Sinclair - Earnings Call - Q1 2022
May 4, 2022
Transcript
Speaker 0
Ladies and gentlemen, welcome to the Sinclair Broadcast Group First Quarter twenty twenty two Earnings Call. At this time, all participants have been placed on a listen only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Lucy Rutishauser. The floor is yours. Ma'am?
Speaker 1
Thank you, operator. Participating on the call with me today are Chris Ripley, President and CEO Rob Weisberg, President of Broadcast and Chief Operating Officer and Steve Zenker, Vice President of Investor Relations. Before we begin, I want to remind everyone that slides and supplemental information for today's earnings call are available on our website, sbgi.net, on the Investor Information page and on the earnings webcast page. Now, Billie Jo McIntyre will make our forward looking statement disclaimer.
Speaker 2
Certain matters discussed on this call may include forward looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports as filed with the SEC and included in first the company undertakes no obligation to update these forward looking statements. The company uses its website as a key source of company information, which can be accessed at www.svgi.net.
In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website and will remain available until the next quarterly earnings release. Included on the call will be a discussion of non GAAP financial measures, specifically adjusted EBITDA, adjusted free cash flow and leverage. The company considers adjusted EBITDA to be an indicator of the operating performance of its assets. The company also believes that adjusted EBITDA is frequently used by industry analysts, investors and lenders as a measure of valuation.
These measures are not formulated in accordance with GAAP are not meant to replace GAAP measurements and may differ from other companies' uses or formulations. The company does not provide reconciliations on a forward looking basis. Further discussions and reconciliations of the company's non GAAP financial measures to comparable GAAP financial can be found on its website, www.sbgi.net. Chris Ripley will now take you through our operating highlights.
Speaker 3
Good morning, everyone, and thank you for joining us today. Two weeks ago, we notified the investment community via an eight ks filing that we would be deconsolidating Diamond from our financials. This is a consequence of Diamond's new financing, which dictated how Diamond's Board of Managers would be selected and certain significant operating decisions approved. While on the surface, they may this may seem to add complexity, we believe it will result in a more simplified, transparent and focused valuation and credit story for our various stakeholders. While Diamond will no longer be included in Sinclair's financial results beginning on 03/01/2022.
Sinclair continues to own nearly 100% of the equity of Diamond and the deconsolidation is not intended to indicate a change in our commitment to Diamond's success or a change in Diamond's future business plans. I'll turn it over to Lucy to speak more about the mechanics and implications of the deconsolidation.
Speaker 1
Thank you, Chris. The deconsolidation of Diamond is a required GAAP accounting treatment and all impacts from it are non cash in nature. The date of deconsolidation was 03/01/2022, which was the date the Diamond first lien financing closed. The deconsolidation of Diamond resulted in a non cash gain of approximately $3,400,000,000 which was primarily driven by the fact that Diamond was in a net liability position at the time of deconsolidation. Post March 1, Diamond is accounted for under the equity method of accounting.
And as a reminder, DSG is a separate debt silo, which is non recourse to Sinclair. In addition, Marquee will be deconsolidated from Diamond's financials as of March 1 and will be accounted for under the equity method of accounting. Later today, we will file a Form eight ks, which will contain pro form a financial statements for the year ended 12/31/2021, reflecting Sinclair as if deconsolidation of Diamond occurred as of 01/01/2021. On our website, we've included supplemental and historical pro form a numbers for Sinclair so you can align your models. If you have any questions, please reach out to our Investor Relations department.
Because of the deconsolidation, our earnings releases will no longer include guidance for Diamond as you saw in this morning's release. However, our website will include some high level estimates as well as Diamond's quarterly and annual financials, which we will continue to post there each quarter. Lastly, the format of our earnings calls will change. Today, we will bifurcate the call and do a Sinclair only portion addressing Sinclair's pro form a results followed by a diamond portion of the call. Next quarter, we will have two separate calls.
We remain committed to continuing to provide financial information and commentary regardless of the format.
Speaker 3
I'll let Rob and Lucy go over the first quarter operating and financial results in just a moment. But first, I would like to give some strategic comments. Over the last few quarters, I have talked about the value of our investment portfolio, which we estimate is over $18 a share. The portfolio is made up of investments in real estate, venture capital and private equity holdings and direct strategic investments in companies. One comment we've heard from investors is whether we can or are willing to monetize that value.
The answer is, of course, we are, which is clearly evident from the monetization of our investments even in recent years. For example, in 2022, year to date alone, we've monetized approximately 40,000,000 generating an annualized return of 30% and a multiple on invested capital of 1.8 times. All three of these investments were acquired within the last three years. Not only do we continue to be opportunistic in monetizing these investments above just a simple return, but our initial thesis to enter into them is often steeped in how we can how they can strategically benefit us and the future direction of the organization. Sankeya Labs is one such example that I will talk about in a moment.
And keep in mind our investment portfolio as a whole has generated an approximate 24% average rate of return since 2014. One of the recent holdings to which we've agreed to monetize our investment was Sankia Labs. In March, it was announced that Sankia, an entity for which we had held a 49% interest was being acquired by Tejas Networks, an Indian based technology company, which produces optical and data networking products and majority owned by Tata Group. You might recall, Sankia is a valued partner of ours that is developing chips for mobile devices for use and receiving ATSC two point zero broadcast signals. Tejas will be the first will be will first be acquiring a large portion of Sankia followed by a merger with the rest of Sankia in the future.
The result will be an initial cash payment to Sinclair of $22,000,000 monetizing a portion of Sinclair's ownership with Sinclair eventually expected to hold 1,500,000.0 shares of Tejas Networks after the merger is completed. Tejas Networks is publicly traded on the National Indian Exchange and the 1,500,000.0 shares would have a value of about $9,000,000 at current price and exchange rate. This is an IRR of over 30% over the two point five year investment period.
Speaker 4
An additional value for the transaction is that Sankia gains a new parent company Tata, which has significant resources and is committed to driving continued progress and innovation, especially around next gen's potential in the Indian market and globally. We certainly look forward to continuing to work with Sankhya, Tejas and Tata in the future. The hidden value in our company goes beyond our investment portfolio. Other assets like Tennis Channel, New Zon and Compulse360 carry meaningful upside that should be valued above the standard broadcast multiple. You can expect to hear more about these important assets going forward with increased transparency around both their operating results and their growth potential in the years ahead.
For those of you not familiar with Compulse three sixty, it is our marketing technology business that offers a SaaS platform combining sales enablement, order management fulfillment and analytics into one consolidated solution for local media companies, agencies and small businesses. Compulse three sixty has grown significantly over the last three years aided by acquisitions and organic client additions. Its revenue is expected to surpass $100,000,000 this year driven by the rollout of incremental capabilities including a new planning tool, streaming integrations and location based advertising and a self serve OTT solution, which will increase its appeal and broaden its market potential. The key takeaway is that we have significant value in our company beyond our broadcast business. We remain committed to monetizing our holdings through a
Speaker 3
number of different avenues with an eye towards adding value for our shareholders either directly or indirectly. I would now like to point out a couple of our ESG initiatives we are working on around reducing our company's interviewers impact on the planet. We launched our battery recycling pilot at a number of our locations in April and also ran a public service campaign with all of our TV stations and RSNs for Earth Day and the month of April, encouraging viewers to recycle their batteries by dropping them off at Batteries Plus, a partner of ours for the campaign or at other recycling locations. We also switched to notice and access for our annual report this year reducing our printed paper accounts by approximately 90% which reduced our annual report and proxy costs by almost 50%. Also, I want to say that we
Speaker 4
are
Speaker 3
honored that the renowned Doctor. Ben Carson, an experienced Board Director and former U. S. Presidential Primary Candidate and former Secretary of the U. S.
Department of Housing and Urban Development has agreed to stand for election to Sinclair's Board of Directors in June as we continue to seek out those with diversity of thought, experience and skills to strengthen our company. On the NextGen front, we had a very exciting NAB conference. ATSC three point zero or NextGen was the main attraction and we had announcements and demonstrations around its many use cases including precision GPS. Just a couple of weeks ago, we announced an important partnership with USSI Global. Together, we are offering a pilot of the first commercial data casting use of NextGen in The U.
S. USSI Global will utilize NextGen technology to bring curated content and targeted advertising to its electric vehicle charging stations while allowing for the collection of audience data and impression based analytics. This is the first step in a new area of business for us, data delivery as a service. We expect this will be an attractive source of revenue for generation for revenue generation in the years ahead. While this technology can be utilized in many ways across many different industries, the electric vehicle opportunity alone is significant.
The U. S. Department of Transportation has earmarked $5,000,000,000 towards the goal of 500,000 EV charging stations nationwide by 2030 to meet the surge in the production and demand of electrical vehicles, which has already commenced. On a higher level, this is a significant announcement that validates the digital promise that there are ancillary services that can generate incremental dollars broadcasters. This is a first small step to opening that door to future possibilities in many different use cases.
Another aspect of NextGen that will be critical to its success and its end development of the tools to allow the emerging of broadcast and broadband services. Sinclair has contributed significantly to the creation of a solution that all broadcasters will be able to utilize. This technology will allow efficient use of channels to maximize data business opportunities. And we have greatly invested we have invested a great deal of time and effort to develop the technological tools to enable consumers to access broadcast or Internet content through both fixed and mobile devices and at the same time have space left to deliver other content or data. We are committed to ensuring that this access is available to all parts of the ecosystem.
This explains why we've decided to develop and deploy a broadcast app open to all via a free open source license. A common approach utilized across the entire broadcast industry will be the most efficient and effective way to promote consumer adoption and help all parties monetize the significant opportunities NextGen offers. I'd now like to turn it over to Rob Weisbored, our Chief Operating Officer, who along with Lucy will go over Sinclair's first quarter results.
Speaker 5
Good morning, everyone. My commentary in this section will strictly be related to our broadcast and other businesses only. The year started strong with first quarter pro form a media revenue up significantly over the prior year and at the top end of our guidance range. Political is tracking above our expectations and we look forward to 2022 having a record midterm election spend. On the content front, we continue to build our viewership for the national desk with its thirty six hours of programming each week.
We recently launched an hour long weekend edition and we will be debuting a daily T and D weather program, which will start on our digital and social platforms before expanding to linear later in the year. And our award winning news programming continues to garner recognition, winning 60 awards so far this year including its fourth consecutive year of being honored with the prestigious IRE award for an outstanding investigating reporting. This year it was WBFF Box Baltimore, which won for its reporting on Baltimore's public school system. WBFF has won three IRE's awards since it created its investigative news team in 2017. On a cumulative basis, Sinclair has won over 1,000 awards over the last three years.
Everyone at Sinclair is proud of our news team and their dedication and results to serving the public. In our Tennis business, standalone fast channel T2 launched on Samsung TVs during the quarter, putting a new Tennis Channel product in front of a platform that's been reported to reach 25,000,000 to 30,000,000 viewers. All Samsung TVs made since 2017 carry the channel to viewers. And during big events like the French Open, Miami Open, T2 is given prominent position at the front of Samsung's fast channel lineup. T2 carries unique live core coverage year round that is not covered on Tennis Channel and Tennis Channel Plus.
Tennis Channel Plus streamed hours more than doubled and authenticated streaming of linear Tennis Channel was up 170% as viewers increasingly watch tennis on a cross platform experience. In April, we rolled out our second tennis predictor game, a free to play game in conjunction with the Indian Wells tournament. And we will be adding new features for future tennis gamification efforts. In fact, we will continue our work on integrating game centers and game zones across all our platforms, including our websites, encouraging participation and creating incentives like earning points that can be used for prizes and exclusive content experience not available anywhere else. I'll conclude my remarks by noting how pleased we are with the renewal of our multiyear distribution agreement with Charter, which includes our local broadcast stations, The Tennis Channel, the nineteen Valley Sports RSNs, Marquee and the YES!
Network. I'll now turn it over to Lucy who will delve deeper into the Sinclair financials.
Speaker 1
Thank you, Rob. Given the deconsolidation of Diamond on March 1 and in order to have a meaningful discussion around comparative results and trends, I'm going to speak to the Sinclair only pro form a numbers for all periods, which excludes dispositions made in 2021 and does not include Diamond and any intercompany transactions with them. For actual results, the two months of this year that Diamond was consolidated, please refer to this morning's earnings release. After the deconsolidation of the Local Sports segment, Sinclair will now be synonymous with what we have called Broadcast, Incorporate and Other on recent earnings calls. There are supplemental slides and pro formas posted on our website to assist in your modeling and analysis.
And as mentioned earlier, this portion of the call is only for the Broadcast segment and Other and Corporate. The local sports or Diamond results will be handled in the second portion of this conference call. Media revenues for the quarter were at the high end of our guidance range and up 9% versus the same period a year ago on a pro form a basis, driven by higher distribution and political ad revenues. Distribution revenues increased 7% versus last year and beat the high end of our guidance range, primarily due to more favorable revenue from the virtual distributors. Core advertising increased 3% in the first quarter compared to the same period a year ago and was in line with our expectations, while total advertising revenues increased 7% over last year.
Although media expenses were 7% higher in this year's first quarter versus last year, they were favorable to our guidance on both timing of expenses and lower news and G and A costs. Adjusted EBITDA for the quarter grew 14% over the first quarter of last year and more than exceeded the high end of guidance. Earnings per share for the quarter excluding Diamond for the two months, the non cash deconsolidation gain and other adjustments was 1.23 per share. Adjusted free cash flow of $176,000,000 in the quarter where $2.4 per share also came in stronger than our expectations and grew over last year by $48,000,000 So in short, this was a very strong first quarter for us. As Chris pointed out, with the investor focus on Diamond for the past two years, it's easy to overlook that this is the fourteenth of the last 16 quarters where STG met or exceeded media revenue and adjusted EBITDA guidance.
The two outlier periods were due to the cyber incident and the initial impact of COVID in 2020. And I think you'll agree that meeting or exceeding expectations for all but two quarters out of the last four years is a strong track record of delivering on expectations. Our liquidity and balance sheet remained strong with $521,000,000 of cash at the end of the quarter. And with an undrawn revolver, our liquidity was almost $1,200,000,000 at quarter end. Total debt at the end of the first quarter was $4,400,000,000 and STG's first lien indebtedness ratio on a trailing eight quarters basis was 2.9 times on a covenant of four point five and four point three times on a net leverage basis through the bonds, which continues to be in our target range and better than many in our peer group.
Of our $176,000,000 of free cash flow generated during the quarter, dollars 7,000,000 was allocated to debt repayments and $18,000,000 to common stock dividends. And if you recall on our last earnings call, we announced a 25% increase to the quarterly dividend rate per share. We also resumed our 10b5-one stock buyback program during the quarter, repurchasing since our February earnings report another almost 1,500,000.0 shares. Year to date, we have repurchased a total of 3,500,000.0 shares at an average price of 26.6 or $94,000,000 of buybacks. Our repurchases were almost 5% of our $20.21 shares outstanding.
So when you consider our first quarter free cash flow, over 65% of it has gone towards debt repayment and shareholder returns. Turning to our second quarter guidance, we expect another strong quarter for political, which is the main driver for media revenues increasing approximately 4% to 7% versus pro form a second quarter last year. Second quarter total advertising revenue is expected to be up high single digit to low teen percent versus Q2 of last year. Second quarter adjusted EBITDA is expected to be 153,000,000 to $170,000,000 compared to $193,000,000 pro form a last year. While total advertising and net retrans are expected to grow in the quarter, the lower amount is primarily the result of technology upgrades, management fee deferral and marketing content and next gen initiatives.
Free cash flow for the second quarter is expected to be $246,000,000 to $266,000,000 or $3.46 to $3.74 per share for the quarter. And so with that, I would like to open it up to questions related only to the Broadcast and Other segments. Operator?
Speaker 0
Ladies and gentlemen, the floor is now open for questions. Thank you. Your first question is coming from Aaron Watts of Deutsche Bank. Aaron, please pose your question.
Speaker 6
Hi, everyone. Thank you for having me on. I've got a couple of questions. I wanted to start on the advertising side. I apologize if I missed this, but Lucy, did you say what core was pacing in the second quarter?
And then beyond that, are you seeing any signs that inflation or other concerns around an economic slowdown, recession looming are impacting advertiser spend or commitments or buying decisions from your partners?
Speaker 5
Yes, Aaron, this is Rob. I'll answer it. Currently, we are watching for the inflation, but we haven't seen the results of softening at this point. But we are factoring in what we're looking at to ensure that we're covering our bases in case inflation sets in. And the core guidance will be that we will exceed what our revenues were in 2018 and 2019.
Speaker 6
Okay, got it. And then secondly, Chris, on the last call, you commented that net retransmission fees for the station group were expected to grow in the low single digit context for 2022. With the charter renewal now completed, can you update us on that metric? Is that low single digit net retrans growth rate impacted for this year? And if you're comfortable, maybe what you're expecting for net retrans growth next year as well?
Speaker 3
Sure. So we did exceed our expectations on the charter renewal. That being said, the overall net retrans guide for this year will still be low single digits.
Speaker 1
And Erin, if I can just come back to one thing that Rob talked about. The total revenue, total ad revenues is to we're looking at that to exceed 2018, twenty nineteen Q2. Which
Speaker 3
I think is particularly important, Aaron, as everyone can appreciate that those are both unaffected pre pandemic quarters and 2018 was a political year as well. So obviously, political is coming in very strong like we mentioned and setting up for a great year.
Speaker 5
Darren, you you should note that both issue and candidate money is very strong since the beginning of the year, which will bode out, obviously, some crowd out, but we will have rates increasing due to the demand for our inventory.
Speaker 6
Okay. That's encouraging. And Lucy, is the what you said about core still true that it should still be up versus those prior periods?
Speaker 1
Erin, will probably be a little bit down to those periods just for what Rob said, which is that we're seeing in political in the second quarter is running a lot hotter than it had in 2018. And so we are seeing in certain dayparts some crowd out effect. But that's all a good thing because at the end of the day, the total ad revenues are pacing up.
Speaker 6
Got it. Okay. Less about the the kind of ad environment, more about the kind of political crowd out. Okay.
Speaker 5
Yes. The political crowd out. If you look at how the strength of our stations in Texas, Ohio, Pennsylvania, you're seeing extensive spending. So that crowd out will naturally affect our core business.
Speaker 6
Okay. Great. I'll stop there and jump back in the queue. Thank you.
Speaker 1
Thank you.
Speaker 0
Thank you. The next question is coming from Dan Kurnos of The Benchmark Company. Dan, the floor is yours.
Speaker 7
Thanks. Can we just dive a little bit deeper into the core commentary just around category strength and what you guys are seeing? It doesn't sound like any of the March national weakness is filtered over into local, but and it sounds like given some of the strength in sports ratings, sports betting is still pretty healthy. So maybe just some category color from what you're seeing to backstop your commentary would
Speaker 3
be a good start.
Speaker 7
And I got a follow-up. Thanks.
Speaker 5
Yes. As we've stated over the last several calls, our reliance on auto has been mitigated by our focuses in the service, retail, food categories and those remain strong. And so that bodes well for when auto does return and we expect it to return. We've spoken to many large tier three auto groups, and they're holding on to their co op money to spend when when the chip shortage is solved. And the expectations are now towards the 2022 into 2023.
So with the political crowd out, it increases our liability going to even 2023.
Speaker 7
Got it. And then just on the retrans, I mean, say maybe more academic, given Chris' comments around, you know, the charter renewal and and low single digit net. But I just just help us understand. So, Lucy, you made commentary
Speaker 5
that the
Speaker 7
virtuals drove the I mean, it's a pretty substantial upside in q one. I don't know if there's any other noise from you guys resetting some of your prior deals to having escalators on Jan one, or if there was something else in there. I don't know if Charter, you know, is gonna be if you're going to have a true up given that the deal was pushed out. But just can you help us think why there would be a step down in 2Q after the sort of the significant upside in Q1?
I'm just trying to understand the dynamics of what's going on.
Speaker 1
Yes. So we did have some estimates in for the charter renewal in our Q1. So that was already taken into account. We did see some strength in some of the virtuals, as I mentioned in Q1. However, we are seeing on some of the traditional MVPDs, a couple that have reported recently a little bit of softening in their churn.
So we've taken that into account in our estimates.
Speaker 7
Then maybe just, I guess, Lucy, it would help just in terms of the cadence of the year. Just remind us what else is up the rest of this year.
Speaker 1
Yes. So nothing major for the rest of this year. And in fact, nothing major really for the next, call it eighteen months.
Speaker 7
Okay. I guess I'll ask get back in the queue and ask questions on the second half of the call. Thank you.
Speaker 1
Okay. Thank you.
Speaker 0
Okay. The next question is coming from Steven Cahall of Barclays. Steven, the floor is yours.
Speaker 8
Thank you. So thanks for giving the free cash flow number for the quarter. Just curious if that's something you might think about guiding to for the year along with the rest of your guidance. All of your peers usually give annual or two year free cash flow. Now that it's not comingled with Diamond, I was just wondering if that's something you might provide.
It will probably help us value the standalone broadcast business. And with that, I was wondering if you could comment on the state of your NOLs now that you're deconsolidating Diamond.
Speaker 1
Yes. So I'll do the last one first. No change on the NOLs. The Diamond deconsolidation is an accounting treatment only, no impact from a tax standpoint. And then on the free cash flow, that is something, Stephen, we're going to take a look at.
We used to provide that pre pandemic. And so we'll take another look at about providing some kind of a future range there.
Speaker 8
Great. And then maybe just also as it relates to the relationship between Diamond and Sinclair, I imagine that Diamond benefited a lot from doing affiliate renewals and ad sales along with STG. Now that you all don't have the same control of the Board of Diamond like you used to, does that change that strategy at all? Does it push the TV group to act a little bit more independently or at arm's length? Or do you still expect to share a lot of the strategy between the two?
Thanks.
Speaker 3
Yes. Thanks, Steve. This really doesn't change the operating relationship between Sinclair and Diamond. There is of course, we own nearly 100% of the equity and also there is the management agreement between the two, which is really the important relationship or important aspect of the relationship. So we don't expect that this accounting change will change the way we operate at all.
Speaker 6
Great. Thank you.
Speaker 0
Thank you. Okay. The next question is coming from David Karnovsky of JPMorgan. David, please pose your question.
Speaker 9
Hi, thank you. Chris, just regarding the data casting opportunity that you were speaking about for your spectrum, we think the timeline is from here in terms of completing the tech rollout, signing up business partners to new models and then ultimately having this be a material amount of revenue for Sinclair stations or for the industry? Thanks.
Speaker 3
Yes. So some of the most promising applications that we saw at NAV probably came from first a little bit more that. That's when the And balancing supply and demand is becoming increasingly hard task. And BitPath has developed a way for them to essentially negotiate with all of their millions of end users simultaneously to balance supply and demand. So we think that's a really great application, enhanced GPS for any number of things from making sure e scooters aren't left on the sidewalk confined to autonomous vehicles knowing exactly where they are.
As it turns out, normal GPS can be have an error rate of up to 10 meters, which we can significantly impact through our ATSC three point zero technology and correction data. And those applications along with our trial with USSI Global, I think they will start to yield revenue for the industry next year. I expect that will start to ramp quickly as people realize how the use cases within next gen, I'm talking beyond broadcast here, brings significant advantages to the ecosystem. And as that happens, the developer ecosystem around next gen will proliferate and more use cases will be developed.
Speaker 9
Thank you.
Speaker 0
Thank you very much. Your next question is coming from Barton Crockett of Rosenblatt Securities. Barton, over to you.
Speaker 10
Okay, great. Thanks for the question. Just one kind of smaller thing because some of the bigger things I was interested in have been covered. On other revenue within the Television Group, I think in 2021 that was $176,000,000 of $111,000,000 was services I think provided to Diamond that were eliminated on consolidation. So I just want to be clear what the treatment is now with the deconsolidation.
Is that no longer eliminated? And how should we think about that? And what that would mean also for the equity and JV part of Diamond going forward to the extent you can talk about that Yes. Here or
Speaker 1
can take it. So you're correct. And, you know, the manage management fees were eliminated between the two entities. Now that will not happen. So as the Sinclair silo will be recognizing the cash portion only of the management fee, and that that will run through the revenue.
And then Diamond, when we you know, will be reflecting the the full contractual expense amount before its adjusted EBITDA will be adding back the deferred portion.
Speaker 10
Okay. But maybe I could follow-up on that. Were those $111,000,000 of fees in 2021? Is that now what's been deferred with the refinancing? Or is there still is that still kind of be coming in going forward?
Speaker 1
Yes. I mean, look, and we've given a range of this before. But for the full year, the total management fee is I'm rounding these numbers, about $140,000,000 Of that, 60,000,000 is paid in cash and $80,000,000 is deferred.
Speaker 10
Okay. All right. And then to switch gears a little bit, with the deconsolidation, how does that impact your capacity and interest in share repurchase? I you guys have been active in the past and I don't know if this makes you more interested or just talk about what this does for your kind of appetite for your own shares at this point?
Speaker 3
Sure. So it is really it's just an accounting change. So it really changes nothing about the fundamentals of the company from an economic perspective. But I do think it actually makes the story simpler for everyone to understand, for all our stakeholders to understand. So we're going to use this as an opportunity to retell our story, make it simpler.
And in terms of buying back our stock, we have tremendous appetite for that. We think we're incredibly undervalued. The sum of the parts story is still the same as it was last quarter, if not stronger. And so our appetite is there regardless of the deconsolidation.
Speaker 10
Okay. That's great. Thank you very much.
Speaker 1
Thank
Speaker 0
you. Your next question is coming from Lance Vitanza of Cowen. Lance, please ask your question.
Speaker 4
Hi. Thanks, guys. Most of my questions are on the Diamond side. But as long as I have you, I will ask, are you getting any, feedback from advertisers that would lend any credence to the, you know, to the recession fears that seem to be gripping so much of the markets over the past three, four weeks?
Speaker 5
Yes. We continue to monitor. We speak with our clients on a daily basis. And right now, they're still hanging top with their advertising. But like I said earlier, we will continue to monitor this and have ongoing conversations with these advertisers.
We're presenting plans to them in case their fears get magnified in a bigger way. So we have all the data points to show that even during tough economic times those that advertise come out of the tough economic times in a stronger position in the marketplace. So we are having those conversations now in case the situation worsens.
Speaker 11
Thank you.
Speaker 1
Thank you.
Speaker 0
Thank you very much. Your next question is coming from David Hamburger of Morgan Stanley. David over to you.
Speaker 11
Hi, thank you. Good morning. I have a quick question with regard to I mean you stated here now that Sinclair remains owner of nearly 100% of DSG. I guess in the past I've noticed with disclosures you've said that you own more than 90%. Can you remind us exactly what the ownership structure is?
How much do you own? The minority shareholders, I believe maybe Byron Allen and others are still minority and how much they own?
Speaker 3
Yes, that's correct, David. One minority shareholder is Byron Allen and it's a very small amount. That's why we say nearly 100%.
Speaker 11
Okay. And notwithstanding the $3,400,000,000 noncash gain, in your kind of your sum of the parts analysis for Sinclair in terms of your asset portfolio, how are you valuing the DSG equity ownership stake?
Speaker 3
So in some of the parts that we have talked about, we have not included any credit for the equity of Diamond. However, I think that there certainly is value there. And anyone looking at that should attribute at least option value to that position.
Speaker 11
Okay. Thank you very much.
Speaker 0
You very much. There appear to be no more questions in the queue. I will now hand over to Chris Ripley, President and CEO. Sir, the floor is yours.
Speaker 3
Thank you. I want to start the Diamond portion of the call by thanking Diamond's stakeholders for their support around Diamond's recent capital structure activities. We are pleased to have closed the $635,000,000 refinancing, which along with Sinclair's deferral of management fees meaningfully enhances liquidity by an approximate $1,000,000,000 We believe these steps allow Diamond to be self funding for the next several years and enables the launch and ramp up of its local sports direct to consumer efforts, a significant initiative which is important to Diamond's future. As you may have seen, this week we announced the Diamond new Board of Managers, which was required in conjunction with the refinancing. This is an impressive slate of seasoned executives from the world of sports, media, streaming and related industries.
The five member board consists of myself and four independents, including Randy Ferrier, former CEO of Hulu and longtime President of FOX Sports Media, who will serve as Chairman. The other members of the Board are Mary Anne Turk, who was Chief Operating Officer of the NFL Bob Witzit, a thirty year Senior Executive, previously with the NBA and NFL and David Preschlak, who was President of the NBCU RSNs. The Board's experience will be invaluable, especially around Diamond's direct to consumer efforts and building future partnerships. In regard to Diamond's D2C plans for Valley Sports, we expect to do a soft launch later this quarter. The initial launch will enable the validation of the quality and reliability of the product prior to the full D2C rollout of the Valley Sports RSNs planned for September.
The initial D2C product will offer an experience similar to what viewers now see on the TV everywhere platform and the price point is expected to be attractive as compared to other similar professional sports D2C offerings at $189.99 for an annual subscription and $19.99 for a month to month subscription, resulting in an expected ARPU of $18.5 In the months after launch, we expect to roll out an enhanced D2C product incorporating additional functionality, content and features with incremental ways to monetize the viewer through a more personalized and interactive experience. Now I'll turn it over to Rob.
Speaker 5
From an operation standpoint, the MLB resolved their collective bargaining lockout. And while the regular season was delayed, the league is scheduled to play the full season of games. In terms of our gamification efforts for Diamond, we continue to move forward with our business plan to initially roll out three predictive games for all the teams we represent. In the first quarter, we debuted Valley Baller and Valley Breakaway games for our basketball and hockey leagues. And Valley's Home Run Blast is expected to debut in June and will run throughout the remainder of the baseball season with chances to win monthly prizes.
Our partnership with Valley's and other gaming companies will continue to help drive our RSN gamification efforts going forward. Also wanted to touch on the RSN viewership, which for the twenty twenty one, twenty twenty two NBA season was up from both the rating and TV household perspective. MLB viewing trends have started favorably as well as remain above a year ago's level. We continue to be encouraged by the viewership trends and we have launched recently two new programs to air on the RSNs, The Rally and Live on the Line. Later this year, we will be debuting a new show called The Rivals and we are also working on short form and long form programming development for the launch of our D2C app and our TVE app.
As I mentioned on the Sinclair portion of the call, we renewed our multi year distribution agreement with Charter, which included our 19 Valley Sports RSNs, Marquee and the YES Network. I'll now turn it over to Lucy to go over the quarterly financials in more detail.
Speaker 1
Thank you, Rob. Okay. So just a reminder, the Marquee also falls under deconsolidation and equity method accounting within Diamond's financials as of March 1. And we are in process of getting an appraisal in order to book the non cash accounting adjustment based on the asset disposition trigger for Marquee and expect to have that valuation later this quarter. We will not be giving Diamond pro formas due to the confidentiality around deconsolidating Marquee from the Diamond results.
On our website, however, you can find Diamond's first quarter actuals and guidance for 2022. Note that today's earnings press release for Sinclair Consolidated Company reflects two months of Diamond in the local sports segment table due to the March 1 deconsolidation. The Q1 results for Diamond that I will be discussing here and which are posted on our website are the full three month period for Diamond, which includes three months of the Bally Sports RSNs and two months of Marquee's results due to its deconsolidation. Diamond Media revenues were $7.00 $9,000,000 in the first quarter. Distribution revenues of $630,000,000 continue to be based on high single digit percent subscriber churn, while advertising revenue on a per game basis is growing.
Diamond's media expenses for the first quarter were $650,000,000 Adjusted EBITDA for the first quarter excluding $11,000,000 for non recurring items and deferred management fees was a negative $155,000,000 And as a reminder, the first quarter is typically the lowest EBITDA quarter for the year due to timing of the rights payments. Now we have done much to strengthen Diamond's future liquidity position and to enable it to build, launch and grow its D2C offering. On March 1, Diamond closed on a new $635,000,000 first lien loan which matures May 2026. Sinclair also agreed to defer a portion of its management fees over the next several years. Together, the new money raised and the management fee deferral provide Diamond with about $1,000,000,000 of liquidity enhancement over time.
Diamond's cash at quarter end was $572,000,000 and its $228,000,000 revolver was undrawn for liquidity of $800,000,000 as of March 31. Total debt at the end of the first quarter was $8,600,000,000 and the AR facility was $163,000,000 Looking ahead to the second quarter, Media revenues are expected to be $759,000,000 to $766,000,000 and distribution revenues are expected to be $621,000,000 to $623,000,000 Included in the estimate is continued subscriber churn of high single digit percent, which is offset by $28,000,000 in distribution revenue recognized from a onetime audit settlement amount from a distributor. Advertising revenues are expected to be 130,000,000 to $105,000,000 dollars on almost 300 fewer games expected in this year's second quarter versus last year. For the full year, Media revenues are expected to be $2,880,000,000 to $2,900,000,000 Second quarter adjusted EBITDA is expected to be 132,000,000 to $138,000,000 which includes fewer games, the D2C cost and continued subscriber churn, which are offset in part by lower management fees and the one time distributor audit settlement. Full year adjusted EBITDA is expected to be $221,000,000 to $239,000,000 As compared to our February outlook for full year adjusted EBITDA between $266,000,000 and $297,000,000 some of the changes are the result of the deconsolidation of Marquee, timing of the D2C launch within the second quarter and slightly higher subscriber churn along with still high single digit percents, offset by the audit settlement benefit and slightly better ad revenues and expenses.
So with that, I would like to open it up to questions related solely to the Sports business for Diamond. Operator?
Speaker 0
Thank you. Thank you. Your first question is coming from Dan Kuranoff of Benchmark Company. Dan, over to you.
Speaker 3
Dan, you there?
Speaker 7
Yeah. Hey. You guys hear me? Hey. Can you guys hear me?
Sorry about that. I don't know what happened. Apologies. Lucy, thanks for all the color on all of that. And I assume that's also the reason why the monthly average for the two months is different than for the full quarter is because of marquee in there, in q one.
I guess, Chris, maybe high level, given all of the noise in the marketplace around SVOD, and, you know, saturation, obviously, Netflix at a slightly different stage of their existence than, the RSN products. But just how are you thinking about kind of marketing, marketing expense going to and all of the other things that go to play as you guys build up towards this DTC launch and how the market will sort of bear the products given everything that's out there?
Speaker 3
Yes. This is a great question. I actually the recent developments within the streaming landscape, I view them as very favorable for what we're doing because the market is rationalizing. And I it was inevitable that a momentum story would eventually cycle to the end, they always do, and the market becomes more rational. And our plan for Valley Sports plus was never about subscriber growth for the sake of subscriber growth.
It was a plan to produce incremental profitability for Diamond Sports. And so now we feel like the market has actually caught up to our thinking in terms of our plan. And that will have many benefits for us. In terms of relative pricing comparisons, I expect that the entertainment value equation of from the consumer perspective when they compare pricing of what we're offering versus pricing of some of these other SVOD services, which are likely to go up in light of the current environment, that relative equation will be better. I also expect that the marketing environment to gain subscribers will get easier as people get more rational around their own marketing.
And so we're really quite bullish on the change in the market environment as it relates to our strategy. In terms of our specific marketing strategy, we're not going to be really that loud for the soft launch coming up here. But as we get as we approach the full launch, we are going to be much more aggressive on the marketing front.
Speaker 5
And then in addition to that, the teams have fully embraced the launch of the B2C coming up from the soft launch to the full launch, and we'll see some joint pro marketing efforts between Valley Sports and the teams as well. Both both the teams and us have had significant email and traffic. When are we gonna launch? So there is that pent up demand. So we look forward to joint marketing efforts with the teams.
Speaker 3
Yeah. And I I think that's it's it's a great point that needs to be emphasized in that. We'll really be the first mover with real premium sports in the direct consumer marketplace. So comparing it to an entertainment based SVOD is too simplistic. There are significant differences between sports and general entertainment.
Not to mention that sports has generational appeal built in fan bases, team partners that have massive incentives to get their fans on the service. None of that exists in general entertainment. So it's a really a different ballgame, no pun intended.
Speaker 7
Well played, Chris. The second question, I have to at least try just given the charter renewal. Any commentary around how we should be thinking about the long tailed impacts there. You know, the DTC was there. I assume that that was discussed and covered.
I'll try not to get into specifics, but just to the extent that you guys can talk about how those conversations went and your expectations for future conversations with distributors around the DTC product and what it might mean for distribution revenues?
Speaker 3
Well, as you know, have confidentiality provisions in these agreements, which don't allow us to talk specific terms. But I but we're as Rob stated, we're very pleased with the outcome with Charter. I think relative to market expectations, which were fairly negative, we massively exceeded those. And I would say in terms of our internal expectations, we met or exceeded our internal expectations. And so that's about as much detail as I can give without breaking a contractual provision.
Speaker 7
All right. Fair enough. I had to try anyway. Thanks Chris. Appreciate it.
Thank you.
Speaker 0
Thank you. Your next question is coming from Stephen Cahall of Wells Fargo. Steven, over to you. Steven, are you there?
Speaker 3
Steve, you there?
Speaker 8
Sorry about that. I'll figure out this mute button in another year or so. Maybe first just a housekeeping one on the Bali performance shares and warrants. Can you talk about if there's any shift in the Board's focus on those? I think those are still held by STG.
So just wondering if the new Board would change any of the way that those warrants or achievement of them might be looked at?
Speaker 3
So those are held at SBG. And no, there won't be any change there.
Speaker 8
And then Chris, I cover a lot of media companies that are going through these linear to direct to consumer pivots. Pretty much bar none, there's like a period of peak EBITDA losses. Some of it's content, which I know you don't have incrementally on Diamond, but a lot of it is technology costs, subscriber acquisition costs, marketing costs, just all the heavy lifting. When do you all think that the kind of peak burn from the DTC initiative will happen? And how do you think about kind of the shape of EBITDA from there as there's some pressure on linear?
Thank you.
Speaker 3
Sure. So I think the best place to look for our view of that is the cleanse that we did earlier in the year. It has detailed models for five years of both the base business and the DTC business. And so you can really just see for yourself what our view is there. It really hasn't changed on the margin.
Some things have changed around timing and some of the specifics. But really there is going to be a burn here in the beginning. Certainly, we're seeing that in 2022 flowing through the numbers, and it will persist into 2023. But as you noted, and I think this is incredibly important, the number one cost of any SVOD service is the content. And we have a we do have some incremental cost here for for content, but, you know, by and large, the freight has been paid on that.
So our model ends up looking a lot different. That's why when you look at those models, they are incredibly profitable relative to other SVOD services because they're we don't have fully allocated in content costs out of then And
Speaker 0
Thank you very much. Your next Is coming from Avi Steiner of JPMorgan. Avi, please ask your question.
Speaker 12
Thank you. I've got several here. Appreciate the time. Just very quickly on the full year outlook change, you listed a bunch of factors. I'd love to confirm if Marquee was the biggest number one and whether the charter renewal played a role at all in the guidance change?
Then I've got a couple more. Thank you.
Speaker 1
Sure. Avi, certainly, marquee is a factor there. But as I pointed out, there are other factors as Chris talked about timing within the second quarter, the DTC launch. We have this settlement, this one time settlement on an audit that's coming in. And as I mentioned on the Sinclair portion of the call, while we're still high single digits for churn, it's just, you know, slightly higher, right, still within high single digit churn just based on some of the recent reports by the distributors themselves as to what they're seeing.
As you As you know, we won't see that for like another quarter come in. And so but yes, marquee is certainly an important piece of that difference.
Speaker 3
And Avi to your specific question related to Charter, it had no impact on the change in guidance.
Speaker 12
Appreciate that. Okay. My second one, you have five MOB teams signed up for DTC. Your capital base has been bolstered. You have a great Board of Managers, distributor renewal, at least the big ones behind us.
You're on the verge of a soft launch. And I'm really trying to figure out what the gating issue is to sign more MLB teams. Is it coming to terms with the teams? How much of I guess a roadblock is Major League Baseball if they are at all? And maybe what do they want to see?
And then I've got one more. Thank you.
Speaker 3
Sure. So look, we have been successful in getting off renewal additions. We had one in January. Marquee has also secured its direct to consumer rights. And
Speaker 7
the rest of
Speaker 3
the teams, we're having constructive dialogue on. And there isn't necessarily a given the status of where we are in our launch, there isn't really a huge timing rush on that, but we are having constructive discussions on it.
Speaker 5
And we're also having constructive conversations at the league level as well, so both with our teams and with MLB itself.
Speaker 12
Okay. Thank you. My very last one and I appreciate the time. So now that Diamond has this new Board of Managers and is deconsolidated as required, I'm curious if Diamond now maybe has more flexibility to pursue either balance sheet remedies or strategic alternatives that perhaps they could not have pursued under the prior consolidated structure? And again, you all for the time.
Speaker 3
Thanks, Avi. I mean, I guess, technically, the answer to that would be no because it was really a self contained silo from day one. So it did have all the flexibility it needed to pursue, deleveraging, exchanges, mergers, you know, what have you. And and so philosophically, the accounting change doesn't really change that. And but I do wanna stress that all of those options are something we are actively evaluating as you're certainly this isn't the last transaction or recapitalization that's going to happen at Diamond.
There's there will certainly, at least in my estimation, be more of that to come.
Speaker 12
Appreciate the time. Thank you.
Speaker 0
Thank you. Your next question is coming from Lance Vitanza of Cowen. Lance over to you.
Speaker 4
Thanks guys. First, I just want to follow-up on a question that Avi asked. The impact on the full year guidance, the reduction that we saw, the change in the launch timing, I guess I would have thought that the launch was always supposed to take place in 2022. So I'm wondering, presumably, any sort of expense that got pulled forward from 2023 to 2022 to put downward pressure on the EBITDA guidance would be pretty modest. Is that fair?
And then I have a couple of follow-up questions. Thanks.
Speaker 1
Yes. So on that, when we talk about the timing, it's really timing within the second quarter. Before we were looking more towards the front end of the second quarter. Now, the soft launch will be towards the back end of second quarter. So it's really the both of revenue and an expense.
Speaker 3
But you are right in that it's a fairly modest impact. That is not the biggest impact of the impacts that changed the guidance.
Speaker 4
Okay. Then so with the balance sheet addressed and $1,000,000,000 of fresh liquidity, how comfortable are you that Diamond has the resources to make it to the other side of the DTC launch? I know you talked about this on the call, but how much cushion have you built into the model? And specifically, what would a recession in 2023 do to your confidence level?
Speaker 7
We have a lot of
Speaker 3
confidence that we have set up Diamond for the foreseeable future with ample liquidity. Your question around the recession is interesting. Diamond is mainly contractual subscription based revenues, which tend to fare much better through recessions than the ad market. Just to give you a reminder, it's 80%, 85% on the subscription side and 15%, 20% on the ad side. So that should give you some comfort with a recession ahead As to how that impacts uptake on D2C, hard to say.
But I do think in the beginning here, we're going to reap the benefit of the hardcore disenfranchised fans outside of the bundle coming on to something new and exciting that really hasn't existed before. And I think that happens regardless of the economic backdrop.
Speaker 5
When you look at the value proposition versus the cost of of a ticket, it's a huge value proposition for that for the fan. And the fans remain recession or or in good times as well.
Speaker 4
Okay. Great. And then my my last question question is, you know, Chris, you'd mentioned those the cleansing materials. And I just so we're still operating, strictly speaking, in a case one world, I assume. Right?
But when you think about the opportunity, really, do you I mean, do you imagine we wind up somewhere between case two and case three? In other words, you know, it's isn't it likely we get all of your linear teams eventually on DTC? And and really, the only question is how much benefit you'll get from higher take rates due to sports betting legalization, I would think. Is that sort of a fair way to characterize
Speaker 3
it? Yes. Again, we always hate to speculate, but I do think what you said is right. And we are currently in a case one world today. But when I think about the future, it looks more like a case two or case three.
Speaker 4
Thanks guys.
Speaker 1
Thank you.
Speaker 0
Thank you. Your next question is coming from Barton Crockett of Rosenblatt Securities. Barton, please ask your question.
Speaker 10
Okay, great. Thank you. So I wanted to just talk a little bit about the high single digit sub churn and how to think about that trajectory over coming quarters because I know that that has in the past been influenced by some drops at some major distributors that were probably lapping at some point. So how do we think about that? And then just kind of a related question, but I know conceptually Charter had been floating this, although I know you can't talk about Charter, but I'm sure others are thinking it.
This notion that as you roll out DTC subscriptions that there should be some flexibility or maybe lesser carriage on the traditional pay TV systems, Just some thoughts about how that's playing out now that you've done the charter renewal. So those two things would be great. Thank you.
Speaker 3
Sure. So the high single digit churn guide does not is not impacted at all by any distribution drops. So we've been in a fairly, I would say, status quo mode long enough that that comparison is apples to apples. The in terms of your question around Charter, you know, the we obviously dealt with that head on in these negotiations, and we're very pleased with the outcome. So, you know, every distributor wants as much flexibility as possible, but at the same time, they need the content.
So it's always that push and pull in every negotiation.
Speaker 10
If I could follow-up, what would you say is the principal driver of the high single digit declines, which I think are bigger than what you're seeing on the STG side, which you didn't put a number there, but I think it has historically been 5% down.
Speaker 1
Sure. Why
Speaker 3
The main reason there, the difference there is that the RSNs, the only virtual MVPD that carries the RSNs is DIRECTV STREAM. And and so some of the growth in the pay TV sector is coming out of some of the other virtual MVPDs, which do not carry the RSNs. So that's what creates the variation in churn between broadcast and diamond.
Speaker 10
Great. Thank you.
Speaker 7
Thank you.
Speaker 0
Thank you. Your next question is coming from David Hamburger of Morgan Stanley. David, please ask your question.
Speaker 11
Hi, thanks. If I can, a couple of questions. And maybe I can just ask this in a more direct fashion. If you did not deconsolidate Marquee in this quarter, would you have hit your range for guidance that you gave in the first the fourth quarter earnings call of $266,000,000 to $297,000,000 of EBITDA this quarter?
Speaker 0
So
Speaker 1
again, that one is look, we yes, I believe we would have again, with the deconsolidation of Marquee, it's a little bit more difficult to answer that off the cuff. But yes, we for adjusted EBITDA, yes, believe we would have.
Speaker 11
Okay. Thanks. And then maybe you could just help me reconcile a couple of things here. So at the 2021, had $479,000,000 of cash. I believe you just disclosed you have $572,000,000 of cash.
You did a $635,000,000 debt raise, I guess about $35,000,000 of which was used to take out the 12.75% notes. You mentioned, Chris, I think before the cash burn for DTC has been maybe a little more front end loaded. I assume that helps reconcile some of those numbers. But also I know, Lucy, previously you've given the cash rebates that have been paid to the cable companies. I think you guided to $210,000,000 for the 2022 and maybe $127,000,000 or so of that would be in the first quarter.
So can you kind of give us a little more disclosure here on what the kind of the liquidity position here and reconcile some of these the cash in the quarter?
Speaker 1
Sure. So a couple of things just to take note of for your models this year, and you pretty much mentioned all of them. First one is the new money raised and the added interest expense as it relates to that and then of course any forward LIBOR and so for rate increases that the market is expecting on all the debt that's not fixed. The other piece are the rebates. And let me just kind of reset the the rebates for you because that has changed, and in particular, with the audit settlement.
And so I'm just gonna give you the the the new numbers here. 2,022, there's a total of a 105,000,000 in in net rebates that Don would pay. 2,023, 62,000,000 that we would pay. So, you know, it's and for '22, Diamond has already paid 24,000,000 of that. So that will also you'll be able to also spread that that across your models.
Really and then you have the deferral, the management fee is the other thing to make sure that you capture in your models this year.
Speaker 11
And how much do you give us any sense of how much of the $105,000,000 will be paid out over the course of the year of 22,000,000
Speaker 1
Yes. Well, we paid 24,000,000 of that already of that 105 It will be roughly $49,000,000 in Q2. And then Q3 is about, call it, 17,000,000 and 16,000,000
Speaker 11
Okay. And any way that you can help us quantify, I think Chris referred to the cash burn for the direct to consumer launch and how that's impacted the quarter and what your expectations are there?
Speaker 3
Yes. We're not going to break that out at this time. But it is I think I'd refer back to the disclosure that we previously put out there. It hasn't really changed much.
Speaker 1
David, what I would say is we've given you a full year adjusted EBITDA number, right? So you have that. And then to that is really just adjusting for your interest and the CapEx is minimal. It's about $30,000,000 for the year Okay. In
Speaker 11
And then just one follow-up question if I can. You had the Charter renewal. Can you give us a sense, I guess the next kind of two big customers with upcoming renewals at some point would be DIRECTV and Comcast? Can you give us any sense like how to think about when those will happen?
Speaker 3
Those are both in the back half of 2023.
Speaker 11
Okay, great. Thank you very much.
Speaker 3
Thank you.
Speaker 0
Ladies and gentlemen, there appear to be no more questions in the queue. I will now hand back over to Chris Ripley for closing remarks. Sir, the floor is yours.
Speaker 3
Thank you all for joining us today. Should you need more information or have additional questions, please don't hesitate to give us a call.
Speaker 0
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.