Local TV Industry CFO’s Update

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Local TV Industry CFO’s Update

Thursday, October 22, 2020 | 10:30 – 11 a.m. ET

Open to: Marketplace Pass Holders

Main Stage

CFO’s from top groups discuss the financial environment faces in the near term, and how to manage the opportunities and risks during these unique times. Discussion areas include the competitive outlook, potential areas of investment, anticipated payback periods for new technologies and what staff needs will be to maximize those opportunities.

Featured Speakers

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Tom Carter

President, COO & CFO

Nexstar Panelist
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Rick Ducey

Managing Director

BIA Advisory Services Moderator
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Victoria D. Harker

EVP & CFO

Tegna Panelist
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Mike Nelson

EVP & CFO

Fox Television Stations Panelist

Session Transcript

Hi, I’m John Wastcoat, SVP of Alliances and Marketing at Zixi. Welcome to day four of NAB Show New York. Coming up today your access to sections covering timely issues facing broadcasters, tech chats, and live demos from industry innovators and a special screening of the Telly awards.

Welcome everybody to this panel. Local TV industry CFO update. We’ve got some great panelists, they’re going to share insights about what’s going on to the extent anybody knows in the local TV industry in 2020. We look ahead to 2021 and beyond. So we have here Tom Carter, who’s president and CEO and CFO at Next Star. Victoria Harker who is EVP and CFO at TEGNA, and Mike Nelson, who is EVP and CFO at Fox TV stations.

So we have a concentrated dose of time care to try to cover a lot of different ground. So I think what we’ll do is just jump right into it. I’m Rick Ducey managing director of BIA Advisory Services. I had the pleasure of being a moderator today to join these three excellent people to share some thought leadership about what’s been going on through this current pandemic year, only ups and downs and trying to figure out how the heck to plan for 2020 one based on what we think we know is going to come out of 2020.

So Tom, why don’t we start with you? So we were just chatting a little bit before we kicked off the session that from a CFO perspective that the process of doing budgeting where– a lot of times you talk about doing zero-based budgeting, but it is sort of start with last year’s budget and make some incremental changes. it doesn’t work like you’re saying looking at 2021. However, you slice it up quarter by quarter total year. There’s so much happening in 2020.

What kind of short term things have you had to look at and what are these short term things coming pre-pandemic like first quarter through the second two quarters, and now, hopefully, looking up for the fourth quarter. What are the short term things that you’d manage through in 2020? And as you finish up your budgets for 2021, what carries forward? What does next year look like?

The biggest challenge was just the shock that went through the system because it seems to me– I can remember back in March, I think it was the 5th of March or something everything seemed pretty normal, and by the 23rd our stock price had gone down 65%. And that was representative I think of the market as a whole, but also the suddenness and the severity of the downturn and how from March to April, things changed appreciably.

And so what we did as I’m sure others have done was really take a good hard look at all of our expenses because We were experiencing. And this is publicly available information at 35% decline in advertising revenue in the second quarter over the prior year. So we dynamically managed our business and our expenses in particular, to try and match up to the degree we can that decline in revenue.

Some of the expenses are variable sales commission, sales overrides, some of that kind of stuff, but clearly that wasn’t going to be enough. And so we dynamically managed our– I’d call them discretionary expenses more so than just sticking to the variable expenses. And we’ve done that quite honestly every quarter since then so Q2, Q3, and Q4, and those amounts vary based on our perception of where advertising revenue was going.

The bad news was it was a precipitous fall. The good news is I can’t call it a precipitous regeneration of revenue, but it has steadily worked its way back. So that I would say our expense savings are probably a third to a quarter of what they were in the second quarter. What they’ll be in the fourth quarter. And then, you’re right you know 2021 will be a budget challenge because every quarter show something different.

In Q1, we anticipate our revenues will be flat to down a little bit compared to Q1 of 20, but our expenses should be down pretty materially because the other thing is never fail to take advantage of a good crisis as a way to always look at your expenses. And while some of these expenses will change, not all of them can change over time and I’m sure others experienced the same thing. We don’t think we’re going to need as much real estate as we have before.

Right.

The bad news is we got to put our disaster operating plan into practice in about a five-day period, the good news is that it worked. And the trains have been running on time, everybody has gotten their job done. It’s easier for some people than others by and large, people have responded very well. And I think that’s going to be a change and what we need to really that is how big a change that’s going to be and what other aspects besides that are kind of see changes going forward.

Yeah, I mean, it seems, obviously the pandemic kind of stress test in a lot of things disaster recovery plans, the budgeting process itself. And then just being close to the market, I mean, what’s really going on. We can’t really make those kind of year over year assumptions. We have to get back to the customers and really get into their business models and what they’re seeing and what they’re planning to do.

And as we were talking before, we have 115 markets and every one of them is different.

Right. Why make it easy? You have to have 115 stories. So it’s just kind of a phenomenal range of challenges and uncertainty and trying to get information and insight as to what’s going to happen when you’re making these big decisions very impactful. So Mike what kind of things, I mean, probably similar I suppose, right? How have you manage these kinds of challenges sort of against pre-pandemic and post-pandemic in 2020. And what are those changes you expect to continue going forward?

Tom and I were chatting actually before this call and our fiscal year ends in June. So we had to do a budget in the middle of April. So as you can imagine that was just a little bit of a challenge. Lots of back of the envelope scribbling and so on and so forth. I think there is definitely a lot of fiscal management and trying to– in uncertain times trying to figure out how to look forward.

I think one of the things that FTS just operationally that we’ve done very well and Tom touched on a little bit is we’ve managed to do remote working pretty well, right? And we’ve put the health and safety of our employees first. Most people are working remotely and it’s not always easy, but I think done just an admirable job of doing that and getting there.

In terms of kind of how do you look forward, it’s interesting. Tom was mentioning that the base market in April and May looks a lot different than the base market looks now, what’s it going to look like in the future? I think we just need to continue to be kind of flexible and adaptable. It’s hard. The real estate issue is hard clearly. You probably don’t need to have as much of a footprint moving forward, but also you don’t want to rush in and do anything right now, right? Because people are eventually going to want to go back to work but you probably don’t need that footprint.

So right now, there’s a lot of kind of wait and see. It’s very hard to come up with a kind of concrete strategy on how to move for other than to keep executing what you’re doing and what you’re doing well and be as pragmatic as possible.

What kind of signals are you looking for from the market, government figures like employment and so on? Is your team getting close to buyers to get a sense of what their markets look like? Auto’s huge and their supply chain has been impaired. I mean, the revenue side drives a lot of this as well as the expense side. Are there any particular things you’ve learned along the way that gives us some pretty good guidance when we look for these kinds of signs or these kinds of data points?

Yeah, I mean, a couple of things for us are promising– look, everything is going great for everyone right now with political. It’s been fantastic and a record year and so on and so forth, and that’s fantastic. The auto markets definitely picked up, I think, for everyone. I’m sure everyone’s seeing and we’re seeing it as well the gaming and sports betting is picking up tremendously.

And at Fox Corp, we’re invested in that. We have an ownership stake in Flutter. We do a lot of integration with Fox betting and the like. So that’s been tremendous. We’ve seen that that pick up. Certainly there’s challenges ahead and again, how much is the base market going to continue to pick up over the next 12 months is anyone’s guess. And it depends, I think, how COVID move forward and whether or not there’s a vaccine. So it’s tough. But we do see definitely some promising signs ahead.

Right. Yeah, one of my standard jokes is, if you’re going to be hired to run a TV station, try to get hired in an odd year because then you get the political ride in the even years. Victoria, from your perspective, I mean, maybe we can divide this into– it’s almost quarter by quarter, I guess, but at least pre-pandemic and then during the height of the pandemic. How have you tried to drive the ship through the coming out of what looked like a great year at first quarter, and then a horror story in second quarter, third quarter. What kind of techniques– how do you approaches? So what’s been your thought process?

We just pre-released last week, actually. The third quarter for us was very strong or a lot stronger than we would have anticipated. And I get the sense that it’s very market specific. We tend to be in demographically growing markets sort of not the LA, New York, but the next tier down. Sector specific, obviously, put a lot of demand has come back for advertising and marketing both digital as well as our broadcast suites of products.

So that was actually a happy surprise relative to the third quarter. We’ve been managing expenses as Tom discussed also, anticipating that it would be a slower recovery than we actually saw. And I think the knock on effect has been at least in the markets we’re in. Ratings are up there are a lot of eyeballs, well, it whether it’s because of the resurgence of sports and all of the sports at the same time or just paying attention to what’s happening in their markets, whether it’s social unrest, whether it’s related to the pandemic or otherwise.

So a lot of eyes on our broadcasts, as well as the advertising. So I think that all has generally lifted the boats at least in our markets relative to the third quarter. So sub trends are better than we would have anticipated as well.

I mean, we we’re talking about different levels of comeback and pieces of comeback geographically among the different markets. Tom, we were talking about bigger markets kind of have one fact pattern and some of the mid-sized and smaller markets may be less affected, anyway and coming back faster perhaps. And then some of the verticals it’s great to see auto comeback. What’s your sense, Tom, of which verticals will come back stronger sooner?

Well, I mean, we’ve actually seen it and I know Mike mentioned gaming sports betting, you know, quite honestly wasn’t even a thing for us a year ago. And now I would say, it’s maybe a top 10 or 12 category, maybe not a top five category. But I mean, it has been exceedingly strong. And it’s very situation specific set depending on how you define restaurants. You’ve got the Chick-fil-A’s and the chick polities of the world and some of that are doing landmine business I know that Chick-fil-A that I drive by every morning on the way to work put in a second drive-through line.

Wow.

But that’s not something you see in New York or except in suburban Chicago. You don’t see it in the major metropolitan areas. And the same with retail there are winners and losers in all of that whether it be the Walmart and the targets and the Home Depots of the world or the Big Box retailers that are struggling. So I would say all of that is very situational, but clearly health and insurance is a growing category.

We talked about sports betting and some of those types of things. Home services and repairs, HVAC, all of those are- really good category. Yeah.

Home improvement.

Where our people are spending their time, right?

[INTERPOSING VOICES]

Anything at home, yes.

Anything that kind of centers around that, I would say the wind is generally at your back. But you’re right, large markets in New York and Chicago largely not open. We haven’t had anybody in our office in New York in six months, and probably don’t expect anybody there for six more. But God bless them in Topeka, and Billings, and Lubbock, they’re all there 100% working in the station. I would say, generally speaking we’re probably 60% in the office, 20% exclusively at home, and 20% kind of a flex.

And the same is true of the Seattle’s, and the Denver’s, and the Dallas’s so they’re all back online and populated.

Right. Do you see from the different verticals perspective, I mean, those sort of interests you said Tom about in the restaurant category. During at pause, I guess that probably gave sellers a chance to go back and talk to these businesses and get a sense of what they’re going to try to do next and then reformulate plans for how to provide advertising plans for these clients. And maybe learning that it has good impact that we can expect coming forward into next year reestablishing client relationships and learning new ways to plan with them.

Well, I think for broadcast in particular really earns its stripes is a total market reach trying to get a message out to the entire consumer. Basically, if you’re saying we’re open again for business, I think one of the most efficient ways to do that is through broadcasting. So but at the same time, we can pivot back and forth between digital et cetera. But just like rolling out new model years for the auto manufacturers is a great business right in the strike zone from a broadcasting perspective.

I want to talk now about 2021, specifically, and where you’re seeing growth opportunities. I know you’ve been dearly lovable budgeting meetings you’ve been having, so sort materially from those. But as you look at 2021 in your budgets and I know you have earning calls coming up. What does it look like? What are the growth opportunities that you’re seeing maybe start with you Victoria let say for 2021 that are actually hitting revenue and expense items. So it’s sort of realistic and not just– this is a future growth strategy just like they were actually putting numbers to it now.

So for us that would be definitely in the avenue of sort of OTT in our premium suite of products, actually. That is it was launched mid-year in 2017 so really 18 and 19 were developing sort of building the products out. We have some peers that are white labeling it, so it’s really doing a nice job sort of both of taking share. And we’re managing it for a little bit more margin than we did in previous cycles when it was purely expense driven to go in and grab share only.

But it’s obviously leveraging political as a very sort of logical extension relative to its platform, but I think even into ’21 in a nonpolitical year, it’s going to be a strong growth year.

Right. Like what are you seeing for 2021, were the pockets of growth that you’re focused on.

The first comment is, yeah, I think things from a linear perspective have bounced back, I think quicker than we anticipated, which is fantastic and speaks to Tom’s comment about the reach of broadcast, but I think the foundation is solid. Looking forward on kind of growth there is we’re very focused on OTT. And from a Fox Corp. perspective to be is now in our kind of lineup so we own to be, which has been great to have an OTT platform is part of our company to launch our own OTT channels that we started, which is Foxhole, which is a channel for the African-American community focused on African-American content.

We actually launched that back in January of this year, that’s now on TV. It’s now on Samsung TV Plus, and it’s a great product still trying to figure out exactly how to monetize it. The other thing from OTT perspective that we have is News Now. That it’s been launched in Phoenix about two years ago. We’re expanding it. It’s another OTT platform where it’s basically kind of just the news.

The idea being that the news speaks for itself without a lot of commentary. What we’re trying to figure out new products and we’re genuinely excited I think about the space. I come from the film industry, so I’ve only been in this industry for 18 to 20 months and coming from the film industry everything that you have to launch costs a ton of money. [LAUGHS] So the barriers to entry are really, really difficult, right? Just a development budget on its own is hard in this industry.

I think what I get excited about is we were able to be nimble about both Foxhole and News Now and focus on– it’s going to be up to the consumer, and it’s going to be up to us to build the best product as possible. But it didn’t cost a ton of money to kind of develop these programs and these OTT platforms, so we’re excited about it.

That’s great when OTT brings in strong as it sounds like. Tom, for 2021 what do you see as kind of a growth drivers that you’re really focused on?

No, I agree with what Victoria and Mike both said. I would say, the way we think about it is we have all of this great content that is in demand. Our viewership is up, our page views are through the roof. And now, we’re trying to make sure that we’re making our content available to consumer in whatever way, shape, or form he or she wants. And wherever they want it, whenever they want it.

So that also means, OTT we have some direct consumer offerings we’re trialing one in San Francisco with Cron, we’re on it both as a spot a subscription video on demand or an AVOD, but both of those work really well from an OTT perspective, either from a subscription or from a programmatic perspective. So again, you know the strengths what we have– we generate so much in local news over almost a quarter of a million hours a year. How many different ways can we monetize that goes back to Mike’s point. You’ve got all of this embedded expense and this embedded human capital. And it’s just up to us to mine it for the best economic return that we can generate.

The last question that I want to put to the group here, and Victoria maybe start with you. Is as we look a bit further clearly OTT is a significant technology, but more broadly looking ahead what technologies– are you kind of curious about in terms of opportunities or potentially challenges for TV. I mean, it could be programmatic technologies, it could be OTT, it could be AI machine learning. It could be whatever. What kind of things capture your imagination as you look a little bit longer term out in terms of how technology might impact the TV industry?

Well, I do think and there’s two different answers to that I give you on the front end relative to content and delivery ATSC 3.0, I think is a technology that will be an enabler of apps and I think we’ve yet to see sort of how that’s going to play through. But certainly the sports betting model as it’s developing, that’s right down the center of the fairway relative to that and I think whether it’s an interactive betting experience, I think it will have broader application than just sports and just betting.

So I think that there are definitely– that’s the conduit. That’ll be the platform we believe relative to technology from a operational and a financial perspective. I think there’s a lot to be gained also in AI and the ability to do things either more remotely or in a more automated fashion than we’ve ever done before. And I think we’ve all moved to shared service and sort of leveraging the intelligence of our teams, but then having AI as an add on, I think will make it even more streamlined and replicable.

Right. Yep, makes total sense. Mike, when you think about technologies and kind of high impact areas in your business lines, what kind of things you tend to focus on?

Victoria kind of nailed it, again, in terms of ATSC 3.0. And then just to reiterate just from our perspective, we’re super excited about all the possibilities surrounding kind of gaming and sports betting and how that’s going to open up. And as Tom mentioned before, a year ago today or whatever it was, not too many people were talking about it and it’s just growing like crazy and it’s become more and more legalized. So I think that’s what we’re really focused on.

Yup, that makes sense. And then Tom, I know OTT and sports betting figure in prominently from a tech perspective, of course, next hour have made a significant investment in 3-0 as a technology platform not just for broadcasting, but also for non-core revenue opportunities. Your partnership with bid path and some other kinds of activities. But when we think about tech in 2021 and beyond, what were some of the high-impact growth areas that you’re looking towards?

Well, I think it really is just kind of the epicenters around ATSC 3.0. We’re up and running on 12 markets. We’ll have three more by the end of the year. We expect to have 20 more next year, and I think that just exponentially grows. I think the only thing that’s limiting to us at this point is some of our own investment required and quite honestly additional consumer scale. But we think that will start to happen as more adoption and as we see turnover and sets both in the home and in your hand and the availability of that.

So we see around 23 or 24 that are really becoming more commercially viable. And the only other thing I would say, is there’s one other area that we think could be just as exciting as sports betting and that’s CBD. In that it is a very dispersed industry right now. Basically, 50 different laws. If we get any commonality in that and any interstate commerce in that right now it’s basically a state by state basis from a growing perspective, from a retail perspective, whether it be cannabis or CBD.

I think we’re all kind of feeling our way through that, but clearly I think that is a potential revenue opportunity for us, because it is a consumer product. What do we do best? We connect businesses to their consumer customers. And so I think that is an opportunity for us going forward. Obviously, there is some regulatory and legislative action that’s going to be required for that to become more transparent and more easily replicable across markets. But I would think that’s something that could be happening in the next 18 to 24 months.

I think we come up the time here on the panel. Thank you very much everybody. I’m just encouraged by the way you’ve approached this session because we had some traumatic challenges in 2020. A lot of things to deal with operationally and strategically and it’s clear that you’ve each and your companies manage to find or create silver linings of the clouds. Some of that was based on ongoing initiatives you’re doing anyway kind of planting the seeds and seeing some of those seeds bear fruit like on OTT side kind of jump start even more so than it might have, otherwise, the pandemic.

Coming back to some of the basics in budgeting, let’s really do kind of a zero-based approach and see where the most efficient allocation of resources actually is and how to set expectations about returns and timing for those resources. So it’s like a stress test an industry, and at least through the viewpoints of your three companies and your voices and minds, it seems like we’re set for a pretty promising 2021 and beyond. Once again, Victoria, Mike, and Tom, thank you so much for being with us here today. And I hope you have a chance to enjoy the rest of the NAB event. Thank you everybody. Bye-bye.

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