to get distributed into every one of these platforms and marketplaces. So I guess I would say right now we are very focused on building that distribution and audience, and then we would expect monetization to follow shortly after.

And then to your question, profit would follow that.

It's tough for me to say because we are on board for the launch of these, which is a great place to be. But I don't have much other than the same analyst estimates you have to go off of on how many Apple TV products you're going to sell or where Roku's growth is going to come from. I will tell you we are doing our job. We are getting Newsy distributed onto those platforms. And then, maybe more importantly, when consumers on those platforms are choosing to watch Newsy, they are sitting with us, they are sticking with us and we are running ads in front of them.

And then most of my questions have been answered. But in terms of spectrum auctions, obviously you guys have rethought your participation in spectrum. And I was just wondering -- I know there's virtually no way for us to gain how much proceeds are going to receive from these spectrum auctions. But I was wondering is there like a target that the Company would like to see in terms of proceeds from the spectrum auctions, whether that's $50 million or $100 million, or what -- if there's any thought in terms of what the internal numbers might be that the Company would like to see from potential auctions?

Hey, Michael. It's Rich. As we get closer, I think the one thing -- the most important to know is this is going to be -- or for those who choose to participate, whoever that might be, this is going to be a real game of Texas hold 'em. And it would really not be actually in most anybody's best interest to disclose what they expect or what markets or anything else. We've talked quite a bit about how we think the auction is much more than just a monetary event as well. It's going to, in many ways, restructure the broadcast business in ways that we think create opportunity for us and others.

But everybody is getting real close to the deadline. I think what you can expect, probably unfortunately for you, is going to be radio silence from most of the companies until it plays out. I will let -- want to add anything, Brian?

Yes. Hey, Mike. The one thing that -- there's so much that's still unknown, believe it or not, even though we are facing a deadline here of just, I guess, four weeks until the window opens for applications. But even when we submit the applications, I think the biggest thing that we will not know at that point is what is the FCC's target of the auction. Is it going to be an 84-megahertz auction or is it going to be a 120-megahertz auction, or is it going to be somewhere in the middle or whatever?

And I think, even trying to model projected proceeds, even if you could figure out whether you would be successful or not, will look dramatically different based on whether it's an 84-megahertz auction or 120. And I think -- for those that are interested in participating, obviously they are hopeful that it will be a 120-megahertz auction. There will be a lot more auction purchase and a lot more spectrum purchase, and there will be a lot more money in the funnel. If it's an 84-megahertz auction, I don't think there's going to be a lot of money distributed to broadcasters.

Perfect. I appreciate that color. Thanks.

Tracy Young, Evercore ISI.

Most of my questions have been answered. I just wanted to see if you had any color from the primaries and if you could give us any sense of where you saw the strength. Thanks.

Go ahead, Brian.

Hey, Tracy. It's Brian. Really, we haven't yet been able to take advantage of any of the primaries. Our first primary is February 13, which is Nevada. The good news is we are starting to see some spending. And we also have, as you know, a couple of counties in Iowa as a result of Omaha.

So in those two places, we are starting to see the Republicans starting to lay in some money. But we're still a long way away from Nevada on February 13. So it's certainly our hope that the folks who are in it will be building their war chest and we will see some super PAC money starting to move into the states. But, honestly, it's real early right now. It seems like most of the focus is Iowa.

Thanks.

Barry Lucas, Gabelli and Company.

Just a couple here. And I may have missed this, Brian, but what are you seeing in terms of core growth for 4Q TV advertising?

Well, we didn't say it, so you didn't miss it. (laughter) The only thing I can tell you at this point is it's early. We have still got more than half the quarter to go. I did say that we had a really good October. Every one of our categories -- our top five categories was up. Versus prior October, it was up. It was how we finished in third. So we still have a lot of business to write really for December and the last couple of weeks of November. But unlike third quarter that started really slow and built, October is starting -- or, October started well. And if it can build from there, it should be a pretty good quarter.

Okay. Thanks. And you talked a bit about the importance of news ratings in the political season. So, what have you been doing there, and what improvements have you seen in either your own stations or the Journal stations?

Yes, look, I think that early on after the close of the Journal, we stepped back and looked at -- we think that we have six states that are going to be hotly contested in the presidential race: Colorado, Florida, those couple of counties I mentioned in Iowa, and then Nevada, Ohio, and Wisconsin.

And so we have been very focused on audience growth in those markets. We have been moving resources around and bulking up in those places. And I think that we've seen some nice growth in, for example, Milwaukee since we acquired the station. I think our Las Vegas station has been a real success to this point. Our morning ratings since we took over the television station are up over 50%, so that's a state and a market of specific focus for us. We're obviously spending a lot of time and attention in Ohio and in Florida. We've got great assets there already, but making sure that they are firing on all cylinders as well as getting Fort Myers kind of going a little bit. And actually in the last two or three months, we've seen morning and evening growth in Fort Myers.

So the new states that we -- the new markets we acquired in those six states, we've been very focused on, as well as just reinforcing what we do in our legacy markets to make sure that we put ourselves in the best position to take advantage of all the dollars that are going to come in those markets. So I would just tell you very focused effort in those markets on audience growth.

Does that include adding news programming in those markets?

I don't -- I'm hesitating because we've moved a couple of things around and so maybe the net net is up a little bit. Obviously our legacy stations -- we already have built out quite a bit of it a year ago when we eliminated Ellen from our syndicated lineup. We added six markets with our newscast or our news programs from 4 to 5. We've added another one this year, and one of our new markets is set to launch in September. So, yes, I guess in its totality, we have added a fair amount of news.

Great. And then for either Rich or Tim, we've got a much seasonally stronger quarter in 4Q and big bulge hopefully in 2016. So maybe you could talk, either one of you, a little bit more about capital allocation. Does the seasonal pattern and improvements as we look into 2016 suggest that an accelerated buyback taking place? Not in ASR, but accelerated share repurchases. And/or how you may be thinking about dividends going forward and anything -- any other color on capital allocation would be great. We would appreciate it.

Sure, Barry. It's Rich. Probably the most accurate way to portray this, as we often say, all of the above. Obviously we think it's prudent to invest a little bit of money first through our P&L in businesses that we think are going to be high-growth and create a lot of value, and also to improve our current portfolio of businesses and TV and potentially radio.

And then on top of those moves that you have seen us make over the past couple of years, we continue to buy shares. Remembering, we buy shares sort of steady along the way when windows open, and we put them plans and try to take in what we can. It's been a little harder to be quick to move.

Dividends, we discuss all the time with the Board. We just finished a Board meeting earlier this week. And I think at this point, we probably still favor investments in businesses that will drive real free cash flow growth and also share repurchase, but we will continue to discuss whether dividends make sense.

Obviously, as you say, we are moving toward a year where we are going to generate an awful lot of cash. So we will be thinking more and more about how is the best way to put that to work heading through that election year.

It's not in hand yet. I guess we tend to be a little conservative and a little old-fashioned. We like to spend it when we have it. But, like you say, we could be coming into a pretty good high-class challenge next year, which is having an awful lot of cash.

Thanks, Rich.

Craig Huber.

On the digital side, I'm curious, this $11 million of revenues you had there, how much of that was from the TV station or digital properties, and what was the percent change there, please?

The TV or the local news was about 25% of the growth over the adjusted combined from the prior year. And then the rest of the growth you saw there over last year would've been the addition of Midroll.

So you are saying 25% of the 51% increase came from local TV station properties?

TV was up -- television local was up 25% over prior year.

Okay. And then how much of the total was that of $11 million? Was it half? Or what was it, please?

About 80%. About 80% of our local revenue -- or about 80% of the digital revenue comes from the local markets.

Okay, that's helpful. And then Brian, back on the fourth-quarter TV pacing, I'm curious -- you were saying things are trending better here. Part of that might be because of the crowding-out effect for political a year ago that would help out October this year versus a year ago. I'm curious, how is your TV pacing looking after the first week of November for both local and national, please?

I don't think that's something we typically share specifically, Greg. But, again, I think -- read into my earlier comments that it's a really good October and it seems to be continuing based on the business that's late in. Again, there's still a fair amount to write through the end of the year. But I think right now, structurally, the quarter looks healthy.

You're confident what you can see right now, the stuff after the first week in November, is trending better year over year than you had in the third quarter, I think your message is. Right?

Yes, I think that's right.

Okay. Thank you.

John Houck, Wells Fargo Securities.

I've got a couple for radio and then digital. But first for radio. Did you say that, ex-political, you're pacing flat to positive in Q4?

Yes. Hi John. It's Steve Wexler. Yes, I think that's fair. We're confident in our guidance that Tim provided. But, ex-political, I think we are going to -- we have some upside opportunity.

Okay. How much was political last year in Q4 for radio?

Political in fourth quarter was close to one.

I'm Sorry. Say that one more time.

Close to one.

Oh, close to one. Okay, okay. Perfect. And then digging into digital a little bit, tacking off of Craig's questions, you talked about the breakdown of digital revenue between local and national. Can you provide the same kind of breakdown for profit between the two?

Go ahead, Tim.

Yes, when we talk about this -- Rich give a good explanation in this. The local business was a good business. It was profitable when we had the newspaper problems in the mix. The Journal transaction gave us a lot of opportunities. The near-term impact, however, on our local and digital business was negative. We took out $25 million, I think it was, of revenue from those markets, replaced it with $9 million or $11 million or some number like that. So we are starting out in a hole. That business is growing, and Adam and his team have a plan in place to march that back up to where it needs to be and being a good business again.

Okay, that's helpful. Thank you so much.

We don't break out the segment profit for each of those pieces.

Okay. Thank you.

And to the presenters, no further questions in queue.

All right. Thank you, John.

Any closing comments?

No, that's all. Thank you very much. Everybody have a good day.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.