E W Scripps Co (SSP) 2017 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.

Your hosting speaker, Head of Investor Relations for Scripps, Carolyn Micheli. Please go ahead.

Thanks, Kevin. Good morning, everyone. Thanks for joining us for a discussion of the The E. W. Scripps Company's Third Quarter 2017 Results. A reminder that our conference call and webcast include 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 e-mails anytime we disclose financial information, and you can listen to an audio replay of this call. The link to the replay will be up there this afternoon and available for a week. We'll hear first this morning from Scripps President and CEO, Adam Symson; then Interim Chief Financial Officer, Lisa Knutson; and Local Media President, Brian Lawlor. Also in the room, our Radio Division Head, Steve Wexler; and Controller and Treasurer, Doug Lyons. Now, here's Adam.

Good morning, everybody. This morning, we're reporting financial results that mostly met our expectations. We do have some noise in the numbers, however. Thanks for joining us as we parse through them with you and explain the short-term issues and the positive longer-term outlook. In a moment, I'll talk you through the factors affecting our digital division, and then discuss the company, the start of a company-wide comprehensive restructuring effort that ultimately will best align our company costs with our business goals. This is consistent with what we shared with you back at our most recent Investors Day, our commitment to put equal energy and focus on short-term results, while creating long-term shareholder value. Let's start this morning with broadcast television, where we realized the expected upturn in core advertising, once you factor out the incremental upside from last summer's Olympics. Brian will give you more color in a few moments, so I'll just say, we were pleased with the health of the quarter and especially the growth in our key categories in September, giving us good momentum going into fourth quarter. Local media is the anchor of our company. Every day across this country, we serve large and engaged local audiences on multiple platforms with the news and information they need to make decisions for their lives, and it is our advertising solutions that power the local economy. Based on the evolving FCC ownership regulations, we're looking forward to the opportunity to refine our TV portfolio through our M&A strategy. We believe this opportunity to improve the profitability of the local media business will be good for Scripps and allow us to continue investment in the journalism that defines our stations.

Turning to our digital businesses, we saw a third quarter slowdown in national advertising, that impacted all 3 of our national content businesses, Newsy, Midroll and Cracked. The dynamics for all 3 are very different however. Midroll saw strong ad inventory growth in the third quarter as the company continues to lead the fast developing podcasting marketplace. Midroll added some very significant shows to the portfolio, including the Hit Podcast My Favorite Murder and we launched our own docu series on the cult responsible for America's largest mass suicide, Heaven's Gate. During the quarter, we also announced that Midroll will be the official podcasting partner of the NFL, and will soon bring a daily news podcast to the market in partnership with Vox Media. Advertiser demand in July and August was softer than expected in part as a result of broader national advertising trends we saw over the summer. Midroll did see sales rebound in September and were looking forward to a strong end of the year. Midroll advertising impressions hit [1.3 billion] in the quarter, up from [1 billion] in the second quarter. Midroll and Newsy combined are on pace to grow revenue about 60% this year over 2016. That reflects the kind of audience and advertising growth we are seeking as part of that strategy for long-term value creation. Newsy too felt the impact of weaker demand in the national digital advertising marketplace during the summer. As we've told you over the last year, we've been pivoting away from the legacy web and mobile syndication revenue streams. During the third quarter, more than 90% of Newsy's revenue came from the business we've moved into advertising and its over-the-top television product. With Newsy nearly fully deployed on the big over-the-top platforms and virtual MVPDs, it's now full steam ahead as we move into cable. As a reminder, in third quarter, we kicked off that move with the acquisition of carriage contracts from RLTV and are now working with the MVPDs to transition program into Newsy. As we head into next year, we anticipate strong audience and revenue growth at Newsy from the development of the OTT market and now the addition of the dual cable revenue streams of advertising and carriage fees. We expect Newsy will end 2018 with about 40 million pay television subscribers alongside its distribution in the quickly developing OTT marketplace. Our strategy for Newsy is also consistent with that of our acquisition of the Katz Broadcast Networks. We know consumers are no longer bound by certain media platforms and instead are seeking up the content they love across cable, over- the- top, and over- the-air. As a content company, we are developing brands and programing that our audiences will seek out and spend time with. Both of these businesses, Katz and Newsy are fast growing with strong upward trajectories for a long time to come. Now, I'd like to talk about Cracked which has clearly not lived-up to our expectations. We've often told you that we would throttle back the expense lever, if one of our national content businesses weren't performing to the levels we expect, that's where we are today with Cracked. The business has not been able to scale and execute to our expectations and the impairment and write-down signals that change. We are working with the businesses management team on a plan that will bring the business to profitability in 2018.

Finally, I'd like to discuss our large-scale corporate restructuring plans and where we expect that to take us. We foreshadowed this activity during our Investor Day discussion. As you saw, we incurred more than $ 2 million of onetime restructuring costs in the third quarter and this work is just beginning. We're acting with great urgency as we move through the next several quarters to take a disciplined and comprehensive look at our cost structure. Our non-core assets and our operating performance. We are strongly committed to improving performance and positioning ourselves for continued growth. Among this restructuring work is our move to pull together our local broadcast and digital operations. We've seen terrific growth in our local digital businesses in recent years as we have put resources to work to capture more than our fair share of digital ad dollars in our markets. That success gives us a firm foundation as we reunite these operations and create new efficiencies. As I said earlier, all of this work is aimed at putting equal energy around delivering short-term results while creating long-term value. Through our M&A strategy and expense management, our goal is to improve margins and cash flow, balancing that activity is our equally firm commitment to our growth strategies with Katz, Midroll and Newsy. Our goal there is to build towards significant meaningful returns for shareholders, an approach that like our commitment to journalism is foundational to the Scripps strategy and unwavering. And now, here's Lisa.

Thanks, Adam and good morning, everyone. All of the details of our third quarter performance are in this morning's press release, and we'll be filing our 10-Q later today. Right now, I would like to go through some details of the quarter, our cash position, as well as capital allocation, fourth quarter guidance including the Katz networks. We're reporting third quarter consolidated results that were mostly in line with our expectations. In our television division, total third quarter revenue was down about 9% compared to the prior year and in line with our guidance. Retransmission revenue was up about 20%, but was offset by $ 25 million less of political revenue. Television expenses were up about 6% as we guided, driven by an increase in network's programing fee. Radio revenue was down about 7% and expenses were down almost 3%. In the third quarter, digital revenue was nearly $18 million, digital division expenses were up about 10%, beating our guidance of up high teens. We took a $36 million non-cash impairment charge for Cracked. We also incurred $2.4 million of costs related to the start of our company restructuring efforts. You can expect restructuring charges to continue for several quarters. These charges increased our net loss by $24 million or $0.29 per share. Without the charges, we would have reported a net loss of $2.4 million or $0.03 a share.

On September 30, our cash totaled $127 million, while total debt was $396 million. We closed our acquisition of the fast-growing, audience- targeted, Katz Broadcast Networks on October 2. Brian will give you more color on Katz in a moment. A reminder that our net purchase price for the deal was $292 million financed with a new $300 million floating-rate term loan.

Year-to-date through October 31, we purchased about 725,000 shares of stock for almost [$14 million]. Last November, the board authorized a 2 year $100 million buyback program. We provided detailed fourth quarter revenue and expense guidance in our earnings release. I do wanted to touch on our fourth quarter guidance for the digital division, which includes the Katz networks.

We told you when we acquired Katz that we expected it to have $38 million of revenue and $33 million of expense in the fourth quarter. So those numbers are factored into our fourth quarter guidance for digital. Finally, I want to talk about our retransmission revenue outlook. While we've experienced some subscriber decline since the first quarter, we expect rate growth will more than offset this decline. We expect our full year retransmission revenue to be up about 15% in 2018. Now here's Brian.

Thanks Lisa, good morning, everybody. I'd like to begin with our local TV station group, where we reported results that were in line with expectations and ended the quarter on an encouraging note with core advertising. Core for third quarter was up slightly over the prior year. Factoring out the incremental spend in the 2016 Summer Olympics. We saw especially positive core trends in September, even despite the loss of nearly $0.5 million of advertising from Hurricane Irma on our 3 Florida operations right at the end of the quarter. Five of our 7 top categories were up for the month, including auto, which was up 5% and services, which were up 9% in September.

Home improvement had a very strong summer, up more than 15% for the full quarter and communications rebounded with a strong quarter growing more than 50% from last third quarter. While still early in the fourth quarter, we're feeling very positive about this upturn as we end the year. On the over-the-top front, we have now launched, our local brands on YouTube TV and Hulu. In addition to DIRECTV Now, Sony Vue and several other new OTT services. We're pleased that we're beginning to monetize these so-called cord cutters, which are really just households finding new ways to watch television. And at the same net economics for us as cable and satellite subscribers. We have always been confident about our value of local brands and these partnerships validate the important role we play in our audience's lives.

During the third quarter, we launched our new original program Pickler & Ben to strong ratings and audience and advertiser enthusiasm. The show is airing in 38 markets, many owned by Scripps as well as a range of other local broadcast companies. Each episode also airs the next day on the cable network CMT. Kellie Pickler and Ben Aaron are an entertaining duo and we've been pleased by their warm reception with daytime audiences. In our radio group, we continue to face secular headwinds amplified by short falls in our largest market, Milwaukee. Results across our group were mixed with year-to-year growth in several of our markets. But these were not enough to make up for the weakness in Milwaukee. We did bring in expenses below our guidance at down 3%. And finally, we're pleased to have brought into the fold the 4 fast- growing Katz Broadcast Networks. Bounce, Grit, Escape and Laff, each have their own unique personality, content focus and targeted audience demographic and advertisers have responded enthusiastically to the Katz programing strategy.

Their growth so far has been impressive. They each reach well over 80% of the U.S. and are 4 of only 6 multi-cast networks that command an audience large enough to be Nielsen rated.

We have great distribution partners, including Nexstar and Univision with both just signed new long-term agreements to distribute the Katz networks in their markets across the United States. The expanded distribution, we just announced from the recent agreement with Nexstar brings the Katz networks reach to nearly 90% of U.S. TV households. And we believe, we have the opportunity to further scale these networks and give more general market national advertisers a mix of well-known and original programing to reach their desired audiences.

Katz will contribute a full quarter of results, as we end this year and is on track to meet our expectations. And now, operator, we're ready for questions.

[Operator Instructions] The first question is from the line of Marci Ryvicker, Wells Fargo.

Adam, can you just talk a little bit about Cracked and what happened. I guess, how likely this to happen to other parts of the digital segment. How long until you shut it down? And then also just clarify the comment on 2018. You talked about something being profitable in digital, was that the whole digital segment or just a part of it. And then one for Brian, [we notice] the sequential step-down in retrans. Is this the new run rate and is it just a true-up or are there lower subs, those are the questions. Thanks.

Good morning, Marci. Thanks for joining us. In short, we've often said, Cracked -- that the -- we've often said that we would pull back on investment in any of these national businesses and run them for profit, if we felt like they weren't meeting our expectations and that's essentially what's happened at Cracked . The humor category in our brand still resonate with younger audiences, direct sales has just been very soft. And we certainly monetize that audience in the programmatic marketplace without seeing a successful and growing direct sales for materialize, we just felt it was really important to dial back the investment. I would say, relative to the overall strategy in digital. I think, it's very different circumstance than we see with our other businesses. Right now, Newsy is on a fast growth trajectory as its moved into the over the television, over-the-top television business and now we're moving it fully into cable which is a much more lucrative marketplace even yet with dual revenue streams. Cracked, as I said, we really felt like dialing back the expense was the right move. With respect to Newsy, Midroll and Katz, we're focused on high-growth with those businesses. They operate with -- in a marketplace with scale. They continue to be brands for platforms with large general market advertisers because of that national reach and broad distribution. We are very committed to creating shareholder value over the long-term with these businesses. And I think, as demonstrated today with Cracked, we're quick to pull back anytime or anywhere, we think it's necessary, if that view of these businesses changes.

With respect to profitability in the segment, as I said, we do believe we're creating real shareholder value. But I think the most important thing is to talk about the components. Midroll and Newsy, right now are on track to put up significant top line growth this year combined about 60% and our decision to reinvest the profits back into that business is actually a sign that we see much greater opportunity ahead to contribute to the company's overall bottom line, obviously, otherwise, we wouldn't be doing this. We're adding Katz into the digital segment in the fourth quarter. Obviously, Katz is profitable today and we expect that that company's revenue will grow in the mid-teens and that profit will continue to be healthy. So overall, with any of these businesses, obviously it's not our goal to lose money in this segment. We know our responsibility is to build value here and with the move today with Cracked. I think, we're proving that we're quick to pull back when we don't see that opportunity ahead. Brain?

Marci, it's Brian. Regarding our retrans numbers. As we've said in the past, we hadn't seen any meaningful decline in subscribers, but we did start to see for the first time some declines since first quarter. So there is a lag time in the data we receive from cable and satellite companies. And so what you saw us report today is sort of a true-up to second quarter as well as what our run rate was for third quarter. So I think, overall, what we're seeing is about a 2% to 3% decline in our overall sub counts. What we don't yet see is the households that are moving to the virtual MVPD services, which again have similar net economics for us. So many of those services, just launched over the summer, we're starting to see some early numbers, but we haven't yet begun to be paid for those. So we're optimistic that some portion of this decline on MVPDs is moving over to these new virtual MVPD services.

And again, just to reiterate what we said, looking ahead to 2018, we do have 36% of our cable and satellite households that are going to step-up to new rates in 2018. And I think with the guidance we gave, we should grow about 15% in revenue here. So obviously the rate step- ups will significantly outpace any decline of subs that we expect to have.

Let me just add a little bit to Brian's comments about what we're seeing on the retrans side. We've been telling you for some time that we're prepared as a company for a future where consumers are accessing TV through a variety of distribution options. And as I said in my prepared remarks, in our view, that's about cable and satellite and over- the- top, and over- the- air. So we're really positioning ourselves very well right now by securing shelf space on all of those platforms. As Brian just said, our local brands are now moving into OTT. We've got carriage agreements now with these virtual MVPDs like YouTubeTV and Hulu at comparable net economic rates as we have with the cable and satellite. Newsy, which is one of the original OTT news brands is now moving into the lucrative cable marketplace. So again gaining shelf space initially on OTT and now into cable, because we think payTV operators want the kind of programing that will help them draw in and retain younger audiences. So at the end of the day, of course, Katz is the growing leader in multi-cast over-the-air programing and we see multi-cast and over-the-air growing quickly in line with OTT. So Brian shared with you some of the view on where we see retrans and subs, but this is what's happening really validates our overall strategy around the future of television.

I just had a quick follow-up. That 36%, I assume that's in the beginning of ' 18 or does it actually flow-in through the year?

Yes, it flows-in through the year, probably more of it hits around the middle of the year, Marci.

Next, we have Craig Huber of Huber Research.

I got several questions, this is a follow-up to the retrans contract renewal percentages. Remind us if you could, what's the net number percentage for 2017, and what is it for 2019 and 2020, just [if you could] fill that out. Thank you for that.

So for '17, we've got about 5% of our subs come up. Again in 2018, 36% of our subs come up for renewal. And then looking forward to ' 19, about 40% of our subs are set for rate step- ups at that point.

Do you have a 2020 number, Brian?

Yes, it's 18%, Craig.

And then I think you mentioned Brian, you expecting your retrans revenues up 15%, next year. What you think the net retrans number will be?

We haven't calculated that yet.

Okay. It sound like we could get later on today or something.

Yes, definetely.

Okay, I'll wait for that. Thank you. Just little more detail Brian on the quarter, in terms of the whole quarter, auto, retail and services, just do you go through that for the full quarter, I notice crowding out in all them, which kind of gums up the numbers.

Look really, there is 2 things that kind of messes with the numbers, so it makes it really difficult to form an opinion on it. So #1, last October we had, what was it $27 million, $26 million of political, so that makes it complicated. And then again we had the Olympics, which were a little over $10 million, and so as we've netted out things, we usually account for about [4% to 80%] of that being incremental. So auto was down 4% in the quarter, services was up 3% for the full quarter, retail was down high single digits, travel and leisure kind of in that same range. I think, I spoke about home improvement being up 15%, communications up over 50%. So it was kind of this mixed bag, but I think it almost go to where the categories that are the biggest spenders in the Olympics, right. So auto is a massive spender in the Olympics, retail was big. So I think, it's hard to go apples- to- apples and that's why we really talked about September because once you kind of clear out everything, we looked at what's the health of the business moving forward, and we saw 5 of our top 7 categories up in September. And then of course October is another month where, last year we had $37 million of political in October. So with all of that cleared out, as you would expect, our categories all had double-digit plus growth comparing October-to-October. So we have really strong momentum September and October going into the rest of fourth quarter.

What would you say, Brian on a year-over-year basis, your TV pacings are looking like post the election year ago on a year-over-year basis, second half this quarter?

Yes, I think it's on par with where we have been the last 2 months, but we still, it's only November -- and we've got a lot of business to write. Auto is very -- adds a lot as you go through each month, but especially into December closing out and trying to gain market share. Same thing with retail as they now get into the holiday season. So I think our pacing is right where we expect it to be, but we've got a lot of points to write to finish out the year.

I mean, [just sort of pin you down] so when you say, how it's been the last 2 months, what exactly does that mean?

In terms of where we had projected our -- each of those 2 months.

Yes , I mean, I'm sorry, can you just maybe help us quantify, it is up 2% or 3%, down 2% or 3%, that you kind of look out here?

Yes, we don't break out month-by- month, Craig.

But I mean the second half -- sorry to labor this, but the second half of the quarter, are you thinking that your ad revenues going to up, [see gone up with] election comparison.

And again, so total revenue is going to be down because of loss of $56 million of political, but we're certainly expecting our core deal.

But the second half of the quarter versus second half a year ago, and that's political stuff that hasten up the numbers, starting out there, do you....

I think it's that pacing to positive.

And then did I hear you guys say earlier on in the call that you are going to roll- in your TV digital operations, you reported into your TV segment?

That's correct. We are anticipating, looking at next year with 2 different approaches to the segment reporting. And we announced earlier, I think this year that we were organizing the company by marketplace and we're going to have segments aligned with management and operating structure. So we've said before, local digital will merge out of digital and merge back in with local TV and radio. So you'll see that change as we head into the year.

Are you guys to be running that operation any different or just the head person of that, Brian, now I guess.

Yes, Brian will oversee that operation, and obviously as we are bringing these 2 things together, we think there's a lot of nice synergies, both on the top line as well as expense synergies as we merge those 2 businesses together.

Maybe I missed it, but are you guys going to provide like the pro forma numbers to the adjusted numbers, so we could go back and redo our models to prior year.

Absolutely, you'll have everything you need to do your models.

So I guess, when you guys report next time, I assume.

That's correct.

Next question is from the line of Michael Kupinski, NOBLE Capital Markets.

Many of the questions been answered already, but I have a couple here. I know that in 1 quarter, we had some changes in agencies, which disrupted some national business. Is there any particular reason that for the weakness other than maybe other geopolitical or economic issues that are going on with the national advertisers?

No, look I think, we did see some fundamental changes a year ago where or at the beginning of this year where national was especially light, because some of those dollars weren't yet placed with agencies. We do see a shift on, some of those national dollars have moved to local just their buying strategies, other have stayed national. So it's hard to look at both local and national and read into something because there's probably been more moving around between those two this year than we've seen in the past. But one thing I can tell you is, in our discussions with the largest agencies in the business, they are very much looking forward to the advance of automation inside of the buying strategies for the local media. And we see multiple tests now, we see 4 or 5 different new technical platforms being set up for that. We think that's a really important technology that will be critical to enhancing our ability to serve national advertisers. The national -- the buying of the local media for all over the country by these national agencies is very cumbersome, very hand-on and so requires a lot of resources and time and we're excited about automation moving. We think that will bring dollars back to local that maybe going in network cable and other places or syndicated. And so in our conversations with the national agencies, they're all moving quickly toward that and trying to build the right platform for that, but we think that that -- once that automated process is in place, we expect that it will be much easier to transact the local side and we think, it's going to bring more dollars back to local.

Thanks, Brian. And when looking at your ongoing restructuring and it seems like it's obviously focused on cost and centralization or decentralization in some ways, but does a review also include the potential for asset sales or how are you looking at the review, is it just mostly focused on cost at this point?

No, as I said in my prepared remarks, we're really looking at everything. Mike, we're really focused on building both short-term value, as well as long-term growth examining all of our assets across the enterprise, making sure we have the right assets, making sure we've got the right and appropriate operating performance. I think, sort of no sacred cows here and I think that sort of reflected in my comments about the actions we're taking at Cracked as well. I wouldn't necessarily say it's about decentralization. I do think it's about expense and greater efficiency from an operating performance perspective.

Thanks and I was wondering if you can give us an update then on the M&A environment in your current (inaudible) acquisitions and what you're seeing out there in the marketplace?

Yes, I mean, I think everybody is sort of waiting right till the things resolve themselves with respect to FCC regulations. So right now things aren't, I would say particularly burning. I do think potential changes at the FCC spell a lot of opportunity for us, we're very much in line with that restructuring as we focus on operating performance, specifically within the local media business. We're focused on what we call a buy-sell swap strategy and the opportunity to go deeper in markets where we already operate network affiliated stations.

Your next question is from the line of Dan Kurnos, The Benchmark Company.

Maybe just asking my question a little bit differently, high level, hypothetically as you make this larger push international, given the weakness we've seen just [on the] category and how it impacted some of the -- well currently digital businesses. Are you going to start, does that, do you think that once you continue to scale those that that will help insulate you against further pressure in national or because of maybe some of Brian's comments, if you have the opportunity to push more into programmatic because it's more of a streaming offering that you might be able to take outsized ad dollars as that market continues to evolve?

Yes, let me start. Dan, to start, obviously scale is critical for these businesses. And you want to control, I think as much of the inventory as you can, as you're sitting down with advertisers and presenting them with the options. With the move Newsy into the OTT space and we're really pleased to see the 90% as I said of Newsy's revenues now coming from OTT, obviously now, we're focused on moving our local brands also in the OTT space, so that we can queue audience across local broadcast cable as well as -- as OTT and present our advertisers with the largest audience we can. That -- I don't think that changes. Both Newsy and Midroll's challenges were in July and August, which we saw as sort of a temporary summer slowdown and we have begun to see that rebound in September. So despite what I think is a sort of seasonal slowdown, maybe it was even a little bit unusually strong December. We still expect those national businesses to grow about 60% year-over-year together. And of course Katz came in on track. As Brian said, it continues to be on track in fourth quarter with respect to the work they are doing with national advertisers. We have seen sort of a trend and I think, it was exacerbated in the summer time, where in the digital marketplace, in the national marketplace, agencies were replacing their buys later and later.

So early on, you would have an agency place their buys for a quarter ahead of the quarter. Then it started to creep into the quarter. And during the summer, it seems to have moved even further into the quarter, making it very difficult to be able to capture as much revenue as possible with our brands. As I said earlier, both at Midroll and Newsy, September seems a lot healthier. Midroll actually had a record month in September with the most advertisers and revenue in 1 month, and that's giving us, I think really good momentum as we move into fourth quarter. Brian, anything further with respect to the local, national marketplace.

Dan, I think, my comments to Mike earlier about just -- we think automation is really critical to bring back dollars we have lost from the national line, and we've been talking about national declining last 2 or 3 years, and we think a lot of it has to do with the structure by which it takes to bring -- put together ad buys that are going to go 100 or more markets deep. Once that automation is in place, it does open up the opportunity for advanced advertising and programmatic, which we do think will now allow us to target new dollars, more niche dollars and so, I think there's a lot of opportunity ahead as we move toward a more standardized and automated platform.

At the end of the day, obviously, we have finite inventory because there's automation brought to it. We still will be able to control our pricing quite frankly for the buys that we've been working on. We've seen the efficiency of the buying process, but in some cases, we've been able to increase our CPMs. So I think, there's a lot to be optimistic about and we believe there's opportunities for new dollars in this space as we move through. And we think, expansion into space is going to very aggressive. I mean, I think, 24 months from now, the national buying process is going to look very different and a lot of the dollars are going to flow through there.

Got it. That's helpful. And then just, Adam, thinking about the expense side on digital. I mean, your -- understanding that you obviously pull back on Cracked, your digital expenses were only up I think about 10% in the quarter, obviously you've been facing a lot higher than that, and you have had some outsized growth at Newsy and Midroll. So just how should we think about digital expenses going forward? And are you going to reallocate some of the Cracked dollars over to your growth -- your vehicles?

[What] with respect to the expense dollars?

Yes.

Yes, I mean, I wouldn't look at it as a reallocation. I think, we are focused on dialing back the investment at Cracked and bringing that business to profitability in 2018. To make sure it contributes. I think the expense profiles for Newsy and Midroll will continue to be scaled for the opportunity ahead, which is to say, we know we're creating real value. And I don't think we're in any necessarily focused rush to make those businesses profitable, when we know that they are in this high growth stage.

I would say with respect to expense in general across the entire enterprise, you should look at this restructuring as the opportunity we are taking to sort of tidy up and reset the table for the company's future. Both creating greater short-term performance at our operating margins and cash flow as well as supporting that long-term view.

Great. And then just one more from me, I apologize if this was in the release, but did you -- was there any change in the economics with Nexstar on the Katz deal or in the terms?

No. Yes, correct. All of that was modeled in in our original estimates.

And next, we have Kyle Evans, Stephens.

Thanks. Curious about the rational for putting Katz in the digital segment given the revenue streams there and are you going to give us enough information on a quarterly basis to separate Katz from the likes of Cracked?

So I will say this, we are going to give you enough information moving forward so that you can continue to model these businesses and track their growth. We are also committed to giving you information beyond just revenue metrics, for example, so that you understand how each of these businesses pacing whether on the Newsy front that includes sub counts or with respect to Katz it include distribution. So we really do want to provide the transparency you need. There is no attempt here to muddy the waters here, we're just really trying to make things as clear as possible for you. Why we put it in there? From our perspective, these businesses all have the common factor that they are all national businesses, they're all focused on the national marketplace, and so I think you ought to expect that as we move ahead, we're managing the business by marketplace and we want to provide you the information that you need, so that you can model the business by marketplace as well.

Okay. But just to be clear, does Katz have meaningful digital revenue inside of it?

Katz does a little bit of digital revenue, but I think that sort of beside the point, don't forget that Katz is delivered over Diginets and it's a multi-cast platform and that's sort of the framework. As we move and transition the digital segment into a national segment. So it's labelled digital today, remember that as we move into next year, local digital will be coming out of that and merging in with broadcast television and radio, that combined will become the local segment and these businesses that remain won't be digital, they all be focused on the national marketplace.

And it sounds like you are seeing retrans declines possibly on lagging payment as consumers transition from cable and sat to the virtuals and the OTTs. First- off, is that -- did I characterize that correctly. And as a follow- on to that, are you seeing sub trends differ by market size. I know, you have about half a dozen station, top DMA, top 20 DMAs and you go all the way down into the hundreds?

Yes. So, it's Brian. We're not seeing -- it really changes by market, we're seeing a little bit of changes by companies. So some of our MVPDs are the second quarter, and I mentioned the data we get from them and the payments lag by a quarter. So some of them are very much in line with where their subs had been previously, and then there were a couple that had more dramatic changes. Craig asked a question earlier, just we talked about the 15% increase in our retrans revenue for next year and he asked the question about net retrans for next year. We are projecting low double-digit growth next year in net retrans.

Low double-digit in net retrans?

Yes. Did I answer the rest of your question (inaudible)?

Yes, you're not seeing DMA size driven changes in your sub counts?

No, but keep in mind, so we are expecting to start to see now the benefits of these virtual MVPD services that are launching in the OTT space. And keep in mind thy kind of started large market and are launching DMA- by- DMA kind of scaling down to the smaller. So if that trend exists and we really haven't seen it, but it's probably, because that's where they started spending their money and their marketing and advertising, first. But we are expecting to see in the next quarter or two certainly will be getting revenue from these new over-the-top services. We're starting to see some numbers. There is clearly a direct relationship between the cancellation of retran MVPDs and move to OTT. I'm not saying, it's a one-to-one -- that will -- we'll figure that out in time. And I think, it's our expectation that as we move forward, and this becomes a more meaningful revenue stream that, all that retrans will be moved back together and reported consistently.

Your next question is from the line of Barry Lucas, Gabelli & Company .

I have a couple, but just want to start up from a small area. Brian, you talk about the launch of the new show and it's in 38 markets, what would that reach be?

Over the broadcast, there, Barry, it's about 20% of the country and then obviously with, its distribution on CMT that picks up another 50% of the country.

And how would that compare to some of the other product that you've produced in-house in terms of launches?

Typically when we launch shows, we build shows for ourselves and make sure that they're going to be profitable on ourselves, and then we take them out for national distribution. So I think that if you look at like the list and so forth that ran for a number years just on our stations before we took it out to syndication. This was a little bit of a bigger swing for us, it had more national appeal, and so part of our strategy right at the beginning was to launch it in syndication. We knew that, where the marketplace was, obviously we track what shows are being canceled, where's the availability, what programing, what time periods are going to be available, not only on our stations, but on others. So this is pretty much in line with where we expected season 1 to be. The nice thing about having a relationship with CMT, it gave us the national scale to be able to get into the national border space into, on the national sponsorship space. So I think, this is very much online with exactly what we expected for season 1.

Just shift gears here and, Lisa, pro forma for the close of Katz, where would you put debt or net debt cash, however, you want to describe that?

So I think, we talked at the end of the quarter, we had $396 million of debt. Closing the Katz deal, we added $300 million with the new term loan B.

So we're talking on a net basis somewhere around $570 million?

Yes.

And that stepped- up the leverage, and it just sort of moves the topic back to M&A and TV station marketplace. The rules look like they are changing potentially in less than 2 weeks and leverage is now appreciably higher than it was just a short time ago. So how does that alter the strategy in an area where I think the company really needs to grow scale in the local television business?

Yes, Barry, first of all, we are -- I think very focused on this opportunity, and we're focused on the opportunity in a couple of ways. First of all, we think there's a lot of opportunity for the industry to sit down and discuss station swaps in which both parties walk away from the conversation with more profitable enterprises as a result of combining assets from different markets. And in that case, there may be situations where we would bring on a second station in a market and potentially exit in another. I do think there is going to need to be potentially some capital deployed in this space and we think, we have plenty of room still to get the work done that we want, as we focus on optimizing our portfolio for better performance.

Okay, let me take it 1 step further here, Adam and play devil's advocate, and I know the discussion regarding expansion of digital over the last year has included the potential to slow expenses. I think company has been fairly straightforward on that. But when you look at writing down the purchase price and effect of Cracked, at a time when you're stepping into a $ 300 million acquisition, calls into question capital allocation and I think a number of us would like to know. And you've been very articulate about this. But how do you give investors more confidence that this is the right move to make at a point in time when you just dexed out a smaller amount, but still a meaningful one.

Yes, I think it's a fair question. The Katz acquisition for us was very consistent with our strategy to ensure that this company is focused on long-term value creation, particularly as we see the future of television evolving. Katz, we expect will grow both revenue and profit, revenue I think in the mid-teens over the next couple of years and we think that the profit will will be healthy, particularly as Katz delivers at the scale that we think that business can get to. And I think, Brian talked about the fact that, it's already reaching just about 90% of the country and has room to grow, while it transitions its advertising mix from a mix of DR and general market over to general market. So having a growth business that's adding profit to the company, to me, makes a lot of sense. And by the way, it's focused on the future. With respect to the Cracked write-down and our continued focus on growing the opportunity at Newsy and Midroll. Look, we have always felt like it's possible to both deliver terrific short-term results as well as set the table for long-term value creation. I think, the company has a history of doing that over the years and we intend to continue to execute that strategy moving forward.

Next question is from the line of Davis Hebert, Wells Fargo Securities.

Thanks for fitting me in here. Just a quick question on leverage. You mentioned adding the $300 million of term loan for the Katz acquisition. I wonder if you could give us pro forma leverage including that deal?

So it's Lisa here. So when we -- if we look at where we are as of September 30 adding in the Katz acquisition. We're about a little over 3.5x.

And is that on an LTM basis or an [L8] quarter basis?

It's last 8 quarters.

Last 8 quarters, okay. And then given some of the softness and guide here, just curious, do you feel like you're still on track to hit that 2.5x by the end of 2018 knowing that's a little bit of [ways off and just] political to come, so.

We are obviously looking at budgets for 2018 and with political coming in will certainly be delevering over the course of 2018.

The next question is from the line of Alejandro Luciano, MFS.

Hi guys, just 2 quick questions. One was on the restructuring cost, so, what should we expect in terms of, you mentioned margin benefit. So can you quantify that? I mean, you're going to spend X amount and that's going to lead to this much of margin improvement. And then my second question is on the ability to delever. Is that going to include paying down debt?

It's Lisa here. We're still working through the reorganization and the restructuring. And then, I really don't want to speculate, really at this time on the amounts but we expect this work to continue early into next year. As Adam said, we are strongly committed to improving our operating performance and we're taking a very comprehensive look at all of our thoughts.

Thanks and then the second question?

Can you repeat the second question, I'm sorry.

Yes, just on the guidance to get back down at 2.5x, does that include, are you guys planning to do debt pay downs or is it just more of a EBITDA story?

It's more from EBITDA.

Okay, thanks, and then sorry, 1 last question. Cash taxes for next year?

We expect to play really just minimal taxes for next year, obviously depending what's happening in Washington.

And do you become full taxpayer in '19, is it or ?

I think, we would expect to become full taxpayer in 2020.

And the final question in queue is from the line of John Kornreich , J.K. media.

Yes, hi, just to beat a dead horse on this retrans. I mean, you've consistently said, you were the -- one of the first ones to say earlier in the year that if we lose here, we gain there, it's a wash. So now you -- basically you're saying, we are losing [$0.5 million] and 600,000 subs. But we'll get it back next year. Why wouldn't you be getting it back in '18. I assume, you're monitoring this thing closely there's going to be [4 million] these alternative distributors 4 million subs at the end of this year. So why would it impact '18, are you going to look at the end of the year as to where those lost 500,000 went and then get paid for them immediately.

Hi, John, it's Brian. In this last quarter, we have received our true-up or our numbers and our payments from the satellite companies for second quarter. So they pay and we get the numbers about, a lag in data of about a quarter. So that was the first time we started to see the erosion that was something meaningful. We therefore applied it to third quarter assuming that whatever they lost wasn't going to come back.

But these over-the-top services weren't even launching until the first of our markets launched in the summer. Some of our markets still haven't launched. Hulu is just beginning momentum that we have contracts with all these guys and they're just starting and they're beginning to build a subscriber base. But just like we went back and trued up from the stuff we got in the second quarter, where we started to see some declines, we haven't yet begun to get payments, because we haven't yet begun to see the numbers. So there will be some revenue coming in, yes in the fourth quarter, but I think, it will be noisy as subs drops and other people shift. So do we expect a large percentage of these households to move from MVPD to virtual MVPDs? We certainly hope so and that's our expectation.

But when those services actually began, when markets launch, so in some of our smaller markets. You could subscribe to pick a service today, but we may not have the local channels launched, even though the services launched and so it's not to the local channels launch that we would actually begin to get.

I get that. Yes. Okay. But in the long run meaning a year or so. Assuming that your lost traditional subs aren't disconnecting all together, you will track it and get paid.

Of course, John. Look, we don't think, people are stopping watching television. Television remains a real important part of their lives. I think people are just choosing to find a different way or a different provider to provide that service and we think that's all happening in real time right now and I think, it will flush itself out in a lot of clarity in the next couple of months.

And there are no further questions in queue at this time.

Okay. Thank you, Kevin. And just to sum up in our broadcast business, nice core advertising momentum going into the fourth quarter and 15% growth ahead in 2018 for retrans revenue. And in our national businesses. The addition of the fast-growing Katz networks, new podcast and added inventory for Midroll and the launch of Newsy into the lucrative cable space. Thanks for participating today. And please feel free to call me with any additional [question].

Thank you, ladies and gentlemen, that does conclude your conference. We do thank you for joining. While using AT&T Executive teleconference. You may now disconnect. Have a good day.