Gray Television Incorporated Q3 2007 Earnings Call Transcript

Nov. 7.07 | About: Gray Television, (GTN)

Gray Television Inc. (NYSE:GTN)

Q3 2007 Earnings Call

November 7, 2007, 09:30 am ET

Executives

Bob Prather - President and COO

Jim Ryan - SVP and Chief Financial Officer

Analysts

Victor Miller - Bear Sterns

Marci Ryvicker - Wachovia Securities

Jim Goss - Barrington Research

Lance Vitanza - Concordia

Operator

Good day, everyone. And welcome to the Gray Television'sThird Quarter Earnings Release Conference Call. Today's call is being recorded.

For opening remarks and introductions, I would like to turnthe call over to Mr. Prather. Please go ahead, sir.

Bob Prather

Thanks a lot. I want to welcome everyone to our thirdquarter conference call. I guess third quarter for most of you in theinvestment world is pretty exciting, I guess is the right word. The meltdown offinancial markets obviously, has been a real shock to everybody in theinvestment business but it seems like the economy itself seems to be stillperforming pretty good and pretty strong.

Our quarter was a little disappointing from the standpointof we don't like to miss our guidance. We were a little bit under on revenue alittle bit over on expenses, those are -- neither one are good to have. But Ithink mainly our local is still continuing to be strong.

Our national still continues to struggle. It seems to hereagain as I've said before, jump around from market to market. We've got somemarkets where we're up almost $1 million in national and others where we'redown $1 million and just there seems to be no rhyme or reason to it.

The one thing I will say that seems to be consistent andprobably has the most effect on us right now, we are about a little over 2%behind our budget for the year right now and 90% of that is our NBC stations.NBC has to be some of our biggest and best markets, Omaha, Huntington, SouthBend, Madison, Lansing.

And the NBC markets are really suffering, I think NBC was ontop for so long and now they probably have the worst prime time schedule of thebig four out there and they continue to struggle and it's hurt us on therevenue side just because of them being in our biggest markets and taking sucha drastic fall from -- normally the ratings don't affect us that much, but Iguess when you go from strong number one to a poor number four, it does havesome effect on primetime and probably our lead in on some of our late news.

But hopefully, they'll get better but we continue to work onour new media initiatives. I think we've got the best new media group of thetelevision groups out there. We're doing real well with that both with ourinternet and our mobile phones.

We continue to think this is going to be a good growth areain the future for us, a matter of fact, we've got even more ambitious plans togrow more next year than we have this year, so I think that's something we'vegot to look forward to.

Our digital stations have been behind where we thought theywould be mainly for two reasons, the channel placement by the cable guysputting us up on the digital tier in a lot of cases where a lot of -- somemarkets, we've got less than 50% of the market where we got coverage nowbecause of this and this has hurt us.

I still think that this is something we are buildingduopolies and triopolies that are really going to be you'll see the growth comingup in 2008, ‘09 and in the future after that, especially when its full digitalcoverage after February 17, 2009.

I continue to be concerned about the Congress FCC and NABsefforts of educating the public about the digital transition for 2009. We areencouraging all our stations to do their own PSAs and announcements andeducational programs to let people know this is happening.

The polls still show there's a huge percentage probablybetween 30% and 40% of the public doesn't even know this is going happen. Ithink it can cause some real disruption in 2009 if that's the case just --although I think the Congress is pretty well mandated cable guys.

Anybody that has cable will be able to get the new digitalchannels, but you get a lot people over the air it could be a big surprise tothem. I think its incumbent upon us as our own group to make sure in ourmarkets that we do a good job educating the public on what's going on with thedigital transition.

But fourth quarter looks like it's going to be pretty goodstill getting very little national political, which we've been surprised but wedidn't have any budgeted. So but we -- when they moved all of these primariesup, we thought they would jump in quicker really haven't so far, a little bitout in Nebraska because we're on the border with Iowa.

But and we had a nice political up in Kentucky where therewas an off year governor's race there just, the election was yesterday. So thatmoney is over but was -- we had a pretty good election money coming in Kentucky.

A little bit in Mississippi not as much as we thought,though. But anyway, we think 2008 isobviously going to be a better year and we're looking forward to it.

At this point, I'm going to turn it over to Jim Ryan to talkabout the numbers. Jim?

Jim Ryan

Thanks, Bob. Good morning everybody. As Bob said, in thirdquarter itself our quarter local ex-political was up about 5%. Our national, asBob indicated was still lagging a little at minus 1, but that's a little bitbetter than it had been doing the first part of the year, so we're a littleencouraged there.

Driving the basic changes, auto was down about 2.8%, againwhile we're not happy that it's down it is better than it had been in the firsthalf of the year. We saw good increases in Telco Entertainment, medical,furniture, appliance type stores, even discount stores showed some life in Q3.So we were encouraged by that and we are reasonably pleased with the 5% corelocal growth.

The nine month numbers are similar in the revenue local coreex-political was up 3, national is down 4. Same trends again in auto but as Isaid, we saw some improvement there on a percentage basis in Q3. And we've beenseeing some good ups in Telco Entertainment, medical; basically the same trendsin Q3 are really indicative of the year.

Our expenses for the quarter were up a reasonable part ofthat is the digital second channels that accounts for about $500,000 of theincremental expense and again as we've talk before similar trend in expensesfor the nine months as well.

The ramp up of the digital second channels accounts forabout $2.6 million of the overall expense change. And actually the digitalchannels, we've been pleased that the operating expenses there have actuallyrun under the budget expectations for the year. Obviously, the revenue as Bobsaid has been a little slower on those channels and we've been pleased thatwe've been able to trim the operations as well to help compensate for thesofter than expected revenue.

Bob mentioned the internet revenues that we have; we arepleased with third quarter. Our total internet revenue, which is -- let me makesure I'm clear what we're talking about because everybody is a littledifferent.

We have two components to our internet revenue. One isdirect, which is pure web based, it's the video roles, it's a banner ads andsponsoring a page. And we also have what we call internet related where someonewho is using our web channel is also buying an on-air schedule to promote theirplacement and their activity on our web channel.

Total internet was up about 40% year-over-year, we're verypleased with that. The direct component itself was up 33% year-over-year againwe're pleased. We were seeing good growth, we know we can have even bettergrowth next year and as Bob said we're going to be working very hard to growthat revenue next year.

Briefly on the guidance for fourth quarter I want toreemphasize that the political estimates we have of approximately 2.1 to 2.2 donot contain any early 2008 presidential primary money. As Bob indicated, wecurrently have a small schedule in Omaha from a couple of candidates they justcame in, in the last few days and we are talking about $125,000.

So we're hopeful that that is a good sign, but we don't haveany other orders yet currently in-house, so we haven't put any of that into ourguidance for fourth quarter and it's certainly leaves us good upside becausewith the primary schedule accelerated to February and January, it seems likethey are going to have to start spending reasonably soon to launch theirprimary campaigns on both sides of the aisle.

Our core local in fourth quarter we are currently expectingabout a 5% to 8% increase and national we are expecting would be up as well.Keeping in mind there are lot of national and especially October of last yearwas displaced because of the very, very heavy political we had.

So it's not surprising that national may be up a little bitin Q4 after being down the first nine months of the year. Although as Bob saidNational continued to be a little slow and very spotty market-to-market some ofour markets are up and others are down.

Our leverage at the end of the quarter on a trailingeight-quarter basis, which is how our senior credit facility monitors it. Wewere at eight times, we had $925 million of debt out we had nothing borrowed ona revolver.

We think the debt level between Q3 and the end of the yearwill be either approximately the same or perhaps, come down a little bit, alittle will depend on how much of the political upside comes in December.

A couple of housekeeping that the people will probably wantto know about. Total CapEx of the quarter was $4.1 million. Cash taxes with allof a $163,000 or so, again just to remind everybody that we are not -- we haveno significant cash taxes this year or for the next several years.

Bob, I'll turn it back to you.

Bob Prather

Thanks, Jim. Moderator, at this time I'd like to open it upfor questions.

Questions-and-Answers Session

Operator

(Operator Instructions) We'll go first to Victor Miller ofBear Stearns.

Victor Miller - Bear Sterns

Okay. Good morning. Thanks for taking my question.

Bob Prather

Good morning, Victor.

Victor Miller - Bear Sterns

You obviously reported in early August, I think August 6thand you did mention that you hadn't -- versus the guidance had some issues onthe top line and the expense line.

Could you talk about what happened in those last 55 days inthe quarter that did take you by surprise on the revenue and expense side? Whatdidn't show up and what did you need to spend that you didn't expect to spend?

Secondly, Bob how do you really look and when should westart seeing retrains dollars from the company because obviously there is a bigpotential for it?

Bob Prather

Fine.

Victor Miller - Bear Sterns

And lastly for Jim, given the numbers it looks like yourleverage is going to pencil in somewhere around 9.7 times by year end. If theguidance is kind of out there. How are you going to deal with that level ofleverage in this marketplace? Thanks.

Bob Prather

Jim, do you want to take that one first?

Jim Ryan

The leverage question?

Bob Prather

Yes.

Jim Ryan

Victor that, there would be a -- that's a T12 and I thinkthat’s, I think we might be doing a little bit better than that on a trailing12 calculation. Obviously, '08 is a very, very strong year for us with thepolitical cycle. We'll also benefit again from an Olympic cycle and in '06 wedid, I think it was 3.4, Olympic money so we'd probably do as well or better Iwould think.

We're still budgeting for that, but I think it's a verystrong year for us in '08. So we will naturally deliver quite a little bit.There is a significant amount of free cash, which we generate next year that wewould apply to the outstanding balances and bring the debt levels down as well

Bob Prather

Victor, I'll answer your retrains. We've got, I think twothirds or roughly two thirds of our cable agreements are up in December of nextyear. We're planning to have an all out campaign to get retrains money out ofthose people.

We'll start hopefully negotiating sometime middle of theyear and try to get deals done before the end of the year. So, any significantretrains won't really be seen until 2009, but we clearly think we'll be able toget some money. We've got some very strong stations you well know that we thinkwe got good bargaining power with these cable companies. So, and we're puttingtogether a strategic plan to make sure we maximize our retrains dollars.

On your first question, I think the revenue mainly wasSeptember just as a slower month than anybody thought. Auto probably was themain villain there. On the expense side, frankly, I'd like to say it was one ortwo things, but it was just a lot of little things. A lot of repair expenses,things like that. Something's we didn't expect, but I promise you -- we've got a lock down on expenses rightnow.

We'll have that a lot better going forward. Frankly, thatwas a little embarrassing for me because we've never missed on expense sidebefore so. I didn't like that all, but we're looking forward to a good fourthquarter and next year, like I said, being a boom year. So hope that answersyour questions? Hello.

Operator

We'll go next to Marci Ryvicker with Wachovia Securities

Marci Ryvicker - Wachovia Securities

Thank you. Bob, based on your opening comments do you thinkthere's any possibility that the digital transition actually gets pushed backin 2009? And then secondly, do you guys have any comments on the writer strikeand how this could impact the affiliate groups, if at all?

Bob Prather

Marci, I don't see any possibility of that getting pushedback, but you're dealing with a political animal with Congress. I would thinkthere have to be some real serious concerns at the end of '08 that it was goingto be a real confusion for the public or something like that, but I just don'tsee it right now. There's too much vested in getting this done. I think eventhe politicians they want to get those old analog channels back and obviously,I'm also -- I don't see much chance of that.

The writers' strike I really don't know what effect you knowthere -- they've been just I've just read what you've read in the publicmarkets, that the shows that got the can they're going to show and then they'regoing to start doing reruns. Obviously, that's not going to be great for TV ingeneral.

Hopefully, they can get this thing settled. But, you knowwe're going to keep putting on our local news live and keep doing the rightthings locally and just kind of ride that out. I don't see it having a bigeffect on individual stations.

Marci Ryvicker - Wachovia Securities

Okay. And then just one follow-up. Can you talk about yourexpectations for political in 2008? I think you have a number out on yourwebsite somewhere.

Bob Prather

I think we're looking for $60 million plus, hopefully. Ithink that's a reasonable -- 2004 was $53 million on a pro forma basis, so andthey've raised a lot more money this coming year then they raised back then.

So, I think the only caveat, I would put on that is I thinkthe political spending is a lot more sophisticated than it has been in thepast. They move money around the lot quicker depending on where they seeopportunities or where they see they don't have a chance in certain markets.

So, and I think if you happen to be in a market wherethey're moving a lot of money, you gain. If you happen to be in a market wherethey think the race is pretty well over, you get money pulled out faster thanyou have in the past.

But in general, we're in a lot of battle ground states. Idon't think any of that has changed any. And I think you're even seeing --based on the Kentucky race yesterday, a democrat won the governor's race upthere, so that state probably will become more of a battleground state.

And Virginia just went democrat with their state Senate, sohere again that's probably going to become more of a battleground state. So,those kind of things will be real pluses for us. But, you know the big deal inFlorida, Michigan, Wisconsin, Nevada those kind of places; Ohio, West Virginia,Kentucky, we're in great shape and real strong stations. So, I think ourpolitical is going to be real good.

Marci Ryvicker - Wachovia Securities

Thank you.

Bob Prather

Okay. Thanks, Marci.

Operator

We'll go next to Jim Goss with Barrington Research.

Jim Goss - Barrington Research

Hi. A couple of questions, one related to your digitalchannels. I'm torn between thinking that since you might have more limitedprogramming in some of the smaller markets that the additional networkaffiliates would be sufficiently attractive to get the cable companies to goalong with you.

On the other hand, you have described your programmingstrategy as being a fairly low cost one, so maybe that provides an offset. AndI'm wondering if you need to step up programming to drive demand and toconvince the cable companies to position you better and that sort of thing. Howdo those economics work as you look at them?

Bob Prather

Jim, I think we're going to have to bargain when we do our retrainsto get better cable placement at that point. I think we're going to have to usethe bargaining power of our main stations to get better cable placement. Thesecable guys, you know, they just took the opportunity when UPN went out. Theytried to get two and three and even five years additional retrains at no costand we just refuse to do it.

So, they use that as an excuse to bounce us up to thedigital tier on some of these markets and two of our best markets, Waco andTallahassee; that's hurt us. We had very profitable operations in both of thoseand now we're probably breakeven or losing money in those just because we getpushed way up on a digital tier.

So, our FOX's are doing real well. Our CWs are doing okay.The MyNetwork's are continuing to struggle. And they -- until they get theirprogramming issues straightened out, which I think they will.

Fox is proven they know how program television. And I thinkit's just a matter of time until they hit the right formula there. But, like Isay, we think we're building duopolies and triopolies very cheaply. There willbe full 100% coverage in 2009 and we think going forward after that -- and wewant to continue.

The other thing we're going to do, Jim, is add more localprogramming. We want to do more college sports, high school sports, localcoverage on the digital channels, which we think we will definitely be able todo in the years ahead.

Jim Goss - Barrington Research

Do you think you could drive more revenues, if you investedmore in programming costs?

Bob Prather

I don't think so. I really don't. If I did, we'd look atthat, but I think it boils down to right now the cable placement in lot ofthese markets, it's just hard to find us. The one thing I think that we can doand I think it's something that we probably should be doing more of ispromoting our cable channels on our own main stations.

Here again, I think we -- some of our managers get in a rutand forget about really promoting them enough. I think that's something we'vegot to make sure that they are promoting these digital channels.

Jim Goss - Barrington Research

And net, net you're running about even in terms of revenuesversus cost --?

Bob Prather

We'll be a little under probably for the year it looks like.

Jim Goss - Barrington Research

And secondly, Jim was talking a little before about directand indirect. Could you talk a little more about the indirect Internetopportunities?

Bob Prather

Here again, I think we were very strict about how we let ourmanagers count Internet revenue and if they send out a bill that's specificallyfor a banner add, a sponsorship or whatever then that's direct. If they sell aTV schedule and then as part of that they send a separate bill that says it'sfor a banner add or sponsorship, we count that is indirect revenue.

I think that's both of those are going to continue to growreal well. I think, here again, I think a lot of people are looking to have astrategy of, overall media strategy of television and new media, both Internetand cell phone and we're in a great position to give it to them.

So I think we are learning how to sell it better. We've gota direct Internet salesperson in all our stations now that will be hitting theground running full speed for next year that's only selling Internet and we'rebasically going after non-television type customers there. They will also workclosely with the TV people, obviously. But their mandate is going to be go findInternet-only customers for our web channels.

So I think next year we're going to see continued growth ondirect and our television sales people know it's to their advantage to sellboth the television station and the Internet.

Jim Goss - Barrington Research

All right. Thank you.

Bob Prather

Thank you, Jim.

Operator

(Operator instructions.) We'll go next to Lance Vitanza fromConcordia.

Lance Vitanza - Concordia

Guys, thanks for taking the question here. It sounded to melike you're actually reasonably pleased with both the core local and the corenational and yet during your opening remarks you talked about the release ofpricing softness, I guess, at the NBC stations. So I am just wondering, is itpossible to kind of quantify what you think the core local and national mighthave been had those stations performed more kind of on an average level ofperformance?

Bob Prather

As I mentioned, we're about a little over 2% behind ourrevenue budget for the year and of that 2% over 90% of those were NBC stations.So if they were just performing at budget, we'd be having a boom year thisyear.

Lance Vitanza - Concordia

Okay. And then, I mean, the online stations like -- thedigital channels, excuse me, also, I guess contributing to some of the weaknessor is your concern there more on the cost side or is it revenue side or is itboth?

Bob Prather

Its revenue. We think we've got our cost in good shapethere. It's just -- revenue has not been hitting targets.

Lance Vitanza - Concordia

Okay. And lastly, just I know it's not a huge number but canyou give me the amount of retrans that was generated, cash retrans revenues, ifany, in Q3 this year versus last year?

Jim Ryan

Let me answer that maybe slightly differently. On an annualrun rate right now, we are probably in the roughly $2.5 million, maybe a littlebit higher than that range. We have a few very small deals with some mom andpop MSOs but the bulk of those dollars would be with the satellite providerswhere we've had arrangements for cash retrans for some years.

And as a reminder to everybody, there are currently no Telcoover builders in any of our markets that we can take it -- develop arelationship and a revenue stream with as well currently. That over time willcome but none of them have opened up in our markets yet.

Lance Vitanza - Concordia

Okay. So $2.5 million run rate right now. This time lastyear, was that run rate zero or you had some I guess, but can you quantify whatit had been last year?

Jim Ryan

It would have been less. I don't have that numberimmediately available, probably high ones, maybe around two.

Lance Vitanza - Concordia

And how should I think about the overall opportunity? I meansome guys have sort of said here's our run rate today and here's what our"penetration" is and you can make some assumptions and then try tofigure out what the retrans pool will look like when you're fully ramped upwith most or all of your guys on contract. Can you give me some information tohelp me do that now?

Jim Ryan

Well, we've got in rough numbers with the satellite about1.4 million or so 1.5 million subscribers. We've got some arrangements there.Our agreements will be - I'm doing this off the top of my head but I believeone comes up December 31, '08 and I think the other one is out to the end of'09.

You know we deliberately staggered those a little bit. Asfar as MSOs go, we've got about 4.5 million of those. We have nothing to talkabout so far as cash retrans there. Again, just because the first cycle datewhere we really start to pick up ability and match, as Bob said, is at the endof '08. So you can see the two sets of numbers and kind of figure out what kindof reasonable assumptions you want to apply to where the marketplace is movingthe retrans numbers to.

Lance Vitanza - Concordia

Great. Looks like a terrific opportunity. Thanks a lot fortaking the call.

Bob Prather

Thank you.

Operator

We have no additional questions at this time.

Bob Prather

Okay. Thanks, Moderator. I want to thank everyone forjoining us today. I look forward to talking to you after the end of the yearfor our full year results. As I said, we're looking forward to a good fourthquarter. So hopefully, we'll have a good report to talk to you about at thattime.

As you know, Jim and I are easy to find. You can call eitherone of us any time if you've got any specific questions and everybody have agreat Christmas, New Year's, holidays and so forth. We'll talk to you at thebeginning of next year. Thank you everybody.

Operator

This concludes today's conference. We thank everyone fortheir participation. You may now disconnect your lines.

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