TEGNA Inc. (NYSE:TGNA) Q4 2016 Earnings Conference Call February 27, 2017 10:00 AM ET
Gracia C. Martore - President and CEO
Victoria Dux Harker - CFO and EVP
David T. Lougee - President, TEGNA Media
Alex Vetter - President and CEO, Cars.com LLC
Matthew W. Ferguson - CEO, CareerBuilder LLC
John A. Williams - President, Digital Ventures
Jeffrey Heinz - VP of IR
Barton Crockett - FBR Capital Markets
Alexia Quadrani - JPMorgan
Douglas Arthur - Huber Research
Kyle Evans - Stephens, Inc.
Marci Ryvicker - Wells Fargo
Dan Kurnos - The Benchmark Co.
James Goss - Barrington Research
Good day, and welcome to the TEGNA Fourth Quarter 2016 Earnings Conference Call. This call is being recorded. Our speaker for today will be Gracia Martore, President and Chief Executive Officer; and Victoria Harker, Chief Financial Officer.
At this time, I would like to turn the call over to Mr. Jeff Heinz, Vice President, Investor Relations. Please go ahead, sir.
Thank you. Good morning and welcome to our earnings call and webcast. Today, our President and CEO, Gracia Martore; our CFO, Victoria Harker, and members of our leadership team will review TEGNA's fourth quarter and year-end 2016 results. After that, we'll open up the call for questions.
Hopefully, you've had the opportunity to review this morning's press release. If you have not yet seen a copy of the release, it's available at tegna.com.
Before we get started, I'd like to remind you that this conference call and webcast include forward-looking statements and our actual results may differ. Factors that may cause them to differ are outlined in our SEC filings.
This presentation also includes certain non-GAAP financial measures. We've provided reconciliations of those measures to the most directly comparable GAAP measures in the press release and on the Investor Relations portion of our Web site.
With that, I’ll turn the call to Gracia.
Gracia C. Martore
Thanks, Jeff, and let me join Jeff in welcoming all of you to our fourth quarter and year-end earnings call. Now I’m going to kick things off with highlights of our performance for the full year and also for the fourth quarter.
And after that, I’m going to turn it over to Dave Lougee, President of TEGNA Media; and Alex Vetter, our CEO of Cars.com for a deeper dive on their respective businesses. Victoria will then cover the financial highlights for the quarter. So lots to cover, so let’s get right to it.
We remain focused on our anticipated spin-off Cars.com which will create key strong companies with leadership positions in their respective industries. Alex and the team there continue to make progress in their preparations for life as a separate company later this year.
Our strategic review process for CareerBuilder results are moving along. We are confident that we along with our partners TEGNA Media and McCarthy will find a solution that maximizes value for shareholders and puts CareerBuilder in the best position to succeed for its customers and its employees.
So now let’s turn to our record performance for 2016, which was more than consistent with what we shared with you in early December. We closed out the year with substantial improvement on both the top line and bottom line, as compared to 2015, with revenue up 10% and non-GAAP earnings per share increasing 62% year-over-year to $0.74. And we generated a substantial increase in adjusted EBITDA, which was 1.23 billion. These improved results reflect solid performance across our segments, as they continue to execute on their growth plans and strategic initiatives.
2016 was a strong year for TEGNA Media. TEGNA Media revenue was at record levels driven by political spending, continued digital growth, the Summer Olympics which aired across our robust NBC footprint and substantial increases in retransmission fees, which were up about 30% in '16 compared to the prior year. On the TEGNA Digital side, 2016 revenues were up about 3% reflecting growth of Cars.com and CareerBuilder.
Before we turn to fourth quarter performance, we want to also note that with the change we made last year to go to a calendar year, 2016’s fourth quarter was three days shorter than the 2015 fourth quarter. So you’ll want to make sure you are viewing our quarterly comps for Media through that lens. Fortunately, there will be no issues like this going forward.
In the fourth quarter, TEGNA Media revenues were up 17% over the prior year’s quarter excluding the three extra days in last year’s fourth quarter. We saw strong growth in congressional and gubernatorial election spending thanks to our well-positioned station footprint. These races brought in more advertising dollars this year than during the 2012 election and helped to partially offset the well-documented lower Presidential race spending. Dave will be providing a full report on our political results in a moment.
We also are very pleased with retransmission growth of over $25 million in the fourth quarter. In addition, our team made excellent progress negotiating new agreements replacing those that expired at the end of '16, which will drive growth in '17 and beyond. Now we continue to see a gap in the retransmission revenue we take in compared to the value we provide, and we have been closing that gap for the last several quarters and will continue to work hard on that front.
We also recognize that 2017 is a unique year for us, in that we have a gap between the increase in retransmission fees we earn and the increase in reversed compensation this year. As we have noted, we plan to close that gap both with the new agreements we negotiated at year end, and Dave will share some good news on that front in a few moments, as well as the initiatives we launched in 2016, which combined were more than offset this exposure.
Turning to Digital, Digital segment revenue rose during the fourth quarter reflecting the mid-single digit revenue growth at Cars.com and CareerBuilder. These gains were unfavorably impacted by lost revenue as a result of our sale of the PointRoll business in November of last year.
Auto remains one of the fastest growing advertising verticals and we continue to see more and more marketing and advertising dollars shifting to a digital solution. To capitalize on these expanding opportunities, Cars.com is rolling out new products, new apps, a more user-friendly interface that provides unique value to dealers and shoppers alike.
Cars’ strong brand recognition and leadership position coupled with favorable industry dynamics and continued hard work and innovation by the Cars.com team gives us confidence that it is positioned to reach its full potential as a standalone company. Alex will provide a deep dive on the specific initiatives underway in just a few moments.
2016 was a pivotal year for CareerBuilder. CareerBuilder is one of the most innovative companies in the human capital space with an unmatched end-to-end platform. For more than two decades, CareerBuilder has led in recruitment with its terrific pre-hire platform. Now with its recent acquisition of Workterra specializing in cloud-based benefits administration and talent management, CareerBuilder has moved into post-hire solutions.
Employers appreciate the expanded suite of services we now provide under one umbrella, and we too are optimistic about the new doors and revenue growth opportunities these value-add services open up for us. The breadth and depth of CareerBuilder solutions make the company a true human resources powerhouse.
Lastly, I want to comment briefly on our share buyback program. As you saw in November, we reactivated the program which had been temporarily suspended in connection with our anticipated spin-off of Cars.com. Our decision to begin buybacks again was based on our strong operational and financial performance and the Board’s confidence in our ability to maintain strong cash flow levels and allocate capital strategically. We will continue to be opportunistic regarding share repurchases going forward.
Now, let me turn it over to Dave for his thoughts on TEGNA Media.
David T. Lougee
Thank you, Gracia. As we had forecasted, 2016 was a year of records. We had a record year for both revenue and EBITDA and our stations outperformed our markets producing a record revenue share for our division, demonstrating that our sales and content plans are working. Our focus on investment and innovation has been key to that growth. I’ll leave the reporting of the numbers to Victoria but let me start with retransmission that Gracia referenced.
So very good news to start 2017. We have stronger than projected retrans revenues due to stronger results and those year-end negotiations that covered 42% of our subscribers. I’m pleased to report the resetting of rates that Gracia referenced in her remarks will result in a 24% increase for retrans revenues in 2017, higher than the range of 17% to 21% previously reported.
As a reminder, as Gracia also referenced, on the expense side of the retrans equation, we’re now making reverse compensation payments for the first time on 11 of our NBC stations.
We had most recently projected a one-time net retrans gap in 2017 of $48 million to $55 million. But now I’m pleased to say based on those year-end negotiations that gap has been reduced to $25 million to $30 million. And as we planned, our innovation initiatives which I’ll discuss in more detail shortly will more than cover that remaining net retrans gap.
Back to retransmission on the topic of pay-TV subscribers. New OTT providers, as we’ve talked about in the past, have shown great interest in our portfolio of strong stations. We’re in pretty much the final stages now of very productive negotiations with our network partners and OTT providers, some of them new OTT providers also known as virtual MVPDs, which we’ll talk about in the future always as VMVPDs only maybe if I can say it right.
Given the strength of our stations and the size of our markets, we’re ending up with very good economics on these agreements which will result in no lost income if a subscriber moves from a traditional MVPD to one of those new players. Furthermore, some of these services are targeting so-called cord-nevers with skinny bundles of channels at lower overall prices, and that’s an opportunity for us to reach new consumers who have not yet before been in the pay-TV ecosystem.
Now onto the regulatory front. We expect a long overdue break in the log jam on outdated TV ownership rules this year. Under new FCC Chairman Ajit Pai, we see very positive signs of relief that will likely allow both vertical and horizontal consolidations of very good and overdue development for TEGNA and the industry overall.
And just last week, the FCC gave approval to broadcasters to broadcast in our new ATSC 3.0 standard, which provides additional business opportunities down the road, another good development for the industry and TEGNA. And regarding the just concluded spectrum option, as expected, TEGNA did not sell any spectrum in the option.
Now let me turn to political and quickly recap political in the fourth quarter. We finished at 91 million, higher than our previous guidance of 88 million to 90 million. While we know Presidential spending was down from prior elections, notably Senate spending was nearly flat and House races were up 20% and Governor’s race is up 138% from 2012.
Looking ahead to 2018, the current political energy and activism that you’re all aware of alive in this country will likely result in heavy fund raising and political spending by midterm election standards, so we expect a healthy year for political next year.
Now let me turn to our many innovation initiatives that we’re using to reinvent our business; innovations like Hatch, our centralized marketing solutions group combined with our new pricing and business intelligence team, a comprehensive content innovation plan, and Premion, our newly launched over-the-top advertising services business, are all positively impacting our clients and advancing the way we meet our consumers' and customers' needs.
Premion has expanded its business and is ramping up very nicely. Local and regional advertisers recognize the importance of over-the-top video content distribution and are taking nicely to Premion’s position as a one-stop-shop in OTT advertising.
In January alone, we have 135% more campaigns than we did in December. The interest from advertisers is real and it continues to grow each month. These campaigns has spanned from 1 to 125 markets, in other words we’re selling way outside our footprint. And in the 38 TEGNA markets, 30 properties have booked more than 300 total campaigns already in 2017.
And finally, Premion is also onboarding new distribution partners, including Turner, FireCom [ph] and Major League Baseball. With these additions, we now have more than 10 major content and broadcast partners who provide access to over 80 long-form episodic branded networks.
Hatch also is off to a strong start in 2017. As a result of Hatch creating unique multiplatform campaigns for local marketers, we have 125 new accounts we didn’t have a year ago. So the pipeline for potential business is strong and we’re optimistic on the prospect for developing new revenue throughout the year.
Now to content. To achieve [ph] the audience share increases and deeper engagement on all platforms that we’re getting, we’re breaking our teams from the assembly line of formulaic local news production and investing in unique, originable, shareable content and pilots that will stand out amongst consumers.
We’ve introduced the concept to our teams, brought in a lot of new innovative leaders to the company and we launched the first test in the marketplace on the air in November and evaluated our results. Despite competition from the World’s Series strong competition and the election in November, we saw share increases across 15 stations in the morning and 11 stations in late news. And it’s important to know there’s often a 6 to 12-month lag between audience share growth and revenue impacts.
On the programming side, our commitment to having more control of our content within any programming that focuses on live and local is also producing results. We currently have two local or regional pilots in production and now two national shows out-to-market for distribution. TEGNA was a featured company earlier this year at the National Association of Television Producers and Executives, also known as NATPE.
Our announcement of the show that Gracia referenced, a first of its kind, daily live and online program, has received great response. We’re in the process of setting up stations now. Produced out of our Denver affiliates with a low production costs, this live show will be live across several time zones each weekday leveraging social media content and an entertaining ensemble cast to create a live experience unlike other syndicating shows on broadcast TV. We have a partner in MGM Studios under President Mark Burnett of The Apprentice.
So those are just a few examples of the bold and aggressive moves TEGNA Media is making. Our focus on innovation has become a competitive advantage and in 2016 you can expect more. In 2018, we’ll be able to take these initiatives and leverage an incredible opportunity to showcase our content and revenue initiatives with The Super Bowl and The Olympics on all our many NBC stations in next year’s first quarter.
With that, I want to turn it over to my partner, Alex Vetter, at Cars.com.
Thank you, Dave. For the fourth quarter of 2016, we achieved 162 million in total revenue, a 5% increase compared to the fourth quarter last year primarily due to continued growth in our retail channels. Retail revenue, which includes our local dealer and national advertising businesses, was up 7.5% year-over-year. With our revenue growth, we achieved strong EBITDA and EBITDA margins which we believe are among the highest in the market.
Our largest revenue gains were with auto manufacturers and major dealer chains where we saw 13% growth in the quarter compared to last year. These customers have higher and larger resources and therefore are able to apply a more sophisticated approach to measuring marketing effectiveness. Further, they are already focused on offline sales beyond digital generation of traditional leads.
Our total wholesale revenue from affiliate newspapers and broadcasters was down 3% in the quarter versus last year. We’re continuing to work with our affiliate partners to improve their performance, and in certain cases restructure our relationships.
At the start of 2017, we took control of certain territories from one affiliate partner, an important first step in a transition that will provide Cars.com even greater opportunities to gain market share at the same time convert losses in our wholesale channel to retail revenue gains within our retail system.
On the local sales level with our broad network of dealers, while we continue to take a leadership role in the industry providing value beyond traditional leads, we are experiencing softer revenue. As a reminder, the fourth quarter is typically the slowest quarter for the company due to the seasonality of the automotive market.
The overall softness in local dealer business is primarily attributable to two factors; traffic declines during the replatforming of the Cars.com technology and the shift of the consumer to mobile devices. The replatforming of our Cars.com technology which is an important strategic initiative in 2016 provides us with a much more flexible and robust technology infrastructure.
We’ve modernized our entire code base to allow us to develop products and features much faster. For example, our legacy platform, we made two and a half changes per month on average. With our new technology platform, we’re now tracking towards more than 60 new innovative updates per month.
Further, as we discussed on the last earnings call, our traffic and search engine position were negatively impacted during the replatforming work. And as we said, it will take us some time to regain our SAR [ph] position, which will in turn further increase the quality of traffic and leads we’re able to deliver to our local partners.
The good news is that I’m confident on the work we’re undertaking, because part of that confidence is based on our shift to and strength in mobile. Our move to the responsive design allows consumers to experience our site regardless of the device they’re using. Our much improved site speed is also contributed to our growth in mobile with our fourth quarter mobile app traffic up 13% year-over-year.
Mobile users are more likely to be repeat visitors and our site data supports this. We saw a 10% increase in our repeat visits compared to the same quarter last year. And while mobile users are typically sending fewer leads to dealers, the mobile user is typically much closer to a sale.
We’ve been tracking and analyzing mobile walk-in behavior on the dealer lot for more than a year through our innovative Lot Insights reports, which was the first of its kind for our industry. And our reporting has revealed that when we factor in Cars.com mobile traffic, we believe that we’re generating nearly 7 million more fiscal leads per year that are not consistently recognized within the industry.
Further, related to product innovation, we continue to focus on improving the consumer experience with innovative app features such as Price Drop Alerts, On-the-Lot VIN Scanning, as well as Urgency Indicators on the site that provide real-time metrics on a given vehicle’s interest to shoppers.
We’re also encouraged by the early results from our acquisition of DealerRater which has positioned us as the largest automotive review platform in the industry. Last quarter, we incorporated more than 3 million dealer reviews into the Cars.com Web site. And research shows that consumers trust reviews nearly as much as personal recommendations. And we’ve emerged as the go-to-resource for unbiased automotive opinions which we expect will translate into increased site traffic.
In addition, DealerRater takes reviews one step further by allowing consumers to review individual employees within the dealership. Our data shows that nearly 80% of DealerRater sales people indicate their employee profiles help them sell more cars and drive more showroom visits.
We told you last quarter that we were awarded the J.D. Power’s highest ranking for overall satisfaction among third-party Automotive Mobile Web sites and the accolades keep coming for our work and our culture. For the fourth consecutive year, Cars.com was named the top review site and Digital Air Strike's Sixth Annual Automotive Social Media Trends study. We also received the Highest Rated Used Car Advertising Award in the eighth annual DrivingSales Dealer Satisfaction Awards.
Now before I turn it over to Victoria, I’d like to make a few comments on our outlook. We are expecting modest single digit total revenue growth in the first quarter. We expect to see revenue growth in our national and major accounts businesses but at a lower rate than during the same quarter last year, primarily related to reduction in spending at two national accounts due to a transition to an advertising agency and a change in placement strategy during the first quarter.
Once these transitions are completed, we expect these manufacturers to increase their spending as we progress throughout the year. Excluding the impact of these two accounts, we expect our national and major accounts to be up in the 12% to 15% range in the quarter in line with the fourth quarter growth rate.
As I noted before, while we’re taking steps to improve and in some cases restructure the relationships with our affiliates, we expect a mid-single digit decline year-over-year in this part of our business.
At the local sales level, as we’ve discussed, it will take time to grow our increase in SEO traffic and the quality of traffic to our dealers. And as that traffic grows, we will be working to influence the industry to adopt new lead generation metrics that matter for today’s consumers, namely the majority of those who made the shift to mobile.
On the industry front, although analysts at this point in the year have mixed views on the SAR, auto sales are expected to remain at an all-time high and dealer profitability levels continue to be very strong. Thank you.
Now I’ll turn it over to Victoria for further comments.
Victoria Dux Harker
Thanks, Alex, and good morning, everyone. As Gracia has already mentioned, 2016 was a solid year for TEGNA by almost every measure and we’re very pleased with our fourth quarter results reflected in double-digit growth in both revenues and adjusted EBITDA.
Before we dive into our consolidated financial results as well as capital allocation during the quarter, I’d like to highlight a few special items which unfavorably impacted operating expenses by about $19 million on a pre-tax basis with an associated EPS impact of $0.05 per share. These are primarily driven by non-cash impairment charges and severance charges, largely due to our recent reorganization at our G/O Digital business.
Beyond this, we recognized about $11 million in non-operating special items on a pre-tax basis with an associated unfavorable EPS impact of $0.09 per share related to the anticipated Cars.com spin-off and the sale of additional business. During the quarter, we also report a special tax benefit resulting from deferred compensation investments with an EPS benefit of $0.02 per share.
As Gracia mentioned, a conversion to a calendar year after the spin-off of republishing assets in 2015 resulted in three fewer days in this year’s comparable fourth quarter results impacting the media segment revenue by about $11 million and adjusted EBITDA by about $7 million. Despite this impact with solid performances by both media and digital segments, we achieved earnings per share of $0.74, an increase of 40% over last year.
Now turning to the fourth quarter consolidated financial results. Total company revenues of $887 million were up over 10% year-over-year driven by a record media segment revenue and gains across our digital businesses.
During the quarter, total company operating expenses of $589 million were 7% higher compared to last year, driven by higher programming fees as well as expenses associated with solid revenue growth and ongoing investments in media segment initiatives. These were partially offset by the absence of PointRoll business on a comparative basis.
As a result of the solid operational execution across the segment, TEGNA overall achieved strong adjusted EBITDA of $350 million this quarter, up 15% year-over-year and our adjusted EBITDA margin was 39%, up 160 basis points compared to last year. We’re also very pleased that the EPS outperformance during the quarter was about half from the benefit of tax rate and half from operational performance.
Now, let’s turn to a more detailed review of the media and digital segment results. Media segment revenues of $529 million increased by 14% year-over-year, driven by strong retransmission revenue and higher political advertising spending as well as continued growth in digital revenue. Excluding the impact of the calendar change, media segment revenue was up 17% in line with our guidance.
Retransmission revenue was up 21%, an anticipated growth rate lower than prior quarters due to lapping of the agreements negotiated during the fourth quarter of 2015. For the year, retransmission revenue was up significantly, about 30% over last year. Beyond this, media segment digital advertising revenues continued to increase, up by about 7%, driven by continued gains in digital marketing services and the success of our recently launched initiatives.
Now focusing on first quarter 2017 expectations. Based on current trends, we anticipate total media segment revenue to be flat to slightly above the first quarter of last year. The year-over-year comparison will naturally be unfavorably impacted by about $16 million due to substantially lower political advertising revenue.
It’s also approximately $9 million less due to the move of the Super Bowl from our 11 CBS stations which reach about 10.6 million or nearly 9.5% of U.S. households to our much smaller three FOX stations footprint which reach only about 600,000 or one half of 1% of U.S. households. Excluding the unfavorable impact of the Super Bowl shift and lower political advertising, media segment revenues is expected to be up in the mid-single digits year-over-year.
During the fourth quarter, media segment operating expenses of $285 million were up 12% year-over-year primarily due to increased programming fees. Excluding these fees, media segment expenses increased approximately 3.5% driven by investments in our strategic initiatives including sales and content transformation projects.
During the quarter, digital segment revenues of $358 million increased by 4% year-over-year. On a constant currency basis and adjusting for PointRoll, digital segment revenues were up by about 6% over last year reflecting higher revenue within Cars.com and CareerBuilder.
Cars.com revenues increased by 5% during the fourth quarter reflecting increased market penetration in direct markets, the recent DealerRater acquisition and strong national display advertising. Wholesale revenue was slightly down compared to last year with mixed performance by affiliates. Cars.com revenues sold to the direct sales channels was up over 7% reflecting the factors Alex mentioned earlier.
CareerBuilder revenues were up by about 7% year-over-year on a constant currency basis with significant improvement sequentially. Growth was mainly due to higher resume data base revenue, continued sales momentum of Software-as-a-Service solution and several recent acquisitions, partially offset by continued headwinds in the job posting business.
Digital segment operating expenses of $289 million were up 4% reflecting investments in growth initiatives and the expenses allocated with the newly acquired businesses within both Cars.com and CareerBuilder, partially offset by the absence of expenses at PointRoll.
Now turning to CapEx. Capital investments of $26 million during the quarter reflects our ongoing commitment to reinvest in business priorities and digital development as well as media content, product integration and platform enhancements. For the year, our capital investments totaled $95 million just slightly above our full year target due to additional investments in software development.
Turning now to capital allocation. After a brief pause in the share repurchase program following the announcement of the intended Cars.com spin-off, we resumed the repurchases on a limited basis in November. Since the reactivation, approximately 0.5 million shares repurchased during the fourth quarter at an average price per share of $22.05 for a total of $11 million.
At the end of the quarter, our long-term debt stood at $4 billion reflecting the extinguishment of $193 million in 10% senior notes which reached their maturity earlier in 2016. Beyond this, in November we accelerated the redemption of the outstanding $70 million remaining on our 7.125 notes at par which were due to mature in September of 2018.
As we mentioned during our previous call, both these actions will result in significant interest expense savings of $14 million annually, approximately $5 million over two years respectively. At the end of the quarter, cash on the balance sheet was $77 million and free cash flow for the quarter was $202 million.
With that, we will now open it up for questions.
[Operator Instructions]. We’ll take our first question from Barton Crockett with FBR Capital Markets.
Okay, great. Thanks for taking the question and I appreciate some of your thoughts about the regulatory situation under the new FCC leadership. But I was wondering if you could expand a little bit on that. I think you said that you see opportunities for more horizontal and vertical combinations. I was wondering if you could be a little bit more specific about what the constraints are that you think could be changed in how TEGNA will try and be positioned for that.
David T. Lougee
Sure. This is Dave. I’ll take that. Just starting with the vertical, there’s been a longstanding UHF discount for stations that’s been frozen effectively recently and we expect that to be reinstated probably within the next couple of months, as the FCC appropriately is looking at that. They should view it holistically with all the ownership rules. And then as or even more importantly I think possibly by as early as the end of the summer or early in the fall, the FCC under new FCC Chairman Ajit Pai who’s been very public in the past about the need for these outdated rules to be updated, we expect him to take action. He does not need to do for those of you familiar with the so-called Quadrennial Review that the FCC is supposed to do every four years. While the next one is scheduled for '18, he’s already got a petition for reconsideration in front of him of the last ones that the previous FCC did. So all the filings have been done. The process is fairly simple and clean for him to reinstate them – to relax them. And specifically what we mean by those in-market rules are there’s a number of old rules that really limit our ability to consolidate in the marketplaces, specifically I’ll call out probably the two most important which is there’s an eight-voices test where you have to have eight independent owners in a market again from a buy point here [ph]. And two, that you can’t own two of the big four stations in a marketplace as determined by ratings technically. And that made sense once upon a time obviously when broadcasting before the Internet was here, before video was here, before cable had grown. But I think the time has come and he’s got control of the commission and we have a pretty high level of confidence that those rules will change. We’ll also need for the Department of Justice to take a look at how they have viewed in-market advertising in those markets. There’s some guidelines there that sort of date back to a previous definition of the market again before at least all these new entrance that I referenced. So in a nutshell that piece of it, the ability to consolidate horizontally in a market is a very good development for the industry and for us specifically as well.
Okay, that’s helpful. Just to try and understand a little bit more clearly, do you expect – what constraints would you expect us to end up with when this process is done? Do you think we’d be able to combine two or three of the top four stations in a market? Where do you think the puck’s going? And would you guys be a buyer or a seller or both in such a situation?
David T. Lougee
I think it’s very likely that two big four stations will be – that one owner will be allowed to own two big four stations finally.
Gracia C. Martore
Barton, I think as you have always known about us, we are incredibly opportunistic people. We will look at all the opportunities that come up. I think there’s room for, as Dave was trying to allude to, both outright M&A activity and then I think there’s other opportunities to look at portfolio optimizations where you might want to swap to better everybody’s portfolio concentration assuming as Dave says that the in-market duopoly rules get relaxed. So I think that we’re blessed with the fact that we have a strong balance sheet, we generated an enormous amount of free cash flow and that we have the opportunity to be active across all alternatives.
Okay. And then if I could switch gears with one other question. In your first quarter '17 outlook for flat to little bit of growth maybe in the media segment, granted there’s political and Super Bowl headwinds but you also have retrans growth. What is the implied trend in core advertising? It looks like you’re seeing maybe a high single digit decline there. I was wondering if you could comment on that. And when you talked about the 24% growth in retrans, do we see that in the first quarter or does it kind of ramp up a little bit later?
David T. Lougee
So the mid-single digits guidance is all-in and we do see retrans that number rolling through the year, because those were deals that were done at the end of the year. As core has been slow starting off in the marketplace, as I’m sure you’ve heard from others as well and it’s been ramping throughout the quarter but we do obviously have the headwinds of almost $10 million last year in the Super Bowl. So it won’t end up, up for us but it is improving.
Okay, I’ll leave it there. Thanks a lot guys.
Gracia C. Martore
To be more specific, Barton, I do not believe that we are in anyway anticipating excluding Super Bowl that our core numbers would be down in the high single digits. That’s not the expectation at all.
Okay, all right.
Gracia C. Martore
But the expectation would be that they would be better than that just to be clear.
Okay, I appreciate that. I’ll walk through the math offline with you guys, but I appreciate that clarification. Thanks.
We’ll take our next question from Alexia Quadrani with JPMorgan.
Hi. Thank you. Just a quick follow up first for my first question. Dave, I think when you just said it won’t end up, up for us when you were talking about the core advertising, you meant I think in the first quarter, right, because for the full year you are looking for improvement in core advertising as the year progresses. Is that correct?
David T. Lougee
That’s right, about the first quarter. We haven’t changed any. It’s very early and money’s been [indiscernible], so we’ve got no information to change any thinking around the year.
Okay. And then just want to follow up on your previous comments also about the virtual MVPDs that you were talking about. Any more color you can give us on how those relationships go? I know you don’t obviously want to talk about any specific contract, but just sort of in general, are the deals similar in nature to traditional deals when you talk about how it’s sort of net neutral from a subscriber whether they’re on linear or they’re on virtual MVPD? Could you also give us more color, are they multiyear deals, do they have escalators, I guess how are they generally set up? Thank you.
David T. Lougee
Sure, Alexia, I’m glad to. There’s no one clear model that – there’s several different forms of which the deals are coming down and being negotiated. For instance, I think it’s worthwhile dividing between new entrants and traditional MVPDs or getting into this space, like dish and direct got well publicized services out there. So the negotiations on the economics around those dish and direct deals are integrated into the affiliate negotiation types of – to the retrans negotiations that we have with those providers. So we’re ending up with almost duplicative economics – I should say almost duplicative economics on those deals. As it relates to the new entrants, the form of payment and the structure may look different than what we do with traditional retrans but the net retrans per subscriber is going to be ending up the same. So there’s no one-stop shopping on the way the deals are being constructed. But in the end they are all, like we said earlier, broadcasting is at the core of each of these services what they have to have to get off the ground. And the consumers have voted loudly that they want us. So that bodes very well for our near and long-term economics in that space.
Okay. Thank you very much.
We’ll take our next question from Douglas Arthur with Huber Research.
Yes, two questions. Dave, in terms of the progress you’ve made on closing the gap on reverse retrans, do you sort of foresee any phasing of that throughout the year or just somewhere to Alexia’s question on retrans or fairly smooth progression? And then I’ve got a follow up.
David T. Lougee
No, the former is the right answer. We will be ramping throughout the year. We’ve modeled that. We’ll be doing --
On initiatives --
David T. Lougee
Yes, on the initiatives that we have that they ramp throughout the year and that the cover on the gap, which we’ll more than do is for the full year.
Okay, great. And then a follow up on the 6.9% growth constant currency CareerBuilder; Aurico, Workterra, how much did they add to that growth and what’s sort of the pro forma organic growth for CareerBuilder?
Gracia C. Martore
Doug, as you can appreciate, we are in the middle of looking at some strategic alternatives so I have to be a little bit careful. But what I would say to you is that every category of revenue grew at CareerBuilder other than jobs board, which we indicated in the past have seen price compression. With respect to some of the growth that we’re seeing from those acquisitions, that’s actually some growth that we look at it as a product. Adding the ability to do pre-hire testing and confirmation of employment and the like is a product that we were going to probably get into. This just helped us to accelerate that process. But what I can tell you is we saw growth across everything other than the jobs board piece of it and saw absolute growth.
Victoria Dux Harker
Doug, this is Victoria, just to expand on this. As we talked about in previous calls, a number of these opportunities in terms of products are now being sold across the sales forces, so they become an integrated part of the solution. So it’s not a direct sale from a previous company that we acquired, it’s much more integrated than that.
Okay, great. Thank you.
Next, we’ll go to Kyle Evans with Stephens.
Hi. Thanks. Alex, could you talk a little bit more about the affiliations and where you took over direct sales, were those markets given back to you by choice? Did you take them as a part of the contracts? Just a little bit more color there would be appreciated.
Sure. We’re in close conversations with all of our channel partners and we’ve spent more time with the partners that have had the worst performance year-over-year, because we’re seeing many markets improve their performance year-over-year. So we’re working from the bottom up. And in those discussions, we identified several territories where they just didn’t have the sales pressure that we felt that we could provide in the market and they agreed to relinquish those territories to us. So it wasn’t a full-on takeover of an entire channel partner but rather them relinquishing a handful of markets and territories. And we’re going to continue, Kyle, to keep the pressure on our affiliate partners and if they’re unable to generate the results, we’re having active discussions about us stepping in and taking over.
I think, Kyle, just to add to what Alex is saying, we are looking at all the alternatives. As Alex has indicated to the extent that the affiliate performance, particularly in a one affiliate or two affiliates worsens, then obviously we’re going to be talking to them before they get to that point where we’re going to take away the markets and see if there’s some logical conclusion we can come to that one benefits them but two benefits us and gets us control of those markets. So there’s a number of things going on that we really can’t comment on specifically, but rest assured that we are not sitting by and not taking actions in a variety of different ways.
Without going into specifics, how fast can you run that process? The affiliates were positive last quarter; third quarter negative. When could we expect to see more consistent growth there?
I would say that all the channel partners have expressed an intent to grow this year and given us plans that show that how they’re going to attain it. We’re backing their plans and in the event that they’re failing to achieve them that’s when we’re immediately engaging with them. I think the good news is over '15 and '16 we’ve got far more channel partners more engaged this year than we had in the past as they see the growth opportunity in front of them.
Gracia C. Martore
Yes, and I think this is the year where we’re going to be having those more creative conversations. Because if this year you don’t see that kind of improvement in '19 and '20 which is when they come up, then the results will be inevitable.
Right. A question for Dave. Could you give us an update on your subscriber account for retransmission in the quarter?
David T. Lougee
Yes, we’re relatively stable. We’ve just saw very mild declines consistent with other quarters that’s really specific to one provider. So we’re feeling --
Gracia C. Martore
M&A activity --
David T. Lougee
Yes, due to some M&A activity in the sector. So we continue to see them being relatively stable. We’ll once again call out when you see public reports, individual cable networks are seeing some significant gaps but that’s different than what’s happening with the overall MVPD subs. And as I mentioned before too, OTT is over time going to become replacement and possibly even additive.
Okay. Lastly, you raised your retrans guide. Congrats on better than expected there. The last thing we got from you on 2017 media was for low singles to mid singles growth; still no change to that for the full year for media?
Gracia C. Martore
Yes, I think again what we would say, Kyle, is that it’s incredibly early in the year. As Dave said, the year – I think universally across the broadcast group you’ve heard folks talking about the fact that the year got off to a much slower start than anticipated. In part, I think we all should have gone back and looked at what happened after Presidential election years and would have seen that there’s not – there’s some pattern to that. This year is going to be an interesting year because when you think about some of the actions that could happen around the economy this year, around taxes, around other things. This year could go in a variety of different ways. And if you saw tax relief for the middle class actually happening this year, et cetera, that could be a positive. So this is one of those unusual years where there’s a lot of things at play and we’re just going to have to see how it all unfolds during the course of the year.
We’ll take our next question from Marci Ryvicker with Wells Fargo.
Hi. David, just want to clarify something. You talked about that retrans gap going from 48 million to 55 million to 25 million to 30 million. Is it based on your negotiations in a rate and from initiatives or just initiatives?
David T. Lougee
No. Initiatives have nothing to do with retrans, Marci. It’s just that the actual gap between what we pay out networks, right, that we were going to have this year with retrans because of the NBC hit, that’s the gap. And it went down simply because of the retrans revenue growth.
Okay. And then in terms of the initiatives, is there any way to think about it in terms of leaving this into our models as the year progresses at incremental I think 40 million to 50 million that you talked about?
David T. Lougee
Yes, I think that’s a good way to think about. I think we’re on track to do that. What pockets the revenue will come in will probably change a little bit through the course of the year as more of it will move to digital. But probably about a half of that is in core and about a third in core and digital and other all-in for the year. But the mix will change and it will be at a margin consistent with the rest of our business.
Okay. And then one last one and I apologize if I missed it. For Cars.com, did you talk about the contribution from DealerRater I guess a Gracia [ph] question?
Gracia C. Martore
No, we didn’t talk about it because frankly we see that literally as a product. We had already at Cars amassed some number of reviews. It was a business that we wanted to get into. We basically bought them and got access to 3 million reviews. Then what we did is we have a sales force which they did not have. We’re bringing the sale force to bear and that’s something that will ramp up during the course of 2017. So the contribution is modest but really it’s a product extension as we see it rather than an M&A actively.
Got it. Thank you very much.
Gracia C. Martore
Thank you, Marci.
Our next question comes from Dan Kurnos with The Benchmark Co.
Great. Thanks. Good morning. Just quickly, Dave, I guess kind of housekeeping. As other people have kind of talked about this, I know you gave a little bit of color around the extra days but if you pull out political views, give us a sense of what Q4 core was ex-political [ph]? It looks like there was a little bit of upside. And just any incremental color beyond auto on categories in case I missed it?
David T. Lougee
For the fourth quarter, core excluding the four days was down high single digits. But as far as categories go, auto was strong. It came back in March after the crowd out in November. And on the flipside of that, media and telecom down a little bit.
Great. And then just for Alex, just a couple of high level thoughts for you as you sort of prepare life after TEGNA I guess. Just can you talk about sort of the influence and the shifting spend from the OEMs back and forth between digital and broadcast, and that’s growing to the dealer level, sort of the impacts between the mix shift we’re seeing in cars between new and shifting more towards used? And then any comments you could have on sort of service usage on mobile versus desktop? Thanks.
Sure. First of all, I don’t have the media allocation numbers in front of me but manufacturers have been aggressively shifting their dollars towards digital over the past few years. And importantly with a flattening new car sales year or SAR predicted for '17, I think you’re seeing manufacturers increase their focus on in-market sites where they can capture incrementality. And retention marketing is probably the biggest term we’re hearing in 2017 from manufacturers as they really seek to hold on to their existing sales and try to take share from their competitors. And so platforms like ours are highly captive. 86% of our audience intends to buy a car within a very near window. So manufacturers can really use that consumer indifference to their advantage. And so we continue to see manufacturers, as I mentioned, if you back out the two accounts that had an agency changeover and a switch in their buying process, our manufacturer spending would have been up in double-digit growth. And we see those two manufacturers have already started to reengage in their first quarter spending. So we expect that process to work its way out. I think on your next question was about new and used trends. While new is projected to be flat to down for '17, the used car market is extremely strong and healthy and growing. And about 75% of our total site traffic comes in looking for a used car. And while we see our users vacillate back and forth between new and used, we’ve got a massive data base of used vehicles in our data base over nearly almost 2 million used car listings in our data base. So we’re seeing strong growth in the used car market for '17. And then the last question, I want to make sure I understand it. Your question was about service usage on devices?
Yes, I just want to kind of get a sense – look, obviously you’re getting more traffic through mobile. You’ve gone through the replatforming now. You added a lot of ancillary service offerings. So I’m just curious sort of any learnings you have so far on customer usage of services on mobile versus sort of traditional desktop?
Sure. First of all, at a macro level, we know intent to buy increases as people move to mobile devices. Our overall business has a six-month purchase horizon for buying a car. If you isolate purchase intent just to mobile devices, the purchase horizon shortens to nearly 90 days. So we think as manufacturers and dealers come to realize that mobile is the last word in deciding what and where to buy, they’re going to just start increasing their investment in mobile much like they first started increasing their investment in digital several years back. And so there’s a learning curve there for the auto industry on how they can use mobile. There’s obviously less room for display advertising and they have to think a little bit more creatively about how they market on mobile devices. But in '17, mobile now accounts for over half of our total site traffic and we don’t ever see a day coming back where the balance will shift back the other way. It’s only going to grow in importance in '17 and beyond. And marketers, we think if you follow the narratives and all industries are viewing mobile as the next battlefield for their marketing dollars.
That’s really helpful. I guess I will also ask a little bit more on the add-ons like mechanics, that kind of stuff, actually service of the car. Do you see more people use mobile for that purpose or are you seeing the same kind of dynamics?
Well, we are seeing an increase in usage in our mobile devices on dealership lots. And so yes, pricing validation, selection validation, a lot of our mobile usage is happening on dealer lots, and I’d be happy to follow up with you offline and get you some more detailed statistics on usage patterns.
All right, that sounds good, Alex. Thanks for all the color. I appreciate it guys.
Gracia C. Martore
Great. We’ve got time for just one more quick question.
Jim Goss with Barrington Research, please go ahead.
Thanks. I wanted to ask about the extent of your program development. The BOLD deal with MGM where you’re going to be producing and they’re going to be distributing, I wondered if you might talk about a little bit more about what that’s going to entail. You say it’s a multiplatform type of venture. Will MGM be your primary partner or only partner going forward, or is this one of many partners you envision as you sort of ramp up this sort of business? And maybe related, can you talk a little about the timing of cost recognition and the revenue potential or will this be more of an equity line item?
David T. Lougee
So on the partnership question first, Jim, let me say that we do plan to do business in the programming space with lots of folks. MGM is a good partner but we don’t intend to be exclusive as nor they. I think you’ll us partnering with other station groups as well. From a timing standpoint, I’ve been talking more about your first question about the nature of the show. What’s going to be unique about it is it is going to be live. So if you got a timeslot at 3 o’clock Eastern or you’ve got a timeslot at 9 AM Pacific Time and you’re on the West Coast, we will – based on the demand from stations, we will be producing multiple half hour increments so that people will have live on the air. We think the data show us that live is becoming increasingly important in linear viewing. And we say online, it’s also we can be an OTT product. Social and digital will drive the content. Because it’s live, we’re not constrained by non-topicality of things being four or five hours old or having to be produced a day in advance and pumped out by satellite in the morning. So trending items I’d say like the Oscars last night and how people are responding to that thing will be embedded into the content of the show in real time. And we will be in turn – the producers of the show will be doing content to engage with the viewers on their own mobile devices while they’re watching the show.
Gracia C. Martore
On your accounting question, Jim, it’s still a little early on BOLD. We’re going to have to see who gets added to the mix, et cetera, to see whether it will be more on the equity side; operating, non-operating equity investment. So we’ll keep you posted on that as we get – we’re really in the nascent stages of it. We introduced it. We now are looking at other opportunities. And as soon as we’ve got that all figured out, we will share with you what the appropriate treatment will be.
And if I could squeeze in one more thought. The ATSC 3.0 impact, I think it will relate to digital elements of the broadcasting business. Does this tie into the whole concept of BOLD?
David T. Lougee
Jim, not specifically. I think that ATSC will provide the opportunity for one-to-one broadcasting and advertising and will be IP compatible with other wireless services. So there’s a number of direct businesses that could come out of it. But the time horizon we’re launching BOLD here in the fall and the business opportunities with 3.0 are a few years away. So it’s not to say there won’t be some potentially innovative interactions between the technology and content, but no it’s not the – BOLD itself is not setup as a 3.0 in this year.
Gracia C. Martore
Thanks, Jim, for your questions.
Gracia C. Martore
We really appreciate you joining us this morning. We are very sensitive to your time, so if you have any further questions you can reach out to Jeff Heinz at 703-873-6917. Have a fantastic day. Thanks.
This concludes today’s conference. Thank you for your participation.
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