Gray Television Incorporated Q3 2007 Earnings Call Transcript

Gray Television Inc. (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

Presentation

Operator

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

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

Bob Prather

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

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

Our national still continues to struggle. It seems to here again as I've said before, jump around from market to market. We've got some markets where we're up almost $1 million in national and others where we're down $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 and probably 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, South Bend, Madison, Lansing.

And the NBC markets are really suffering, I think NBC was on top for so long and now they probably have the worst prime time schedule of the big four out there and they continue to struggle and it's hurt us on the revenue side just because of them being in our biggest markets and taking such a drastic fall from -- normally the ratings don't affect us that much, but I guess when you go from strong number one to a poor number four, it does have some 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 on our new media initiatives. I think we've got the best new media group of the television groups out there. We're doing real well with that both with our internet and our mobile phones.

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

Our digital stations have been behind where we thought they would be mainly for two reasons, the channel placement by the cable guys putting us up on the digital tier in a lot of cases where a lot of -- some markets, we've got less than 50% of the market where we got coverage now because of this and this has hurt us.

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

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

The polls still show there's a huge percentage probably between 30% and 40% of the public doesn't even know this is going happen. I think 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 digital channels, but you get a lot people over the air it could be a big surprise to them. I think its incumbent upon us as our own group to make sure in our markets that we do a good job educating the public on what's going on with the digital transition.

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

But and we had a nice political up in Kentucky where there was an off year governor's race there just, the election was yesterday. So that money 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 is obviously 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 talk about the numbers. Jim?

Jim Ryan

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

Driving the basic changes, auto was down about 2.8%, again while we're not happy that it's down it is better than it had been in the first half 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% core local growth.

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

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

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

Bob mentioned the internet revenues that we have; we are pleased with third quarter. Our total internet revenue, which is -- let me make sure I'm clear what we're talking about because everybody is a little different.

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

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

Briefly on the guidance for fourth quarter I want to reemphasize that the political estimates we have of approximately 2.1 to 2.2 do not contain any early 2008 presidential primary money. As Bob indicated, we currently have a small schedule in Omaha from a couple of candidates they just came 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 have any other orders yet currently in-house, so we haven't put any of that into our guidance for fourth quarter and it's certainly leaves us good upside because with the primary schedule accelerated to February and January, it seems like they are going to have to start spending reasonably soon to launch their primary campaigns on both sides of the aisle.

Our core local in fourth quarter we are currently expecting about 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 year was displaced because of the very, very heavy political we had.

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

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

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

A couple of housekeeping that the people will probably want to know about. Total CapEx of the quarter was $4.1 million. Cash taxes with all of a $163,000 or so, again just to remind everybody that we are not -- we have no 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 up for questions.

Questions-and-Answers Session

Operator

(Operator Instructions) We'll go first to Victor Miller of Bear 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 6th and you did mention that you hadn't -- versus the guidance had some issues on the top line and the expense line.

Could you talk about what happened in those last 55 days in the quarter that did take you by surprise on the revenue and expense side? What didn'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 we start seeing retrains dollars from the company because obviously there is a big potential for it?

Bob Prather

Fine.

Victor Miller - Bear Sterns

And lastly for Jim, given the numbers it looks like your leverage is going to pencil in somewhere around 9.7 times by year end. If the guidance is kind of out there. How are you going to deal with that level of leverage 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 think that’s, I think we might be doing a little bit better than that on a trailing 12 calculation. Obviously, '08 is a very, very strong year for us with the political cycle. We'll also benefit again from an Olympic cycle and in '06 we did, I think it was 3.4, Olympic money so we'd probably do as well or better I would think.

We're still budgeting for that, but I think it's a very strong 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 we would 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 two thirds or roughly two thirds of our cable agreements are up in December of next year. We're planning to have an all out campaign to get retrains money out of those people.

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

On your first question, I think the revenue mainly was September just as a slower month than anybody thought. Auto probably was the main villain there. On the expense side, frankly, I'd like to say it was one or two 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 right now.

We'll have that a lot better going forward. Frankly, that was a little embarrassing for me because we've never missed on expense side before so. I didn't like that all, but we're looking forward to a good fourth quarter and next year, like I said, being a boom year. So hope that answers your 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 think there's any possibility that the digital transition actually gets pushed back in 2009? And then secondly, do you guys have any comments on the writer strike and how this could impact the affiliate groups, if at all?

Bob Prather

Marci, I don't see any possibility of that getting pushed back, but you're dealing with a political animal with Congress. I would think there have to be some real serious concerns at the end of '08 that it was going to be a real confusion for the public or something like that, but I just don't see it right now. There's too much vested in getting this done. I think even the 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 know there -- they've been just I've just read what you've read in the public markets, that the shows that got the can they're going to show and then they're going to start doing reruns. Obviously, that's not going to be great for TV in general.

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

Marci Ryvicker - Wachovia Securities

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

Bob Prather

I think we're looking for $60 million plus, hopefully. I think that's a reasonable -- 2004 was $53 million on a pro forma basis, so and they'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 think the political spending is a lot more sophisticated than it has been in the past. They move money around the lot quicker depending on where they see opportunities 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 where they're moving a lot of money, you gain. If you happen to be in a market where they think the race is pretty well over, you get money pulled out faster than you have in the past.

But in general, we're in a lot of battle ground states. I don'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 up there, so that state probably will become more of a battleground state.

And Virginia just went democrat with their state Senate, so here 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 in Florida, Michigan, Wisconsin, Nevada those kind of places; Ohio, West Virginia, Kentucky, we're in great shape and real strong stations. So, I think our political 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 digital channels. I'm torn between thinking that since you might have more limited programming in some of the smaller markets that the additional network affiliates would be sufficiently attractive to get the cable companies to go along with you.

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

Bob Prather

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

So, they use that as an excuse to bounce us up to the digital tier on some of these markets and two of our best markets, Waco and Tallahassee; that's hurt us. We had very profitable operations in both of those and now we're probably breakeven or losing money in those just because we get pushed 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 their programming issues straightened out, which I think they will.

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

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

Jim Goss - Barrington Research

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

Bob Prather

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

Here again, I think we -- some of our managers get in a rut and forget about really promoting them enough. I think that's something we've got 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 revenues versus 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 direct and indirect. Could you talk a little more about the indirect Internet opportunities?

Bob Prather

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

I think that's both of those are going to continue to grow real well. I think, here again, I think a lot of people are looking to have a strategy of, overall media strategy of television and new media, both Internet and 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 got a direct Internet salesperson in all our stations now that will be hitting the ground running full speed for next year that's only selling Internet and we're basically going after non-television type customers there. They will also work closely with the TV people, obviously. But their mandate is going to be go find Internet-only customers for our web channels.

So I think next year we're going to see continued growth on direct and our television sales people know it's to their advantage to sell both 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 from Concordia.

Lance Vitanza - Concordia

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

Bob Prather

As I mentioned, we're about a little over 2% behind our revenue 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 this year.

Lance Vitanza - Concordia

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

Bob Prather

Its revenue. We think we've got our cost in good shape there. 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 can you give me the amount of retrans that was generated, cash retrans revenues, if any, in Q3 this year versus last year?

Jim Ryan

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

And as a reminder to everybody, there are currently no Telco over builders in any of our markets that we can take it -- develop a relationship and a revenue stream with as well currently. That over time will come 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 last year, was that run rate zero or you had some I guess, but can you quantify what it had been last year?

Jim Ryan

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

Lance Vitanza - Concordia

And how should I think about the overall opportunity? I mean some 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 to figure out what the retrans pool will look like when you're fully ramped up with most or all of your guys on contract. Can you give me some information to help me do that now?

Jim Ryan

Well, we've got in rough numbers with the satellite about 1.4 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 believe one 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. As far as MSOs go, we've got about 4.5 million of those. We have nothing to talk about so far as cash retrans there. Again, just because the first cycle date where we really start to pick up ability and match, as Bob said, is at the end of '08. So you can see the two sets of numbers and kind of figure out what kind of reasonable assumptions you want to apply to where the marketplace is moving the retrans numbers to.

Lance Vitanza - Concordia

Great. Looks like a terrific opportunity. Thanks a lot for taking 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 for joining us today. I look forward to talking to you after the end of the year for our full year results. As I said, we're looking forward to a good fourth quarter. So hopefully, we'll have a good report to talk to you about at that time.

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

Operator

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

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