Hearst-Argyle Television Q3 2007 Earnings Call Transcript

Hearst-Argyle Television, Inc. (HTV)

Q3 2007 Earnings Call

November 8, 2007 9:30 am ET

Executives

Harry Hawks - EVP and CFO

Tom Campo - Director of IR

David Barrett - President and CEO

Terry Mackin - EVP

Analysts

Lee Westerfield - BMO Capital Markets

Marci Ryvicker - Wachovia

James Dix - Deutsche Bank

Victor Miller - Bear Stearns

Jim Goss - Barrington Research

Aaron Chew - JP Morgan

Presentation

Operator

Good morning and thank you for participating in the Hearst-Argyle Television Incorporated Third Quarter Earnings Call. Your lines have been placed on a listen-only mode until the question-and-answer session. (Operator Instructions)

Your host this morning is Mr. Harry Hawks, Executive Vice President and Chief Financial Officer. Also participating are Mr. David Barrett, President and Chief Executive Officer; and Mr. Tom Campo, Director of Investor Relations.

I would now like to turn the call over to your host, Mr. Harry Hawks. Please go ahead, sir.

Harry Hawks

Good morning. This is Harry Hawks, CFO at Hearst-Argyle. Welcome to our third quarter earnings call. This morning you'll hear from David Barrett, our CEO, who will discuss our financial results, operating trends and the current business environment. I will follow David with some additional comments, financial comments and speaking to our financial position and outlook. Then we will take your questions.

But first, I'd like to ask Tom Campo, Director of Investor Relations, to address certain administrative matters.

Tom Campo

Thank you, Harry. Just to remind all of our listeners, we will be discussing forward-looking information, and we refer you to the cautionary language that we detailed in the safe harbor statement in our earnings release, which was released earlier this morning and which is also posted to our corporate website, hearstargyle.com, or to most any finance website.

We will be discussing non-GAAP information during this call, and in compliance with Regulation G, we provide tables within the press release reconciling this non-GAAP information to GAAP measures. Cautionary language is also provided in our SEC filings, also accessible via our website. The company undertakes no obligation to update this information.

Once again, we want to welcome those of you who are listening to the webcast, which will be archived on our site. And with that, I will toss it over to David Barrett.

David Barrett

Good morning to everyone, and thank you for being with us today for a discussion about our third quarter earnings, which we released earlier today.

As noted in our press release, we achieved increases in core net ad sales, digital media revenue and retransmission consent revenue. But an expected decline in political revenues '06 was, of course, quite strong for us in this regard caused total net revenue to decline by 3%. Compared to '05, Q3 revenues were up 8%.

Net income of $9.7 million for the period generated earnings per share of $0.10. This result was impacted by $3.6 million in expenses incurred during the quarter associated with the Hearst Corp. tender offer. Excluding that expense, earnings per share would have been $0.13.

I continue to be concerned by overall weak economic conditions, which, ultimately, influence ad spend levels. The subprime issue and the drag on real estate markets is a national problem, but it's quite acute in certain regions where we have stations. And the residual effect on a number of important categories for us, which are a factor of consumer confidence, consumer spending, furnitures and housewares and financial services, I think, are affected by the overall housing condition in the country. Both of those categories, furniture and housewares, financial services, are top 10 categories for us.

While the auto category has stabilized somewhat for us, it was down in Q3 by approximately a little less than 2%. That's better than has been the case in recent quarters for us. And, in fact, auto was actually up modestly for the single month of September. Still, on a year-to-date basis, the auto category is down approximately 11%, and it's a tough challenge when that category represents approximately 25% of our ad sales.

We believe there is some linkage between the housing issues in the country, automotive, energy costs, all of these things are interrelated and have created some downward pressure on ad spending commitments by our customers. That said, seven categories were up in Q3, pharmaceuticals, events and attractions, packaged goods, fast foods, telcos, beverages and the overall retail category.

Political has been a bit better than expected, and I suppose some could say we are consistent with that kind of report. Our political total through November 6th, as represented in our public files, is approximately $21 million. The gubernatorial races in Louisiana, Kentucky and Mississippi, along with the presidential primary spending, principally in Manchester, New Hampshire and Des Moines, Iowa, are the drivers for our political. And we'll be adding to the political total over the remaining 53 days of 2007.

We currently, and this is really almost a yesterday report, have seven candidates on the air, Romney, Richardson, Obama, Edwards, Clinton, Paul, Dodd and McCain had orders that are in place. It's principally concentrated, as I said, in Manchester and Des Moines, but Romney is also spending some money in Florida and South Carolina. A couple of the other candidates are spending a little money in Omaha to cover Western Iowa, and then Portland, Maine, and on our station in Plattsburgh and Southern New Hampshire area as well.

Believe it or not, the date for the New Hampshire primary is not yet finalized. We do expect it to be January 8. The Iowa caucuses are scheduled for January 3. It appears as though we won't pin down or New Hampshire will not pin down its date until November 15th as it kind of dances with Michigan, who is trying to usurp New Hampshire's role as the first primary in the country. So we are waiting on that date and, of course, that will bear on spending levels. If the New Hampshire primary were in the second week of December that would have a bearing on what our Q4 revenues would look like.

So, although there are only seven weeks left in the year, we're dealing with a very dynamic sales environment in respect to political, but also in respect to late-breaking business overall. You're aware, I'm sure, that the network scatter market has been strong. Upfront was well sold. Inventory is tight for the network, and there appears to be some good old fashioned spillover in the spot television this year, which I can't say has been the case in recent years.

It's still too early to tell what the effect of the writers' strike will be, but our sellers will be reemphasizing the value of our local news inventory for those national spot advertisers who might be weighing alternatives.

On the digital media front, we're making very good progress. We've noted highlights in our release. Our challenge, like that of everyone else, is to sell the products in the new digital inventory we've created. As evidence of that, we're really resonating well with the audiences. I think the usage data that is included in our release is very impressive. Our focus today is on developing digital sales strategies so we can capitalize on the momentum that we think is building for us on the digital media front with our audiences.

Our stations are generally in excellent competitive shape. We're not without challenges in several places, but we've got a great collection of leading local news stations, well positioned to capture every opportunity available. And they're also infused with the new digital media culture that is on the leading edge of our industry, I believe.

Our press release references are what, I think, is an unprecedented achievement in the July Nielsen sweep. We had six of the top 10 ranking in the ABC affiliate lineup. So six Hearst-Argyle stations are represented in the top 10 list of ABC affiliates. In my life in the business, I can't recall any single affiliate accomplishing such a feat.

We've provided an updated outlook for '07. You'll note that we expect to be at or slightly below the bottom end of our revenue range that was provided as the year began. Along with other detail included in our release, you get a good and most current view of how we think the year will wind up. Obviously, at the stage, we're focused on '08 and the numerous opportunities that await us. In a cyclical business like ours, probably best viewed on an eight quarter basis, the trick is to bring in a big harvest when it's available, and for us, that will be in 2008.

Our stations are poised to capitalize on every opportunity, and I'm thinking of political, the Beijing Olympics, but most significantly an advertising economy that will have a high demand stimulant in it. So the value of the inventory we have in a high-demand economy, we price it well and manage our inventory well.

We've got a very nice upside at all of our leading stations. We're going to have a lot going for us over the next 12 months. As a company, we're focused on generating organic growth at our stations, developing profitable digital and multiplatform media products, and using our strong balance sheet for strategic purposes that will enhance the value of our company for all of our shareholders.

Finally, please be advised that we will not be making comments today regarding Hearst recent tender offer for our shares. If you ask a question, I'm going to tell you we're not prepared to comment on it. So there's plenty of other things to ask me, I'm sure.

With that, let me stop. I will hand it to Harry. And then all of us will take your questions.

Harry Hawks

Thank you, David. I would like to add three comments before we go to your questions. First is really a press release presentation and format kind of comment. You'll recall that some time ago we provided a three-year comparative income statement in the press release. Last quarter, we added a balance sheet and a statement of cash flow to the press release to expand our disclosure and transparency.

This quarter, we have added a three-year comparative to the statement of cash flows to better facilitate your understanding and analysis of the pronounced cyclical effect on our results due to the very large amounts of even year political revenues and the big swings that causes in working capital as well as, to a lesser extent, the impact of the even year Olympics.

As David mentioned just a moment ago, our business is probably best looked at on an eight-quarter basis. So this revised and enhanced presentation, we believe, this helps illustrate that the normal historical pattern for the core suggest a business cycle of at least two years.

The second comment is with respect to our financial position. As you can see, we have $55 million of cash on hand and $400 million of unused availability on our line of credit. Although, certain credit markets are uneven at the present time, there is no refinancing risk for us regarding the $125 million maturity of our sevens of '07 public bonds, which indeed mature this month and our scheduled $90 million payment on our private placement debt.

The revolver pricing for us is tied to LIBOR, which, yesterday, 90-day LIBOR, was around 4.9. Our spread, depending on leverage, is between 3/4 and 7/8. Should we elect to consider going out to a longer term, based upon yesterday's 10-year treasury of around 4.3, and recent spreads for comparably rated media paper of less than 200 basis points, it appears that either short-term or long-term, there is a positive arbitrage in the interest rate with respect to these pending refinancings.

Third and final comment, I will also comment on the outlook, as David mentioned. As many of you know, we do not give quarterly guidance. However, we have provided at the beginning of the year a full year outlook of a revenue range and estimated expenses. We first did that on February 23rd. We updated it on April 27th. On July 26th, we guided you to the lower portion of the revenue range.

Today, we're providing a final update to that revenue range. And as David commented, based upon our assessment today of localized economies, the pressures caused by the downturn in housing, the stable, but somewhat uncertain, outlook for auto, financial services, housewares, NBC prime performance, and our best estimates that we have today of timing and amount of political, we now expect the full year revenue to be within a tight bandwidth of a couple of million bucks on either side of the low end of the range that we originally provided on February 23rd.

Regarding expenses, we have also provided an update for certain categories, really only two of note that I'll mention here. Since February 23rd, we've taken about $3.5 million out of station operating expenses. Unfortunately, we have added about $5 million to corporate expense for unplanned expenses associated with the tender offer.

We will now take your questions. Operator, back to you.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question is from Lee Westerfield. You may ask your question and please state your company name.

Lee Westerfield - BMO Capital Markets

Lee Westerfield, BMO Capital. The question I have actually relates to your digital media side, and the question is you provided some statistics in the press release, which were quite helpful about the amount of traffic growth and video stream growth. And the question I have is: at this stage, is it measurable? And: if you could tell me what kind of advertising inventory sellout you have against your available traffic or your available video streams? I'm trying to get a sense at this stage about, since you are generating a modest, but growing, amount of revenue in your digital media side: about how much, if you would, coverage or inventory sellout that your traffic and streaming growth is capturing?

David Barrett

Terry Mackin, who you know is our Executive VP overseeing all these digital media efforts, is here, and I'm going to ask him to respond.

Terry Mackin

Hi, Lee. It's a good question. When you are growing page views as rapidly as we are, and uniques, it's a high class problem to have more inventory to sell. And so we have two kinds of inventory that continues to expand. One is just traditional inventory resulting from what the industry would call standard units of display, IAB units. We're also, as you will note in the press release, video streams are going up exponentially. Video preroll inventory is still sold at a premium and in high demand, and then also sponsorship inventory as we add more vertical content online. Olympics is one, High School Playbook is another, weather sponsorships. We're getting better and better at creating verticals online and convergence between TV and the web and mobile.

To specifically answer your question about sellout, the world of the Internet is you can create more inventory, as you know. So I don't want to give you a direct answer to your question. I think we've got sufficient inventory to keep pace with the kind of volume that we're looking to in the future, which means more deals, more sponsorships, and we've got headroom both on, probably more on volume. I think if you compared our pricing to portals, we're pretty good at it. There's been a focus, as there always is, in local on the quality of the audience. And compared to the portals, which we can't control, our pricing is a part of our strategy and considerably better.

David Barrett

Let me just add a little bit more color. Obviously, the first step in the sales process here has been selling convergence packages, people who are buying both web and television. The guys did an analysis for me in the first half of the year, which indicated that we had 670 clients who got TV/web invoices. So we are really making inroads with our existing client base in terms of drawing them into the web. And relative to our company, it's a very blue-chip list of some of our best advertisers, both national and local.

Harry Hawks

Lee, let me also tag team with Terry and David. Implicit in what Terry was commenting on, I think it's important to note is that the inventory question that you asked, frankly, you could ask it about half a dozen different platforms that Terry has now taken us out onto. There's the inventory that's on our own websites, the inventory, actually, on our sites that IBS has, YouTube inventory, high school sports inventory, mobile and, of course, the digital weather multicast. And there's an inventory or, if you will, a revenue opportunity, if you will, in lots of different places.

So, I think that's indeed an important observation about what we're trying to do with this important strategic initiative, and that is really build an audience on a number of different platforms and work like crazy to monetize that as we go forward here.

David Barrett

That's a full answer, Lee.

Lee Westerfield - BMO Capital Markets

Very complete, and I appreciate it. Thank you.

David Barrett

Thank you.

Operator

And our next question is from Marci Ryvicker. You may ask your question and please state your company name.

Marci Ryvicker - Wachovia

Thanks. I'm from Wachovia. David and Harry, you talk about a couple of challenges that you face, the housing market, NBC and key ad categories. Is any one of these more challenging than any of the others? Is the first question and then, secondly, in terms of auto: can you talk about the performance of the different tiers and also how domestic is doing versus foreign?

David Barrett

I have that data. I guess in terms of the challenges since auto represents 25% of ad sales, it is the centerpiece of concern for us and one that we worked very hard on. I guess I'd also note that we are disappointed in NBC's primetime performance. I think we indicated in our release that our NBC stations' revenue decline was quite a bit worse than that of our other stations.

Now we've said in the past that prime represents about 20% to 25% of total revenues, but the halo effect of prime on our late news is very significant. Some of our big NBC markets are frustrated. This is a little bit of: “deja vu all over again”. Several years ago, we were talking about ABC's weak condition in primetime and today we're talking about NBC's weak condition in primetime. But we need strong network programming from both ABC and NBC to be working full-throttle as a company.

On the automotive side, it's interesting. We've talked in the past about the three buckets where we take in automotive revenue from local dealers, from manufacturers and from dealer groups. And in the third quarter, the manufacturing dollars were off 6%. Dealer ad groups were off 12%. Local dealers themselves were up 23%. Some of that is a shift. The dealer groups, regionally or locally, have kind of broken up and people have been left to their own devices. So it's logical to think that Jerry's Ford somewhere would be spending more money at his own store as opposed to contributing it to dealer groups. But that's essentially how the pie is cut.

In the third quarter, GM and Nissan and Infiniti were essentially flat. Saturn, Mitsubishi, Hyundai and Volvo were up and the rest of the category was down. So in the down list, call it Dodge, Jeep, Chrysler and Ford, Lincoln Mercury, Toyota Lexus, Subaru pretty small contributor to our total. Mercedes, Honda, BMW was down a tiny bit, same with Mazda. So, I guess, my look at this would say that the domestics are down more and struggling more with their ad spend levels than foreign manufacturers. And guess what? That's what their car sales results look like as well. The foreign manufacturers are generally faring better than domestic.

Harry Hawks

Let me tag team with David and come back to the first part of the question, which was which ones are more challenging. As David mentioned, the issues here are very concentrated in a few markets and a few stations. Just so happens, it's our biggest stations in our biggest markets, so California, Florida, Northeast. What's interesting, as was mentioned by David, the auto category was actually up as a category in the month of September. It was actually up as a category at more than half of our stations for the quarter.

But the big ones are down enough that it pulls the whole category down. But as you look at places where the regional economies are challenged, the Floridas and the Californias, et cetera, et cetera, it gets hard to decide which is the biggest challenge, is it auto, is it network, is it housing, recession causing reduced spending on housewares? But we're convinced all of them do contribute. And I know that in reading the transcripts of all the other calls for media and marketing related companies in the past couple of weeks, we're not the first to mention this.

But we've also looked at probably two or three dozen different sources, trying to understand those economies. And I'd say that it's fairly challenging across a number of those markets. The flipside of it is some of the small to middle sized markets for us are doing quite well. So it's kind of a mixed bag, Marci.

David Barrett

And what we have really tried to accomplish over the past 10 years, and we've talked a lot about this, but maybe not recently, is we have tried to create a diversified company here in terms of geography and in terms of network affiliation. So although I bemoan the fact that NBC is not doing well, we've hedged it by having 13 ABC affiliates, as it's turned out. And to Harry's point, and we've both said it in July, our mid to small size stations in the center of the country are doing reasonably well. I think we'd be very pleased. If we broke out that individual performance, they're very strong. So Harry hit the nail on the head there.

Marci Ryvicker - Wachovia

Thank you. This is very helpful.

Operator

Our next question is from James Dix. You may ask your question. Please state your company name.

James Dix - Deutsche Bank

James Dix, Deutsche Bank. Good morning, gentlemen.

David Barrett

James Dix - Deutsche Bank

Just a couple of questions. If you could give a little more color on the differences you're seeing in the regional growth? For example: if you excluded the stations in California, Florida and the Northeast that you had referenced by region, at least, in the release, how much better would revenue growth have been?

And then, secondly: do you expect housing and subprime to impact the auto category going forward? Do you think that you've already seen that impact? David, in your remarks you've mentioned specifically furniture, housewares and financial services. But I just want to know: do you think real estate could have a further impact on auto spending going forward?

And then my last question is: just on your philosophy on retransmission revenue guidance. You signed a deal with Cox. Is your view generally to give guidance on deals that you have already signed or do you allow for some potential for new deals to come online when you're giving that guidance? Thanks.

David Barrett

Let me start from the bottom and talk about the retrans. We've said in the past that this was not a year where we had many deals in negotiation, Cox being the notable deal that we had, and we included that. It is a multiyear deal. Its impact is fairly modest in terms of this year. We don't have any major deals brewing to be negotiated until we get to the fourth quarter of '08. And when we accomplish those deals, they will have an impact on '09, '10 and '11 going forward. So I think a lot of this is just timing of when these deals come up.

Harry Hawks

With respect to guidance on that, which was part of the question, we give guidance, if you will, and an outlook that's sort of just one year at a time. With respect to retrans, it's kind of what's in the bag. So when it comes time next February to give you '08 guidance, the same discipline will emerge there. We're not going to give you guidance to a number that we don't think is realistic for the year. David, back to you.

David Barrett

On the revenue side, I think probably the best way to present it is if we factored out several of our largest markets, we'd be flat to modestly up in terms of overall revenue as a function of how the large, mid size stations in the middle of the country are doing. So, said another way, these large markets are dragging us below the flat line.

Harry Hawks

You asked a question about: the future impact of real estate downturn?

James Dix - Deutsche Bank

Yeah, on auto in particular, yeah.

Harry Hawks

I think we would love to hear your perspective, because if you pick up the newspaper in the morning, somebody else is -- and of course, obviously somebody else is in the market or in the news this morning, announcing more losses associated with subprime lending and that sort of thing.

We're not sure where that is headed, frankly. All we know is, right now, the consumer confidence and its impact on consumer spending on things such as housing, autos and housewares, that sort of thing, is impacted here in the short term. We would hope that that disruption in that marketplace would stabilize in the coming quarters. And if so, obviously, we think we'd have some operating leverage to the upside recovering from some of this.

David Barrett

I think you've got to add to the calculus the high cost of energy as well, and how that bears on automotive purchases and as we come to the wintertime, what it costs to fill a 400 gallon tank of oil in the Midwest. If that's an extra $400 a month for a family, does that represent a car payment or a lease payment? So to me, all of these things are linked. And the middle class that drives this American economy is really challenged. I heard somebody remark on CNBC this morning that, will you go out and spend $200, $300 for a new iPhone, if you're having trouble making your mortgage payment? The answer is probably: “no”.

James Dix - Deutsche Bank

Right. Okay. Can't disagree. Thank you.

Operator

Thank you. Our next question is from Victor Miller. You may ask your question and please state your company name.

Victor Miller - Bear Stearns

I'm with Bear Stearns. I assume that you were hoping to get rid of us, but here we are back.

David Barrett

I thought I'd say: “we're back”.

Victor Miller - Bear Stearns

Sorry. Yes, exactly. First of all, just on the potential for next year, you did $81 million in political, you did $12 million in Olympics in the '06 framework. Maybe give us a sense of what your expectations are just relative to those numbers? Whether you expect to exceed those, and if you want to give us any kind of sense where that might go?

And then I would love to get your thoughts: the retransmission consent growth was 18% in the quarter. Should we see that kind of growth in '08 as well? And then the digital media was up 43% in the quarter. As we go into '08, do you think you will maintain those types of growth rates? Thanks.

David Barrett

We're looking to give guidance at this juncture, Victor, for '08. But let me offer up the Olympics the focus on for us is probably Athens comparing Summer Games to Summer Games, and '06 was of course a winter event. In Athens, we did $20 million, a little less than that, about $19 million. And I guess I'd say that our sellers know that we have expectations for growth on the Olympics from Beijing. So, that will be one growth component. And on an absolute dollar basis, this is important to us, but on a standalone basis, the Olympic total is relatively modest. Our success is really going to come from how we leverage that product for other sales and how we use it as a promotion platform for our local news. If we come out of the Olympics with enhanced local news ratings that will help us through the rest of the year.

On the political side, I guess I've been wrong on this consistently. So, what we're trying to calibrate is where these races that are important to us on the Senate side, we've got 14 races. About a third of those, I'd call, are fairly safe seats that are not going to generate an extraordinary amount of spending. There is another third of those, call it four or five, that should really generate some big bucks. And I think the new seat in New Hampshire is going to be a highly competitive race. The New Mexico race is really going to be competitive. Nebraska is an open seat. That's going to be very competitive, as well, I think, North Carolina may be in the same column. So those are the kind of ones that we're looking at where we'll really generate some significant bucks.

I think a key thing for everyone to remember is what was the composition of our political in '04? The Presidential Candidate dollars represented about 19% of what we did in '04. The Senate races were about 11%, local congressional races 18%, governors' races about 19%, call it 20%, various other state races 8%, various local races 4%, and issue advertising was 21%, the single biggest component here. And that's the wild card. And you've had a better record of handicapping our political than I do, maybe you ought to do what I do. But what really it's going to come down to is how many issue ads come out, how many of these things are in play in the market. And I think that will probably make the difference between $70 million, $80 million, $90 million or $100 million.

Victor Miller - Bear Stearns

Thanks.

David Barrett

That's all I've got to say about that.

Victor Miller - Bear Stearns

How do you feel about your relative to the digital and re-trans growth rates that you've posted?

David Barrett

I think we have high expectations for digital growth and reasonable expectations, given on retrans in '08, my expectations for re-trans growth are more aggressive for '09 and '10 and '11, when we get past the current contracts that we have.

Victor Miller - Bear Stearns

And then just on a question on C3. Has C3 really filtered down into the marketplace yet on the local side?

David Barrett

No, it hasn't yet. I think most of the buys are still coming down on a live basis. We don't yet have the benefit of plus 3, let alone plus 7. I've said before I think this distills down to a live plus 3 world, but we're not seeing enough evidence of that right now in the marketplace.

Victor Miller - Bear Stearns

And I imagine, what is the numbers for…

David Barrett

There are no minute by minute ratings, as you remember, in the local measurement.

Victor Miller - Bear Stearns

In terms of news I've got to think that's a, what, high 90s live viewing?

David Barrett

Yeah, 98, 99. I mean there's not much time shifted viewing there at all. USA Today prints a pretty interesting set of statistics every week about what's been time shifted, what's been viewed on DVR. It's kind of the usual suspects. If on a Tuesday night you want to watch Boston Legal and time shift Cane or what have you, that's what's going on in that dynamic when there's primetime shows competing against each other and you have the luxury of watching both.

Oprah's got some delayed viewing as well, and that makes sense. Her audience is 25 to 54 year old females. Many, many of them are in the workforce. So the notion that one can time shift viewing and watch Oprah at night in lieu of something else is just intuitively on spot.

Victor Miller - Bear Stearns

Thank you.

Operator

Thank you. Our next question is from Jim Goss. You may ask your question and please state your company name.

Jim Goss - Barrington Research

Barrington Research.

David Barrett

Hi Jim.

Jim Goss - Barrington Research

Hi, how are you doing?

David Barrett

Great.

Jim Goss - Barrington Research

A couple of things. First, can you verify last year the fourth quarter political was about $50 million, is that correct? You were comparing against this year?

David Barrett

If you have a two part question, give me part two.

Jim Goss - Barrington Research

Okay. And with Olympics: do you think the same rule of thumb toward the incremental dollars, the 50% sort of concept, applies there as well? And then lastly, I'd ask about your thoughts on ownership proceedings, with Martin's move with the FCC? We haven't talked about that for a few quarters.

David Barrett

On the political last year, you are spot-on. It was $50 million political in Q4 on a GAAP reported basis.

Jim Goss - Barrington Research

Okay.

David Barrett

I still believe that 50% is a good way to look at political and Olympics as an incremental factor. Absent someone persuading me there is a better way to look at it, that's how I think it is best viewed. One thing that's going to be interesting on the Olympics is that there are some 30% of the athletes that compete in the summer games are from California. And that gives Sacramento a huge advantage in terms of viewership, and they understand that and they can price it.

And a guy who will arguably be the most prominent athlete in the world next summer in Beijing is this young man, Michael Phelps from Baltimore, the swimmer who could win six, seven gold medals. BAL will really make hay of that, and Michael is a very attractive personality, so they've got a star in the games that both the NBC and us locally, we've got a very good relationship with his family down there. So we've got good access to him, and that will be good for our station.

And NBC also worked out with the organizing committee there that the swimming events, the finals are going to occur in the morning in Beijing, which means they will be live in primetime, not delayed. And to the extent that those are two or three of the biggest events, those swimming events, the fact that they are live in primetime as opposed to they've already occurred and we're watching them on tape will be a help, I think, to the network in a big way and for us locally as affiliates.

What was your third question?

Jim Goss - Barrington Research

Kevin Martin's ownership effort for December.

David Barrett

He has all good intentions. I think he'd like to solve the newspaper TV cross ownership issue very, very soon. I think he has got a real uphill climb to accomplish that, given all the Congressional resistance we have all read about. I'll be very clear. I think his approach to finding a solution here is the right approach. I think that is an antiquated rule that ought to be eliminated once and for all. I don't know if he can get it done, but I applaud his efforts to do so.

I am not optimistic at all that there will be any meaningful focus or change on the TV duopoly rules in this proceeding. I think that they will end up trying to approach this incrementally. If they could get newspaper TV done, that would be a big win, and then there will be another day when TV duopoly gets revisited.

Jim Goss - Barrington Research

Thanks, David.

Operator

(Operator Instructions)

Our next question is from John Blackledge. You may ask your question please state your company name.

Aaron Chew - JP Morgan

Hi, this is actually Aaron Chew for John at JP Morgan. I'm just wondering: if you guys could shed any light on the economics of the YouTube deal? If not the revenue share, maybe: some revenue expectations? What formats you're offering ads in and how advertisers are paying?

David Barrett

Terry Mackin will address it.

Terry Mackin

Aaron, I will give you an overview of the deal. As in many strategic partnerships in the web, they both have skin in the game. It's a rev share deal. You've probably read and seen that YouTube for the past year has been testing the integration of video ads. And I've seen those tests on the West Coast, and I think they're going to create a more dynamic presentation, which will, as a rev share partner, will give us a better upside opportunity.

You probably also read that we just launched 10 more stations, so that we'll have YouTube channels. Our observation of the video traffic that we were getting directly from YouTube and back to our sites was significant enough to make us want to almost double down on it. And I would describe it as something that we're still excited about and video is still very important in the digital space and I think that our rev share partner, YouTube, will be a good business partner. I would also say we just added the opportunity for us to sell it locally as well. We're the first broadcaster to be entering into that opportunity. So the rev share goes kind of both ways. We can sell it with them or they can sell it and distribute the revenues.

Aaron Chew - JP Morgan

Okay. Thank you.

Operator

Thank you. We have a final question from Victor Miller of Bear Stearns. You may ask your question.

Victor Miller - Bear Stearns

David, you talked about the spillover from the networks. I imagine one of the categories that seems to be spilling over mostly is the packaged goods category, because I think they took a gamble on the upfront. Can you talk about maybe that category, in particular, and then what other categories you see spilling over from the upfront?

David Barrett

You're right on…

Victor Miller - Bear Stearns

And the scatter market.

David Barrett

You're right on point that the packaged good category didn't aggressively enter into the upfront, and they're on our doorstep, and we've put in place, particularly for the first quarter, some nice business from the packaged good folks. I would say that the spillover is also coming on pharmaceutical, on telcos and some big retailers. I mean, you can think about retail and it's too big a catchall category. It includes the mom and pops, but it also includes the Macy's of the world. And that is an account and a client that we are getting some spillover or trickle down, if you will, from the networks.

Victor Miller - Bear Stearns

Thank you. Okay.

Tom Campo

Thank you. I think that concludes our call this morning. Thank you for participating. Have a great day. Bye, everyone.

Operator

Thank you. This does conclude today's conference. Thank you for participating. You may disconnect at this time.

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