TVN Focus On Business | 2Q Review: Ad Recovery Picking Up Steam

Broadcasting company executives reporting quarterly results told Wall Street analysts over and over that after falling off a cliff in April, advertising revenues have been regaining strength month after month since then.

“The quarter turned out better than we thought early. That was because we did see sequential improvement in each month of the quarter,” said ViacomCBS President-CEO Bob Bakish in his conference call with analysts.

“And simultaneously scatter pricing held strong — 25% or so better than the upfront,” Bakish continued. “The softness we did see was very concentrated in terms of categories, but at the same time we saw some early signs of strength from others, notably pharma, insurance and financial.”

Overall, the broadcasting segment at ViacomCBS saw revenues drop 22% in the second quarter as COVID-19 heavily affected both advertising and content sales. Ad revenues fell 27%, but affiliate revenues rose 22%, fueled by higher retrans for the O&Os and higher reverse comp from affiliates.

“Our business slowed less than we feared, and it recovered faster than we’d hoped,” said Gray Television Chairman-CEO Hilton Howell. April core plummeted by 38%, but May was down only 34% and June was off only 17% from a year ago. Howell noted that some stations actually beat their pre-COVID budgets in June.

Meredith Local Media Group President Patrick McCreery noted sequential month-over-month improvement throughout the pandemic. April TV ad revenues fell 49%, May was down 43% and June improved to a decline of 28%. Moving into the current quarter, July was down 25%.

While Gray isn’t issuing formal guidance for the current third quarter, CFO Jim Ryan is upbeat. “Currently the anticipated increases in political and retransmission revenue should allow our total revenue to grow in a high single-digit to low double-digit range,” Ryan said.

Although visibility is still limited, Gray is expecting that total core revenue this quarter will decline at least in a range of 10-15%. “But, as we saw in Q2, total core revenue appears to be sequentially improving each month of Q3. While still a decline, it is a dramatic improvement over Q2,” Ryan told analysts.

Business Coming Back

“While the advertising market was hit hard, it is coming back more rapidly than we anticipated and the upfront is now in full-swing,” said Jeff Shell, CEO, NBCUniversal, in Comcast’s second quarter conference call with Wall Street analysts. He didn’t provide any specific details on what to expect for ad sales in the current quarter.

At Fox Corp., Executive Chairman-CEO Lachlan Murdoch singled out Fox’s owned stations as a bright spot in the quarter, with record political ad sales helping to offset the pandemic impact. Political is pacing more than 50% ahead of the equivalent period four years ago, he told analysts.

“In our top seven markets, where businesses have not yet fully reopened, we are now pacing overall down 29% at the start of [fiscal] Q1. Our next 11 markets are together pacing down just 4%. That’s a tremendous recovery from what we were seeing just a couple of months ago,” Murdoch said.

Also, he proudly noted, “three of our markets are now pacing well ahead of last year.” Those are Atlanta, Tampa and Phoenix. “Not coincidentally, these are all strong political markets,” he added.

COO John Nallen said it is “remarkable to see how quickly local advertising is coming back.” And he noted that the smaller Fox O&O markets, where the populations are less dense and the markets have been less impacted by government-ordered shutdowns, are enjoying the fastest rebound.

Disney CEO Bob Chapek is also encouraged about the current quarter after seeing total broadcasting ad revenue was down 17% in the past quarter, driven by decreases at the O&Os and the ABC Network. He noted that some production has resumed for the TV studio and, on the cable side, live sports has resumed on ESPN.

Green Shoots

Although everyone took a hit from COVID-19 impacting established advertising sectors, some broadcast sales teams have still managed to bring in new business.

“In total, our sales teams generated $20.7 million of second quarter new-to-television revenue, marking an 11.3% rise over the first quarter and a 4.5% rise over the comparable 2019 period,” said Nexstar Chairman, President and CEO Perry Sook

At The E.W. Scripps Co., Brian Lawlor, president of local media, praised the local station sales forces for being aggressive on bringing in new-to-television advertisers, even during the pandemic. He said $15 million of new business aired during the second quarter, with more than $30 million booked for this year.

As horrible as it is for the nation to endure a pandemic, it was probably fortunate for broadcasters that it came in a presidential election year. Political spending was at record levels in the first and second quarters, with expectations of continuing record-breaking levels in the third and fourth quarters. If anything, COVID-19 is likely to produce even more spending on TV, since campaigns are restricted in their traditional rallies and person-to-person events.

TV broadcasters might also get a boost from having major sports events delayed from the second quarter now coming as advertiser demand improves. Tegna President-CEO Dave Lougee ticked off a list that included the Indy 500, Kentucky Derby, U.S. Open golf, NHL and NBA as examples.

“Considering these events would not typically take place in the second half of the year, when we will also experience extraordinary political advertising demand, we will benefit from having this additional high-value content and inventory in the coming months,” Lougee said.

“Looking ahead to third quarter, while the pandemic continues to impact commercial advertising, we’re seeing the same pattern of month-over-month improvement in our pacing data,” Nexstar’s Sook said. “We expect to benefit from significantly increased levels of political advertising spending. And, in fact, our July political billing exceeded that of all of Q2.

“Overall, we’re encouraged by continuing signs of recovery across our station footprint and by key economic indicators, including employment data and consumer spending,” he added.

Auto’s Woes

Analysts repeatedly asked about the auto sector. Gray COO Bob Smith pretty well summed up the consensus view of broadcasters that the auto industry has been held back by supply-chain disruptions. He said sales reps and managers have been hearing from dealers that they just can’t get product, but that is expected to improve later this month or in September as factory output improves.

“Some of our car dealers are doing remarkably well with the limited inventory they’ve got,” Smith said. “Used is driving it in a lot of cases. The ones that have hot product — with the little bit they can get — like [Ford] F-150s for example, if they get one on the lot, they sell it at list [price] and they’re really not negotiating right now, because of lack of inventory.”

Once inventory returns, the car dealers will be healthier and TV stations should benefit, he said.

Better-Off Sectors

Along with political, there are other sectors doing well. “We continue to see services perform well,” said Sinclair President of Local News and Marketing Services Robert Weisbord. “We have pharmaceuticals that has joined the strength. We’re seeing the education category take off as well.

“We expect in the back half, towards the end of third quarter, going into fourth quarter, to see auto getting healthier than what we’ve seen it,” Weisbord continued. “They’ve had a supply chain issue. We expect that to be fixed as the plants have been reopened and the ’21s [2021 models] will be hitting the dealerships.”

Tech’s Tough Quarter

Broadcasting’s new media rivals reported similar advertising trends following the COVID-19 outbreak.

For Facebook, second quarter revenue was up 11% to $18.7 billion. CFO Dave Wehner told analysts that “ad revenue growth in the quarter was stronger in May and June relative to April.” He noted particular strength for advertisers using direct response ad formats.

“Facebook has been a lifeline of economic activity during a time when offline activity has been curtailed,” Wehner said. “Our growth was primarily driven by small- and medium-size businesses around the world who leveraged our advertising platforms to connect with customers. As a result, we continue to see increased diversification among our advertiser base. In Q2, our top 100 advertisers represented 16% of our ad revenue, which is a lower percentage than a year ago.”

Wehner noted that pricing was weaker early in the quarter, with pricing improving as demand became stronger.

Looking forward, the CFO offered this insight: “In the first three weeks of July, our year-over-year ad revenue growth rate was approximately in-line with our Q2 ad revenue growth rate of 10%. We expect our full quarter Q3 year-over-year ad revenue growth rate to be roughly similar to this July performance.”

Sundar Pichai, CEO of Alphabet and its Google subsidiary, told analysts, “The macroeconomic environment caused by the pandemic created headwinds for our business. Our revenue declined on a reported basis and is flat year-over-year on a fixed foreign exchange basis.

“Like other companies, this quarter, we saw the early signs of stabilization, as users returned to commercial activity online. This was true across most of our advertising verticals and geographies. Of course, the economic climate remains fragile,” Pichai added.

CFO Ruth Porat detailed the advertising results: “Starting with Google search and other advertising revenues, we generated $21.3 billion in revenues in the quarter, down 10% year-over-year in the aggregate with improvement as the quarter progressed. We saw a gradual return in user search activity to more commercial topics throughout the quarter followed by an increase in spending by advertisers.”

Porat said this resulted in an improvement in year-on-year search revenue trends during the quarter, and search revenues were essentially flat to last year by the end of June. “Network advertising revenues were $4.7 billion, down 10% year-on-year, with trends improving somewhat toward the end of the quarter as advertiser spend began to return,” she said.

What about the most direct competitor to TV? “YouTube advertising revenues were $3.8 billion, up 6% year-on-year, driven by ongoing substantial growth in direct response, offset by a continued decline in brand advertising which then moderated toward the end of the quarter,” Porat said.

Amazon doesn’t report separately on advertising revenues, which remain a relatively small portion of overall business. But it does say that the “other” category in its quarterly financial report is primarily advertising. That category grew 41% year-over-year to $4.22 billion in the second quarter — somewhat slower growth than the 44% seen in the first quarter.