TEGNA Inc. (NYSE:TGNA) Q3 2023 Earnings Call Transcript
TEGNA Inc. (NYSE:TGNA) Q3 2023 Earnings Call Transcript November 7, 2023
TEGNA Inc. beats earnings expectations. Reported EPS is $0.39, expectations were $0.34.
Operator: Good day and thank you for standing by. Welcome to TEGNA's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Julie Heskett, Senior Vice President Financial Planning and Analysis, and Head of Investor Relations. Please go ahead.
Julie Heskett: Thank you. Good morning and welcome to our third quarter conference call and webcast. Today, our President and CEO, Dave Lougee; and our CFO, Victoria Harker will review TEGNA's financial performance and results and discuss TEGNA's quarter-ahead outlook. After that we'll open the call for questions. Hopefully, you've had the opportunity to review our third quarter earnings results. If you have not yet seen a copy of the release, it's available at tegna.com. Before we get started, I'd like to remind you that this conference call and webcast includes forward-looking statements and our actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. This presentation also includes certain non-GAAP financial measures. We have provided reconciliations of those measures in the most directly comparable GAAP measures in the press release. With that, let me turn the call over to Dave.
Dave Lougee: Thank you, Julie, and good morning, everyone. TEGNA's third quarter results reflect our business plan, centered on continuing to enhance performance, optimizing operational efficiency and driving long-term value for our shareholders. We achieved a record third quarter for subscription revenue and saw sequential improvement in advertising and marketing services revenue, driven by improving trends in key verticals such as auto and services. In addition to these strong underlying results, we also completed our initial $300 million of accelerated share repurchases or ASR. We completed that ASR at the end of August earlier than anticipated. Despite a limited trading window, we were able to quickly purchase shares opportunistically in the open market.
This increases our capital commitment this year to return nearly $800 million to shareholders. I'll talk more capital return actions and our advantaged positioning in a couple of moments. Turning to third quarter results. Total company revenue finished in line with our guidance, down 11% year-over-year due almost exclusively to the reduction in political revenue from the mid-term election cycle last year. Excluding political, revenue was down just slightly year-over-year. As I mentioned, subscription revenue was a third quarter record and up just slightly year-over-year. TEGNA subscription revenue continues to provide stable and predictable cash flows supported by contractual rate increases, partially offset by subscriber declines. We expect to reprice approximately 30% of our traditional subs by the end of this year, further improving visibility into our outlook.
Despite broader macroeconomic challenges, advertising revenue trends were sequentially better than the first two quarters of the year and that trend is continuing into the fourth. AMS revenue finished the quarter down 3% compared to the third quarter of last year. However, underlying advertising trends were basically flat year-over-year when adjusting for the Premion national account loss, we've discussed on prior calls. Automotive, our largest category within AMS continues to improve and show strong year-over-year growth now for the fifth consecutive quarter. Auto was up 20% year-over-year in the quarter, also notably, Services our second largest category continues to be strong and was 15% year-over-year. Looking ahead, 2024 will be a strong year of performance at TEGNA, with a very favorable portfolio of stations for political advertising in next year's presidential Olympic cycle, as well as the Summer Olympic Games from Paris on our large NBC portfolio of stations and the Super Bowl on our large CBS portfolio, compared to last year's much smaller Fox portfolio.
Turning to our capital allocation. We are enthused about the go-forward opportunity at TEGNA and building on our strong track record of returning capital to shareholders. Our industry-leading balance sheet and resilient financial performance, affords us the unique ability to return capital to shareholders, to share repurchases and dividends, while we simultaneously pursue organic initiatives and evaluate opportunistic bolt-on M&A to further augment our attractive growth outlook and opportunities. We're on track to surpass our previously announced capital return to shareholders. Following the completion of our initial $300 million ASR program earlier than anticipated as I said, we repurchased an incremental $28 million of shares in the open market, slightly just shortly before entering our blackout period.
These repurchases were executed under our existing $300 million share repurchase program. On our last earnings call, we announced the second ASR program of $325 million. That program is expected to commence shortly. The completion of these four steps, the two ASRs, the stock transferred to satisfy the $136 million deal termination fee and our recent opportunistic purchase of shares, will result in us retiring nearly $800 million worth of TEGNA shares. Looking ahead, strong operating performance and disciplined use of free cash flow position us to continue to build on our capital return track record. As I said, we have an industry-leading balance sheet and that provides us that optionality. Even after both ASR programs and the incremental purchase of shares in 2023, we still expect to end the year with net leverage under three times.
Our strong free cash flow generation is expected to further strengthen next year due to the political Olympic and Super Bowl tailwinds I mentioned earlier. This offers additional flexibility, as we make capital allocation decisions across organic growth, both on M&A opportunities and returning capital to shareholders through share repurchases and our recently increased dividends. Turning to strategic updates. In the quarter, we reached a comprehensive multiyear deal with ABC. This renews our ABC network affiliations in 13 markets across the country, which covers 9% of the US serving nearly 11 million households. Our partnership combines ABC's popular entertainment sports and news program with our local -- with our strong local stations and large audiences.
We believe, our successful negotiation with ABC, highlights the win-win long-term relationships we have with our programming partners. TEGNA's local stations provide irreplaceable local news which is some of the most watched and trusted within the nation, coupled with leading programming -- leading program from program partners like ABC, our platforms deliver scale audiences with strong engagement. The vast and powerful reach of broadcast distribution is enjoying a growing audience reach advantage over other far more fragmented competitors in ecosystem, most specifically cable channels and cable programmers. One area that highlights that shift is what's happening now with professional sports. With the existing RSN cable model in the final innings, the move of local sports from cable to broadcast is in the first inning of a new era.
Professional sports teams and leagues are more acutely aware than anyone of this seismic shift in reach and distribution and are excited about the chance to reach all consumers, not just a smaller and smaller percentage of their addressable market. Along these lines, this quarter we announced that KENS, our station in San Antonio will exclusively air 11 San Antonio Spurs games during this broadcast season, with French sensation a number one draft pick Victor Wembanyama captured attention across the country and if not the globe. We're thrilled to be the spurs broadcast partner for this year. As the current RSN bankruptcy proceeding plays out, look for more announcements to come. Given our large portfolio of strong stations in big sports home markets, we are very, very well positioned for this shift and opportunity in local sports.
Also in the third quarter, Locked On, our leading local sports digital network with daily shows for all four pro sports leagues and major college programs hit more milestones. Its audience has now gone past 27 million listens and views per month and we launched four local Locked On fast channels in the quarter with more slated to launch in the fourth quarter. Daily Blast LIVE, our daily talk and trending topic show entered its seventh season this September. Now with a larger distribution footprint than ever. We've added 20 Sinclair markets and an additional Hearst market to our current footprint of 16 gray markets as well as all of the TEGNA station in our large reach, being our total reach to more than 55% of the US. As the programming landscape continues to evolve, we believe Daily Blast LIVE's efficient production model will increasingly offer broadcasters a sustainable option for their content needs while simultaneously delighting our audiences.
VERIFY, our national brand to combat this information ended the second quarter with – into the third quarter I should say, with approximately 467,000 followers across its various dedicated channels. Weekly VERIFY, this show increased for the fourth consecutive quarter with more than 2.8 million minutes watched across TEGNA station streaming apps during the third quarter. And about those streaming apps – our TEGNA station streaming apps now have reached 677 million minutes on streaming, a 78% increase year-over-year in the quarter. These apps are now available for all stations on Roku, Fire TV and Apple TV devices. And in the quarter we also started rolling out streaming – rolling out our apps for Samsung, LG, Chromecast and other platforms and expect to have all stations live on these platforms by year-end.
Delivering news that matters and impactful investigations that make a difference in people's lives are the center of each and every one of our newsrooms. We're very proud of the determination and resilience of our engaged employees that enables us to fulfill our mission every day. A special congratulations and shout out to WWL, our station in New Orleans, they recently received a national News Emmy for their investigative reporting that shines a light on the deplorable living conditions for nursing home residents after hurricane Ida. Their investigation led to much needed law changes in Louisiana. The work we do changes lives and changes loss. With that, I'll now turn the call over to Victoria.
Victoria Harker: Thanks, Dave. Good morning, everyone and thanks for joining us. As you've already heard, we've achieved record third quarter subscription revenue and we continue to deliver sequential improvement in both advertising and marketing services revenue. We also successfully achieved all of our key revenue and expense guidance provided last quarter in line with expectations. Before I drill down on drivers of our third quarter financial results, I'd like to reiterate both the Board and the management team's focus and commitment to continued return of capital to our shareholders, as you've seen in our ongoing execution on those plans. As Dave mentioned earlier, we are very pleased that nearly $800 million in cash accumulated during the pendency of our transaction has been committed to share repurchases over the past six months.
And as you've already seen, execution on that return of capital is well underway. During the third quarter, we completed the initial $300 million accelerated share repurchase program on August 31, a few weeks earlier than we previously anticipated. The initial $300 million ASR program reduced TEGNA's outstanding share count by approximately 18 million shares. In addition, in the second quarter, approximately 9 million shares were retired through Standard General's extinguishment of their termination fee obligation. As Dave mentioned, following the completion of the first ASR and before entering our third quarter blackout period on September 16, we opportunistically repurchased an additional $28 million or nearly 2 million shares in the open market.
As a result, total share reduction as of the end of the third quarter was $29 million. Beyond this, as announced in August, our second ASR program targeting $325 million in repurchases will kick off this week. As a result, of all of these actions, since the termination of the merger agreement in late May, TEGNA is committed to nearly $800 million in share repurchases through ASRs, the settlement of the merger termination fee and opportunistic repurchases in the open market. As a result of this commitment, we expect approximately 45 million to 50 million shares to be retired by the end of March 2024 based on current market prices reflecting more than 20% of shares outstanding prior to us undertaking these actions. Additionally, following the termination of the merger agreement, the Board declared a 20% increase to the regular quarterly dividend, which was paid out for the first time in October.
As you're also aware, we have an extremely strong balance sheet including low leverage and we are very well positioned to continue to return capital to shareholders through buybacks and dividends, while investing in organic growth and bolt-on M&A opportunities. We also have manageable debt with no near-term bond maturities until March of 2026 and all of our debt is fixed rate at a very attractive 5.2% on a weighted average basis. We ended the quarter with total debt of $3.1 billion in cash of $553 million. As a reminder, our only financial covenant is a 4.5x leverage cap that applies to our undrawn $1.5 billion revolver. Net leverage ended the quarter at 2.61x. All of these well planned and executed actions highlight the strength of our balance sheet, which provides optionality around capital allocation decisions and continues to differentiate us in this current macroeconomic environment.
Now, let's take a look at the drivers of our third quarter financial performance. My comments today are primarily focused on TEGNA's performance on a consolidated non-GAAP basis to provide you with visibility into the financial drivers of our business trends as well as our operating results. You can find all of our reported data and prior period comps in our press release. For the third quarter, total company revenue was in line with our guidance range, down 11% year-over-year due almost exclusively to lower political revenue when compared to the midterm election cycle last year. Excluding political revenue, total revenue was down just slightly compared to the third quarter of 2022. Our record third quarter was subscription revenue which increased slightly year-over-year was driven by subscriber rate increases from contractual rate escalators, partially offset by subscriber declines of mid single-digits.
As we mentioned last quarter, we have an additional 30% of our traditional subs up for renewal by the end of this year. On the reverse comp side of the equation, we had previously stated we had approximately 60% of our Big Four subs up for renewal by year-end. We are pleased to announce we reached a comprehensive multiyear agreement renewal with ABC, representing roughly 20% of our Big Four subs. We also look to renew our agreement with NBC toward the end of this year. Now, I'll unpack the drivers of AMS performance in the third quarter and the drivers. AMS revenue finished the quarter down 3% compared to the third quarter of last year. Advertising trends were basically flat when adjusting for the previously disclosed loss of a single premium national account earlier this year.
Despite macroeconomic challenges, advertising revenue trends improved in the third quarter and were sequentially better than second. These gains were driven by improving trends in key verticals such as automotive, services, insurance, and packaged goods. As a reminder, the underlying advertising improvements began in second quarter and are continuing into the fourth. Within AMS, we are thrilled to see our two largest advertising categories, automotive and services continued to perform well. Automotive advertising generated growth for the fifth consecutive quarter with third quarter up double-digits year-over-year. The services category was also up double-digits year-over-year with the strength in home services such as HVAC, electrical, pest control, and plumbing.
Categories facing headwinds in the current macroeconomic environment include media telecom, restaurants, healthcare, and banking. Now, turning to Premion. As you've heard over the prior quarters, Premion continues to strengthen its position in the convergent TV marketplace by winning additional local advertisers that are allocating larger spending dollars to streaming. During the quarter, Premion introduced programmatic selling capabilities, enabling agencies to leverage either managed services or hands-on keyboard buying workflow. Similar to last year Premion revenue was down year-over-year, impacted by the loss of a single large national account. However, Premion's primary focus is on the growth in local OTT revenue where is uniquely positioned to win.
Premion local revenue was strong, up double-digits year-to-date. As a reminder, the national account loss impacted AMS by two points in the first three quarters of the year. However, in the fourth quarter, the account impact will be four points on AMS given seasonality. We cycled the loss of this account at the beginning of 2024. Looking ahead, 2024 will be a strong year at TEGNA, driven by favorable portfolio stations in key markets benefiting from a robust presidential election cycle, the Summer Olympics, and the Super Bowl. TEGNA's high-margin subscription and political revenues produce annuity-like EBITDA and free cash flow and carries more than 50% of our total revenues on a two-year basis. Turning now to expenses for the third quarter.
For the quarter, non-GAAP operating expenses of $576 million, finished in line with our guidance range, up 1% compared to third quarter last year, driven by higher programming fees. Excluding programming costs, non-GAAP operating expenses for the quarter also finished within our guidance range, down 1% when compared to last year due to expense management and ongoing operational efficiencies. Third quarter expenses coming out of the merger termination were slightly higher than previous run rate as we increase activity around employee development, recruitment, and retention, as well as our renewed strategic planning efforts. We expect fourth quarter year-over-year expense to be lower as well. As expected, our third quarter adjusted EBITDA of $166 million was down 38% year-over-year, primarily driven by the absence of high-margin political revenue from midterm elections and higher programming costs.
We continue to generate strong free cash flow of $60 million during the quarter, driven primarily by our high-margin durable subscription revenues and the thoughtful management of our balance sheet as we've historically done. Now, turning to 2023 outlook. As you saw in today's third quarter release, we remain on track to meet all of our key guidance metrics for the full year and provide forward guidance for the fourth quarter and key financial metrics. To help you model our near-term expectations, let's walk through a few fourth quarter financial guidance metrics. As a reminder, we expect to be disproportionately impacted on a comparable basis in the fourth quarter by the absence of $179 million of high-margin political revenue from the mid-term election last year.
For the fourth quarter, we expect total company revenue to be down mid- to high teens percent year-over-year, primarily driven by the absence of political revenue, I just mentioned. Excluding political fourth quarter revenue is projected to be flat. We forecast operating expenses in the fourth quarter to increase, in the low single-digit percentage range compared to fourth quarter 2022, driven by increased programming expenses. Including programming costs, we project fourth quarter operating expenses to be down low single-digit percent year-over-year. Now turning to full year 2023. We'd like to reiterate that our full year 2023 guidance, elements in ranges remain the same as announced last quarter, and we remain on track to meeting or exceeding them.
As a reminder, you can find our 2022 actuals for all of these metrics in our investor presentation on our website. For the year corporate expense, is expected to be in the range of $40 million to $45 million. Depreciation is projected to be in the range of $60 million to $65 million, amortization is projected to be in the range of $53 million to $54 million. Interest expense is expected to be in the range of $170 million to $175 million. We expect capital expenditures to be in the range of $55 million to $60 million. We forecast an effective tax rate in the range of 23.5% to 24.5%. Even after the impacts of both ASR programs and the incremental repurchase of shares in 2023, we continue to expect to end 2023 with net leverage below 3 times. And with that I'll now turn to Q&A to take your questions.
Operator: [Operator Instructions] Our first question comes from the line of Dan Kurnos with The Benchmark Company.
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