Sinclair Overpowers Headwinds For 3Q Gains

Core advertising was displaced and political advertising was not what it might have been in this historically odd election year. And further net injury was inflicted by the Rio Olympics. But despite it all, Sinclair Broadcast Group made ample use of the black ink well during 3Q 2016.

Revenue before factoring in barter was up 27.5% to $635.3 million, total revenue was up 26.5% to $693.8 million and operating income was up 54.6% to $154 million.

The $45 million political take, up from $8 million in 3Q 2015, was below guidance due to less-than-expected spending in the presidential campaign and certain U.S. Senate races that were less competitive than expected.

“In particular,” amplified EVP/COO David Amy during Sinclair’s Wednesday morning earnings call with analysts, “Trump has not raised the same level of funding as past candidates,” and added that he is getting very little help from political action committees. “We believe this lack of financial support is a one-time anomaly, and one need look no further for that confirmation than the first half of this year, when our political revenues were 12% higher than 2012’s pro forma levels.”

At least political is finishing strong. VP/co-COO Steven M. Marks said: “Political in the last two weeks is what we anticipated … it’s been robust in the last two weeks and we expect that to continue right up to Election Day.”

Marks observed that the unique nature of the Trump campaign underscored the value of television even while it took a bite out of the medium’s anticipated political payday.

“Nobody understands the power of television more than Trump does. It’s been incredible, the amount of time that the networks have given him. So, if you’re Donald Trump, it’s more effective than a 30-second spot. The networks have been putting him on for 30 minutes, let along 30 seconds…. So if you’re getting free time, why would you spend money?”

Core advertising results, under the unique circumstances of 3Q 2016, were seen as a plus.

“Despite the political crowd-out and the Olympic effect on our non-NBC stations,” said Amy, “our core advertising revenues, which excludes political, were up slightly in the third quarter.” And while the Olympics were highly beneficial to the group’s NBC affiliates, CFO Christopher Ripley noted that only 15% of the group’s stations are in the NBC fold.

Marks pointed out that any gain in core was an example of strength given the group’s low NBC profile. He noted that Sinclair NBC stations in San Antonio and Las Vegas gained six points in revenue share, and commented, “You take into consideration that we don’t have a lot of exposure with NBC stations, and we still finished positive on the core — really strong performance.”

The key automotive category was flat for the quarter, with crowd-out and lack of Olympic exposure each among the headwinds encountered. Amy also noted that auto advertisers typically buy around hot political time periods.

Ripley did not offer a specific number, but said auto is looking positive for the fourth quarter.

Amy cited technical schools as a particularly troubled advertising category, and said increased government regulation and scrutiny was causing many to go out of business. Lucy Rutishauser, SVP/corporate finance/treasurer later told analysts the category represents about 4% of the company’s core advertising.

Sinclair execs are not overly concerned about the much-reported slump in NFL viewership. Ripley said poor match-ups, less star power and player protests were damaging the national games. But at the same time, viewership of regional games of interest to local fans is holding up just fine.

Marks added that the Sunday night Clinton-Trump debate was such a viewer draw that it knocked down that night’s NBC NFL offering.

Responding to a question about Sinclair’s intention to get leverage below 4x by the end of 2017, Ripley said the goal is to get it down and keep it down, and its achievability does not factor in any possible windfall gains realized from the incentive auction.

Added Rutishauser: “We have leverage that is trending down, we have our free cash flow per share that’s increasing, and that’s before we start looking at everything that’s on the horizon, whether it’s the auction proceeds, whether it’s 3.0 opportunities.”

Ripley noted that there is as yet no visibility as to when ATSC 3.0 will begin to have an affect on the company’s income. At present, patent activity is expected to extend into 2018.

Sinclair’s ONE Media 3.0 is in development, and will use ATSC 3.0 as a vehicle to provide full multi-platform viewership statistics for the entire industry. It is a bid to improve upon and be independent of third-party measurement services. The company said it expects to invest $1 million in R&D during 4Q, and according to Ripley, total spending for the year will reach $4 million.

 Amy highlighted the company’s focus on local news. He said service was expanded in six markets, and that it will expand its use of drones to 40 markets during the course of 2017.

While the company in general respected the regulatory cone of silence placed over spectrum auction activity, Amy did note in his closing remarks that the company does expect to reap a benefit.