Nexstar Media Group - Earnings Call - Q1 2021

Transcript

Operator (participant)

Good day and welcome to the Nexstar Media Group Q1 2021 results call. Today's conference is being recorded. I would now like to turn the call over to Joe Jaffoni, Investor Relations. Sir, please go ahead.

Joe Jaffoni (Head of Investor Relations)

Thank you, Katie. And good morning, everyone. I just need to read the safe harbor language, and then we'll get right into the call. All statements and comments made by management during today's conference call, other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Nexstar cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during the call. For additional details on these risks and uncertainties, please see Nexstar's annual report on Form 10-K for the year ended 31 December 2020, and Nexstar's subsequent public filings with the Securities and Exchange Commission. Nexstar undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

With that, it's now my pleasure to turn the conference call over to your host, Nexstar Founder, Chairman, and CEO, Perry Sook. Perry, please go ahead.

Perry Sook (Chairman and CEO)

Thank you, Joseph, and good morning, everyone. Thank you very much for joining us to review Nexstar's record Q1 results, with our net revenue, profitability, and cash flows handsomely exceeding consensus expectations. The Q1 clearly highlights the resiliency and adaptability of our business and the proven ability of our long-term strategies to drive top-line growth through increased content monetization and diversification, while at the same time leveraging our scale, reducing debt, and allocating our growing free cash flow to return of capital initiatives which are driving shareholder returns. We're extremely proud of the record Q1 results and the more than 12,000 members of the Nexstar Nation across the country who, while serving their local communities, have managed through and, in most instances, overcome the challenges presented by the pandemic, putting Nexstar on a path for continued growth in the current quarter and beyond.

Before getting into the quarterly highlights, I'd like to quickly review our progress against our capital allocation priorities and long-standing commitment to enhancing shareholder value. In the Q1, we allocated $80 million towards debt reduction and returned approximately $151 million to shareholders through dividends and share repurchases, thus reducing our share count to approximately 43 million shares. Nexstar returned approximately $383 million to shareholders in the form of share repurchases and dividends in 2020. So, with $151 million in the bank in Q1, we are well on pace to exceed that level this year. Tom Carter, Nexstar's President and Chief Operating Officer and CFO, is also with us on the call this morning.

We'll review the quarter, our outlook, our plans for continued capital returns, and our confidence in achieving our pro forma annual average free cash flow guidance for the 2021-2022 cycle of $1.27 billion, or about $30 per share. Nexstar started 2021 exceptionally strong, with record Q1 net revenue, including double-digit growth in distribution and digital revenue, alongside our team's success in driving a recovery in core advertising. Nexstar's Q1 net revenue grew 2% year-over-year to $1.1 billion, as the ongoing execution of our strategies to leverage our strong local content and diversify our revenue sources nicely offset the approximate $50 million in year-over-year decline in political advertising.

Top-line growth, the $178 million cash distribution from our 31% ownership stake in the TV Food Network, and our expense management vigilance combined to drive record Q1 adjusted EBITDA and Free Cash Flow before one-time transaction expenses to $572.6 million and $484.7 million, respectively. Nexstar brought over 35% of our Q1 net revenue to the operating EBITDA line before the Food Network distribution and one-time transaction expenses. You can expect Nexstar to further leverage its scale and operational excellence to generate significant free cash flow, reduce debt, and drive further total shareholder returns throughout 2021 and beyond. Q1 2021 total television advertising revenue, excluding political, decreased just 1.4% versus the prior year. That outpaced our expectations, and it reflects the growing demand for our premium local and national content and marketing solutions.

Nexstar's new business strategies, ongoing sales training, performance-focused incentive structures all continue to prove highly effective as we capture broadcast and digital ad spend and healthy levels of profitable new business. Our sales teams generated $27.8 million of Q1 new-to-television revenue, marking a 149% increase over the same quarter prior year. We are extremely proud of our sales team's successes in delivering solid Q1 core advertising results when you consider that the Q1 of 2020, I'm sorry, the Q1 of 2021, would be our most challenging core revenue comparison for the year, given our core strength last year prior to the onset of the pandemic. Looking ahead, we're encouraged by the overall acceleration in economic activity and the improved trajectory of ad spending across our footprint as market conditions continue to improve.

In the Q1, total revenue for Nexstar's top 10 ad categories paced 9% ahead of the prior year, with gains in six of our top 10. In addition, five of our top 10 auto advertisers increased their spending year-over-year. The resumption in auto category spending is being complemented by the resurgence in insurance, lottery, sports betting, home service and repair, medical health care, packaged goods, grocery stores, and auto aftermarket spending. Nexstar's core ad strength is being achieved despite the auto inventory headwinds as a result of the chip and supply chain issues. We're also accomplishing this growth before all small and mid-sized businesses have fully returned to the ad market, a trend which we think bodes well for our business and one that could possibly accelerate as we move throughout the year.

With Nexstar's core advertising accelerating year-over-year beginning in the Q2, our local sales teams are working hard to drive further revenue share gains as we move deeper into the recovery. Q1 2021 distribution fee revenue rose 13% year-over-year to approximately $621 million, reflecting our 2020 renewal of distribution agreements across approximately 18% of our subscriber base, the synergies related to Mission Broadcasting's acquisition of WPIX-TV in New York, as well as our annual contractual escalators. Subscriber trends across our platform are stable and consistent with our expectations and support the ongoing distribution fee growth and net retrans margin trends that we continue to project. Nexstar has solid visibility into the distribution economics and ongoing growth of this revenue stream, as over 85% of our Big Four affiliations are contracted through 31 December 2022.

Our retrans growth, coupled with the Q1 cash distribution from our ownership stake in the Food Network, has significantly offset the historic seasonality that media companies typically face in Q1. One other note here on the significance of our ongoing revenue diversification initiatives: in the Q1, total television advertising revenue accounted for about 37% of net revenue, while distribution fee revenue was 56%. The balance then came from digital and other sources. Looking forward, we expect continued growth from all of our non-political revenue sources for the balance of 2021, with similarly high levels of overall revenue diversification.

Moving on to digital, Q1 2021 revenue increased 18% over the prior year to approximately $66.4 million, with substantial profitability improvement, partially reflecting our actions over the last year to discontinue or de-emphasize certain less profitable digital operations, as well as the strategic operational realignment we put in place last fall. Top-line growth was driven by the success of Nexstar's integrated content and audience development strategies, as well as a full quarter contribution from our December 2020 accretive acquisition of BestReviews. Our integration of BestReviews is progressing ahead of our plan, and results are similarly favorable. Nexstar's digital network continues to generate strong consumer engagement with our content, as well as significant digital usage across our 400-plus digital touchpoints.

Last year, Nexstar's digital properties delivered record growth in audience engagement, ranking number one in local news for every month of the year and reaching all-time highs across key performance indicators, including average monthly users of about 91 million, total page views of 7.8 billion, total multi-platform minutes of 10.4 billion, and total digital video views of 1.6 billion, all according to Comscore. With the momentum of our content and audience development strategy, we expect growth in digital revenue going forward, and combined with the expected mid-seven-figure expense savings this year, resulting from our strategic operational realignment of our broadcasting and digital operations conducted last year, we expect increased cash flow contributions from digital throughout 2021. This June, Nexstar will celebrate the 25th anniversary of our company's founding.

During this period, the company has grown from a single station to become the nation's largest television broadcast operator, as well as the top producer of local news in the country. This growth has come thanks to our disciplined approach to growth through accretive acquisitions, a focus on enhancing operating results of our acquired stations, and organization-wide commitment to localism. At the same time, the material diversification of our revenue mix has resulted in strong and consistent free cash flow generation, affording us the financial flexibility to reduce leverage, increase shareholder returns, and to pursue additional accretive growth opportunities while also investing in our business and our people. As always, we remain focused on actively managing our capital structure, and we expect Nexstar's net leverage absent additional strategic activity to continue to be in the sub-four times range throughout 2021.

With that, let me turn the call over to Tom Carter for the financial review and financial update. Tom?

Tom Carter (President, COO and CFO)

Thanks, Perry. And good morning, everybody. I'll now review Nexstar's Q1 income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance. Q1 of 2021 was a very good quarter for Nexstar. Net revenue increased 2% over the same period of the prior year and approximately the same amount on a combined pro forma same-station basis. Net revenue ex-political was up 7% to $1.1 billion and up 6% on a pro forma same-station basis. Core advertising revenue, local and national, was down 1.4% to $411 million, but on the television station side, was up 2% on a same-station basis. Political revenues, as expected, were down approximately $50 million due to the lack of political advertising in 2021 compared to the Q1 of 2020.

Distribution fee revenues were up 13% to $621 million and up 13% on a same-station basis as well. Digital revenues were $66.4 million, which was up 18%, and that was up approximately 3% on a comparable basis, with the difference really coming from the acquisition of BestReviews. Also, I might add that the digital business profitability continues to improve considerably during the year, and we see that as a growth vehicle going forward from a profitability perspective. Adjusted EBITDA was $571 million, which was up 2.4% over the same period the prior year, and importantly, free cash flow was $484 million, which was up 14% over the same period the prior year. Reported Q1 direct operating expenses, net of trade expense, and SG&A expenses were affected by previous quarter's acquisitions and the realignment of Nexstar's digital business.

As a result, some expenses shifted from direct operating expenses into SG&A, making comparisons less meaningful on a direct basis. Overall, these combined expense categories increased $41 million, a 6.8% increase, which was attributable to the station and digital acquisitions during the period. Q1 pro forma fixed expenses, excluding programming expenses, were down 3.8% over the same period in 2020. Total corporate expense, including non-cash compensation expense, was in line with the company's guidance for the Q1. Corporate expense declined 18.7% to $43.5 million, inclusive of $11.6 million of stock-based compensation expense in the quarter. Total corporate expense, including non-cash compensation, was in line, as I mentioned before, with overall guidance. And during the quarter, we were at $1.2 million in one-time transaction costs. Q1 operating cash taxes were only $5.5 million, as the Q1 estimated payment is typically made early in Q2.

Ongoing CAPEX totaled $27.5 million and was in line with our Q1 guidance. Spectrum repack CAPEX totaled approximately $4.4 million, and we received approximately $5.4 million in reimbursements from the FCC during the quarter. As a reminder, we're anticipating being fully reimbursed for all CAPEX related to spectrum repack, as those activities wind down later this year. Q1 total interest expense amounted to approximately $72 million, down from over $100 million in 2020. Cash interest expense was $68.4 million compared to almost $97 million last year, with a decrease due to lower interest rates and lower first-lien borrowing levels.

Q1 adjusted EBITDA of $573 million and free cash flow of $485 million, all before transaction expenses, meaningfully exceeded consensus expectation and reflect the ongoing recovery in core advertising, strong double-digit distribution and digital revenue growth, and $178 million in distribution from equity investments, primarily related to our 31% ownership in the TV Food Network. Looking ahead, we project recurring cash corporate overhead, exclusive of stock comp and transaction costs, to be approximately $30 million for the Q2 and $115-$120 million for the year. Non-cash comp is expected to be approximately $12 million for the quarter and $50 million for the full year, with transaction expenses approximately $1-$2 million for the Q2.

Operating cash taxes are expected to increase to $110 million in the Q2 as we make the estimated payment for Q1 and still expected to be approximately $280 million for the full year. CAPEX should come in at approximately $35 million in the Q2 and $135 million for the full year, so no change there. We expect Nexstar's cash interest expense to approximate $69 million for the Q2 and $285 million for the full year, reflecting interest expense savings related to lower outstanding borrowings, the decline of LIBOR, and our recent refinancing activity. For the Q2 of 2021, we anticipate recording approximately $22 million in TV Food Network distributions and continue to think that for the entire year will amount to approximately $220-$225 million.

Turning to the balance sheet, reflecting our most recent capital markets transactions and $75 million of voluntary payments in Q1 and $5 million of scheduled payments, Nexstar's outstanding debt at 31 December 2021 was approximately $7.6 billion. Our total net debt amounted to approximately $7.25 billion at 31 March 2021 compared to $7.5 billion at year-end 2020, net debt for first-lien covenant purposes is $4.6 billion, with that amount limited netting of cash to $200 million. Our net first-lien covenant ratio at 31 March 2021 was approximately 2.14 compared to 2.28 at year-end and well below the first-lien covenant of four and a quarter. Our total leverage at quarter-end was 3.4 times compared to 3.6 times at year-end 2020. As a reminder, Nexstar's only financial covenant is our first-lien debt leverage, which is the aforementioned four and a quarter times.

As always, we remain focused on actively managing our capital structure and expect Nexstar's net leverage, absent additional strategic activity, to be, as Perry mentioned, below four times at year-end 2021. In January, the board of directors increased Nexstar's quarterly dividend by 25% to $0.70 per share per quarter and authorized the repurchase of up to $1 billion of our Class A common stock. The board's repurchase authorization reflects the attractiveness of Nexstar's free cash flow yield and a potential acceleration of share repurchases as our leverage moderates and large-scale acquisitions become more scarce given the current regulatory environment. The 20-plus % increase in Nexstar's dividend for the eighth consecutive year and the implementation of a significant share repurchase will allow us to continue delivering industry-leading risk-adjusted returns to our shareholders. At the same time, the current dividend payout remains a modest low double-digit % of our free cash flow.

Consistent with our capital allocation priorities and commitment to enhancing shareholder returns, during the Q1, we returned $151 million to shareholders through the purchase of approximately 800,000 shares of stock at an average price slightly below $150 per share for a total cost of $121 million, and through our upsized quarterly cash dividend payment, increased to $30 million. In addition, Nexstar continued to deliver on our leverage plan reduction, reducing our first-line debt balance by approximately $80 million. Altogether, during the Q1, we allocated approximately $231 million in cash from operations towards dividend payments, share repurchases, and leverage reduction. In preparation for Nexstar's 2021 proxy and annual meeting, we conducted extensive outreach to our shareholders during the Q1 to update them on the company's recent ESG initiatives and to solicit their feedback on these matters.

We also expanded the disclosures in our 2020 Form 10-K on our ESG initiatives and launched a corporate social responsibility section on our website, which we will be adding to in the near future. The input and recommendations from our shareholders who elected to engage with the company were presented to the board of directors for consideration, and a summary of those efforts will be disclosed in our 2020 proxy. Throughout the company's history, the alignment of our commitment to our local communities and our commitment to our shareholders continues to be a key driver of our long-term success. As a result, we remain focused on evolving our ESG policies and disclosures in a thoughtful manner that supports our employees, communities, as well as our goals for growth and enhancement of shareholder value. You can find the copy of the proxy on the SEC website.

It was filed middle of last week, and we expect the proxy to be mailed sometime later this week. In March, we had a ratings review with S&P, which resulted in a one-notch upgrade on our corporate issue rating to double B, a two-notch upgrade to triple B minus on Nexstar's secured debt rating, and a one-notch upgrade on our unsecured bond rating to B plus. S&P's commentary centered around the rapid deleveraging exhibited post-Tribune acquisition and the approved economic recovery. We have similarly requested a ratings review from Moody's, and we are awaiting a response on their review. Looking ahead, with operating momentum continuing in the Q2 across our businesses, we expect to generate year-over-year growth across all of our non-political revenue sources throughout 2021.

Nexstar has already made significant progress on our leverage reduction goals, and we enjoy a strong cash-generating position which provides us financial flexibility to deliver growing capital returns for shareholders while reducing debt and investing in our business. In summary, our scale, leadership, flexibility, synergy realization, and operating plans are generating results, while our capital structure is in great shape from a cost of capital and maturity perspective. Finally, our service to our communities and our local and national advertisers has never been stronger. The solid foundation of our assets and operations, combined with the resiliency of our business model, give consistency and visibility to our results. As such, we remain confident in our ability to enhance shareholder value, deliver pro forma and deliver pro forma average annual free cash flow of approximately $1.27 billion over the 2021-2022 cycle. That concludes the financial review for the call, and now I'll turn it back over to Perry for some closing remarks before Q&A.

Perry Sook (Chairman and CEO)

Thank you, Tom. We continue to execute extremely well on our strategic priorities, including serving our local communities and driving increased content monetization while reducing debt and allocating free cash flow to growing capital returns for shareholders. Looking ahead, we have excellent visibility to delivering on or exceeding our free cash flow targets in this current cycle and a clear path for the continued near and long-term enhancement of shareholder value as we follow the successful strategies that we've established in terms of building the top line, maintaining close control of fixed and variable costs, and optimizing the balance sheet. Our disciplines in these areas have added consistency and visibility to our results while creating and enhancing value for shareholders.

Our guidance for pro forma annual average free cash flow for the 2021-2022 cycle is again $1.27 billion, and that underscores the strength and resiliency of our operations and ability to continue delivering free cash flow per share that is among the highest in the market. Our strong free cash flow generation is allowing Nexstar to meaningfully increase its return of capital initiatives, as reflected by our recent authorization to purchase up to an additional $1 billion of shares and our eight-year track record of dividend increases of 20% per year or more. We look forward to reporting on our continued growth and accomplishments throughout the year, and on behalf of the entire Nexstar Nation, our board, and our management team, thank you for your continued interest, support, and thank you for joining us this morning. Now, let's open the call to Q&A to address your specific areas of interest. Operator?

Operator (participant)

Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question comes from John Janedis with Wolfe Research.

John Janedis (Managing Director)

Thanks. Good morning, guys. You've got a good footprint, so can you talk more about the contribution from the gaming category? Can that be top five longer term? And then from a market perspective, did the larger markets lag the rest of the portfolio due to COVID? And if so, how do you see those rebounding as we move into the back half of the year?

Perry Sook (Chairman and CEO)

Thanks, John. Yeah, gaming, in conjunction with lottery and all other gambling spend, is already a top five category. In fact, it was the number three category behind auto and attorneys in the Q1, and we have every reason to believe that it will be a nine-digit revenue contributor in 2021. As it relates to markets, there's really no hard and fast rule. I would say that New York and its reopening and recovery is lagging behind some of our other markets, New York City particularly. Chicago is maybe a little further ahead, but still not as open or robust as some of our other markets. While Los Angeles, even though in a virtual lockdown until just very recently, our station there is just absolutely killing it.

I don't know that you can apply any one-size-fits-all to geography or market size, but generally, the larger markets have lagged behind the middle and the rest of the country in terms of reopening. But we did see fairly broad-based support. Of our 116 markets, 104 exceeded their Q1 revenue and EBITDA budget, which means only 12 of 116 did not achieve that benchmark. So it's pretty robust, and we're very heartened with the reopening and the city employees and all that's going on in New York City because we think that will flow directly to our revenues at WPIX as the year moves on.

John Janedis (Managing Director)

Got it. And Perry, let me ask you, there have been a couple of cases where some of the digital players have paid newspaper publishers for news content. Do you see that as an opportunity at some point for the broadcast space?

Perry Sook (Chairman and CEO)

I think we produce a lot of content on our own, and in those partnership discussions, there's never been, in my view, an equitable split of the economic, so at this point, I think since we are the largest producer of local content across the country, over 300,000 hours a year of local news, I think we have enough content to fund our own platform.

John Janedis (Managing Director)

Okay. Thanks, and maybe one quick one for Tom. Can you give us an update on the buyback for the year? And if there's ultimately not much on the M&A front, does the grow out of the deal?

Tom Carter (President, COO and CFO)

Sure, well, obviously, we bought back $121 million in the Q1, and that was basically in one month because we were in a blackout period in the first part of the year. I would say that for a month, for a quarter, that's probably a good representation for quarter by quarter. I wouldn't say we're going to buy back $121 million every month, but I would say if you extrapolated the $120 million for an entire year, that would be approximately $500 million. I would say that's probably a good number, maybe slightly more than that later in the year. But that also has some variance based on if there is some potential M&A, although M&A I don't expect to be meaningful. It could be a low nine-figure amount in total for the year, but that would potentially eat into the share repurchase program a little bit. But I would say we're on trajectory to be at or slightly in excess of $500 million for the year.

John Janedis (Managing Director)

Thanks so much, guys.

Operator (participant)

Thank you. Our next question comes from Dan Kurnos with Benchmark Company.

Daniel Kurnos (Equity Research Analyst)

Great. Thanks. Good morning. Another nice print. Perry, maybe just first for you, you're already kind of talked about this, and you guys have a really great visibility setup, but obviously, there have been some pretty prominent public commentary just around retrans. And obviously, there are some tougher comps from the MVPDs in the back half of the year. So just kind of maybe if you want to give your own perspective on the retrans cycle and how much legs there is still left on that. And then Tom, look, fixed costs again down 4% year-over-year. You've done a great job kind of keeping that down. I think it's hard for some of us to get sort of a handle on how much of the COVID savings are continuing. So, just maybe sort of how we should think about expense growth over the balance of the year would be super helpful. Thanks, guys.

Perry Sook (Chairman and CEO)

I think on retrans, and we may have said this on the last call, I think in my own mind, I've revised the thinking of where the goal line is. I think we've actually moved the goalposts further down the field and that the upside is perhaps more than I thought it might be on a Big Four basis or on a total revenue basis for our company. So we're, despite protestations to the contrary, retrans is not over. And in fact, we're very pleased with the way we do a trailing 12-month subtrend here. And if I go back to the Q1 of last year, our actual attrition was somewhere in the mid- to high 6% range on the annualized basis.

In the Q1 of this year, it's in the low 5% range on an annualized basis. We think, as we have said, sub declines would ultimately level off, and we're obviously able to, with our portfolio, achieve our unit rate increases and continue to drive double-digit growth in both top and bottom line contributions. From that standpoint, there's been no change to our perspective other than I think we maybe have more runway than I originally thought three or five years ago.

Daniel Kurnos (Equity Research Analyst)

Tom, on the cost side?

Tom Carter (President, COO and CFO)

Oh, on the cost side, I apologize. Yes. No, I think, look, costs are going to be more difficult. We're running up against some comps, especially in Q2 and Q3, which were the majority of our cost takeouts last year. Cost takeouts on a comparable basis for Q2 and Q3 of this year will be more difficult. I still think that we will clearly be down on a fixed basis. Our variable costs will be up slightly because we expect meaningful growth in advertising revenues in Q2 and Q3 of last year, but our fixed costs will continue to decline during the year.

Daniel Kurnos (Equity Research Analyst)

Perfect. Thanks so much, guys. Appreciate it.

Operator (participant)

Thank you. Our next question comes from Jim Goss with Barrington Research.

Jim Goss (Managing Director and Senior Research Analyst)

Thanks. First question relates to a comment you made in the text that you had noticed a difference in the pace of recovery in core advertising by geography. I wonder if you might expand on that and talk about any implications we should read into that.

Perry Sook (Chairman and CEO)

Yeah. As I said earlier, that's primarily pointed at New York, which New York City, which has kind of lagged behind most of the markets in our universe. Unlike Upstate New York, that is very robust in terms of comps to the prior year. But it's primarily New York City that has lagged behind. And with the announced reopening, we think that business activity will begin to accelerate. Beyond that, as I said, it's pretty widespread recovery, perhaps a little less in New York, Chicago, L.A. But again, as I said earlier, our L.A. station in that marketplace is killing it both digitally and in linear television. And we think the secret sauce there is they produce about 90 hours a week of local content, which is way more than anybody else in the market, and people are very interested in what's going on these days. So that's about the extent of the differences in the commentary.

Jim Goss (Managing Director and Senior Research Analyst)

Okay. That's great. KTLA has always been a great station. In terms of TV Food Network, are you still totally passive investor, or are there programming opportunities on your platform in using some of the content they produce, maybe as a special show or something of that nature?

Tom Carter (President, COO and CFO)

Jim, I sit on the board. That is a possibility. I would say right now, Food Network is focused on maximizing their content with the new Discovery+, which we will participate in from the Food Network's perspective. We get a cut of any advertising revenue on the Food Network channel as well as the Cooking Channel, and we get a cut of a proportion of the subscriber fees on Discovery+. Keep in mind that there really are two drivers on Discovery+. It's HGTV and the Food Network, and we obviously own 31% of one of those two. So it will be additive to our financial results this year.

It's just that obviously they're in a rollout position. There's a large percentage of subscriber base that's through Verizon, and that's currently a no-charge subscriber acquisition or no-charge subscriber fee there for a period of time. So it'll take some time to flesh out exactly what it looks like, but it will be additive from our perspective this year.

Jim Goss (Managing Director and Senior Research Analyst)

Okay. That's great. Great insight. And lastly, I might ask if you have any expectations as to the FCC with the new group in Washington in terms of ownership caps or two stations in a large market or anything else that you think might be important to you?

Perry Sook (Chairman and CEO)

Well, certainly, we don't expect much activity in the short term. The Supreme Court basically overruled the Third Circuit Court, and now the decision to be remanded to them to then remand to the FCC to reinstate the old rules. That's all process, and that's going to take a little while. Obviously, as you know, it does nothing to affect the national cap or our ability to add markets on a linear basis, but it does allow some opportunities for us to buy in second stations in the market where we couldn't with the eight-voice test currently in place. That will be a marginal benefit to us. And then all top four combinations are still subject to approval on a case-by-case basis. So we don't really know what that bright line looks like or if there is a bright line.

So I would say it will take a little while to sort all of that out, but obviously, we have a playbook and know what we think opportunities are in every one of the markets that we only operate a single station in. But I don't expect that will play out in a meaningful way until perhaps later this year and perhaps later on in 2022 in the cycle. So I wouldn't anticipate anything happening on a material nature in the very short term.

Jim Goss (Managing Director and Senior Research Analyst)

Okay. Thanks very much. Appreciate it.

Operator (participant)

Thank you. Our next question comes from Steven Cahall with Wells Fargo.

Steven Cahall (Managing Director and Senior Analyst)

Thanks. So maybe just a big picture question, Perry and Tom. I think there's now about 40 million homes that don't take any form of the bundle and maybe never will. And that pool might be growing. You've got a lot of cash that you're generating. You've started to make some digital investments. You talked about digital growing and profitability this year. How do you just think about targeting those 40-some million households that aren't going to be participating in the traditional bundle and how you get your content in front of them and using your balance sheet to maybe grow those assets over time? And I have a quick follow-up.

Perry Sook (Chairman and CEO)

Sure. Well, that's always been, if you follow this since we went public in 2003, we've always said that approximately 15% of our television households do not consume us via the aid of a pay service. So that number has grown slightly, but not a lot. So maybe we're down to the low 80s in terms of the pay TV universe, which is traditional and virtual MVPDs. That's not a material change. And it's certainly, as I said earlier, the attrition has been far less than anything we have ever modeled. So we feel confident in our ability to continue to grow. We do reach them every day over the year, and that was OTT before it was cool. So they also receive and consume our diginets. Antenna TV has shown tremendous, dramatic growth over the last year.

And because when you rescan your TV, you now have a new channel that you can watch if you're only consuming over the air. So we plan to launch a second digital network, which you've seen the press on, called Rewind TV, which will be focused more on 70s, 80s, and as opposed to 60s and 70s, which is Antenna TV nostalgia. So there's an opportunity for us to mine that in the near term. And then obviously, our spectrum opportunities, which are further down the road, will target all households. Obviously, the ones that are most capable to receive a 3.0 signal without any intermediary are the over-the-air homes.

We think that's important over time because if you think about sports betting and all the things, the prop bets that could happen, there is a latency factor of up to 30 seconds in the streaming products that are out there. If you want to make a prop bet on whether the putt is going to drop, chances are that the putt and the play is already over before you can get a bet down in a streaming service, which we think will make either the traditional cable broadband delivery or over-the-air more attractive for those that are attracted to sports betting. We continue to serve that audience daily. Again, they have fewer channels. Therefore, our advertising is more valuable in those homes because there's less competition. But again, we see incremental change and not revolutionary change.

Steven Cahall (Managing Director and Senior Analyst)

Thanks. And then maybe just on the balance sheet, the comment of staying below four times maybe implies that there'll be some upward pressure on leverages as you move through the year. Just wondering if that reflects anything contemplated in terms of uses of cash or if that's just a reflection of some more COVID-impacted quarters hitting the trailing eight-quarter EBITDA calculation.

Tom Carter (President, COO and CFO)

I would say it's even more linear than that. It's losing $400 million in political revenue in Q3 and Q4 this year that pushes leverage up, which is a natural occurrence, obviously, in an odd-numbered year. I don't think it's anything with regard to capital allocation. It's just we did a yeoman's job of backfilling $50 million of lost political revenue in Q1. Those numbers get rather large in Q3 and Q4, and we don't anticipate being able to make up for that lost revenue until 2022.

Steven Cahall (Managing Director and Senior Analyst)

Great. Thank you for that.

Operator (participant)

Thank you. Our next question comes from Craig Huber with Huber Research Partners.

Craig Huber (CEO and Managing Director)

Yes. Hi. Thank you. I guess my first question is, can you just talk a little bit about the TV advertising pacing, your core pacing for the Q2? I mean, last year, as you know, I think it was down about 30%, given the - sorry, 35% a year ago given the pandemic. I mean, how much of that do you think you'll be able to make up this year? How close do you think you'll be able to get back to comparable apples-to-apples 2019 levels for ad revenue in this current quarter?

Perry Sook (Chairman and CEO)

Well, I can give you April results here. And if you look at all ad-supported revenue for the month of April, it was up 62% over the prior year. Broadcast portion of that, including political, was up 73% over the prior year. So if I extrapolate that to 2019, we make up, we get into the low single digits down versus 2019 on a Q2 based on our internal projections versus Q2 of 2019. But obviously, we will make up a lot of what we lost, if not all or more, in Q2 from an ad-support basis.

Craig Huber (CEO and Managing Director)

And my next question, please. I believe in the past you've said you expect net retrans for the year to be up low double digits. Is that still the case? And just on a preliminary basis, do you think it'll still be up next year?

Tom Carter (President, COO and CFO)

Yes and yes.

Craig Huber (CEO and Managing Director)

Very helpful. I like that. Okay. And then next, you touched on this a little bit, but your SG&A line up 10% year-over-year, but then you talked about some reallocation of costs in that line. I don't want to get into accounting discussion here because I don't want to waste your time on that. But what should we expect for your SG&A line going forward? It seems like the last two quarters, it's been roughly around $200 million each quarter SG&A. Is that reasonable to expect going forward? How should we think about that?

Tom Carter (President, COO and CFO)

I'm really not in a position to talk about specific expense numbers for Q2 or beyond. I will say that I think the reallocation has happened in Q1, so that type of effect going forward. If you look at it versus the prior year's quarter, there will be changes. But if you think about the new allocation of total operating expenses ex-corporate between sales and SG&A and direct, I think that'll be Q1 will be representative of those proportions going forward.

Craig Huber (CEO and Managing Director)

What was the biggest change you had to make in your reallocation there?

Tom Carter (President, COO and CFO)

Well, it's not really a change. It's just an allocation of cost of goods sold for digital products. When we're selling third-party websites, is it a direct operating expense or is it a sales expense.

Craig Huber (CEO and Managing Director)

And then my other question, if I could ask, just go through the percentage of your retrans subs again that renewed last year. What percentage are up for renewal this year? I believe they're all at year-end. And what percentage is for next year, please?

Tom Carter (President, COO and CFO)

It was 18% last year. It is a high single digit this year. And the number moves around a little bit. Last I saw, between 60%-70% next year.

Craig Huber (CEO and Managing Director)

Okay. Great. That is all I had. Thank you.

Operator (participant)

Thank you. Our next question comes from Aaron Watts with Deutsche Bank.

Aaron Watts (Managing Director of Media, Entertainment, Cable, & Satellite Fixed Income Analyst)

All right. Thanks for getting me on. Appreciate the time. One follow-up on the core ads, specifically auto. It sounds like the category is performing better now. Just to be clear, am I correct to say that auto was still down year-over-year in the Q1? And then looking forward, can auto return to year-over-year growth in the next couple of quarters given the supply chain headwinds that you mentioned earlier, Perry?

Perry Sook (Chairman and CEO)

Auto was down in the Q1, a low single digit versus the prior year. It depends on the chip shortage. I think at some point, there will be a tremendous pull forward of demand of people that are looking for cars. They can't find cars. Whether that bubble exists in the Q3 or Q4, I don't know, but I would anticipate it's there. I don't think it'll be in the Q2. Although our auto is performing relatively on par with the Q1 performance from a comp to the prior year.

Aaron Watts (Managing Director of Media, Entertainment, Cable, & Satellite Fixed Income Analyst)

Okay. Got it. And then second, we had seen some headlines a while back now around some networks' intent to prioritize growth of their nascent streaming platforms, perhaps over that of the linear broadcast. Have you had any further discussions with your partners around that? I'm just curious your latest thoughts there.

Perry Sook (Chairman and CEO)

We have discussions all the time. They have their corporate priorities, and we have ours. And so I don't think anybody's going to change anybody's mind. I think we'll see down the road how streaming plays out and what the churn rates are on these products. I think there'll be probably two or three winners, and everyone else will be in a less good place. And so we'll see where we are over the long term. We're not too excited about - we don't get too excited about these things because having been in the business 42 years, it seems the more things change, the more they ultimately kind of gravitate back to a traditional model. And so I think that would tend to favor what we do over the long term. But obviously, we all have to work our way through these shiny new things.

Aaron Watts (Managing Director of Media, Entertainment, Cable, & Satellite Fixed Income Analyst)

Okay. Got it. That's helpful. One last one for me. We had a notable announcement yesterday in the space from Gray and Meredith, the latest of several consolidation transactions over the past couple of years, and certainly Nexstar has taken part. Does all this consolidation change the competitive dynamic at all on a market-to-market basis for you? And then I guess more holistically, do you view a more scaled local TV space overall as a positive relative to the evolving video landscape and some of the pressures facing the traditional distribution channel?

Perry Sook (Chairman and CEO)

I think that we are a big believer in scale, not only nationally, but for example, we're in every market in the state of New York now. What unique content and advertising opportunities can we create that no one can compete with? You can say the same thing about the states of Tennessee and Illinois and Missouri and California. And so we see real value in that, and we think we're just beginning to unlock some of that value now that we have all of our stations and digital properties under one roof. So I think it's good for the business. I think healthy companies are good for the business. And there's no question in negotiating video distribution. It is a business of scale. Scale matters, and in some cases, it's the only thing that matters.

So it's important to be important, as we like to say. Commentary, listen, I congratulate Gray on their announced acquisition of the Meredith stations. And we did some internal work here. And obviously, if all goes according to plan, the new constituted broadcast company will be approximately half the size of our company, which again, I like to say that we're unique. No one has been able to create a company like ours, and no one will be able to create a company like ours in terms of linear television because there just aren't that enough available transformative transactions out there. So again, we're happy with our scale and again, are beginning to mine the economic benefits of that on a regional level, on a statewide level, and ultimately on a national level, more to come.

Aaron Watts (Managing Director of Media, Entertainment, Cable, & Satellite Fixed Income Analyst)

Okay. Thanks, Perry.

Operator (participant)

Thank you. Our next question comes from Kyle Evans with Stephens.

Kyle Evans (Director of Research)

Hi. Thanks. Tom, thanks for separating out BestReviews and digital. Could you update us on the rough % split between national and local in the digital segment, and then maybe give us some high-level thoughts on M&A in that segment?

Tom Carter (President, COO and CFO)

You know, Kyle, I don't even, I'm not sure I have access to a local versus national split for digital. We don't think about it a lot that way. It is by far significantly more locally than it is nationally. I don't have that exact percentage.

Kyle Evans (Director of Research)

Okay. Fair enough. And then maybe just some early thoughts on the 2022 political cycle. Thanks.

Perry Sook (Chairman and CEO)

2022 election cycle?

Kyle Evans (Director of Research)

Yeah.

Perry Sook (Chairman and CEO)

Oh, okay. Well, listen, we got our first orders over the weekend for the recall election in California. So don't discount 2021 in terms of being a political year that is maybe ahead of our expectations. But we obviously think that both the House and the Senate will be in play in 2022. Who controls those? I think if you look at some of the early elections here, the incumbent party usually loses seats in the midterms, and we think this will be no exception. And losing enough seats means losing control, and the balance in both houses is precarious.

So we expect a lot of spend in those races. We also have several visible gubernatorial races in 2022. So we think it will be a very healthy year. There is a number embedded in our guidance. It is somewhat less than 2020, but maybe not as far down as you would think. But we anticipate the political cycle to continue to grow and be robust in the off-cycle years as well as the presidential election years.

Kyle Evans (Director of Research)

Thank you.

Operator (participant)

Thank you. Our next question comes from Alan Gould with Loop Capital.

Alan Gould (Managing Director of Equity Research)

Thanks for taking the question. Numbers are excellent. I was wondering if you can talk strategically about our big picture. What's happening in terms of ratings, particularly ratings of the local news? And are you able to capture how much of the audience is moving from your local TV stations to your digital property?

Perry Sook (Chairman and CEO)

I would say if compared to last year when we saw a tremendous spike and 20-year highs in terms of local news viewership across virtually all day parts, there has been some decline from those high watermarks. Although we are still collectively, and again, this is the sum total of 116 markets viewership, we are still collectively ahead of pre-pandemic viewership levels for our local news products. And it's literally across the board. So we're glad that there's some stickiness to that. And we think as we kind of transition into the next political cycle and all of that, there'll continue to be stickiness there. And as far as a rotation or migration from local television to our local websites or our apps, we are beginning to mine data on our digital users.

And so we can tell where they come from and where they go, but we can't tell if they were watching linear TV before that. So I don't know that I have perfect data on the migration. Our goal is to serve our viewers and our marketing partners across all platforms, all screens, using a common currency, and to be relatively indifferent as to how they access our content and we access our opportunities to help them sell things. So that's kind of the model we're building and where the puck is going. But I don't think there's any way really that we can efficiently track or accurately track rotation from digital to broadcast or vice versa.

Alan Gould (Managing Director of Equity Research)

Thanks, Perry. If I could just follow up, what is the common currency you're looking at using?

Perry Sook (Chairman and CEO)

Well, very simply, it's impressions. Broadcast television is really the only medium that sells ratings currently. If we all sold on impressions, or better known as thousands, across digital, linear, diginet, cable networks, broadcast, and created a common currency, I think it would be a boon to our business. There are initiatives out there. The TVB and the TIP Initiative are working toward this. Other companies in our business are working with us towards a conversion of all of our audience metrics to a common currency of impressions. It sounds so simple. It's almost counterintuitive that it hasn't happened at this point.

There's increasing momentum as I think everybody sees what we see. Why would you sell the smallest number on the page, which is the rating, when you have thousands that, again, every other medium sells impressions or thousands, and we're still selling ratings and television? So we've just got to make our business easier to do business with. And I think the money will follow because obviously everyone understands the superior value proposition.

Alan Gould (Managing Director of Equity Research)

Thank you. Helpful.

Tom Carter (President, COO and CFO)

Before we take another question, I did go back and look up some information on Carl Evans's question. It's about 65% local, about 15% national, and about 20% consumer, which is basically BestReviews.

Operator (participant)

Thank you, sir. Our next question comes from John Kornreich with JK Media.

John Kornreich (Analyst)

Yeah. Hi. I have a few very quick questions. Tom, I noticed that cash outlays for TV programming rights is trending down. Is there anything or is that trend going to continue, and why is that happening? That's really all around WGN America now as NewsNation using less syndicated programming, as some of our larger stations locally are using less syndicated programming because we're doing more local news. This will continue?

Tom Carter (President, COO and CFO)

Yes.

John Kornreich (Analyst)

Okay. CAPEX for the year? I may have missed that.

Perry Sook (Chairman and CEO)

About $135 million, John.

John Kornreich (Analyst)

Right. Okay. What is the difference between the 43 million shares and the 45 million fully delivered shares? What does that do to?

Tom Carter (President, COO and CFO)

That's really outstanding options and RSUs.

John Kornreich (Analyst)

Okay. Could you confirm for me that stock-based compensation is not part of the free cash flow calculation? It's exclusive—

Tom Carter (President, COO and CFO)

It is a non-cash item, so it is part of free cash flow.

John Kornreich (Analyst)

So it's not part of free cash flow? Well, it adds back to free cash flow.

Tom Carter (President, COO and CFO)

It is added back. If you look at the press release that we put out, there is a reconciliation of free cash flow on page eight. And in that, we add back non-cash, the stock-based compensation expense.

John Kornreich (Analyst)

Okay. Okay. That'll be maybe what, 30 or 40 for the year?

Tom Carter (President, COO and CFO)

It'll be about 48 to 50.

John Kornreich (Analyst)

Okay. And finally—

Tom Carter (President, COO and CFO)

That's the unintended consequence of a higher stock price.

John Kornreich (Analyst)

Okay. Not today. Anyway, lastly, just a quick incidental. Any thought being given to split the stock?

Perry Sook (Chairman and CEO)

We've looked at that, John, and I've got studies on my desk that show there could be a benefit and studies saying there's no benefit, no long-term benefit to that. So no plans to do it currently. And we've got other priorities that would be ahead of that in any event. But I'm not convinced that there is a long-term benefit to doing it, although we've certainly asked the question on a number of occasions.

John Kornreich (Analyst)

Okay. Thank you.

Operator (participant)

Thank you. This concludes today's Q&A. I would now like to turn the call back over to Perry Sook for closing remarks.

Perry Sook (Chairman and CEO)

Thank you very much, everyone, for joining us. We look forward to gathering together in three months' time to update you on all of our initiatives and our operating performance for Q2. Have a great afternoon.

Operator (participant)

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.