E W Scripps Co (SSP) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Scripps' First Quarter 2022 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Carolyn Micheli, Head of Investor Relations. Please go ahead.

Thank you, Toni. Good morning, everyone, and thank you for joining us for a discussion of the E.W. Scripps Company's financial results and business strategies. You can visit scripps.com for more information and a link to the replay of this call.

A reminder that our conference call and webcast include forward-looking statement, and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. We do not intend to update any forward-looking statements we make today.

Included on this call will be a discussion of certain non-GAAP financial measures that are provided as supplements to assist management and the public in their analysis and valuation of the company. These metrics are not formulated in accordance with GAAP and are not meant to replace GAAP financial measures and may differ from other companies' use or formulations.

Included in our earnings release are the reconciliations of non-GAAP financial measures to the GAAP measures reported in our financial statements.

We'll hear this morning from Scripps' President and CEO, Adam Symson; Chief Financial Officer, Jason Combs; Local Media President, Brian Lawlor; and Scripps Networks President, Lisa Knutson. Also on the call is Controller, Dan Perschke.

Now here's Adam.

Thanks, Carolyn. Good morning, everybody. Thanks for joining us. Once again, in the first quarter, Scripps delivered a terrific financial performance. Outstanding results in Local Media coming as a result of Scripps' commitment to new business development and better-than-expected retransmission revenue.

And at Scripps Networks ad revenue that outpaced its marketplace, supported by both growth in ratings share and advertising share. None of this is by chance. It's a reflection of our company's evolution over the past several years.

We have crafted and continue to craft a durable and high-performing company that delivers a steady stream of free cash flow, one that comes despite fluctuations in advertising marketplaces and across political spending cycles.

Through investments that have grown our top line, ongoing sales execution and careful expense management, we have built an economic engine that is not just stable but designed to grow meaningfully every year. To illustrate this point, in first quarter 2022, our free cash flow was 3x higher than the comparable quarter in 2020.

Our growth strategy is fairly straightforward. It relies on American TV consumers' desire for easy-to-use technology, efficient delivery of the shows they love, and the most cost-effective ways to watch television, whether that be over-the-air, on the connected TV service or through cable or satellite.

Americans are watching more television than ever before, of course, how and where they're watching is changing. At Scripps, we have put ourselves in the best position to profit from the evolving TV marketplace.

Our brands, local and national, can be found across every linear TV viewing platform, pay TV, over-the-air and connected TV. So for Scripps, it continues to be an all-of-the above approach, meeting the media consumer wherever they may be. We execute our strategy with the best of both, the pure-play broadcast business and the lucrative national networks marketplace.

As you know, we're delivering strong growth with our 9 fully distributed over-the-air networks. We benefit as free over-the-air television is buoyed by the rising cost of the SVOD services, the consumers' plus fatigue and inflation attacking the American pocketbook.

We continue to expand those same networks distribution into the connected TV ecosystem through free advertising supported television services. We told you that we would be launching programming from most of our national networks on major CTV platforms this year, and we continued to do so.

We are finding big, new engaged audiences in this rapidly expanding marketplace. Remember that I said it's an all-of-the above strategy, because pay TV customers account for the majority of the audiences for our Local Media brands.

We believe forecasts of the demise of cable are not just premature, but ill-informed. pay TV too, appears to be benefiting from plus fatigue and SVOD price increases. A typical household internet and subscription services now surpass the cost of a cable bundle.

Again, American consumers are today more than ever guided by their wallets. Here is recent proof. Our pay TV subscriber households are up from the prior quarter, and we saw significantly lower churn year-over-year. And then there's spectrum and the opportunities we see ahead with the transition to ATSC 3.0 NexGen TV.

Scripps is the largest holder of broadcast spectrum. Today, the distribution of our Scripps Networks also makes us the most efficient monetizer of that spectrum. We are dedicating significant resources to developing the new avenues for value creation that will come down the road from this valuable asset.

While Scripps has a long history of creating value over the long term, we've also proven to be disciplined operators with an excellent track record of near-term operating results. That financial success comes as a result of all of the terrific employees across The E.W. Scripps Company, including the superb work of our local and national network sales teams.

They have been delivering best-in-class ad revenue growth against macroeconomic headwinds, garnering new business and launching new products, programs and networks, benefiting the enterprise and investors.

Now we're moving into what by all accounts will be another record-breaking national political spending season. As leaders of a connected TV political sales consortium and owners of a prime political station footprint, we anticipate a record year ourselves, leading to free cash flow of $400 million to $450 million.

At Scripps, on our work to evolve and grow this company and create new shareholder value has no end point. Instead, we will continue to strive to meet milestones that build to our next big opportunity. Several years of work have produced greater and more even free cash flow generation and a more economically durable financial engine that is creating new shareholder value.

And now here's Jason.

Thanks, Adam, and good morning. Our earnings tables in today's press release include our as reported results for the first quarter of 2022. We also give an illustrative comparison to first quarter of 2021, as though we had owned ION beginning January 1 rather than January 7 last year. My Networks division comparisons today will be on an adjusted combined basis.

Let's begin with the Local Media results for the first quarter, which are all same station. Local Media core advertising revenue was up 3.4%, driven by our strong sales execution and attracting new advertising business. Total revenue was up 4.5%, aided by solid core ad performance and retransmission revenue growth.

Political ad revenue in the quarter was about $6 million. That's about 70% higher than the first quarter of 2018, the last midterm cycle. Retransmission revenue was up 2.5% to $160 million. Local Media expenses increased 6% from a year ago quarter and segment profit was $54 million.

Turning to the Scripps Networks division. Revenue for the first quarter of 2022 was $239 million, up 8.5% from the prior year on an adjusted combined basis. Networks segment expenses rose 23% over the first quarter 2021 adjusted combined results.

We continue to cycle through the cost of launching Newsy, Defy TV and TrueReal over-the-air, as well as continued investment programming and higher costs tied to revenue growth. Segment profit for the Networks was $85 million. Shared services and corporate expenses were $23 million.

The company realized Q1 income from operations of $0.10 per share. The quarter included $1.6 million of acquisition and related integration costs as well as a $1.2 million gain on extinguishment of debt from the redemption of senior notes.

During the quarter, we redeemed a total of $123 million on the outstanding principal of our senior notes. As of March 31, cash and cash equivalents totaled $35 million. Our net debt at quarter end was $3.1 billion and our net leverage was 4.7x per the calculations in our credit agreements.

With our new cash flow profile and our 2022 political ad revenue outlook, we continue to expect to move our leverage to about 4x by the end of this year.

Now looking ahead, I'd like to give guidance on a few key areas for the second quarter of 2022. We expect total Local Media revenue to be up about 10% from the second quarter of 2021. We expect political ad revenue in the mid-$20 million range. We expect retransmission revenue to be up about 10% in Q2. We expect Q2 Local Media expenses to be up in the high single-digit range.

In the Scripps Networks division, we expect revenue to be up low-single digits despite the macroeconomic climate. Networks expenses are expected to increase in the mid-20% range.

During the quarter, we will continue to cycle through the start-up costs for the 3 new over-the-air networks that we launched in the back half of 2021. And we are assuming production costs for the Scripps National Spelling Bee broadcast and the Bounce Trumpet Awards, both of which take place in the second quarter. Lisa will speak more in a moment about the benefits of our bringing the National Spelling Bee production in-house for the first time this year.

We do expect the Networks' year-over-year expense increases to moderate significantly as we move into the back half of this year. Second quarter shared services costs are expected to be about $21 million.

And one note on our Other segment, it includes the expense for our over-the-air consumer marketing campaign. We expect about a $6 million operating loss in the Other segment for Q2 and about 2/3 of that is related to the marketing campaign.

Finally, we continue to expect to deliver free cash flow of between $400 million and $450 million this year. And just a reminder that the midpoint of that range equals about a 55% free cash flow conversion and would represent the highest amount of free cash flow that this company has delivered since we spun off our cable networks back in 2008.

And now here's Brian to talk about Local Media.

Thanks, Jason. Good morning, everybody. Our Local Media team looks very pleased to exceed expectations for core advertising revenue and total division revenue in the first quarter. We'd guided to low-single digits for both and then achieved 4.5% growth in total revenue and 3.4% growth in core advertising.

Q1 was our fifth consecutive quarter of year-to-year growth in core. The growth in core was driven by 2 categories in particular, services, which was up 11%; and home improvement, which was up 12%. 5 of our top 7 categories showed year-to-year growth in the first quarter.

The 2 categories showing declines were auto, which continues to be challenged with supply chain and inventory issues and our new category gambling, where we now report sports betting. Without gambling and auto, core was up 11%. Within gambling, sports betting continues to be an emerging and material segment. We now have 2 years of experience with this segment and are better understanding the cadence of the business.

As states legalized sports betting, we see an aggressive push for new customer acquisition by state-authorized companies. After a defined period of time, these companies take their spend to more moderate levels as they focus on customer engagement and move dollars into new states where they seek to replicate this playbook. We look forward to Ohio and Kansas coming online this fall and other states in the near future.

Overall, in core advertising, we were pleased that our local sales teams once again developed business from more than 1,000 new to TV advertisers. That sales execution has continued to be a driver in Scripps core advertising performance, and I'm proud our teams have not taken their foot off the gas and their focus to help local businesses grow beyond the pandemic.

For the second quarter, it's still early, but we've been seeing orders getting booked later as businesses manage through the current economic climate, waiting to make sure they have product and employees before advancing their marketing.

In addition to the performance of core, our total division revenue growth of 4.5% was aided by an increase in retransmission revenue. We continue to see a slowing of subscriber churn from mid-single digits to low single digits year-over-year and actually up 1% from the prior reporting period. Virtual subscribers continue to grow meaningfully for us.

Looking ahead, we are greatly anticipating this election year. Forecasts continue to call for record political ad spending. And as we have experienced in Ohio over the last month, Scripps is extremely well positioned to capture more than its fair share of dollars.

You may have seen our April 5 announcement that we are leading a group of local broadcasters in forming a Political CTV Consortium. Nearly $2 billion of the $9 billion in projected election spending this year is expected to go to connected TV, and we're making it easy for agencies to access local broadcasters CTV inventory.

In terms of overall spending in the U.S. Senate, forecasts call for $1.5 billion for just 9 top races, and we have 12 stations in 5 of those states; Arizona, Florida, Nevada, Ohio and Wisconsin. More than $1 billion is expected to be spent on 9 governors races as well. And we have 10 stations in 6 of those states; Arizona, Kansas, Maryland, Michigan, Nevada and Wisconsin. And we see about 75 competitive U.S. House seats.

Overall, we've projected about $270 million in revenue from Scripps footprint. We began to expect that record number about a year ago, and now we are even more confident in that opportunity.

And now here's Lisa.

Thanks, Brian, and good morning, everyone. At Scripps Networks, we are now well into the new advertising upfront season, and we are armed with a number of great stories to share.

Our new upfront presentation is deemed Freevee, and it focuses on our nationwide audience reach across 9 networks as well as our leadership and free ad-supported television of all kinds, over-the-air and on connected TV.

During the first quarter, we outperformed our national networks peer group in advertising growth. And we're also leading viewership performance. During the first 3 months of the year, we achieved a 5% year-over-year increase in total primetime viewers across our entertainment networks according to Nielsen. That growth came despite total nationwide linear usage declining 9%. Our industry-leading viewership trends position us well to continue delivering better revenue performance than our peer set.

In fact, our Q1 revenue growth of 8.5% outpaced total national TV spending, which was up only 6% according to SMI. We also compared well against our network portfolio peers whose ad revenue was down. Our success is due in part to our cross-selling of portfolio inventory as well as our strategy of optimizing our advertising mix, moving our ad inventory between general market and direct response to yield the best market rates.

We saw a particular success in Q1 at our second largest revenue network Bounce. As you know, Bounce produces programming primarily for Black audiences, and we have recently been working to refine the programming and further build its brand with Black communities. This effort paid off in Q1 with a 54% increase in ad revenue. And that growth came across categories and platforms, general market, direct response, broadcast and connected TV.

Our newest entertainment networks, Defy and TrueReal also exceeded our revenue expectations in the quarter as they continue to see audience growth and rate increases each month. On the new side, Court TV revenue was up 21% compared to last year due to growth in each of its revenue streams.

Looking into the second quarter, our ad revenue visibility is somewhat limited at the moment given the current macroeconomic environment. We do continue to expect nice year-over-year growth. We are experiencing solid scatter market rates, maintaining levels of 30% to 40% above upfront pricing depending on the network. And we are confident that our national advertising marketplace will return to full strength once we've moved through this economic climate.

On the Q2 expense side, we expect a few new expenses to moderate our profit margin in the short term, but to bring us audience and revenue benefits in the near term. We are still cycling through the first year of expense for launching Newsy, Defy and TrueReal over-the-air and watching them grow audience and revenue.

And this year, the Networks division will produce Scripps National Spelling Bee telecast for the first time and the Bounce Trumpet Awards in Q2 for the first time. We are extremely pleased to be producing in-house these marquee events.

The Scripps National Spelling Bee telecast was produced by ESPN for 27 years and bringing it into Scripps as a tentpole event allows us to sell the advertising and to retain the intellectual property of this iconic American event.

In addition, rather than only a cable audience, we will deliver the Bee on cable, satellite, streaming platforms and over-the-air to 95% of TV -- U.S. TV households. That greatly expands the Spelling Bee's audience reach and will allow many more Americans to watch the entertaining and impressive competition of young spellers.

The National Spelling Bee finals will air on ION and Bounce at 8:00 p.m. Eastern Time on Thursday, June 2, and I hope you and your families will tune in.

Turning to distribution. We continue to make strides in expanding our connected TV audience reach, and we are poised to take more dollars out of the lucrative CTV ad market. During the first quarter, we reached agreements with Xumo, TCL and Amazon owned Freevee, and we just completed an agreement with Samsung TV Plus, which is by far the largest free ad-supported platform. The Samsung agreement covers all 7 of Scripps' FAST networks.

ION launched April 27, and Grit Extra and ION Mystery launch on Samsung in the third quarter. As you know, Newsy and Court TV are already fully launched across CTV. Speaking of Newsy and Court TV, I'd like to end my remarks by highlighting how they contribute to creating a better informed world.

At Newsy, we sent reporter Jason Bellini to Poland and then into the Ukraine to give our viewers a closer look at the humanitarian crisis after the Russian invasion. Although Newsy does not have staff overseas -- does not staff overseas' bureaus, we believe it is important to provide objective first-hand coverage of major world event.

At Court TV, we made another successful bid to allow cameras in the courtroom, this time for actor Johnny Depp's libel lawsuit against ex-wife Amber Heard. In the past few years, we've seen tremendous viewership for high-profile cases. For the Depp-Heard trial our daily streaming hours have been up more than 300%.

In addition to building Court TV's viewership, televising live court proceedings lends valuable transparency into our legal system. We are proud of Court TV's ongoing efforts to serve in that watchdog role.

And now operator, we're ready for questions.

(Operator Instructions) Our first question will come from the line of Craig Huber with Huber Research Partners.

Maybe we start on TV station side. Brian, maybe can you be a little more specific on your outlook for 2Q core ad revenue for your TV stations. Why don't we start there, please?

Right now, it's still early in the quarter. We've got about 7 weeks of business to write. But right now, we're looking to be about flattish compared to a year ago.

And then auto, how did that do year-over-year? Obviously, it's a tough environment for auto, but how did that do in the first quarter? And what are you hearing from your dealers -- your advertisers out there, when you think it might start to at least start to flatten out? I mean the hope it used to be middle of the year, second half of the year? What are you thinking there?

Yes. I think that's still what we're hoping in talking to dealers. They are -- some dealers are starting to get more inventory made available to them. I don't think we'll be back to a normal inventory load in 2022. But we do see or do expect improvement in the back half in the first quarter. It was still down double digits, over 20%. And I think I would probably expect the same again in the second quarter.

And then sports betting, I guess, with gambling in total, I think you said it was 1 of the 2 categories that was down. Maybe can you just flush out a little bit? Is that because sports betting has sort of hit a wall here after an additional flood of advertising when they roll into the various states and then it slows down afterwards? Maybe just...

Yes, Craig, it really is about timing. When the sports betting is legalized in states it's really aggressive spending. First quarter a year ago, a heavy spending in Michigan, heavy spending in Virginia and Indiana and a big important -- Colorado, some big important markets. They do after a period of time, as I said in my prepared remarks, peel back to a maintenance level and then move some money to new launch states. So we did see Lafayette and Louisiana come online this quarter. We had Arizona, which launched at the end of last year, but still in its first 4 quarters with active spending. We saw New York come online in the first quarter. So really, it's just a timing.

Again, I think we expect it to be a very healthy category for us this year. Ohio will come online around the fall in time for the football season. We think Kansas, same thing, a great opportunity for Chiefs, Browns and Bengals, sports betting. So we just -- I think it's the cycle now. And so it will depend on the cadence and the timing of one state's launch and how long they stay with the aggressive spending. But we're definitely not reading into anything that this category is going to pull back.

What percent of your advertising, if I could ask, is gambling and into sports betting in the first quarter, say?

Under 10%.

Okay. And my last question, guys, I think I asked you this last quarter as well. Are you hearing or sensing a recession, Brian, in any of your markets? And I have the same question on the Scripps Network site. I mean, given all the macro issues out there, are you picking up the -- moving into a recession in any of your markets?

So I can start and then anyone else can weigh in. I don't think we're feeling the effects of moving into a recession, I think we are feeling the effects of the challenges of supply chain and employment. And so I think businesses are challenged to get product in some categories and in other categories, they're having a hard time getting employees. And so I think that is the bigger factor that is influencing our local business. I don't see much of a pullback at this point that would indicate that it's a recession that is driving any slowdown.

Yes. Craig, I agree with Brian's comments. One thing I will add on the national ad marketplace is really the Ukraine crisis, many advertisers who were doing business in Russia pulled out. So that is a little different nuance in our business, which created some pressure at the end of first quarter and looking into second quarter. But really, I agree with Brian's comments about supply chain, labor shortages are really the driving factors at this point.

Our next question will come from the line of Steven Cahall with Wells Fargo.

Maybe first, Lisa, just to follow up on that last line of questioning. I think your comments were that once the market comes back, you expect some strong growth in your Networks division. Are we to imply though that it's the moment and especially with the Q2 guide it does feel like things have softened a little bit?

We've heard from companies like Radio that they're starting to see a pickup in pacings as they get into May, June after a slowdown in April. Could you maybe just give us a little more granularity? Are you seeing signs of things are they recovering? Are you seeing stability? Are you seeing instability? Would kind of love to know what the trendline looks like right now?

Yes. Actually, early days of May, we are seeing some -- a little bit of a pickup in May versus what we saw at the end of first quarter and early days of second quarter. So I would echo some of that. For us, it's about executing our strategy, optimizing our inventory and continuing to find the best rate out there.

With our CTV launches, I think we're really bullish that marketplace is really strong. And with launching ION on CTV, we're now able to capture dollars in that really lucrative marketplace.

So we're -- I would say, looking ahead. We're really focused on third quarter with hopefully a lot -- cards coming back on lots and paired with some outlook of improvement that we're seeing in the early days of May that we're really optimistic and confident in our growth trajectory.

Yes. Steven, its Adam. I think I want to just sort of add. The Scripps Networks was up 8.5% in Q1. We expect it to continue to demonstrate really superior revenue growth when compared to any benchmark, local peers, national networks peers. While the networks generates its revenue in the national ad marketplace like the other cable network portfolios, we're sort of uniquely positioned to take advantage of the growth of over the year, which they, for the most part, don't have access to.

So we're really a growth story in the national advertising marketplace on both ratings and advertising share metrics. It's sort of the best of both worlds. And I say this just because I want to jump in and focus on this sort of notion of the question of Scripps compared to pure-play this or pure-play that. I think that's really a red herring.

When you think about our company, you have to think about the benefits of the company made stronger over the last several years through the development of the Scripps networks. We continue to have terrific scale in local broadcast that takes advantage of the growing dual revenue streams. Of course, including the upside with retrans, but the Networks is something we laid on top of our local broadcast business, and it's a growth story. And it's a strong growth story in the national ad marketplace, and we expect it to get back to that after we move through a cycle of some macroeconomic conditions.

And maybe, Adam, just to give you a little bit more of the floor on that. Could you talk about the marketing campaigns that are forecasted in the year ahead? And where you are in terms of achieving those and what sort of goals we can expect to see, whether that's customer activation or growth in OTT or CTV?

Yes, yes and yes. I mean, we expect our marketing campaign to kick off in earnest probably sometime in Q3 focused on several events that we know are coming that are going to be catalysts for consumer adoption of over-the-air.

We really expect to take advantage of this moment when consumers are frustrated with the increases they are seeing by the subscription video-on-demand services. They're frustrated by the content glut, and they're experiencing a level of plus fatigue. I know you all know that, because I think you can see the impact on the other networks and the SVOD services' stock prices.

According to Nielsen, we have about a 25 to 30 share of OTA viewing at any one time. It's a really formidable share of -- in that marketplace, and that marketplace continues to grow. Nielsen just recently released some information demonstrating again another year of growth in the OTA marketplace. Our focus on growing the OTA marketplace goes well beyond just a marketing campaign.

We're developing now customer activation opportunities with retail partnerships that we're going to share more about in the coming months. We think there's a lot of opportunity to solve the problems that consumers have had on the install side and the user experience. In any way we can, we expect to introduce Americans to the opportunity for them to add free over-the-air television to their bundles.

Not in a way that's going to cannibalize the pay TV ecosystem, but in a way that's going to be additive, that's going to show people who have already cut the cord that if they're subscription video-on-demand consumers, they should right now plug in a digital antenna so that they can get access to the entire buffet of premium content in the over-the-air marketplace, including, for example, all of the live sports that's on the Big 4 broadcast networks.

Our next question will come from Dan Kurnos with The Benchmark Company.

Let me pursue the Networks side just a little bit more. I guess I'll start, Adam, obviously, it's more than just a play on viewing trends. It's also quality. It seems like you're winning not just because of the mix shift, but you're winning eyeball share across the broader portfolio in a landscape that has increasing proliferation of AVOD content. So just maybe some incremental thoughts on that to start there. And then I've got some questions for Lisa and Brian.

Yes. I mean absolutely. I think one has to be reminded of the fact that the top streaming shows in the SVOD marketplace are actually today available for free on our premium networks. And while they're not on demand, and while they're served up with advertising, free is an incredibly compelling consumer proposition at this moment of high inflation and SVOD fatigue. And we're taking advantage of that.

You can see it in the share of audience that we're growing compared to our peers whose portfolio shares and ratings have been down. Our portfolio's rating share has actually been up. And that is, I think, a testament to a good programming strategy, premium quality programming and a growth marketplace over the year. Lisa, do you want to add anything to that?

Yes. I would also say our portfolio -- taking the portfolio approach and having really a genre that appeals to really a mosaic of Americans, it certainly is also a competitive advantage for us. So as each network is in its own life stage of growth, there are some that are growing significantly, like we talked about with Bounce this year in the first quarter, growing 54% and Court TV growing over 20%. So I think it's also that -- having that portfolio that appeals to a different genre of audiences is also certainly something that we see as a competitive advantage.

Lisa, just you made some comments just around optimization of inventory. Obviously, DR was strong. Now it's probably not as strong. Just, A; how are you thinking about further inventory optimization as you head into NewFronts, upfronts and then into kind of the next TV season? And B; do you think all of your networks will be rated by the end of the year?

I'll start with the last question. So, probably not all of our networks will be rated by the end of the year with really free in StartUp mode. We are watching that very, very carefully. So we turn on those ratings when we see the opportunity to monetize in the upfront and general marketplace. So that's the one question.

In terms of -- we really do continue daily to optimize, and it's all about taking the highest rate. As I said in my comments a few moments ago, May -- the scatter market in May is up compared to April, and so we're seeing that as signs of -- so those are the dollars we're writing when we're seeing our scatter rates 30% to 40% higher than our upfront rates.

And when we're seeing the opportunity to shift that inventory into DR, we are absolutely doing it. And we saw that really pay off for us in first quarter, up 8.5%. A lot of that -- it was really that inventory optimization between general market and DR.

I do think with the launch of ION and the rest of our FAST networks, that's going to be even a better story for us. Certainly, in the upfronts, we're selling both linear and CTV inventory. And so that's really helped, I think, our story in the upfronts, along with our strong viewing and share numbers.

Got it. That's helpful. And last one, Brian. I know you mentioned it in your prepared remarks, but I don't know if this got enough coverage. The political consortium that you guys have, especially in the CTV side partner with Magnite and all of this, it feels like it's TAM expansionary, potentially. I think it's super interesting. I love what you guys are doing there. Just would love to hear some more granularity and just how we should be thinking about how that evolves over time?

Look, we saw an opportunity. Let me just step back in our history. The bold steps we started taking a decade ago to carve out our place and our leadership in political, creating an infrastructure, Washington office. We've controlled our own political now for more than a decade.

We've continued to advance that and offer new products and data-driven products to the candidates and to the agencies. We've built great relationships with them. And so we continue to, I think, be a leader and forward thinking in this space. And we saw an opportunity where, like other categories, there was going to be a fair amount of money moved or available in the CTV space.

And we saw an opportunity to not just put Scripps out there but really to create a marketplace that would be interesting and easy to use for media buyers in the political space. And so with a couple of peers and others, we've put together a consortium. Just launched in April. So it's early, and I don't have any numbers to share with you at this point.

But I think we're seeing acceptance. We are booking orders. Those orders are getting placed in and out of our markets. And I think we're going to have an opportunity to play on dollars and roll that space up, where these are not our linear channels. And so it's an all additive revenue stream.

Our next question comes from Michael Kupinski with NOBLE Capital Markets.

Congratulations on your quarter, by the way. First of all, I'm going to go back to the Networks question. Particularly, my interest is in the direct response business on your networks. Obviously, during COVID that business seemed to do quite well. And I was just wondering in this environment, are you starting to see shifts in terms of national advertising versus direct response? Can you talk a little bit about the percentage of direct response to total advertising, how that might look versus where we were maybe during the pandemic?

Yes. So Mike, Direct Response in the first quarter was a strong performer despite the macroeconomic trends, certainly put pressure in some cases, in the latter part of the quarter on rates. The strength -- I mentioned this just a minute ago, of our portfolio and our ability to optimize that in DR or general market is really sort of our secret sauce, so to speak, and the portfolio approach that I mentioned.

And remember, each of our networks is sort of in a different mix, so to speak. Some of our over-the-air networks like Grit or ION Mystery may have a revenue mix of DR and that's heavier versus ION, which is more general market focused, but continually looking at the best rate possible. And that's why we've invested in Nielsen ratings to be able to share -- or to be able to sell each of our networks, both in the upfront and also in the general market space.

So hopefully, that answers your question in terms of -- each network is in its different life stage in terms of a split. I think last year, we were at about 50-50, 50% general market and 50% DR overall for the Networks division. But obviously, that's made up of lots of different -- each network being in a different stage.

Lisa, what is the percentage now?

It hasn't moved. It's about the same at this point in time.

But you're not seeing any increase interest from direct response than like we did in the COVID period, like a heightened level of interest just kind of like -- I'm just trying to understand the tone of the marketplace for DR.

Yes. I would say as the scatter market -- I mentioned this last quarter, the visibility and the buys that are coming in sort of later, they're placing buys closer to knowing whether or not they have inventory. And so we're able to then shift some of those dollars that aren't written and scattered to DR.

But you're also starting to see, I think, in DR, that there is probably more inventory at this point in time out there because other national networks are certainly moving some of the -- they're not getting dollars written and scattered, they're moving them to DR. So there is a bit more demand from an advertising perspective there is certainly more inventory available out there.

And in your earlier comments, you mentioned Newsy, so I think it's fair to ask a question about Newsy. It seems like the news and information category is very crowded and it would seem to be a hard to get a voice in this space, especially a lot of the other networks have reporters on the ground in Ukraine, and you mentioned Ukraine.

Has Newsy hit your milestones in terms of delivering upon your expectations? And are you still in investment mode there? Or are you trying to mine your earlier investments? I'm just curious about where you're at with that with Newsy.

Yes. Thanks, Mike. So Newsy is just a little over 6 months into its newest revision of Newsy with being an over-the-air network. And remember, Newsy's strength prior to making this change last year was also on the CTV side.

And so, we're not Nielsen rated at this point in time. So I can't share with you those kinds of viewer trends. But what I can share with you is, on the CTV side, which we're well established in, our viewing on CTV is up 40% versus prior year on Newsy. So we see that as really great engagement and some of the work that we've done to really improve the product is coming through.

And I would say the investments that we've made were -- to your point, we're really now mining to make sure that we are taking advantage of those investments. So the investment trend on Newsy has sort of -- has moderated. But in the first half of the year, we're lapping those expenses will be in the second half of the year.

Mike, if I could add, the new space, depending on how you define it, is potentially crowded, but the space for quality objective journalism on television, in our opinion, is not crowded. And what we saw happen across the street with CNN pulling the plug on CNN+ is a validation of our strategy, that America is very interested in quality objective journalism, particularly if it's delivered for free.

And our reach across America with both CTV and OTA makes Newsy a unique proposition at this moment. And we're really beginning -- again, without Nielsen ratings really beginning to see that resonates. So I'm -- for us it's very much stay the course, continue to build the brand, continue to expose more Americans to the quality objective reporting that's coming out of our team at Newsy and monetize it.

And one last question for Brian. In terms of Local Media, I was just wondering if you can give us the tone of advertising, particularly our local advertising. Are you seeing advertisers shifting in terms of booking their advertising maybe closer to airtime. I'm just wondering in terms of how much visibility you're getting in terms of the pacing data as you go forward and if there has been a shift towards advertising being booked sooner or later.

Hey Mike, it's Brian. Yes, I think you're spot on there that I think -- first of all, just reported that 5 of our top 7 categories were up in Q1. And if you take out sports betting and auto, all of our core was plus 11%. So those are pretty significant numbers.

But that said, yes, there has been a change to the pace of how people are booking business. Clients that would normally book at a quarter, at a time or even month-to-month are definitely holding back and booking 2 weeks out or a week out, and they're really waiting due to supply chain issues to determine if they're going to have enough product to sell. And then they've also got to look at, do they have the employees to -- think of the service category. Do I have enough employees to go install a fence or put on a roof or deliver a hot hub? And do I have the hot tub or are they're backordered. So, all of those things are factors now.

But I can tell you in the first quarter, as we got to March, we were seeing bookings month -- week to week to week that was building through the month as people identifying, okay, I got the product and I got the staff, I can move forward. But it is -- we have less visibility than we've had in the past as we're working week to week now.

Our next question comes from the line of Craig Huber with Huber Research Partners.

Brian, your net retrans outlook for this year, I think you guys said last call, you thought it would be flattish for the year. Where do think you're right now?

Craig, it's Jason. Yes. So we continue to look at it as being flattish. If you recall, we only have about 20% of our subscriber base renewing this year and some contractual network comp step-ups. So flattish this year. But as you look forward to next year, 75% of our subbase renewing. We're really optimistic about some nice net retrans growth in 2023.

Thanks for the update there. And the other thing, the services category, Brian, in your TV stations in the first quarter, what percent of the total was that? And maybe just talk about the specific piece underneath the services were really, really strong in your mind, what you saw there?

Craig, 1/3 of our core advertising was in the services category, and it's been that way now for a couple of quarters. So it's a big material part of our success. And when we talk about developing 1,000-plus new advertisers, a lot of that is in the service area. Inside of services, you have medical, financial, legal, educational. So there's a lot there, but a lot of that is local and a lot of that is our focus of our sellers.

We are not going to sit around and just accept that auto is down, we're going to do something about it and work actively to replace it. And this is a category that decisions can be made by local owners, and we can take advantage of that. And so it's about 1/3 of our business. It was up double digits, as I said, 11%. Inside that, medical was up almost 30% in spending, so that's a big subcategory inside there. Financial segment was up, the legal segment was up. So banks insurance are all part of financial and they're healthy. So a lot of different segments there, but very healthy.

That's great. That's all I had. Actually one more thing. On the Scripps Networks side, did you see a material slowdown in your ad revenue there soon after the invasion of Ukraine, back on February 24? There's a material slowdown soon after that and it sort of stabilized several weeks later. How was that cadence? I'm curious.

I'd not say a material slowdown, I think after the Ukraine invasion it was probably later in the quarter toward the end of March that we started to see as large advertisers were pulling out of Russia is probably the timing of that.

And as you mentioned a moment before, Craig, May feels like if not stability, maybe even an uptick to the benefit of the advertising marketplace.

Our next question comes from the line of Jennifer Lovell with Principal Global Investors.

As it relates to your free cash flow guidance, I was wondering if you could provide us with a capital allocation priorities?

Well, in the near term, our capital allocation priority is consistent with what we've been since the ION transaction, it's paying down debt. We have made a lot of progress since the ION deal closed. We paid down nearly $700 million in debt, and we're on the path to getting to 4x levered by the end of the quarter and back -- or sorry, by the end of the year and then into the 3s next year. So that's our #1 priority.

And those leverage targets, are they net leverage target or gross leverage targets?

That's our net as defined by our bank covenants.

And one other question as it relates to sports betting. Do you have any geographies that have newly launched here in the second quarter or have pending launches this summer?

Jennifer, it's Brian. Nothing in the second quarter. We do have a couple that launched in the first quarter. New York, Louisiana started in the first quarter, as I mentioned earlier, Arizona at the end of the year. So they are still in their first cycle. I think the ones that will be up next will be Ohio and Kansas, and we expect both of those to come online in the fall, hopefully, in time for the NFL season.

There are no questions remaining in the queue. Please continue.

Thank you, Tony. That's the conclusion of this call.

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