Gray Details First Quarter Spot Troubles

Like other station groups, Gray Television is slogging through a tough first quarter in spot sales, according to unusually detailed guidance provided today to analysts in its fourth-quarter earnings report and subsequent call with securities analysts.

In the report, the station group says local spot would be off between 4% and 6% and national would be off 11% to 13%.

January got off to a particularly slow start, said CFO Jim Ryan on the call. “The buy side seemed to have taken an extended Christmas break.”

Ryan went on to provide several specific reasons for the 1Q shortfall.

Chief among them: the shifting of the Super Bowl from CBS last year to Fox this year. While its CBS stations reach four million homes, he said, its Fox stations reach only 400,000. That alone accounted for a loss of $1.5 million, he said.

But other factors were in play, he said. Ford took $450,000 in Tier 2 spending out of the Gray markets and reallocated it to network “and other uses,” he said.

Another hit came from insurance provider America Home Family, which spent $300,000 with the group in the first quarter of 2016. That money didn’t come back this year, Ryan said. “They completely changed their marketing strategy.”

A couple of food accounts moved back into national, taking $475,000 with them, he said.

Spending by mid-size telcos and cable operators was off $825,000, he said. “That looks to us like a lot of M&A-induced activity.”

Business in the second quarter is “breaking very late,” Ryan added. “A lot of key accounts are only now beginning to be negotiated so we really don’t have any hard data points to make any comment on 2Q.”

Despite the litany of first-quarter losses and second-quarter uncertainty, Ryan said, “we are still remaining generally optimistic as we move through the rest of the year.” National for the year is “probably flattish,” he said, while local increases will be in the low single digits.

The good news is retrans and net retrans revenue, according to EVP Kevin Latek.

In prior guidance, he said, Gray predicted that both would grow 17% this year. But given 2016 renewals, he said, Gray is now forecasting that retrans will grow 24% this year to $275 million and net retrans will increase 26% to $142 million. Saving the analysts from doing the math, Latek said that translates to a net retrans margin of 51%, the same as in 2016. He said he could not yet shed any light on 2018.

Latek said that Gray has renewed all but one of the retrans agreements that expired in 2016. When that deal is done, he said, Gray will have “re-priced” 4.6 million — or about 40% — of its 11.9 million in-market, Big Four network “subscribers.”

The re-pricing will be more pervasive this year, when Gray expects to renew 7 million or 58% of its in-market, Big Four subs, Latek said.

Gray announced on Feb. 8 that it would be getting $90.8 million from the sale of spectrum in the FCC incentive auction. Latek said Gray will use the money to pay for the two stations it is purchasing from Diversified Communications for $85 million. That makes the acquisition “essentially leverage neutral,” he said.

Latek said that the company may be able to defer taxes on the $90.8 million “on a long-term basis” because it had the foresight to set up the two stations that it acquired from Media General in January (spin-offs from its merger with Nexstar) as a “like-kind exchange” for the stations it sold in the auction.

Despite several questions from analysts that implied that Gray is over-leveraged, Latek and CEO Hilton Howell said the group remains on the lookout for high-performing stations in good markets, including markets larger than those Gray is currently in. Gray’s largest market today is Knoxville, Tenn. (DMA 62), where is operates a CBS-CW combo.

“We have been generally opportunistic and generally patient with growing the company, although in the last couple of years we have moved pretty quickly in that regard,” Latek said.

Latek added that the anticipated relaxation of the FCC’s broadcast ownership restrictions should stimulate the station trading market and create some buying opportunities. But he also pointed out that some limits would remain, creating another kind of opportunity. Gray could pick up stations being spun off from mergers between larger groups as it did when Nexstar and Media General combined.

He rejected the suggestion that Gray might swap stations. That doesn’t seem to make sense for Gray. he said. “We are very, very happy with the stations that we have and the portfolio that we’ve built.”

And Howell made clear that Gray was not a seller. “I’m sure someone could give us a price that our board would consider, but it would be an awfully high price. We think we have a unique and special broadcast property and a unique and special business.”

Latek said that Gray has been a supporter of ATSC 3.0, but it doesn’t expect to upgrade any of its stations to broadcast with the new standard this year or early next.

“It represents some really interesting opportunities for us, especially the bandwidth throughput,” he said. “But we need to see a little bit more of a business case.”

He noted that new RF equipment that the company will buy to migrate stations to new channels in the FCC’s post-auction repack of the TV band will be ATSC 3.0 compatible.