Sometimes it is not how a company did, but how a company is doing, that matters most to investors. For The E.W. Scripps Co., that is precisely the case with respect to its first-quarter 2019 results, and its second-quarter pacings.
Scripps in Q1 enjoyed a revenue gain, and significantly trimmed its net loss.
But, Local Media revenue on a pro-forma basis is pacing down in the low-single digits for Q2, and expenses are on the rise.
Within the first 15 minutes of trading on Friday (5/10), Scripps shares were off a steep 13.3% and tumbling fast. A recovery was in progress just before 3pm Eastern, with shares down by 7% to $21.52. At the Closing Bell, SSP was down 6.7%, to $21.60.
Scripps in Q1 saw its operating revenue jump to $292.2 million from $254.2 million, as the company’s net loss attributable to shareholders shrunk to $6.81 million (8 cents per diluted share), from $26.5 million (10 cents). This includes revenue from Triton, acquired Nov. 30, of $10.5 million, and revenue from television stations acquired from the former Raycom Media, effective Jan. 1, of $5.6 million.
Local Media dollars grew by 5.9%, to $203.39 million from $192.06 million. Further, core advertising for Local Media was off 2.2%, to $113.4 million. This was offset by retransmission revenue growth of 20.6%, to $85.4 million.
National Media dollars surged by 43.8%, to $87.3 million.
What’s the breakdown in this segment? It’s all looking up. Podcast industry player Stitcher grew revenue 37.5% due to strong advertising rates and demand.
Unfortunately, consolidated operating expenses for Scripps increased in Q1 to $292.02 million from $254.82 million — nearly mirroring its revenue. Why? The jump reflects the impact of the Raycom acquisitions, an opportunity made available from that company’s now-closed merger with Gray Television; higher network programming fees; and continued investment in programming at Katz and Stitcher.
Then, there’s the Q2 visibility, and how Scripps’ purchase of 15 stations from Cordillera Communications for $521 million will fit into the mix. Scripps on May 1 closed on the transaction.
Local media revenue is projected to be down by the low-single digits, to between $245 million-$250 million, pro forma. At the same time, local media expense pro forma is pacing up low-single digits, to between $195 million-$200 million.
National media revenue is expected to be $90 million on expenses projected to be $14 million. Scripps’ national brands include Katz Networks, which is set to roll out a rebooted “Court TV” via digital multicast distribution; podcast entity Stitcher; advertising network Midroll Media; news-focused network Newsy; and digital audio services and data analytics provider Triton.
Scripps is selling out millions of dollars to grow. In addition to the Cordillera buy, there’s the $580 million acquisition of eight Nexstar Media Group stations, including WPIX-11 in New York.
A $625 million Term Loan B commitment to help fund that deal is in place with Wells Fargo Securities, and in late March said it intends to finance the Cordillera acquisition through an issuance of a $765 million (originally reported as $525 million), seven-year incremental Senior Secured Term Loan B maturing in 2026 and cash on hand. The loan was upsized by $250 million “due to strong demand and favorable pricing of LIBOR plus 275 basis points,” Scripps said.
The Cordillera transaction will push net total debt to $1.18 billion, or 3.7x EBITDA, while net senior secured debt will surge to $783 million, or 2.5x EBITDA.
Asked about Scripps’ leverage during its Q1 earnings call on Friday by Stephens analyst Kyle Evans, EVP/CFO Lisa Knutson said, “we see a clear path to somewhere in the low 4s by this time next year.”
As of December 31, 2018, Scripps’ net total debt was 3.3x EBITDA, or $592 million. Its net senior secured debt stood at 1.1x EBITDA, or $192 million.
AUTO SHORTFALL OFFSET BY COALITION GROWTH
Noble Capital Markets Director of Research and Senior Media and Entertainment Analyst Michael Kupinski kicked off the analyst Q&A portion of Scripps call, asking specifically about automotive — a category that had traditionally been one of the biggest for broadcast TV but not so much in recent months.
Scripps President of Local Media Brian Lawlor noted that automotive was down 10% in Q1.
But, this was not surprising, due to poor comps related to the Winter Olympic Games and Super Bowl in Q1 2018. Still, he admits, automotive continues to struggle.
Combating this decline is strong growth in several other categories.
Services is “50% larger than automotive now,” Lawlor said, and is “really, by far, our most powerful” category. Also strong, with double-digit growth, are Insurance, Financial/Banking and Real Estate. And, to the surprise of few who follow Media Monitors Spot Ten reports each week in RBR+TVBR, Home Improvement was up 10%, showing that it still is a strong category for Scripps.
Then, there’s the programmatic prowess seen at Scripps. “We’re very pleased to see the volume of automated advertising dollars come in at twice the level that we expected to see at the beginning of the year,” Lawlor noted.
Scripps’ Local Media segment is comprised of 17 ABC affiliates, five NBC affiliates, two FOX affiliates and two CBS affiliates. There are also two MyTV affiliates, one CW affiliate, two unaffiliated TV stations and four Azteca America affiliates.
OTT ACTION, OTA DETERMINATION
Evans, who serves as Managing Director of Little Rock-based Stephens, asked about Newsy, which is now enjoying MVPD distribution but remains primarily an over-the-top (OTT) revenue generator for Scripps.
SVP/National Media Laura Tomlin confirmed that, with respect to OTT viewership, Roku “owns the marketplace today.” However, a new partnership with Amazon is poised to allow Newsy to capture “a lot more revenue” for Newsy.
During the Q&A period, which saw a minor technical glitch yield a brief period of silence, Lawlor reiterated Scripps’ position on what its view of what the local video marketplace is in 2019. “We think the current evaluation rules are archaic,” he said, noting that this was “certainly brought to light by those who testified.”
With Hispanic media, along with digital dominators YouTube, Amazon, Facebook collecting many of the advertising dollars that have moved away from broadcast TV, the local marketplace is not just 4 or 5 broadcast stations, Lawlor said.
Lastly, in one of the final questions from analysts on the earnings call, what will Scripps’ full-year 2019 retransmission fee revenue likely be?
Tomlin noted that, excluding the Nexstar acquisitions, Scripps will likely see $370 million in fees collected from DirecTV, DISH Network and the nation’s cable TV service MVPDs, as well as over-the-top virtual MVPDs such as YouTubeTV, DirectTV Now and Sony Vue.
With SSP sliding southward, Scripps’ shares have ended a strong 12-month surge in value. One year ago, Scripps was trading at $12.37.
SSP bears a 1-year Target Estimate of $23.50.