TV Ads No Longer Prime Rev Source At Nexstar

It may be time to stop thinking of TV broadcasting as an ad-supported medium.

In reporting its fourth-quarter and full-year 2018 results this morning, Nexstar Media, which is expected to become the industry’s largest station group when it closes on its merger with Tribune this fall, said that for the first time in its two-decade history, “non-TV revenue” from retransmission consent and digital will exceed that from TV advertising.

According to the company, combined digital and retrans revenue totaled $1.38 million in 2018, up 13.1% from the prior year. TV advertising clocked in at just $1.34 billion, up 18.2%.

And the non-TV revenue was able to surpass TV revenue even though Nexstar enjoyed a deluge of political advertising during the year, mostly in the fourth quarter. Political jumped from $12.5 million in 2017 to $140.2 million in 2018.

What’s driving the non-TV revenue, of course, is retrans, which grew 12.3.% to 284.5 million in the fourth quarter and 12.6% to 1.1 billion for the year.

Nexstar CEO Perry Sook expects retrans to continue to lead the way on top-line growth. “This is a revenue stream that we pioneered. We pay a lot of attention to it, we treat it with respect and we do a lot of planning and analysis before we begin the negotiation.”

CFO Tom Carter said to expect retrans to continue to grow in the low double digits.

By contrast, core advertising, which excludes political, remained in the doldrums. For the year, local was down 1% and national was down 3.5%.

Sook partially blamed displacement of core advertisers by political ones for the poor core results.

And, he said, the core picture is brightening a bit, predicting an increase “on the order of 1%” this year. He said the group is over budget on core in January and February, although he said February’s targets had been lowered because there is no Olympics advertising as there was last year.

Take out February and core is pacing up at a mid-single digit in the first quarter, he said. “It’s a small sample size, but it’s the beginning of a streak.”

Nexstar Broadcasting President Tim Busch noted that auto pacing “has been slowly improving, certainly over the prior quarter.”

Nexstar’s big job this year will be to close on its merger with Tribune. Sook indicated that he was not concerned about the merger running into any problems with government regulators.

“We have made a commitment to them that we will deliver to them a … clean transaction. You know, we will not be asking for any waivers of any existing regulations. We are keeping our eyes on the prize of closing the big deal.”

In its transfer application, Nexstar has asked the FCC to hang on to Tribune’s CBS-Fox duopoly in Indianapolis even though the agency’s local rules prohibit combinations of top-4 stations. The FCC said it would consider such requests on a case-by-case basis, but that a grant should not be construed as a “waiver.”

To comply with FCC ownership rules, Nexstar has said that it will be spinning off stations in at least 10 markets.

Sook said he expects to announce buyers for the spinoffs by the end of March, possibly sooner. “The station divestiture process is robust. There are a number of participants that are moving forward and have advanced into our next round.”

Following the divestitures, he said, Nexstar will have 216 stations in 118 markets.

Reuters reported last week that the Apollo Global investment firm, which announced last week a deal to acquire the Cox Media Group station, also has a deal to pick up all or some of the Nexstar divestiture stations.

Sook wasn’t asked to comment on a possible Apollo deal, but he said Apollo’s acquisition of Cox underscores the health of the broadcasting business. “It’s a net positive for shareholders to have private equity interested in the business because that should help to firm up valuations.”

Apollo has yet to reveal what it is paying for Cox.

“My understanding is that the headline price will be a healthy multiple, probably above where the space is trading today…. The documents [at the FCC] will need to be made public before we can know for sure.”

Sook said he and Busch have been touring the Tribune stations to instruct employees on the Nexstar way. They have visited seven and are due in Des Moines, Iowa, and Oklahoma City later this week.

In each market so far, he said, they have identified opportunities for increasing local programming. However, he said, he remains averse to plunging into national programming like some other large station groups have.

Said Sook: “This will be a company of national scale, but focused on local markets.”

Sook is a big believer in ATSC 3.0, but he cautioned investors not to look for revenue or profits from it for several years. “We have been encouraging folks to tap the break on monetization.”

Before broadcasters can roll out 3.0-based businesses, they have to complete the repack of the TV band and then covert their RF facilities to the new standard, he said.

“We think it’s like having mineral rights. There is value here to be unlocked by the right technology. It’s going to take five or 10 [years] before this becomes a real meaningful contributor.

“I think it is the next huge value lever for local television because we are the ones that can control and monetize our spectrum.

“I think the potential is as big as retrans probably, which is almost a $11 billion industry…in 2018.”