Sluggish Core Dampens Tegna’s Growth Trend

Tegna executives told securities analysts today that although the company is anticipating growth in the second quarter, it won’t come from core advertisers matching their spending from 2Q 2016. Nor were they willing to speculate on likely year-end core results.

Like many groups, Tegna is enjoying increased income from retransmission consent, which has been enough to offset the big loss of political advertisers and the more modest decrease in core revenue.

Automotive was — and is — a tough category. Tegna Media President Dave Lougee said that it was down slightly in 1Q and has started 2Q in a sluggish manner.

Discussing the overall progression of advertising trends from one quarter to the next, he said: “We used to see a lot of 13-week buys, we’ve seen a lot more things like five-, six-, seven-week cycles and that’s continued into the second quarter.”

He noted a specific drag Tegna is facing — the movement of AT&T advertising to DirecTV following its merger with the latter, which has allowed their competitors to scale back local advertising as well. He said Tegna indexes high on AT&T U-verse subscribers and said the category reduction accounted for “…almost half of our delta in the first and second quarters right now.”

Retail, entertainment and home improvement were cited as currently strong categories.

EVP-CFO Victoria Harker said the company is on track to record a low-to-mid-single digit gain in 2Q despite the continued political headwinds.

Although Tegna has provided full-year guidance also calling for low-to-mid single-digit revenue growth, it is not based on a solid forecast of core income, which Lougee said was as yet “too volatile” to use as a basis for a reliable projection.

Retrans growth of 24.2% was a big factor that allowed the company to meet 1Q guidance of an overall 1% gain in revenue. Harker noted that in additional to the normal big reduction in political advertising, Tegna was another one of the groups that suffered from the move of the Super Bowl from CBS to Fox. These factors combined with one less day in the quarter, and if the trio is excluded from the equation, core would only have been down 5%, rather than the 9.7% the company recorded on its financial chart.

Retrans continues to be a growth category for the company, said Lougee, but for the first time, it will fail to come in higher than the company’s reverse compensation outlay, as it paid reverse comp on its original NBC stations for the first time in 1Q. As a result, growth in reverse comp will exceed growth in retrans by about $25 million-$30 million over the course of the year, but it will be a one year-only phenomenon.

Lougee said the company anticipates offsetting this with “several new sources of revenue and a continued focus on cost efficiencies.”

One location of found revenue is the OTT universe. Lougee echoed the many television execs who are reporting the negotiation of OTT retrans fees in line with those paid by traditional MVPDs. He also noted that as with traditional MVPDs, the critical importance of television content to OTTs is being confirmed.

Beyond the extra revenue, Lougee cited another benefit, noting that OTT services are bringing younger viewers into Tegna’s overall audience.

Lougee noted the need for a partnership between networks and affiliates. “We and our networks have to work together because we’ve got our rights and they’ve got their rights so we have to negotiate together to get these things done.”

He cited the value of the station group’s local programming and the national programming provided by the networks.

Given the necessity of broadcast on OTT channel lineups, Lougee has no fear whatsoever of the skinny bundle, saying it simply reduces linear competition, and that’s a good thing.

The return of the UHF discount and the expected relaxation of local ownership cap rules were cited as welcome news by Lougee, who said that Tegna fully intends to take advantage.

“We will be very well positioned from a balance sheet perspective to be a strategic opportunistic, albeit disciplined, consolidator,” Lougee said. “We have significant vertical scale reaching 32% of the country on an undiscounted basis.”

Lougee added: “In the large markets we are now in with single stations, which is the majority of our portfolio, the ability to consolidate two Big Four stations through purchases or swaps will create significant  margin improvement on the acquired station and solidifies our already strong position in negotiations with distributors.”

Tegna execs didn’t have much to say about the freshly-announced Sinclair/Tribune merger deal beyond the assessment that the merged entity will not have any particular impact on Tegna.

Although Tegna execs made no mention of any interest in possible spin-offs, Sinclair mentioned three markets where they may be taking place: Wilkes-Barre/Scranton, Pa.; St. Louis and Salt Lake City. Tegna has one station in this small universe: standalone NBC affil KDSK in St. Louis.

Read TVNewsCheck’s coverage of Tegna’s 1Q earnings here.