Q2 2023 TEGNA Inc Earnings Call

August 3, 2023

Of our traditional subscribers up for renewal by the end of this year.

Premium continues its momentum it is a fast growing streaming television advertising space with established proven and unique sales channels focused on local during the quarter premium and delivered new advertiser innovations, including the interaction of sales conversion attribution, providing insights into the efficacy of advertising spend as well as premium IQ a comprehensive.

That said similar to last quarter premium was down in Q2 due to unfavorable year over year comparisons impacted by the loss of a single large national account.

As we've mentioned premiums primary focus is on the growth in local OTT revenue, where it is uniquely positioned to win.

non-GAAP operating expenses were $565 million up 1% compared to the second quarter last year, driven by higher programming fees.

Excluding programming fees non-GAAP operating expenses for the quarter were down 2% when compared to last year due to ongoing prudent expense management and operational efficiencies.

Our second quarter, adjusted EBITDA of $194 million was down 24% year over year, driven by the absence of high margin political revenue and higher programming costs.

We continue to generate strong free cash flow of 121 $112 million during the quarter driven primarily by our high margin durable subscription revenues and thoughtful management of our balance sheet over time.

Now turning to our quarter ahead and full year outlook.

As you saw in today's release, we provided guidance on key financial metrics for the third quarter and remain on track to meet all of our key guidance metrics.

As a reminder, 2023 net leverage will move up a bit to reflect the anticipated impact of the second ASR program, We announced today, we expect to end the year just below three times on leverage.

To help model, our near term expectations, let's walk through a few third quarter financial guidance metrics. As a reminder, we expect to be disproportionately impacted on a comparable basis in the third quarter by the absence of $93 million of high margin political revenue from the midterm election cycle last year.

For the third quarter, we expect total company revenue to be down by low double digit.

Year over year, primarily driven by the absence of political revenue.

We expect operating expenses in the third quarter to increase in a low single digit percent range compared to third quarter 2022, driven by the increased programming expenses associated with higher subscription revenue.

When excluding programming costs, we project third quarter operating expenses to be down low single digit percent year over year.

Now turning to our full year 2023 guidance elements. As a reminder, you can find our 2022 actuals for these metrics and comparisons in our investor presentation on our website.

For the year corporate expense is expected to be in the range of $40 million to $45 million.

Depreciation is expected to be in the range of $60 million to $65 million.

Amortization is projected to be in the range of $53 million to $54 million.

Interest expense is expected to be in the range of $170 million to $175 million.

We expect capital expenditures in the range of $55 million to $60 million.

We forecast an effective tax rate in the range of 23, 5% to 24, 5%.

As we've mentioned we are updating our net leverage guidance for the year to reflect the impacts of the second $325 million planned ASR program, which will be launched later this year.

As a result, we expect to end 2023 with net leverage to below three times as Dave mentioned as a result of all of our capital allocation actions taken together this year.

And with that I will now turn to Q&A.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one wondering your telephone again to ask a question. Please press star 111 moment for our first question.

Our first question comes from the line of Dan <unk> of Benchmark Company. Your line is open.

Great. Thanks, good morning.

Just to level set.

A description so Victoria.

You've kind of said that you had.

For the quarter.

Quarter. After there was some noise in Q1 and I just want to make sure we understand the puts and takes there is no real.

Yes.

This year.

That comes out of it.

The next 30% you've talked about and I think on the reverse side.

One at the end.

Okay.

Sure.

Is that the right way to think about.

Description.

Hey, Dan it's Dave that's exactly right.

And in order of magnitude on the reverse comp side the one.

At year end is much larger than the one off earlier.

Right.

Dave in terms of your expectations, you're hearing a little bit of noise in Q3, but it sounds like it's still expected to sort of fall in that mid single digit range.

Sure.

Yes.

It's actually been very stable.

In recent months in that mid <unk> mid.

Mid single digit number that's right.

Okay, Perfect and then I just wanted to go back to your prepared remarks.

Just.

Your ability to balance share repurchase potentially look at accretive opportunities.

Okay.

Obviously the.

Sure.

Welcome surprise I think it's certainly would investors were hoping for incremental ASR.

And you guys have a super clean balance sheet. So I guess I'm just trying to understand.

No.

Order of magnitude desire for diversification.

Our thought process on what's out there how much you're willing to flex the balance sheet or how much does it really matter.

Whatever you do you still leave a lot of dry powder on the table.

Adding back stock.

Very undervalued level.

No I appreciate the question, Dan So I definitely don't want to be signaling that we're talking about taking some big swings. We are very much in this market, especially like having a conservative balance sheet and our leverage position what I'm really trying to say is that we've proven before our ability to do some things that are frankly pretty low on cash.

Little we'll have a great return premium is a great example, frankly, we didn't spend it was organically built from the ground up right. So we made we made the money as we grew so.

All I'm, saying is we may there may be some small bolt on M&A acquisitions that make a tremendous amount of sense, but.

Definitely not trying to signal.

At all about major swings in M&A.

Anytime soon.

And we will but we have.

Sorry about the flexibility.

We do have the flexibility to do things organically and as well as you know.

If it makes sense some.

We will not impact our larger financial picture and Dan just as a reminder, in the past when we have done larger M&A, we've always done accretive EPS and free cash flow and a very quick fashion. So we have the ability to flex up with the balance sheet, we have and get right back to our current levels very quickly and I think that historically has been our our investment mode.

Just to add on that I guess to add on <unk> like I said in our comments, we will have obviously.

Prior to the acquisition process, we had a.

I think we're very proud of a very disciplined strategic machine as a company in terms of.

How to best use our capital and give the best returns to shareholders.

Broadcast M&A is off the table for the time being as we've talked about it light.

From the regulatory standpoint so.

The ASR is not signaling that.

That's the end of returning capital to shareholders I think like I said at the year and we're going through the strategic process now and back with all the engines have been turned back on if you will but return of capital to shareholders.

As a key part of our future and as Dave said in his remarks I mean.

Got it perfect. Thank you I appreciate it.

Okay. Good and then just to further clarify here Youre seeing your Retrans revenue in the first quarter was abnormally high people should use a second quarter number is more of a true underlying number what's going on right now.

Yes, that's correct.

Okay, great. Thank you.

Thank you one moment please.

Yeah.

Our next question comes from the line of James Goss of Barrington Research again, Mr. <unk>. Your line is open.

Thank you.

A little bit more on retrans in a broader sense I know you have some renewals coming up.

But are you do you see.

Since you're hitting any sort of a wall in terms of retrans programming fees or are you getting some relief on the programming side.

From the streamers, who might be spending less in new programming and maybe that gives you a better argument.

And maybe you could tie in the comments you made about this.

Station streaming apps.

And the economic value might be creating there.

Getting some of the.

So.

The local station access back in terms of.

Sort of a contributing factor to argument toward retrans fees.

Well first of all Hi, Jim Let me take the second question first I'm going to ask you to restate. The first question I didn't quite follow that completely relative to streamers on the first question on retrans, but as it relates to our own apps is additive right. So.

These are really focused on the cord never homes right. So we're really.

Give us access to our products.

AD dollars in homes that don't even don't have any kind of service.

So that's the value of that the money is small today, but the audience growth is very fast and so we.

We're pretty bullish on what that might look long term. It will continue I think to look at strategic options and how we might ask.

To accelerate that through distribution agreements and the like now Jim on your first question on Retrans.

Yes.

With you until you talked about the streamers could you restate that for me again.

Okay on the streamer side I'm wondering most of the.

The networks are owned by companies of streaming services there is a big focus.

Profitability that wasn't there to the same extent a couple of years ago and the services were launched and it seems like there could be some.

Maybe a reduction in allocation of.

Spending toward new programming and I wondered if it might.

Provide any.

Better argument for you too.

Just by not paying.

Huge increases in programming fees.

But in the meantime, you do.

As time goes on Retrans, obviously, the huge base of revenues as you say more than half of your total that doesn't go away but.

To the extent that it grows the way it has been.

We're continuing to see the kind of rate increases, we expect and deserve on the deals we do.

Obviously in those.

Just under 50% replacement of every traditional we lose we gain a virtual and while we've talked about the different economics of that in the past are still they are additive to our bottom line in a very very good way I think your point is good one relative to this to the network streaming services and I think they are found themselves in a.

<unk> situation in that.

They all were sort of in a race with Netflix and it turned out and that has not turned out to be a very profitable business for anybody.

And some of the networks more than others have really because they just don't have the kind of programming to compete with Netflix have taken programs off the mothership networks or or or double running them, which which does which does make their program less valuable to us and does change the nature of a.

<unk> with the network about what we should take it which I think is was key to your point in your question right.

Exactly so.

Can you at least be somewhat of a mitigating factor.

Two of which it will it.

It will be.

In upcoming negotiations.

You have a number of new initiatives here and Theyre verify lock then.

I'm wondering.

<unk> in the past and some other sort of things I'm wondering as you try to.

Look at new growth options for the whole enterprise beyond broadcasting.

One is do you think are significant in terms of potential monetization.

I think for competitive reasons, I don't really want to get into that and obviously right now as we as I mentioned earlier.

A previous question.

Turned back on all of the strategy machine engines. If you will and we're also in a process of assessing that because you know it's interesting and just the <unk>.

Basically the the negotiating of independency of the merger agreement that was terminated was really two years of us on ice from a strategy standpoint, but it's been fascinating to see how much has changed we were right before we sort of turned off that engine. We were looking at a lot of initiatives in.

Our premises behind a lot of those turned out to be true, but other opportunities have developed just in the last two years.

AI being the most obvious and most broadly abused as a word probably but there is a lot out there relative to AI. Both in terms of operating the business from an expense standpoint, as well as both threats and opportunities.

No.

But I wouldn't I wouldn't focus on one particular sector other than to simply say.

When you look at our assets and capabilities, we have very strong brands and a lot of markets.

Across this country and Theres a lot less local competition in the brand world than there is in the national side and that remains a very big asset for us.

<unk> partners.

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Q2 2023 TEGNA Inc Earnings Call

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