Q4 2023 Earnings Summary
- Management expresses strong confidence in refinancing upcoming subordinated debt due in 2026-2027, supported by "tremendous amounts of free cash on a 2-year blended cycle" and a consistent history of free cash flow generation. This indicates the company's strong financial position to manage debt obligations effectively.
- The acquisition of professional sports broadcasting rights is driving significant increases in viewership and advertising revenue. For example, NBA Pelicans games on Gray's Fox affiliate in New Orleans are achieving ratings that are "essentially double what the normal prime time average is in that market". This strategy is attracting new, younger viewers and bringing in new advertisers across multiple markets.
- Gray Television is the only TV company that consistently grew its core revenue throughout 2023, with growth accelerating in the first two months of 2024. This demonstrates strong operational performance and positions the company for continued success.
- Accelerating declines in traditional MVPD subscribers are negatively impacting retransmission revenue growth. Despite securing higher rates in recent renewals, subscriber losses have offset these gains, leading to lower-than-expected growth. The company noted that sub declines have accelerated last year, possibly due to strikes impacting new programming.
- The market is expressing skepticism about Gray Television's ability to refinance its subordinated debt of $1.450 billion due in 2026 and 2027. This is evidenced by the bonds yielding around 13%, which is higher than peers and suggests concerns over the company's refinancing plans.
- Gray Television's high leverage ratio of 5.6x at the end of 2023 raises concerns about financial flexibility. Even with plans to deleverage, the company expects to reach only the lower 5s over the next year, indicating that leverage will remain elevated in the near term.
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Leverage and Debt Refinancing Plans
Q: How will you reduce leverage and refinance upcoming debt maturities?
A: Management emphasized that debt reduction remains the top priority for free cash flow allocation. They plan to reduce leverage to the lower 5s over the next year and into the 4s thereafter. They are confident in their ability to refinance the $1.45 billion in subordinated debt maturing in 2026 and 2027, citing strong free cash flow generation. They intend to address the front-end maturities and may return to the market in the near future to refinance. -
Retransmission Revenue Trends
Q: Why is retransmission revenue growth slowing, and what is the outlook?
A: The slowdown in retransmission revenue growth is due to sub declines in traditional MVPDs, which have accelerated, partly due to strikes leading to less new programming. Their first quarter guidance reflects these trends and assumes renewal of contracts with some large parties. Gross retransmission revenue is guided at approximately $1.5 billion for the year, with network comp of $937 million. -
Political Ad Revenue Expectations
Q: Has your outlook for political ad revenue in 2024 changed?
A: Management expects 2024 to be a strong political year, citing the way primaries have shaped up and historic fundraising numbers, such as the $114 million raised by the Biden-Harris team. They anticipate significant spending due to numerous Senate and House races and increased activity from third-party candidates. However, they are not providing specific numbers this early. -
Assembly Studios Project and ROI
Q: What is the status and ROI outlook for the Assembly Studios project?
A: The total net cost for the Assembly Studios project is $570 million. Currently, the studios are experiencing slower leasing activity due to fewer productions being greenlit and potential labor strikes. Management expects leasing to improve later in the year and believes future development of the remaining 80 acres will unlock additional value over the next 3 to 7 years. They acknowledge it will take time to build to a proper ROI. -
Reverse Compensation Plans
Q: How do you plan to address reverse compensation costs?
A: Management notes that the rate of increase in network compensation is stabilizing, with full-year guidance for network comp being flat with last year. They believe the current system, where broadcasters pay a fixed fee to networks while receiving variable income, needs to change. They advocate for paying networks on a per-subscriber basis to better align costs with revenue. -
Sports Rights and Margins
Q: What are the margins and financial impact of acquiring sports rights?
A: The sports deals are expected to be accretive to earnings. Broadcasting local sports teams has led to significant audience increases, with ratings for NBA Pelicans games in New Orleans being double the normal prime time average. These games bring in new viewers and advertisers across multiple markets. -
Core Revenue Growth and Future Growth Levers
Q: What are your main growth drivers for the next few years?
A: Management is optimistic about several growth opportunities, including the rollout of ATSC 3.0, potential changes in retransmission agreements, and continued growth in digital revenue. They highlight that core revenue consistently grew throughout 2023, and this trend is accelerating in the first two months of this year. They believe broadcast television is as healthy now as it has been in decades. -
Production on P&L and Georgia Tax Credits
Q: How does production revenue appear on the P&L, and is Georgia's tax credit impacting you?
A: Production revenue appears in the production line on the P&L. Regarding the Georgia production tax credit, management does not see any efforts to eliminate it and expects it to continue supporting the state's film industry. -
Retransmission Subscriber Trends
Q: How are retransmission subscriber numbers trending?
A: Subscriber counts are consistent with publicly reported trends, with traditional MVPDs declining while virtual MVPDs are growing. Total sub count is down slightly, reflecting industry patterns. -
Miscellaneous Income
Q: What accounts for the $12 million miscellaneous income in the quarter?
A: The majority of the $12 million was from proceeds on a spectrum auction. -
Contract Renewals and Network Comp Costs
Q: How did you manage to keep network comp costs flat despite contract renewals?
A: Management renewed contracts with CBS and NBC and had been predicting that network comp rate increases would stabilize. The full-year guidance reflects flat network comp costs, indicating successful negotiations. -
Impact of CW Sports Programming
Q: Has adding sports to CW impacted your affiliates?
A: The addition of sports like ACC football and basketball to CW has led to some increases in viewership, especially in markets like Atlanta. While the impact isn't significant yet, management is pleased with the network's efforts to acquire sports content. -
Ability to Refinance Debt
Q: Can you reliably refinance your 2026 and 2027 subordinated debt?
A: Management expresses absolute confidence in their ability to refinance the debt in due course, citing strong free cash flow generation. -
Dividend and Capital Allocation
Q: Is debt paydown still the top priority for capital allocation?
A: Yes, reducing debt remains the #1 priority for free cash flow. -
Assembly Plant Reimbursements
Q: Why are Assembly plant reimbursements less than expected?
A: There's a timing difference in public fund reimbursements, with some shifting from 2023 to 2024 due to the construction schedule. -
Rebroadcast Deals Completion
Q: Are all rebroadcast deals renewing this year completed?
A: Contracts that expired in Q4 and January 2024 have been renewed, with ongoing discussions expected to conclude in the ordinary course. -
Production Revenue and EBITDA Expectations
Q: What are the expectations for production revenue and EBITDA for 2024?
A: Expected production revenue is $110 million with production costs of $85 million, implying about $25 million of EBITDA. Management notes that leasing of studios is expected to improve later in the year, and they foresee growth over time. -
Operational Impact of Potential Strikes
Q: How might potential strikes affect production activities?
A: Potential strikes have led to reticence in greenlighting productions, affecting studio leasing. Management hopes for a resolution to resume production capacity.