Q2 2024 Earnings Summary
- Record-setting double-digit growth in new local direct advertising, with a 20% increase in July , indicating strong local market performance and effective sales initiatives.
- The company is extremely bullish on political advertising revenue for the year, expecting a significant influx due to the competitive and energized Presidential race, with strong political advertising coming in and expectations of a really good year.
- The company's Assembly Atlanta studios were profitable from day one, and they have secured solid leases with prominent clients, expecting all studios to be leased up in the near future , suggesting a positive outlook for additional revenue streams from their production facilities.
- Declining distribution revenues due to subscriber churn are creating a significant structural imbalance in Gray Television's financials. The company acknowledges that affiliate expense growth has flattened, but distribution revenues continue to deteriorate. The reliance on renegotiating network affiliation fees in the next 18 months to rectify this imbalance may not yield favorable terms, posing a risk to future profitability.
- Core advertising revenue tailed off in June, primarily driven by a decline in the auto category, which is down mid-single digits in the third quarter. This downturn in a key revenue segment could negatively impact Gray Television's overall revenue growth.
- Elevated leverage levels have increased to 5.9x, partly due to timing of refinancing and lower political revenues in Q2. While management expects leverage to decrease to the low to mid 5s by year-end, this is dependent on uncertain political revenues, and the company is not providing full-year guidance on political revenue, adding uncertainty to their leverage reduction plans.
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Political Revenue Boost
Q: How has Biden stepping down impacted political revenue?
A: With Biden stepping back, political advertising is set to increase significantly across all levels of the ballot. Management is very optimistic but won't quantify the exact impact. They expect a very good year due to their strong presence in battleground states and competitive races. -
Core Guidance Reduction
Q: Why was core guidance lowered by $75 million?
A: The reduction reflects weaker core advertising revenue, partly due to auto sector softness and displacement from political ads. While core was down in Q2, new local direct sales increased by double digits, with a 20% increase in July. The revised full-year guide of $1.525 billion is still up over 2023. -
Core Ad Revenue Trends
Q: Is core ad revenue weakness continuing?
A: Core ad revenue tailed off in June, primarily driven by declines in auto advertising. However, the company projects core revenue to be flat to +3%, with many categories up in Q3. They remain bullish on Main Street due to strong new local direct sales. -
Leverage Outlook
Q: Where will leverage be by year-end?
A: Leverage increased to 5.9x this quarter due to timing but is expected to decrease to the low to mid-5s by year-end. This improvement depends on cash flow generation from political ads and debt repayment priorities. -
Network Affiliate Fees
Q: How will you address declining distribution revenue?
A: Management believes network affiliate fees are too high given subscriber declines and will seek adjustments in upcoming renewals over the next 18 months. They aim to compensate networks appropriately with both cash and above-average eyeballs, expecting costs to come down to maintain affiliations. -
Assembly Studios Payback
Q: What's the outlook for Assembly Studios' cash flow?
A: The studios are built and were profitable from day one. They've secured a solid lease with an important client and expect all studios to be leased soon. The project cost was $571 million, and meaningful returns are anticipated starting in Q1 next year. , -
Network Renewals Timing
Q: When are your network renewals up?
A: All network renewals are up within the next 18 months. A schedule listing them by network is available in the investor deck from March. -
Local Sports Partnerships
Q: Any plans to expand local sports partnerships?
A: The company is interested in more local sports deals. They've had success with the Phoenix Suns and are working with four NBA teams. They hope to announce additional partnerships soon. -
Debt Refinancing Strategy
Q: Any thoughts on longer-term debt refinancing?
A: Management evaluated various options and chose a five-year refinancing to balance cost and tenure, efficiently addressing the 2026 maturities with the best terms. They will consider market conditions for any future refinancing. -
Bond Repurchase Plans
Q: Will you target other bonds for repurchase?
A: The company will opportunistically repurchase bonds, focusing on where they see the best returns. They have $125 million available on the revolver and will be guided by market pricing, not limited to specific maturities.