Sinclair Q3 down 4.5%; Freedom purchase may mean Q4 LMA (audio)

0
Sinclair Q3

Net broadcast revenues were $151.7 million for the quarter, a decrease of 4.5% versus Q3 2010 $158.8 million.  Much of the decrease can be attributed to political revenues of $2.4 million in quarter, vs. $9.8 million in Q3 2010. This met with the company’s guidance. Sinclair Broadcast Group O&O’s programs or provides sales services to 65 TV stations in 39 markets.


The company’s operating income was $52.2 million in Q3, as compared to operating income of $56.1 million in the prior year period.  Net income attributable to the company was $19.2 million in the three-month period versus net income of $14.3 million in the prior year period. 

In September, Sinclair announced its deal to purchase the seven Four Points Media stations for $200 million.  They were added to the books on 10/1, pursuant to a Local Marketing Agreement and Sinclair expects to fund and close on the stations early in the Q1 2012.

Sinclair also announced 11/2 a purchase agreement to buy the assets of Freedom Communications’ eight TV stations (see related story) for $385 million. Before the deal closes in Q1 or Q2 of next year, an LMA is planned. The LMA will likely be attributable to Q4 ’11 numbers. Pro forma for the Freedom and Four Points television stations, Sinclair will O&O, program or provide sales services to 73 television stations in 46 markets, reaching 26.3% of the U.S. television households.  Sinclair’s television portfolio will consist of 20 FOX, 18 MNT, 13 CW, 11 ABC, 9 CBS, 1 NBC, and 1 Azteca station, in addition to 79 sub-channels. 

Sinclair reported diluted earnings per common share of $0.24 for the three-month period vs. diluted earnings per common share of $0.18 in the prior year period—that’s up 22%. 

Listen to the Q3 call, above.

For the year to date, net broadcast revenues from continuing operations for the nine months ended 9/30 were $466.8 million, an increase of 0.3% vs. the prior year period result of $465.4 million.  The company had operating income of $161.7 million in the nine-month period versus the prior year period operating income of $159.0 million.  Net income attributable to the company was $53.1 million in the nine-month period versus net income of $43.1 million in the prior year period. 

Also for YTD, Sinclair reported diluted earnings per common share of $0.66 in the nine-month period versus diluted earnings per common share of $0.54 in the prior year period. 

Local net broadcast revenues, which include local time sales, retransmission revenues, and other broadcast revenues, were up 1.2% in Q3 while national net broadcast revenues, which include national time sales and other national broadcast revenues, were down 19.2% versus the third quarter 2010.  Excluding political revenues, local net broadcast revenues were up 3.2% and national net broadcast revenues were down 8.9% in the third quarter. 

Ad categories that reported the largest spending increases in Q3 were automotive, retail, and schools, while services, media spending, telecommunications, and grocery were down the most.  Automotive, Sinclair’s largest category, was up 3.2% in the quarter. 

In October, SBGI extended its LMA for WNYS-TV (MNT 44) in Syracuse, NY for an additional three years. Also in the month, Sinclair decided not to sell the alarm monitoring contracts of its subsidiary, Alarm Funding Associates (AFA).  As a result, AFA’s financial results have been reclassified from discontinued operations to continuing operations for all periods presented.

Outlook
Sinclair expects Q4 station net broadcast revenues from continuing operations, before barter, to be approximately $178.0 million to $181.0 million, down 4.7% to 6.3% compared to Q4 2010–also due to lower political revenues in a non-election year.  This assumes approximately $3.5 million in political revenues in Q4 as compared to $26.8 million in Q4 2010.  Also included in the Q4 net broadcast revenues is approximately $8.7 million related to the Four Points Media LMA, which includes $2.5 million in management and incentive fees and $6.2 million of LMA expense reimbursement.  Excluding political and the $6.2 million LMA expense reimbursement, net broadcast revenues are expected to be up 3.2% to 5.0% in the quarter compared to the prior year period.

Also included in Q4 is y $6.2 million of LMA expenses related to the Four Points Media LMA which are reimbursed and recorded as revenue.  Excluding the $6.2 million, Q4 television expenses are expected to be up 1.2%.  On a FY basis, television expenses are expected to be approximately $300.6 million, up 6.9% as compared to 2010 television expenses of $281.2 million.  Excluding the $6.2 million, full year television expenses are expected to be up 4.7%.  The 2011 expense forecast includes $1.3 million of stock-based compensation expense for the year as compared to $1.7 million for 2010.

SBGI also expects program contract payments to be around $15.6 million in Q4 and $68.3 million for 2011, as compared to the 2010 actuals of $19.9 million and $89.0 million for the quarter and year, respectively.

“We are pleased to announce this morning that we entered into a purchase agreement to buy the assets of Freedom Communications’ eight television stations for $385 million,” said David Smith, Sinclair CEO.  “We expect to fund and close on the transaction late in the first quarter or early second quarter of 2012, pending Freedom shareholder, antitrust and FCC approvals.  Until that time and after receiving antitrust approval, we will operate the stations pursuant to a local marketing agreement.  The combination of the Freedom stations with the Four Points stations would give us two full power stations in the West Palm Beach market, which is Freedom’s largest market.  It is our intent to continue evaluating television station transactions which are accretive and where we can use our expertise and presence to improve profitability and competitive position.”

Smith added, “Looking ahead to the fourth quarter, core broadcast revenues are expected to continue to grow.  Automotive advertising spending is on the upswing with the Japanese auto manufacturers back to near full production and political ad spending heating up.  For the fourth quarter, we expect our stations to benefit from a low-teen percent growth rate in ad spending by the automotive industry, as compared to fourth quarter 2010, and approximately $3.5 million in political revenues.”

Marci Ryvicker, Wells Fargo Securities analyst, said Sinclair’s Q3 results came in better than predicted: “Net broadcast revenue of $151.7M (-4.5%) was slightly better than our $151.4M (-4.7%) estimate. Local ex political was +3.2%, while national ex-political was -8.9%. EBITDA of ~$61.3M (-5.5%) beat our $57.6M (-11.1%), guidance of $56.4-58.4M, and Street’s $56.9M (-12.2%). EPS were $0.24 v. our/Street’s $0.18 – beat due to alarm business reclassified into continued ops.”

For Q4, Ryvicker was optimistic and said SBGI should be higher than previous predictions:  “Q4 net broadcast revenue is forecasted to be $178 – $181M (-6.2% to -4.7%) – we were anticipating $173.0M (-8.9%). BUT SBGI’s guidance includes a $2.5M management fee for Four Points which we did not have in our model in addition to a $6.7M LMA fee reimbursement – also not in our model. Including both of these items, our net broadcast est. would have been $181.7M, a bit above SBGI’s range but NOT due to a miss in core – it is political, which is anticipated to come in ~$1M lighter than we have modeled.  Q4 expenses in general are slightly lower than our current estimate. We think Street estimates may rise due to Four Points, the reintegration of the alarm business into continuing operations and lower opex.”