Nexstar Media Group Inc
NASDAQ:NXST
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
141.79
188.5
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Nexstar Media Group Inc
You don't have any saved screeners yet
Good day, everyone, and welcome to the Nexstar Media Group 2018 Second Quarter Earnings Call. As a reminder, today's call is being recorded.
And at this time, I'd like to turn the floor over to Joe Jaffoni, Nexstar Investor Relations. Please go ahead.
Thanks, Greg. Good morning, everyone, and thank you for joining Nexstar Media Group's 2018 second quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions and answers, but first I'll review the Safe Harbor disclosure.
All statements and comments made during today's conference call other than statements of historical fact may be deemed forward-looking statements within the meaning of the Federal Securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause future results to be materially different from those expressed or implied in the forward-looking statements.
Important risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements are specified in Nexstar's filings with the Securities and Exchange Commission.
It's now my pleasure to turn the conference call over to your host, Nexstar Chairman, President and Chief Executive Officer, Perry Sook. Please go ahead, Perry.
Thank you, Joe, and good morning, everyone. I'd like to thank you all for joining us today to review Nexstar's record second quarter 2018 operating results. As outlined in this morning's release, Nexstar delivered another period of consensus-beating growth across its revenue and cash flow metrics as we continue to identify new opportunities to improve our performance and profitability across our portfolio.
Our operating outperformance puts us solidly on pace to deliver on our free cash flow targets for the 2018-2019 cycle. And combined with our share repurchase activity, that will all result in higher free cash flow per share. Tom Carter, our Chief Financial Officer is with me, as always, this morning.
Our second quarter results reflect the value we continue to mine from our local content and business relationships, our accretive scale-building acquisitions and the ongoing development of complimentary revenue streams that are diversifying our revenue mix, the effectiveness of our local broadcast and digital advertising platforms as proven marketing solutions for both businesses and candidates are the drivers of our operating and financial growth and allow us to simultaneously be aggressive with our return to capital, our leverage reduction, and select accretive M&A, which all come together to drive free cash flow growth per share and shareholder returns.
With over $148 million of second quarter free cash flow, we allocated a total of approximately $84 million to the return-of-capital and levered reduction initiatives spread across share repurchases, quarterly dividend payments and debt reduction, and Tom will highlight each of those in just a moment.
Looking at Nexstar's Q2 results, the 5.5% rise in second quarter net revenue reflects solid television advertising growth, as well as another quarterly sequential and year-over-year rise in retransmission and digital revenue growth. Reflecting these factors, Nexstar posted record second quarter broadcast cash flow adjusted EBITDA and free cash flow with these metrics growing 13.5%, 15.3% and 6.6% respectively on a year-over-year.
Our enterprise-wide focus on operating leverage and efficiency continues to support strong free cash flow margins, so on $660 million of quarterly net revenue, we brought about 22% to the free cash flow line, up from 20% in Q1 as we begin to see the operating leverage benefit and pacing to be record levels of political midterm advertising this year. This is also evident in the BCF and adjusted EBITDA margins on page 1 of our release, as we posted 280 basis point year-over-year rise in broadcast cash flow margins, and a 300 basis points improvement in the year-over-year EBITDA margin.
We expect the results to continue to build over the second half of 2018 as Nexstar will see accelerated growth in midterm election spending, new PAC and issue spending related to the Supreme Court nomination process, new advertising related to the advent of sports betting in our markets, continued retransmission and digital revenue growth, as well as the recurring free cash flow benefit from the Tax Cuts and Jobs Act.
So, with record second quarter and first half operating results on the board, we remain confident in meeting our target for average annual free cash flow growth in excess of $600 million for the 2018 and 2019 cycle.
Also, as I noted earlier, Nexstar is taking advantage of 2018 market volatility with meaningful repurchase activity which has reduced our Class A common stock outstanding, which by the way is our only class of shares outstanding, to approximately 45.5 million shares.
I'll now review the second quarter operating highlights, after which, Tom will go through the finances including an update on our balance sheet and other items of interest. Total television advertising revenue rose 3.2%, reflecting record second quarter political revenue which more than offset the reduction in inventory available for local and national spot sales.
The fact is that during the second quarter, on a consolidated basis on our audited markets, Nexstar grew our share of local spot revenue by a full share point over the prior year. And we saw an impressive bump in our new to television ad revenues even as we offered more ad time in the very active political cycle.
As noted a moment ago, we continue to address the core TV ad market for our aggressive focus on new to television ad revenue, which for Q2 amounted to $15.3 million, marking an 8.5% improvement over this metric in Q2 of 2017.
In total, our new advertisers accounted for approximately 7.7% of total second quarter local ad revenue. That's an increase of 7.1% in Q1 and about 5.7% over last year's second quarter. These increases reflect the application of Nexstar's local sales practices across the Media General markets, and we continue to see our local sales effort as a proven means of building our local end-market share.
Political was the best performer in our second quarter ad-supported revenue streams as political ad revenue rose fivefold over year-over-year to approximately $31.6 million, reflecting our presence in states with high levels of political spending activity. 2018 second quarter political revenue outpaced our internal budgets and our consensus estimates.
Importantly, despite strong demand from the candidates, PACs, and other advertisers early in the election cycle, the auto remained off-record levels of last year and we posted up or flat results in four of the top seven categories with spending from Ford rising mid-teens on a percentage basis over last year, although that was not enough to offset the lower spending from Dodge, Chrysler, Jeep that we've spoken about before.
During Q2, there were 24 primary state-wide races across Nexstar markets. And we garnered a significant share of TV ad spending related to the battleground primary races in Nevada, South Carolina, West Virginia, Ohio, and Indiana. Our political revenue stream also saw the early establishment of significant spending in Florida and Tennessee, which is carrying through to Q3. By category, we booked about 60% of our Q2 political revenue from candidate spending while PAC and issue spending made up the balance.
Given our outperformance of our internal targets in the first half of 2018 and our strong bookings already in the back half of this year, this morning, we are raising our 2018 political guidance from below $200 million to a range of between $215 million and $220 million for the year. Over the last several election cycles, Nexstar has continued to invest in our news resources and reporting capabilities, including the expansion of both our Washington, D.C. and our state capital bureaus.
As part of the company's expanded political coverage, Nexstar stations have taken the lead in producing over 120 debates since 2016, highlighted by this year's multi-debate series and the Texas Gubernatorial Primary. This series included three debates, which aired in six Nexstar markets covering the State of Tennessee.
In addition, Nexstar's Indiana markets produced a Republican primary debate earlier this year for the U.S. Senate seat. This coverage brings the local communities we serve across the United States and direct access to local lawmakers and candidates. And these events provide an important public forum for the constituents to engage with local leaders on the issues that matter to local families and local communities.
These events also strengthen the brand of our local news and other local programming offerings in our markets, thus better positioning us as the requisite platforms for businesses, candidates and other advertisers seeking to reach and influence consumers.
Combined second quarter digital media and retransmission fee revenue of $340.2 million rose 7.6% over the prior-year period and accounted for 51.5% of net revenue, illustrating again the positive and ongoing shift in our revenue mix and marking 100 basis points upward shift in this metric from the 2017 second quarter levels.
Overall, the year-over-year increase in second quarter non-television advertising revenue reflects recent renewals of distribution agreements with multichannel video programming distributors and the establishment of distribution agreements with OTT providers and the January 2018 accretive acquisition of LKQD, as well as organic growth across our profitable digital operations.
These gains were partially masked by digital revenues included in the 2017 comparable second quarter period from certain unprofitable legacy Media General digital operations that were discontinued in the second half of last year.
I'll add that MVPD subscriber levels in our markets remain consistent with our expectations and those embedded in our guidance, with the upside coming from new OTT agreements that are currently coming online.
Our long-term record of significantly expanding free cash flow by identifying, executing and financing accretive transactions, and our unmatched record in terms of our integration execution and synergy realization has been a cornerstone of our ability to enhance shareholder value.
To that vein, last week, Nexstar entered into definitive agreements to acquire stations in Springfield, Missouri and Huntsville, Alabama for aggregate purchase price of $19.45 million. The addition of these stations will result in Nexstar generating incremental advertising and net retransmission consent revenue growth without an increase in our U.S. total television household reach. Not only are these transactions accretive, but they are leverage neutral on a pro forma basis.
So, we continue to expect Nexstar's leverage absent additional strategic activity and discretionary capital returns to decline to the mid-to-high 3 times range by year-end 2018. Given that both of our new transactions are expected to close in the fourth quarter, we'll see the full value of their contributions in 2019.
Throughout our history, Nexstar's organization-wide commitment to broadcasting excellence for local viewers and unparalleled marketing results for local advertisers have been fundamental to our success and growth. We're executing well on all facets of our business plan, including elevated levels of local content and service to local viewers, continued operational improvements, and further optimizing the company's capital structure and cost of capital.
With our singular focus on generating free cash flow and free cash flow growth, we remained disciplined in managing costs while paying dividends, repurchasing shares, and pursuing additional select accretive acquisitions.
During the first six months of 2018, we did over $271 million in free cash flow. We allocated approximately $166 million of that toward debt reduction, opportunistic share repurchases, and cash dividends while also funding the $94 million to acquire the fast-growing LKQD Technologies for our digital tech stack.
With our year-over-year and year-to-date progress on debt reduction, the biggest midterm election cycle in the company's history right before us and the upcoming renewal of the larger percentage of a retransmission agreements in the upcoming 17 months, as well as the upcoming completion of a recently announced tuck-in acquisitions, we have excellent visibility to delivering on or exceeding our free cash flow targets and a clear path for the continued near and long-term enhancement of shareholder value.
With all of that said, let me turn the call over to Tom Carter.
Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q2 income statement and balance sheet data, after which, I'll provide an update on our capital structure and some points of guidance.
To start, as noted previously, effective 01/01/2018, the company adopted the new revenue accounting guidance issued by the Financial Accounting Standards Board. As a result, beginning January 1, the company presents local, national, digital, and political revenues net of their related agency commission.
This morning's release also provided the 2017 second quarter and year-to-date local, national and political revenue comps adjusted to net out the sales of the agency commissions similar to what we've done in 2018. In addition, we no longer recognize barter revenue and barter expense related to the exchange of advertising time for certain programming materials. These changes don't impact the company's past or future income from operations, net income, broadcast cash flow, adjusted EBITDA or free cash flow.
Also, effective on January 1 of this year, the company adopted another accounting standards update, which requires pension and other post-retirement plans, cost or credit, other than service costs to be presented outside of the income from operations category. Thus, the income from operations during the three months ended June 30, 2017 was decreased by a pension and other post-retirement plan credits of $3.2 million.
Now, turning to the Q2 income statement. As Perry mentioned before, net revenue was up 5.5%, television advertising revenue, local, national and political was up 3.2%.
Political revenue driving all of that at $31.6 million for the quarter, which was a record for our second quarter. Retrans fees were up 9.2% to $276 million. All of those are on a same-station basis as well, given no acquisition activity during the last 12 months as of the second quarter, obviously that will change in the third quarter.
Digital revenues were $64 million which, on a comparable basis, were up mid-single digits. Broadcast cash flow was up 13.5% to $257 million, adjusted EBITDA was up 15.3% to $233 million, and free cash flow was a robust $148 million. Second quarter station direct operating expenses net of trade rose 8.6%, primarily reflecting the growth in broadcast ad sales, as well as budgeted increase in network affiliation expense and expenses of LKQD in Q2 of 2018, which were not there in Q2 of 2017.
Same-station fixed expenses, excluding programming expenses, were up 1% year-over-year. Our 6.7% decline in SG&A expense reflects our previously disclosed reclassification of certain digital administrative expenses to corporate expense. For 2018, we reclassified some of these expenses as part of the update from the Accounting Standards Board and moved the pension and other post-retirement plans out of corporate expenses to reflect them as non-operating items, but include them in EBITDA.
Nexstar's second quarter corporate expense was $27.3 million inclusive of approximately $9 million of non-cash comp, $800,000 of one-time expenses relating to LKQD. This was in line with our guidance for the second quarter recurring cash corporate overhead exclusive of stock comp of approximately $18 million to $19 million. And that range, $18 million to $19 million, is a good quarterly run rate for Q3 as well.
Non-cash compensation is expected to be $8 million to $9 million for the third quarter and $30 million to $32 million for the year, reflecting the issuance of new equity incentive awards in Q1 of 2018.
Turning to the balance sheet. I'll review the key items as of 6/30/2018. Total net leverage was 4.69%, which compares to 4.96 times at Q1. First-lien covenant, which is the only material financial covenant we have, was 2.92 versus a covenant of 4.5. And that compares to 3.13 at 3/31 of 2018.
Outstanding net debt at 6/30 was $4.139 million dollars. That compares to $4.226 million which is end of Q1, which again is approximately a $90 million reduction. We've already reduced net debt by approximately $570 million since closing Media General transaction in January of 2017 or through six quarters of operation, even though – even as we have allocated capital to other shareholder enhancement activities. As you will see in the 10-Q, which we expect to file later today, subsequent to quarter-end, we made additional voluntary debt payments on the Term Loan B.
With our expectations for significant free cash flows leading to the first senior debt – leading up to the first senior sub-debt maturity in 2022 and the flexibility of replay first-lien borrowings without penalties, we feel very good about our overall capital structure and weighted average cost of capital in a rising interest rate environment. We remain on pace and continue to expect Nexstar's net leverage absent additional strategic activity and discretionary capital returns to decline to the mid-to-high 3 times range by year-end with a significant reduction in debt outstanding.
We remain committed to applying our free cash flow to drive shareholder returns, and during the second quarter we allocated approximately $85 million to return of capital and leverage reduction initiatives.
During the quarter, we use $16.7 million of cash from operations to repurchase 0.25 million shares outstanding. We paid our 22nd consecutive quarterly cash dividend which amounted to approximately $17 million. And as just noted, we reduced debt by $56 million and net debt by approximately $90 million given our cash build during the quarter. As Perry noted our record operating results including $271 million of free cash flow in the first half of 2018 enables us to remain opportunistically active in taking action to increase shareholder value. And in the first six months, our return of capital and leverage reduction amounted to approximately $156 million in total.
Additionally, we funded $94 million acquisition of LKQD Technologies, our enterprise digital video advertising technology infrastructure business in Q1 and cash on hand grew from $115 million at year-end 2017 to approximately $147 million at June 30, 2018. Subsequent to quarter end, we funded the recently announced $19.45 million acquisitions of WHDF and KRBK out of free cash flow.
Q2 total interest expense amounted to approximately $56.3 million compared to $55.4 million in Q2 of 2017, while cash interest expense was $53.7 million, compared to $53.2 million in the prior year. We expect cash interest expense in 2018 to total slightly in excess of $200 million during the year, and for the quarter to approximately between $52 million and $53 million for Q3 of 2018.
In Q2, we had operating cash taxes of approximately $32 million compared to $16 million in cash taxes in Q2 of 2017. With the enactment of the Tax Cuts and Jobs Act in December, the federal corporate income tax rate was reduced from 35% to 21%. The Tax Act was timely in terms of benefiting Nexstar as NOLs were minimal at year-end, and we expect cash taxes in 2018 to approximately $100 million.
Nexstar's CapEx for the quarter totaled $15 million, of which $13.5 million was related to station infrastructure, with the balance of $1.5 million for station repack and relinquishment of spectrum costs. With the passage of the RAY BAUM Act in March, which provides an additional $1 billion for repack reimbursements, our FCC-mandated repack costs are fully reimbursable.
Through June 30, 2018, we've spent approximately $7 million which is included in CapEx, and we've been nearly fully reimbursed, as reflected in the income statement. We will manage this cash flow item during the year to minimize any cash flow impact, and we expect Q3 2018 CapEx to be approximately $18 million with an additional amount for repack CapEx on top of that.
Our Q2 free cash flow was $148 million inclusive of the impact of $800,000 of onetime transaction expenses. As such, our second quarter recurring free cash flow was almost $149 million compared with the consensus expectation of approximately $135 million.
We continue to believe our capital structure represents the ideal balance of fixed and floating debt, an attractive weighted average cost of capital of approximately 5%, and both prepayment and refinancing flexibility. We have a well-staggered maturity profile with no significant maturities until 2022, at which point we expect we'll have made further significant headway towards substantial debt reduction.
As it relates to management's focus on free cash flow generation, our positive outlook for Nexstar Media will follow the approach that we've successfully deployed in terms of building the top-line, maintaining close control of fixed and variable costs, and optimizing the balance sheet and capital structure. This plan will continue to support our goals of generating significant free cash flow growth while allowing us to reduce leverage, pursue additional selective accretive acquisitions, pay dividends, repurchase shares, and take other actions that can enhance shareholder value.
As we continue to benefit from expected significant 2018 midterm political spending, the growing value of our retransmission consent agreements and the profitable operation of our digital assets, we have excellent visibility to meet our free cash flow targets in the current cycle and believe we have forged a clear path for the continued near and long-term enhancement of shareholder value.
In summary, Nexstar continues to execute well across all functions, including operations, integration, capital allocation, capital structure and service to our local communities. As such, we are reiterating our guidance for annual free cash flow in the 2018-2019 cycle of approximately $600 million, or approximately a little over $13 per share on a fully tax basis.
That concludes the financial review of the call. I'll now turn it back over to Perry for some closing remarks before Q&A.
Thank you, Tom. Nexstar's execution consistency across our businesses and in the management of our financial and capital structures enables us to continually elevate service to our local viewers and advertisers while also upholding our commitment to enhance shareholder value with growing operating results and growing the return of capital to shareholders.
Now, let's open the call to Q&A to address your specific areas of interest. Greg?
And first, we'll take John Janedis with Jefferies.
Thanks. Hi, guys. Two questions for me. First, you talked about your accretive scale acquisitions and increasing shareholder value. And with your focus on leverage reduction, how are you thinking about the potential for further large-scale broadcast M&A given the assets that are on the market?
And then separately, Perry, you hit on the sports betting topic. On a practical level, when do you see that kicking in given your portfolio? And do you see the potential for it to be a category in like the top 5 or 10 range?
I'll take the second part of that first, John. I mean, obviously we have not seen any direct investment spend yet on the sport betting category. But as it goes on a state by state basis, we can see the purveyors ramping in and ramping up. And it most likely for us would happen in markets that are adjacent to major markets where the betting activity may take place in states that have already approved it. But I think it could become a significant category over time and it will be a local category by and large because it will roll out on a state by state basis. So, I think that if I were to handicap it, I think we'd start to see spending perhaps in the back half of this year, but more likely more evidence of spending in 2019.
And I'll let, Tom, answer the leverage question and capital allocation question.
John, is your question what is our leverage tolerance given potential M&A transactions? I guess, it was – I wasn't exactly sure what your question was?
Yeah. Maybe it's rolled – a few things rolled and I guess that's part of it. I guess secondly, there's – I mean, given your focus on leverage reduction, I guess I was just wondering what is the appetite you have currently for maybe larger-scale M&A going forward given what may be on the market currently.
Well, I would say the appetite for leverage reduction is exactly so that we can participate in potential future consolidation of the space. We made a pledge to not only shareholders but to the bondholders and the debt holders that post-Media General, we would operate down to below four times to continue to improve the business model and the strong free cash flows. We are well on our way to doing that. We reduced leverage by three-tenths of a turn of cash flow between the first and the second quarter. And the third the fourth quarters are going to have multiples of the revenue that the second quarter had in terms of political revenues. So, we're going to see a substantial turbocharging of debt reduction going forward.
Given potential leverage covenants or leverage timing and comfort levels, I would say it's probably somewhere around a 5 times level and that's more deal-specific just in terms of the return on the actual acquisition and the free cash flow characteristics of that. But I would say generally, that's probably a good number.
Yes, John, I would just say for a substantially accretive acquisition, we are happy to consider increasing our leverage profile, because it's a substantially accretive acquisition. Obviously, again with a clear path toward de-levering vis-à-vis synergies and operational improvements in the short term thereafter just as we have demonstrated with our acquisition of Media General in 2017.
Thanks, guys.
All right. Moving on, we'll have Dan Kurnos from The Benchmark Company.
Great. Thanks. Good morning. Two questions just on core, Perry, interesting color around Ford. If you could just talk to kind of sort of the underlying core trends as we head into Q3, understanding that there's incremental displacement? So, if you also want to comment on displacement, auto being a focal point in core.
And then, on the OTT, I remember asking you last call, I think you guys have just signed up NBC on YouTube. I think your sub-count was kind of in the mid-6s. Can you just talk about how OTT sub-count is pacing kind of general sub-trends there, and if you have any OTT renewals coming up in your expectations? Thanks.
Sure. Let's start with core and, first of all, kind of review a bit of Q2. We had roughly 5 of our top 10 categories that were flat to up and 5 that were down. The categories that were up were attorneys, medical healthcare, home repair, and kind of infomercials, paid programming, long-form media. The categories that were down were auto, which was down about 10%, and I'll give you some more color on that in just a minute. Fast foods, furniture, other media, radio, TV, cable, and then service various were down. So, kind of a typical quarter in terms of half up and half down in our top 10 categories.
As it relates to automotive, we think there are some things that are specifically influencing the category currently that are situational and not secular, and I'll give you our view on that. Car companies continue to spend on incentives. In fact, incentives now represent about 11.5% of the vehicle prices, and that all comes out of the marketing budget. So, they're moderating ad spend and co-op I think in order to stabilize those budgets as we approach the back end of the years. So, I think that's item one.
In our footprint, we have multiple dealers that are consolidating, and in that instance, budgets have been put on hold, like in Arkansas, for example, Everett Group buys the Landers Group. And so spending is on hold until the acquisition is completed. Most car companies have changed their executive management in the past 12 months, as well as their ad agencies which we believe impacted their media strategies for 2018. So that's a bit of a color on Q2.
I think as it relates to Q3, as we look at our categories, automotive is pacing better than it finished in Q2 at this point with a substantial amount of the automotive business on the books. Other categories that are pacing ahead are attorneys, medical healthcare, home repair, insurance, entertainment, utilities, real estate, lumber, hardware and along the way.
I will say as it relates to – so our pacing for Q3 core revenue is pacing ahead by a material amount over where we finished in Q2 on our core ad categories. I will say, as it relates to automotive though, there is hanging like the Sword of Damocles, the potential of a 25% import tariff, which could affect not only Asia, but Canadian and Mexican imports of domestic vehicles or domestic nameplates. And that issue could impact ad placement across several of the foreign nameplates. And we think yet to be seen is the senior management changes due to the death of the CEO of Fiat Chrysler, we think that's already affected their already slowed and stalled marketing plans.
And that's again, the advance placements have been cut back all year for Dodge and Chrysler and Jeep, and a reminder that Ford and Dodge place annual buys, every other OEM dealer places on a quarterly basis. So, hopefully, that is helpful on the core revenue as we see it.
From an OTT perspective, we estimate right now that we're somewhere in the 700,000 OTT subs. Reminder that the counts lag by 90 days as does the payment check. We did just sign and launch our NBC affiliates on the DIRECTV NOW platform, literally the week before the British Open. So, we have no data yet on those sub-counts but we now believe it will be likely the end of the year before we have sub-count trends for all the services, in all the markets where they are launched. So, hopefully, that's responsive to your questions.
Very much so. Thanks, Perry.
Next from Deutsche Bank, we have Aaron Watts.
Hey, guys. Thanks. Appreciate all the color. Bigger-picture question, as you think about M&A opportunities, has the Sinclair-Tribune process with the FCC and DOJ altered your view on the likelihood of getting transactions of scale approved by the government?
I don't believe so, given that we had a very definitive plan to clear through the regulatory agencies when we acquired Media General. I think we would apply that same discipline and rigor to any other large scale. Our opinion and it's just our opinion is that a number of the situations that arose in, the Sinclair-Tribune process are specific to that process. And I don't think there's a read-through that this is a general M&A trend. Having said that, I'll be in Washington next week at both the DOJ and the FCC and asking some of your same questions.
Fair enough. And maybe I'll get more color on this next week, but also, is it still your view that the ownership caps, the 39% cap is still likely to move in one way or another over the near term?
Yes. We think that there will be an increase in the National Ownership Cap proposed by the FCC at some point this fall. And we think it will be a substantial increase that will be coupled with the elimination of the UHF discount. As you know, our position is if you raise it from 39% to some other arbitrary number, all you've done is replace one arbitrary number with another. And that the only answer that will likely survive judicial review would be a total elimination of the cap and allow us to compete with all of the unregulated industries and businesses in media space, primarily on the digital side that are not capped to only reaching or doing business in 39% of the country. So that's the position we will continue to advocate. And where the FCC ultimately ends up and ultimately the courts end up, I think it's too soon for us to speculate on that.
Okay. That's helpful. Thanks.
Next, we have from Stephens, Kyle Evans.
Hi. Thanks. 62% of your revenue today comes from duopoly markets you just announced Springfield and Huntsville. How much more duopoly opportunity is there into the station footprint you've got today?
Well, we're now doubled up in 66 of our 100 markets. So, in theory, a third of our market footprint would create the opportunity for a duopoly. Now, there may be some markets where there's just not a willing dance partner, or it would, in the DOJ's eyes, provide an undue market concentration, so not all 34 of those markets will be actionable. But suffice-it-to-say, we have conversations ongoing in any market where we only have a singleton station to see if there's an opportunity to create a larger revenue share in the marketplace, and an increase in margin by running those two revenue streams off of a single fixed cost structure.
So, that continues to be where we will look to opportunistically expand, as well as vertically taking our lead from what kind of capacity we would have under whatever a new national cap scenario might be.
Thanks. Tom, on digital do you mind spending a minute unpacking that line there, I know there's some discontinued from the prior year. Could you talk a little bit specifically about how LKQD is performing, as well, please?
Sure. No. LKQD is meeting our expectations in terms of the second quarter operating performance. It is materially profitable, so we're very happy with LKQD. But you're right, Q2 of 2017, the digital number there included revenue from federated and dedicated that is non-recurring and those businesses were shuttered in the first half of 2017, so that amount was excluded from the 2017 number in calculating the comparable growth numbers in revenue.
Got you. And lastly, you alluded to some progress on the new to TV metric in terms of applying Nexstar practices in Media General markets. How much longer is the tail there? How much – what inning are we in, in terms of getting that full revenue synergy pie?
Well, when you have 100 markets and some get it probably a little quicker than others, so it's a continual process. Tim Busch and his regional vice presidents are in those markets literally on a weekly basis, spreading the gospel as well as making sure that all of our legacy markets are continuing to perform with those expectations. But I think that in terms of sales practices and indoctrinating sales management, you'll see that a continued effort for us into and through 2019, being a non-political year, business development is going to be increasingly in-focus.
A, we'll have inventory back that the politicians won't be laying claim to. And, B, we're going to be looking to grow our core revenue in the absence of any potential displacements. So, we tell our GMs all the time, the quickest way to grow your share of market is to develop a piece of business that your competitors don't have because that's a 100 share piece of business. And obviously, we give visibility to it on every quarterly call. That's how important a mandate it is in the company overall, and we kind of speak that talk every day in communications with our local markets.
Great. Thank you.
Okay. Moving on, we have Leo Kulp from RBC Capital Markets.
Hi. Good morning. So, first question, when you think about doing further M&A, how do you think about what the ideal target would look like? Is there a particular type of station or size of market that you're targeting, or is it really just about the financial impact? And I...
I would say, yes, the most accretive deal is going to be the deal that we gravitate towards first and foremost. There are situational things – we could potentially acquire Cox today under the current rules and be under the 39% cap with UHF discount. So, that obviously would have regulatory certainty in today's environment. The environment could change tomorrow or in September or October but – so, that obvious effect (39:54). But it's the most accretive deal, we have CW affiliates. We have ABC, NBC, Fox and CBS affiliates. Money is money and opportunity is opportunity, and we would gravitate to the one that returns the biggest bang for the buck in terms of accretion to our shareholders.
Got it. Thank you for that. And do you see a real strategic benefit from owning, say, non-big four stations in top 10 markets, or is that just about accretion too?
It's about accretion. I mean, I would say that we do well with – we have done a great job. Tim and his team with KRON in San Francisco. And Tim installed a new general manager out there, who has done a great job of making that station more local. We've increased the amount of local news. And what used to be an eight-digit negative cash flow is now an eight-digit positive cash flow.
And so, I started my career in independent television even before Fox existed and that can be a good business. I wouldn't say we want that to be our only business or our primary business, but again if you believe as we do that the next value lever for our industry is going to be spectrum monetization. And again, we believe that monetization is T plus 5 years or more – 5 to 10 years before we fully monetize our spectrum assets, then spectrum in larger markets and creating a larger footprint of spectrum across the country would be attractive.
So that's one thing that might not be in everybody's vernacular that would certainly be in ours. But the deal would have to stand on its own and be the most accretive opportunity in front of us before we would act on it just for spectrum purposes.
Okay. I appreciate that. And then last question, how do you think about doing a transformational deal on your own? Would you do it on – do you have the financial capacity to do it or would you prefer need to bring in an outside investor?
You know, that's all very situational specific, and we'll do the most accretive thing for our shareholders. We're not excluding or including any or all opportunities, but that's – you're asking a very hypothetical question and I really can't answer any more specificity than that.
All right. Thank you both.
Next, we have Barton Crockett from B. Riley.
Okay. Thanks for taking the question. I guess a couple of things. One is, I know that there's been some kind of talk relatively recently about the potential that private equity may have a renewed interest in the TV station sector. And I'll ask you kind of generally because you guys have some, obvious, kind of background around this.
But what can you tell me about your current view of the suitability for a large company like Nexstar in this environment to contemplate being private versus public? How would you describe kind of the attractiveness and unattractiveness and the capacity for that given your current view of credit markets and the appetite for debt?
And then I know there's been a history, years past when private equity was very interested in active and TV stations maybe less so in recent years. Are you sensing that there may be more interest generally in private equity and being active in this space again?
Well, I think, Barton, it would start with depending on whose estimates you read. There's a $1 trillion of money raised in private equity looking for a home, so could that necessarily mean that there's more interest in our sector and any other sector. We've said on prior calls that our sector is tailor-made for private equity, given the high margins and the high free cash flow and the ability to delever quickly. That seems to be the first chapter of a private equity playbook, having been in business with a private equity sponsor for the first seven years of the company's existence.
Having said that, I think we would only go private if we were paid to do so. And if it were the best decision and to create the most value for our shareholders, then it would be something we would consider. We don't necessarily see it as a financing mechanism or a capacity creation. I mean, we've got a pretty stout balance sheet and equity that is highly valuable to us and, we think, to others. So, the only reason we would do it is if that were in the best interest of our shareholders. And I think you can put a period at the end of that sentence.
Well, if I could follow-up a little bit on that is with going private be a bad idea in this environment, given that it would take away stock as acquisition currency?
I think you'd have to tell me. You'd have to ask our shareholder base at what price and then you can tell me whether it was a good idea or bad idea. There are people that want all cash. There are people that may want stock. I mean, you can give stock in a private company just as well as a public one. It will not be LKQD obviously, but I don't think that would drive any decision here. I think it would be made purely on the basis of what is in the best interest of our shareholders.
And if someone were willing to pay a significant premium to what we have been able to generate for our shareholders in the public markets as a standalone company, then that's obviously – the shareholders will get a chance to vote on that if it ever came to that point. So beyond that, I mean, as Tom said earlier, these are kind of hypothetical and theoretical questions, and they're not things that really we've thought about at this point.
Okay. And then switching gears, one other question, if I could. One thing that came out of Sinclair's problems with the FCC was essentially some pushback on what I would describe as sidecar arrangements. And I'm just wondering, do you think that the FCC pushback on Sinclair suggesting that maybe they were deceptive and some of that? Is there anything in that makes sidecar arrangements generally problematic? Or do you think it's just so specific to Sinclair?
And I say that because I assume that if you are working with a sidecar, they'd be someone you had a longstanding business relationship or friendly with. So, I'm just curious if you think that there's any broader issue in the way the FCC has come down.
I'll go back to my earlier statement that I think that inferences coming out of a Sinclair-Tribune transaction are specific to that transaction. I don't think there's any read-through to the broader marketplace. I would tell you that all of our VIE or sidecar arrangements, if you want to use that term, are with broadcaster – veteran broadcasters that have experience in the industry, and so we believe that those have been – and we did our first one in 1998, obviously. So, we've been around for a long time. And the FCC has had plenty of time to review them, and I believe that they pass the inspection and we don't anticipate any issues with our sidecar relationships and think that any of the commentary you're speaking to is probably deal-specific and not a read-through to the broader market.
Okay. That's great. Thank you very much.
And next we have Clay Griffin from Deutsche Bank.
Hi. Good morning. So, thank you for taking the question. Tom, I think you mentioned the run rate for corporate expenses and I wonder perhaps if you could revisit that but just at a higher level, just curious what kind of opportunities there are for further efficiency in your non-programming OpEx, and how we should think about that over the next quarters?
When you say other efficiencies in non-programming. Are you specifically speaking to corporate?
Well, just corporate SG&A just kind of non-programming station expenses, just kind of the opportunity you guys might have for further efficiency gains there?
Sure. Absolutely. I mean, there are all the time. We are long on real estate post Media General. I think you'll see us, and we have been taking action to monetize or to exit leased inventory from a real estate perspective in order to reduce costs.
Clearly, we're also automating wherever possible not only on the business hub and traffic side, but also at the station level from a master control perspective, etcetera. Those projects are ongoing, and we chip away at that on an annual basis. So, yes, there's plenty of opportunities there, and it's up to us to wring that towel as much as we can. Some of that does require capital in order to put in place technology, in order to generate some of those efficiencies, but all of that is ongoing and a continual process.
Great. And then as we think about other folks have asked about the cap and opportunities to achieve greater scale, I'm curious about the – if your view on in-market consolidation has changed over the last quarter or 90 days. And then as a follow-on just how you see collaboration opportunities like the TIP Initiative and others progressing from here?
Sure. With regard to in-market, obviously we've executed on that in the last 30 days. Some of those opportunities take a little time, a little hand-holding to get them over the finish line, but obviously those are in our view massively accretive. We just wish that there were more media and larger opportunities out there. Those do exist, but they take some time to get to the finish line.
Great. Thanks for the time.
All right. Next, we have Marci Ryvicker with Wells Fargo.
Thank you. I want to follow-up on another, I guess a bunch of questions. If you were to do a large transaction, I know you levered up for the MEG deal to about 5.5 times. Is that the level you're comfortable with, or is it something below that?
Like, I said before Marci, it's all deal-specific with regard to how quickly we can deleverage and get back down. Generally, I would say since we did the MEG transaction, the cost of debt is higher, therefore our appetite for debt is probably marginally less now than it was before. But in terms of trying to put a specific number on that it's difficult because every transaction is different.
Okay. And there's a thought out there in the marketplace that should Tribune and Sinclair not consummate their deal, that Tribune may still be up for sale and that Nexstar would be the most natural buyer to take a second look because you took a first look. Can you comment on that sentiment?
No, other than to say our eyes are wide open as to opportunities that are out there. And I would tell you that at our board retreat last week, we discussed the point that in Nexstar's history, there probably hasn't been this much supply or potential supply in the near term. And so, that's of interest to the company. We are a consolidator. We will continue to attempt to grow where it makes sense for our shareholders and financial sense and operation and the synergies are dramatic. So, we look at everything, and we have a bright line walkaway price from everything.
And if we can transact inside of that that means it's more accretive than buying back our stock, and that's what we're kind of paid to do. So, I think that we will have to see how that situation plays out and the timeframe on which it plays out and what the downstream legal situation is with all of the entities involved and what those contingent liabilities could look at. But that's not anything for us to comment on specifically because it's hypothetical as of this point in time.
Okay. And then, last question is on fundamentals. I know you're one of the only companies to give a 2018-2019 free cash flow guide. And, Tom, I can't remember if you talked about what the underlying expectation is for core in that free cash flow guide?
Flat to up slightly.
Okay. Thank you.
But that was also based on a political number which has now been increased.
So, for 2018 it would be lower than that, but 2019 it wouldn't be affected, correct?
Well, 2019 – political is really not that important.
Right. Okay. Thank you.
Yeah. I would just point out Marci that not in the original guide were the two acquisitions that were announced last week, and the increase in the political guide that was announced this morning.
Got it.
Moving on, we have David Joyce with Evercore ISI.
Thank you. A couple of questions on digital and targeted advertising. First, on the digital side, can you discern if the digital – if you're taking share from other digital platforms or is it from advertisers who are allocating new spending into digital?
I don't know that we're taking it so much from other platforms today. Although as we build our digital business, our vision is that our local sellers and our local brand identity can perhaps be the tiebreaker that would allow our local sales people to be the concierge to help SMBs navigate through this morass of opportunity. So, we do think that will be an opportunity going forward. I would say that it is either increased spend that is allocated to digital or a lot of our digital growth in our local sites has come from, frankly, from newspaper over the past several years.
Thanks. And second question is if you could just provide an update on the ATSC 3.0 (54:57) is there any new learnings there, any adjustments to an earlier strategy maybe as you've been moving along in those two markets?
No, it's obviously very early days. We have agreed to be the first 3.0 lighthouse in Phoenix for that full market conversion. That will happen later this year. It hasn't happened yet. And, here, in Dallas, with the build-out of the SFN Network with American Tower as a partner, those are just beginning. So, there's nothing really up and running yet. We're all in the early stages of the transition which will lead to kind of the test, and the learnings will come out of all of that.
And I would say we are learning all the time. Brett Jenkins, our CTO, is navigating both the Spectrum consortium and the Pearl consortium and our representation in both. We're the only group that's represented in both of those. So, I think we will have the highest and best learnings out of both of those 3.0 transitions as they develop. And, again, it's not as if Phoenix has transitioned or Dallas has been fully built out yet. Those things are ongoing, but we still have a ways to go.
Okay. Thank you.
And next from Barrington Research, we have Jim Goss.
Thanks. Perry, given that you're headed to D.C., are you expecting that the regulatory issues are about to become or be better defined, or is that still vague and in process?
Well, I think that it's kind of a Texas Two Step, Jim, that the regulatory agencies will propose change and there is likely going to be predictable blowback from special interest groups regardless of what that change is, whether it's a point increase in the cap or total elimination. So, often, these things end up in the courts and jurisprudence would prevail.
But I think the affirmation of the UHF discount, creating an effective 78% cap today, while it was – it occurred on a technicality it still occurred. And I think that hopefully will give Chairman Pai some additional momentum to deregulate here. So, we're hopeful and we'll, obviously, be in discussion with that and other topics of issue to the local broadcast market. And I think with the DOJ, to make the case that total television ad spend as a percentage of total local ad spend is about 14% of the marketplace.
And so, I'm not sure how anyone could see the 14% is undue concentration of anything at this point in time because obviously video is video, and these sources are replaceable, which is an underlying tenet of DOJ regulation. So, we'll be trying to understand that more and have conversations there that are substantive and make our case and kind of see where things go.
But I do think that FCC will take action before the year is out. That's my belief. I don't know anything more than anybody else does. But I do believe that the FCC will make a proposal to increase the National Ownership Cap from 39% and eliminate the UHF discount item as part of that review. And I believe we'll see some action from the FCC before the year is out. It could roll in to next year after the elections, but I don't think so. But again, that's just one man's opinion.
Do you also – are you inclined to wait until the regulatory dust settle before you pull the trigger in any sort of acquisitions? Or do you just continue the negotiations behind the scenes based on what you assume will happen and just wait until that sort of thing happens?
Yeah, we're not really waiting for anything. As I mentioned, there is a particular potential acquisition that could be done under the current rules. But that is going to have to be an accretive acquisition opportunity for Nexstar or we won't act on it. We continue to look at in-market and other acquisitions that would increase our national reach. As you know, we're at about 26% and change against the 39% cap today. So, we have running room with the UHF discount in place. And then obviously more running room if the cap is raised substantially or eliminated. So – and I think we would price the risk accordingly in any transaction that was in discussion while the rules were being reviewed.
Okay. One final thing. There's a general assumption that as you make acquisitions or become bigger, you have better negotiating leverage in terms of things like retrans, given that you doubled your size effectively or more so with MEG. Have you found that to be the case that you do have a better positioning and it's been beneficial to you in that way?
I do believe that scale matters, and I do think we have seen incremental benefit from doubling the size of the company in 2017. And both vertically larger reach, and then horizontally, having more outlets in a marketplace that are wholly-owned that you can bargain for. I think both of those scale matters. And scale matters in MVPD discussions, scale matters in discussions with the networks as we become more important partners to one another, I think that scale is increasingly an asset. So [Technical Difficulty] (61:03-61:08) scale is incremental negotiating leverage.
And it's often the reverse comp issue as well?
Never know because we're not in a control group obviously, but we feel it does. We're an important customer with each of the networks. We're either the number one or number two affiliate group for all networks now. And so, it's important to be important we believe. So, I think we have good relationships with constructive business discussions and we have very spirited negotiations. But at the end of the day, both parties have to be [Technical Difficulty] (61:45)
Okay. Thank you.
Thank you so much.
All right. And ladies and gentlemen, that concludes our question-and-answer session for today. I'd like to turn the floor back to Mr. Perry Sook for any additional or closing remarks.
All right. Well, thank you very much. We look forward to continuing to report on our growth and accomplishments in the second half of 2018. And on behalf of the 9,200 employees of the Nexstar nation, thank you for your interest and your ongoing support and for joining us today.
And once again, ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect.