Scripps Expects Core Rev To Grow In 2017

Increased income from core advertising will come later rather than sooner, executives of The E.W. Scripps Co. said in a teleconference today concerning their latest financial results and projections. Any growth will build on what will likely be a flat first quarter for the category.

Flat will be a vast improvement for core in the wake of double-digit decreases during 4Q 2016, but the negative 4Q result was an expected side-effect of heavy political spending, which drove television revenue up 37% to $233 million. Political accounted for $56.2 million of that total.

Overall revenue in the first quarter is expected to be flat, as is core advertising. Net retrans income is expected to balance out the absence of $9 million of political advertising the company brought in during 1Q 2016.

The return of core advertisers actually began at the end of 4Q, according to SVP Broadcast Brian Lawlor, who noted: “When the dust settled in December core was down 1% versus December 2015 so I was obviously pleased to see the core business bounce right back.”

Core hasn’t necessarily moved in a straight line since then. A slow month of January for core advertising is typical in a year in which a new president is installed, said Lawlor.

He said February has been better, and added that March will be better than February. With five weeks to go, he sees positive momentum, highlighting strength in the automotive, communications and home improvement categories, and predicted that core will be up by year’s end.

SVP-CFO Tim Wesolowski said that most of the company’s MVPD subscribers are under fresh contracts, many coming from 2016 deals. He said that the positive financial impact of that will be evenly distributed throughout the year with a slight uptick in 4Q as a handful of smaller contracts come up for renewal.

Wells Fargo Securities Senior Analyst Marci Ryvicker noted that the company’s revenue projection for 1Q is “a touch below” Wells Fargo’s expectation. And while television income projections for the full year are on par with Wells Fargo’s, expense projections from Scripps are higher, reducing profitability expectations.

Looking to the recent past, President-CEO Rich Boehne said: “2016 had some peaks and some valleys. We took in $100 million dollars in political advertising revenue and while that was less than we expected political advertising overall was a huge net positive. We also felt the effects of the fully expected pullback by some core advertisers, local and national, who had already made plans to avoid the flood of campaign ads. At the same time we were encouraged by strong spending for U.S. Senate and House spending in our markets.”

According to Ryvicker, Scripps scored a slight beat of expectations, bringing in about $2.5 million more than Wells Fargo’s $230.7 million total revenue estimate, while losing less than expected in core advertising.

Wesolowski said that core advertising’s 12% overall downturn was entirely a result of crowding out and was completely expected. Comprising an 11.3% drop in local and a 14.3% drop in national, it was also better than what Wells Fargo was expecting, according to Ryvicker, which had predicted drops of 13% and 15%, respectively.

The Trump effect was pronounced when it came to political income. Lawlor estimated that the presidential race accounted for only 17% of the category as opposed to 25% in 2012.

EBITDA was well in excess of expectations, said Ryvicker, with the reported $86 million, $10 million better than Wells Fargo’s $75.7 million projection; and television profit of $96 million was almost $10 million better than Wells Fargo’s $86.3 million projection.

Looking further ahead, political is expected to come on strong in 2018. Lawlor said, “Democrats will have every reason to put up a good fight for the Senate with 33 seats up for grabs. Ten of those races fall in Scripps markets. In addition, the mid-term election offers 16 governors races across our markets. Those races are especially significant next year, because whoever takes the governor’s mansion will hold the pen on redrawing congressional district maps after the 2020 election.”

Scripps execs are encouraged by the presence of a more pro-business regulatory environment at the FCC. Boehne said that while they aren’t seeing any particular uptick in M&A activity at the moment, Lawlor added that they expect “a flurry of activity” if and when the FCC addresses certain regulatory matters. In particular, the reinstatement of the UHF discount and perhaps an increase in the national ownership cap can be expected to spur station trading action.

Whatever the activity, Scripps does not feel compelled to participate. Boehne explained, “We don’t see any evidence of being disadvantaged at our current size.… From here we’ll see if there are opportunities to improve the portfolio.… We weren’t obsessed with moving to 40% so we won’t be obsessed with moving up from here.”

When considering an acquisition, Lawlor noted that the company’s preference is for buying the market, not necessarily the station. It likes college towns, state capitals and battleground states. While Scripps has no objection to acquiring a strong established station, it will also happily invest in fixer-uppers as well if it likes the location.

Wesolowski said that Scripps opened the year with to $134 million cash on hand, up from $94 million at the end of 3Q 2016, and with only $259 million in net debt, it has a very admirable leverage position of 1.8x.

As announced in November, Boehne will be relinquishing his CEO duties mid-year, remaining as board chairman, and COO Adam Symson will be taking on Boehne’s role.

Symson said he was humbled and honored by the challenge of his new role, and stated that whatever the company does to meet the future, two things will not change: its devotion to its journalistic tradition and its focus on building value via its entrepreneurial culture. “Those two,” he said, “have been the foundation of the successful Scripps playbook for nearly 140 years, and some things need not change.”

As for ATSC 3.0, Lawlor said that the company has been highly involved in the development process and is highly optimistic about its potential. He predicted that some markets will begin adopting the technology as early as late this year.

He echoed Sinclair executives when he noted that the timing of the spectrum auction repack and the introduction of ATSC 3.0 couldn’t be better. Doing both projects at once will be a money-saver for stations on the move. Scripps has 17 such stations.

And it has all the stations it started out with prior to the spectrum auction. It sold zero. In the main, it saw more value in using its spectrum as a going concern than a one-time income windfall.