In addition to political shortfalls typical of an odd-numbered year, Tegna will come up short because its many NBC affiliates will not be able to match revenue they garnered in last year's 3Q when they aired the Olympic Summer Games. Auto advertising also remains problematic. Looking forward, CEO Dave Lougee said that if the FCC eases the ownership limits, Tegna will have ample headroom to expand and could also add to its portfolio in markets where it already has a presence.
Tegna Facing Stiff 3Q Olympian Headwinds
After a modestly successful second quarter in which Tegna recorded a slight revenue gain, it is looking at an NBC-generated revenue hurdle coupled with reduced political income, which it told securities analysts will result in a 3Q plunge that may reach double digits. But the NBC connection has a big payoff coming early next year.
Overall revenue was up 3% during 2Q, but advertising/marketing revenue took a 5.6% hit which included a $3.2 million drop in political income. That loss was more than offset by a 23.7% gain in subscription revenue.
EVP-CFO Victoria Harker said 3Q was expected to be problematic. In addition to political dropoffs typical of an odd-numbered year, Tegna is facing a stiff Olympian headwind due to its strong fleet of NBC stations. “Keep in mind that exactly half of our revenue comes from our NBC stations,” she said.
The result will be a loss of revenue ranging from high-single-digit to low-double-digit territory. The silver lining is that if political and Olympic earnings are excluded, overall revenue will be up mid-single-digits.
Two factors have negatively affected core advertising. One of these has been the pullback from the market by AT&T U-verse, and the other has been weak automotive advertising.
“It’s no secret that automotive has hit a cyclical slow spot,” said President-CEO Dave Lougee, who was conducting his first conference call in that role following the retirement of Gracia Martore. “New car sales have slowed down and that’s affecting advertising…. A lot will depend on how auto holds up and recovers.
“Long term,” he added, “I’m not worried about auto because television is an important part of any auto buy. Furthermore, the marketing services and initiatives we’ve created are [in the] position of taking a larger share of the auto pie out of our markets.”
Harker noted that the company has experienced sustained core advertising growth as the year progressed through the first half, although at a slower-than-expected pace. She said the company is taking a wait-and-see approach when it comes to 3Q core results.
Tegna did not discuss its retransmission consent income at length in its remarks to analysts, but due to the nature of retrans agreements, the 23.7% gain posted in 2Q will likely be similar to the final results in the two remaining 2017 reporting periods.
Looking a little further ahead, what NBC will take away in 3Q will come back in spades during the first quarter of 2018. That’s because Tegna will enjoy the unprecedented income-generating juggernaut of the Winter Olympics and the Super Bowl. And there’s icing on that mega-layer cake of advertising potential — a certain-to-be-over-heated political mid-term year.
Regarding political, Lougee said that Tegna’s status in terms of battleground presence was still murky, but he expressed his firm belief that the money will be flowing freely as Democrats mount a furious effort to take over Capitol Hill and Republicans strive just as hard to block them.
Tegna sold cars.com on May 31 for $650 million, and sold almost all of its stake in careerbuilder.com on July 31 for $250 million. One result of the sales was the transformation of Tegna into what Lougee described as a “pureplay media company.”
Proceeds from cars.com were used to reduce debt, and income from the careerbuilder sale, expected to be available in October, is earmarked for the same purpose.
Tegna is generally focused on strengthening its balance sheet, said Harker, with an eye toward creating maximum capacity and flexibility to participate in the merger and acquisitions market. Additionally, leverage covenants have been extended. “We have the capacity and the ability to act as the market opens up,” Harker said.
Asked about the timing of M&A activity, Lougee said: “A lot of people are waiting for clarity in in-market rules that the FCC will likely issue an order on in September.” He expects to see the FCC proposals two or three weeks ahead of time and further expects to see relaxed in-market rules.
Lougee noted that Tegna’s audience reach is now 25%, giving it ample headroom to expand. Lougee said it also has room to expand in markets where it already has a presence.
Citing its effort to market itself across all platforms, Tegna has elected to fold its digital results in with its broadcast results. The new catch-all ad category is Advertising and Marketing Services and what used to be known as Retransmission Consent is now simply called Subscriptions.
“This is how we run our business and how we sell our products,” explained Lougee, who added that it reflects the fact that the company is not pushing one category or platform over another.
Lougee underscored both the importance of strong local news operations and the marriage of local broadcast news with a presence on digital platforms. Of particular interest to the company is using this combination to allow real-time viewer interaction.
Recent activities have included revamped news operations at its stations in Charlotte, N.C.; Tampa, Fla.; and Sacramento, Calif. And a feature for all local news operations is called Verify, which allows a real-time collaboration between stations and viewers aimed at fact-checking.
Additionally, it will be launching two self-produced live programs in September. Daily Blast Live will be unique in that it will be viewable at the same time in all time zones. Sister Circle will be aimed at African-American women and will be launched in partnership with TV One.