Tegna Awaits Olympics, Super Bowl-ing For $

Tegna CEO Dave Lougee took the occasion of the company’s 3Q earnings call with securities analysts to enumerate the reasons his company figures to prosper next year. The first quarter will bring the NBC-centric group both the Winter Olympics and the Super Bowl. And then there’s political.

Lougee said that the 1Q 2018 convergence of both the Super Bowl and the Winter Olympics is something that Tegna has not enjoyed for 12 years. As with other NBC-centric groups, the revenue hole Tegna experienced in 3Q 2017, when it did not have Olympic revenue, will be equaled — and exceeded —during next year’s first quarter.

Additionally, political is expected to storm back, and Lougee pointed to the strong turnout for Virginia’s gubernatorial race yesterday, saying it was a positive omen pointing to a big mid-term battle.

Tegna expects to particularly benefit from its presence in Arizona, where Sen. Jeff Flake (R) has announced his retirement, setting up the prospect of what Lougee called potentially the most expensive Senate race in the cycle, if not historically.

Overall, Tegna’s footprint encompasses 18 gubernatorial and 14 U.S. Senate races.

On an as-reported basis, during 3Q Tegna careened into a particularly deep roller coaster revenue nadir, as laid out by EVP/CFO Victoria Harker.

Like all broadcasters, it lost big political bucks (net $34 million), and specifically, the group’s high exposure to NBC cost it $57 million associated with the Olympics. In additional, comps suffered from the loss of $16 million in revenue tied to digital assets no longer in the company stable.

The visits from Hurricanes Harvey and Irma were also a factor, taking a $3 million bite out of Tegna’s comps.

Excluding all of these factors, total revenue increased 5% on the strength of a gain of $23.7 million in subscription fees, overcoming a pro forma loss of 2% in advertising and marketing services income (the closest the company comes to reporting a “core” figure).

Lougee noted that while the company does not get into traditional core specifics, it has seen advertising improve incrementally quarter to quarter and said local has been strong, with the drag coming from weakness in national sales.

The deregulatory initiative of the FCC and the future of broadcast M&A are tied together, and Tegna is thankful for the former and said it’s ready for the latter.

On prosed regulatory changes, Lougee commented: “We commend FCC Chairman Pai for aligning these rules with the reality of the modern video marketplace,” adding, “Tegna is uniquely positioned to take advantage of these long-overdue changes over time.”

He said that while traditional M&A will be a part of the upcoming period of consolidation, so, he believes, will station swaps. “Other affiliate owners in our markets are going to be motivated to optimize their portfolio as well and swap stations with us because of the inherent industrial logic.”

Either way, Tegna will be there. He concluded: “We have the rock-solid balance sheet and free cash flow fire power that will allow us to play an opportunistic role in the consolidation of our industry for the benefit of our shareholders.”

Lougee noted that the FCC’s inclusion of case-by-case language when mergers of two big-market Big Fours are proposed was likely necessary to allow the overall dereg package to survive judicial review. He noted that if the standard ceiling is a 40% market share then Tegna will have no problem getting its contemplated activity approved.

Harker placed the company’s current leverage at 3.8x, and said there is no plan to drive it down. She said that the company’s use of capital will be focused on M&A or on lowering debt to strengthen the balance sheet to take advantage of M&A opportunities.

Concerning MVPD distribution, Lougee said: “We are generally agnostic whether a consumer views us on a regular MVPD or on a so-called virtual MVPD or OTT service. That’s because there are benefits of moving our content on to OTT platforms.” Lougee explained: “Not only does it allow us to reach cord-cutters, but as significantly, it allows access to a new market of subscribers, basically cord-nevers who may never sign up for higher-priced cable.”

He noted that in the long term it will widen the broadcast advantage over competitors, because only a few cable channels achieve carriage on skinny bundles. The effect will be favorable to broadcasters in terms of audience, advertising and program distribution.

Lougee noted that OTT compensation is expected to be equal to or slightly better than traditional retrans terms, but added that the income stream from OTT will not be noticeable until sometime in 2018.

Tegna reported a 2% decrease in MVPD subscriber totals, tied to its unusually high exposure to AT&T U-Verse. Lougee noted that a lot of these losses are actually simple moves from traditional to virtual MVPD service, and said he expects that as results begin to come in from the latter the subscriber numbers will begin to recover.

Tegnia is continuing its strategy of adapting to modern video marketplace trends. “Our content transformation efforts have transformed from an initiative to a culture,” said Lougee, “and it’s core to our future strategy. We’re taking our future in our hands by creating unique live and original content both in news and non-news time periods to combat changing viewer habits. In an on-demand OTT world, unique live locally relevant and differentiated content is becoming far more important than it was in the past, and we are acting on the trend.”

Tegna includes digital marketing, over-the-air programming on both primary and sidecar channels, and over-the-air/digital tie-ins for forward this strategy, most recently via its just-announced deal to carry Cooper Media’s new diginet Quest in an agreement in which Tegna will have a minority ownership stake.

Lougee noted that its news presence on mobile platforms was of particular value to residents of Houston and Florida when this year’s hurricanes came calling.