Sinclair Predicts 1Q Gains Despite Flat Core

Executives at Sinclair Broadcast Group told analysts and investors today that they expect to follow a successful 4Q 2016 with substantial gains to start out 2017. However, it won’t be attributable to a swarm of core advertisers spending more on spot adverting.

Despite the political spending oddities of the 2016 election year, Sinclair reported revenue gain of 33.1% for 4Q to $726.7. For the full year, revenues were up 23.3%. Further details are available here.

Sinclair’s reported 4Q revenue was below its own guidance and Wells Fargo Senior Analyst Marci Ryvicker placed it $8.7 million below her company’s projection. Widespread reports pegged the company’s $1.32 in earnings per share four cents below anticipated earnings per share.

Sinclair execs said the miss was entirely attributable to the unusually low spending in the 2016 presidential race, and Ryvicker agreed.

On a pro forma basis, according to SVP/Corporate Financial Officer/Treasurer Lucy A. Rutishauser, the gains were lower but still robust. For the quarter, revenues increased 26% pro forma coupled with an 18% increase over the full year.

Steven Marks, EVP-COO, Sinclair Television, said that 4Q core was down mid-single digits, due to crowding out by political and the loss of advertising from schools that went out of business. Marks said that the key automotive category came in flat during the quarter, which he saw as a major achievement given the crowding-out hurdle it had to clear.

The company is anticipating a 13%-14% increase in 1Q revenue to $602 million-$606.7 million. Political, it said, will account for about $1.5 million-$2 million.

Ryvicker said Sinclair’s revenue estimate was well in excess of its Wells Fargo’s projection of $582.9 million, with $1 million of political. She suggested that increases in core, retrans and other income may be the source of the surplus.

Marks was not expecting a big jump in core income. According to him, core advertising in 1Q is expected to be flat. Automotive is expected to enjoy a low single-digit gain and both services and telcom are showing strength. Weaker categories are retail — including department stores— food, media and technical schools.

Marks said he is expecting growth in core advertising as the year progresses.

What is looking up for 2017 is retrans income, expected to grow 17% for the year. Rutishauser said retrans growth grew 21% during 2016 and attributed the slowdown to the fact that most major carriage contracts are current. The gain will only be in the single digits for 2018, she said.

At that point, the negotiation cycle will begin again, which she said should provide a new round of accelerated retrans income growth.

Looking a little further ahead, both Rutishauser and Marks expressed high expectations for the 2018 election cycle, which they believe will feature a large number of hotly contested congressional campaigns as well as a great deal of issue advertising.

Sinclair announced on Feb. 9 that it anticipated earning $313 million from spectrum sales in the incentive auction. President-CEO Christopher Ripley said three stations were sold (unspecified), and noted that there would be no resulting loss of national footprint coverage or MVPD income.

Sinclair is highly optimistic about regime change at the FCC. Ripley said, “On the regulatory front, the FCC has recently enacted some welcome and overdue regulatory improvements, rescinding the JSA processing rules and launching the ATSC 3.0 NPRM process. We expect the ownership rules to be tackled sometime later this year.”

He added that he expects FCC action regarding the UHF discount to addressed relatively soon on a standalone basis, with other ownership rule reconsideration coming later.

He concluded: “The elimination of antiquated rules will allow us to compete on a level playing field with other forms of communications.”

Rutishauser noted that the company has recently been able to shave 0.3 points off of its leverage figure, bringing it down to 4.4x, and said it hopes to shinny under the 4.0x threshold by year’s end.

As to its M&A plans, Ripley noted that the company does not discriminate by market size, and will deal anywhere, as long as the acquisition is accretive and at a good price.

He added that the company would be comfortable with taking on leverage to get a large deal done, but it would want a clear path to getting back on track to its target of a sub-4.0x level.

Ripley said it is too soon for analysts to start adding earnings benefits from ATSC 3.0 to their projections, but did offer a timeline to consider.

He’s hoping the FCC’s NPRM can be done this summer, followed by beta tests in 2017 and actual deployment in 2018.

He said that the repack is perfectly timed for this. Stations making major changes and buying equipment will be able to get a channel change and a conversion to 3.0 done at the same time.

After that, it’s a matter of getting receivers into homes. Ripley said the timing on that is very hard to predict, hence his reluctance to predict any resulting income.

Vice Chairman David Amy addressed the issue of broadcast losing business to digital. He said: “The pattern that we have seen over the years where advertisers move towards digital and fall in love with the digital solution … and they move away from TV thinking it’s kind of an old media, it’s not going to work, and they realize time and time again — we’ve seen it with beer, we’ve seen it with auto and now we’re seeing it with retail — the importance of branding through television still remains so essential to creating foot traffic or pulling inventory off the shelves.”

Sinclair executives expect that M&A activity will begin to pick up this year.

The company said it’s very pleased with the progress made by Comet, its relatively new multicast network. Its success has inspired the launch of two more: Charge, which will be similar to Comet but more focused on action and adventure programming; and TBD, a more experimental network providing internet-spawned programming.