Nexstar: Fox Thursday NFL A Strong Move

Nexstar CEO Perry Sook said Tuesday that Fox made a “smart investment” in paying $3.3 billion for the TV rights to the NFL’s Thursday Night Football for the next five seasons.

“It builds value for the network and the affiliates,” he said on an earning call following release of the company’s 4Q results this morning. “It’s good programming that will be consistent not only for 11 weeks, but for five years.”

Sook said he did not believe that Fox would make Nexstar and other Fox affiliate pay more in reverse comp to help cover the rights.

“Fox is no slouch in attempting to extract value from their affiliates so I think they have already taken that bite from the apple.”

All in all, it’s a “net positive” for Nexstar.

On the call, Sook and CFO Tom Carter gave more insight into the health of the company by providing pro forma same-station results. All the growth numbers in the earnings report were grossly inflated by the addition of the Media General stations in 2017.

They also discussed the outlook for retrans growth, the impact of the FCC’s decision to loosen station ownership restrictions and the potential for the new broadcast standard, ATSC 3.0.

According to Carter, on a same-station basis, core ad revenue grew 3.4% in 4Q, contributing to overall revenue growth — excluding political — of 9.1%.

The principal driver for the overall growth was retrans, which grew a little more than 20%.

Sook noted that six of nine ad categories were up 4% to 10% in the quarter: retail, attorneys, medical, insurance, cable and banking.

But the No. 1 category — auto — was a drag, falling 2%.

Sook said the group expected core advertising to be “flat to slightly up” in 1Q 2018, even though Nexstar’s 34 NBC affiliates are expected to post double-digit core growth because of the Olympics.

“If 20% of your portfolio is up double digits and the average of the rest is basically flat, you’re looking at slightly up in core for the quarter.”

Auto has not rebounded in 1Q, he said. In fact, he said, it is “a little softer” than it was in last year’s fourth quarter. “Local auto may have stayed away from the Olympics a little more than they have in years past.”

Sook said that retrans surpassed local advertising as the company’s top revenue stream and that by the end of this decade it could surpass total advertising revenue. In 2017, total advertising accounted for $1.3 billion, while retrans chipped in nearly $1 billion.

Despite all the talk of cord cutting at the MVPDs, Sook said he has he has seen “virtually no diminution” in 4Q of MVPD subscriptions. Since retrans is calculated on a per-sub bases, loss of subs would depress retrans revenue.

“Virtually no” doesn’t mean none, according to Carter. He said that subscriber “churn” caused retrans revenue to slip from $257 million in 3Q to $253 million in 4Q.

But “rest assured,” he said, retrans will be up in 1Q and will continue to rise as Nexstar renews retrans deals for about 10% of its homes this year and more than 80% next year.

Sook added that Nexstar has factored some attrition of MVPD subs in its guidance. If that loss doesn’t materialize, he said, there could be some upside in projected retrans growth.

Additional retrans from OTT skinny bundles has not been significant, partly because the most of the deals were signed late in 2017, Sook said.

The only OTT service generating revenue on a consistent basis is CBS All Access, he said.

Sook made the case that, when the MVPDs pay retrans fees to carry TV stations, they are not paying only for the network programming.

He knows this from his own experience. Cable subscribers in Wilkes-Barre/Scranton, Pa., can watch the network O&Os from New York and Philadelphia, he said. “Yet, I am being paid to be on those systems and its obviously for my local news.”

“We think the value proposition of our local content is equal to, and perhaps greater than, the value contribution from marquee network content,” he said.

“That’s why we have invested heavily in expanding our local content to what is now about 203,000 hours a year across our markets.”

The FCC’s relaxation of the local ownership rules is a “boon” to local broadcasters, Sook said.

“We are engaged with multiple companies … [about] potential swaps that would be allowed under these new rules, that would allow us to rationalize our portfolio and a counterparty to rationalize theirs, to exit a market, to double up in another and to add more strategic value to them.

“I believe those discussions will be ongoing through the next couple of years.”

Sook said the new rules also give Nexstar the opportunity to “buy in” the second stations it has been operating in some markets through “sidecar arrangements.”

Such acquisitions are not a priority, he said, but they will yield some cost savings.

Sook said that Nexstar is involved in trying to exploit ATSC 3.0 on two separate fronts — with the Pearl group of leading station groups as it explores enhanced TV and advanced advertising and with Sinclair and Univision as they explore datacasting.

He compared broadcast spectrum to mineral rights. “This is the shale gas that in the ground that we have to figure out how to horizontally drill to and hydraulically frack to monetize the assets.

“It’s there. It’s not if, it’s just when we will be in a position to monetize our excess spectrum in a material way.”