CEO Christoper Ripley says retransmission consent and other distribution revenues now account for 45%-50% of the company’s revenue, depending on the amount of political advertising. “At a time when audience fragmentation and uncertainty about the economy are on the rise, investors should take solace knowing that almost half of our revenues are sheltered from advertising volatility,” he said.
The first quarter of 2018 was not a good time for traditional sales at Sinclair Broadcast Group, which suffered the double whammy of a weak automotive exacerbated by little benefit from the Olympics and Super Bowl. Nonetheless the company still managed to grow revenue. But why talk money when there’s news programming controversy to discuss?
According to President-CEO Christopher Ripley, the uproar over the conservative slant of some must-run news content sent by corporate to its fleet of stations has had no visible effect on their performance. The large number of awards won by Sinclair news operations testify to the quality of the stations’ journalism, he said, and added that there has been no noticeable impact on ratings.
“On the advertising side,” he continued, “We would get some calls of support, people that realized this was very overblown, and then there were some cancellations but an immaterial amount.”
Regarding the company’s financial performance, Ripley did not actually say retrans is the new core, but he did say that retransmission consent and other distribution revenues now account for 45%-50% of the company’s revenue, depending on the amount of political advertising. “At a time when audience fragmentation and uncertainty about the economy are on the rise, investors should take solace knowing that almost half of our revenues are sheltered from advertising volatility,” he said.
Ripley said that content, network, wireless and marketing services initiatives are all contributing to a reduction of reliance on ad dollars.
According to financial analyst Seeking Alpha, Sinclair’s earnings per share of $0.42 was below consensus by $0.17, but its $665.35 million in revenue represented both a 6.1% gain year over year and beat consensus by $5.5 million.
Helping to offset weak advertising were $300 million in distribution revenue, up $14 million; and $7 million in political, up $5 million, noted SVP-CFO Lucy Rutishauser. She emphasized that the company’s lack of NBC stations, and resulting lack of Olympics and Super Bowl revenue, was a big hurdle during the quarter.
In fact, according to EVP-COO Stephen Marks, NBC is the least-represented network in Sinclair’s portfolio.
Marks said political will come in between $140 million and $150 million by year’s end. More immediately, he said he’s expecting a 7.8% increase in revenue over 2Q 2017 driven by big increases in political (from $5 million to $18 million-$19 million) and distribution (from $279 million to $318 million).
On the downside, core advertising exclusive of political is expected to decease 7%-8%.
The automotive category has been a key problem, and its woes begin with the mass cancellation of ad flights by Chrysler, which has affected all television broadcasters, but it goes beyond that. “Perhaps dealerships are putting a little bit more money in their pockets because sales remain strong and inventory remains low,” opined Marks, “so we think there is some profit-taking going on.”
Automotive will face weak comps next 1Q after dropping low-double-digits this time around. It is on track to drop mid-single-digits in 2Q. And there will likely be no back-half-of-the year rebound, explained Marks, due to political crowd-out, but he fully expects auto to rebound in 2019.
But it’s not all bad core news. Marks said that drugs and cosmetics, entertainment/casinos, movies and services all look to be positive categories in 2Q.
Ripley refused to lay the adverse advertising results on the increasing number of viewing options, saying: “I think the fragmentation is been a trend that we have been fighting for decades now … so it’s really nothing new.” He added: “I think the recent softness that we’re seeing is weak sectors around auto so I expect that to rebound.”
Looking at the competitive situation going forward, Ripley said: “Even though its challenged today, I see great potential in the future for really levelling the playing field versus other ad forms … be it cable networks or broadcast networks or digital video which have inherent advantages over us which need to be equalized.”
Ripley said that the Tribune deal is on track to close late 2Q-early 3Q. Greasing the wheels is the $910 million sale of seven stations to 21stCentury Fox that was announced shortly before its earnings conference call began. The sale brought to 23 the number of stations being divested, 14 of which are coming from Tribune and nine of which are currently owned or operated by Sinclair.
Some of these stations will enter into service agreements with Sinclair. The deal will bring sales proceeds to $1.5 billion in gross sales proceeds augmented by another $100 million in working capital to be retained by Sinclair.
According to a release detailing all of Sinclair’s station divestitures, it will continue to provide services to four of the stations being divested; meanwhile, three of the stations are owned by a different licensee for which Sinclair currently supplies services, with the sale consisting of Sinclair non-license assets along with the right to purchase the license from the actual license holder.
Regarding ATSC 3.0, Ripley said one of the biggest challenges is the need for market-by-market cooperation agreements by local station owners to get a test system set up, and he said he thinks the pace of the agreements will pick up in the second half of the year.