Jeffrey Heinz - TEGNA, Inc. David T. Lougee - TEGNA, Inc. Victoria D. Harker - TEGNA, Inc..

Craig Anthony Huber - Huber Research Partners LLC Kyle Evans - Stephens, Inc. Barton Crockett - B. Riley FBR, Inc. Marci L. Ryvicker - Wells Fargo Securities LLC Dan L. Kurnos - The Benchmark Co. LLC Douglas Middleton Arthur - Huber Research Partners LLC Barry L. Lucas - Gabelli & Company James Charles Goss - Barrington Research Associates, Inc..

Good day and welcome to the TEGNA First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jeff Heinz. Please go ahead..

Thanks, Cathy. Good morning and welcome to our first quarter 2018 earnings call and webcast. Today, our President and CEO, Dave Lougee; and our CFO, Victoria Harker, will review TEGNA's financial performance and results. After that, we'll open 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 remind that this conference call and webcast includes 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 have provided reconciliations of those measures to the most directly comparable GAAP measures in the press release and on the Investor Relations portion of our website. With that, let me turn the call over to Dave..

Thank you, Jeff, and good morning, everyone. Today, I'll review our progress in the quarter that gives us further proof that our growth strategy is on track and that we're well positioned to take advantage of the opportunities before us.

Our first quarter revenue was up 12% year-over-year on a non-GAAP basis, which was at the high end of our guidance and a record first quarter in revenue in the history of our broadcasting business. Excluding revenue from the tailwinds of Super Bowl, Olympics, and political, our revenue still grew nearly 6%. Subscription revenue was up 13%.

Importantly, we have seen three months of sequential growth in total paid subs, a combination of traditional MVPD subscribers along with subscribers to new virtual MVPD services like DIRECTV NOW, Hulu, and YouTube TV.

Specifically, we saw a positive reversal of total sub trends in the fourth quarter that has continued into the first quarter and is a reflection of how critical our strong broadcast affiliates are to these new virtual MVPDs.

As of today, we now have more than a 1 million virtual MVPD subs, and our total subscriber trends are strongest in our largest market DMAs, which I'll be glad to give further color on during the Q&A portion of this call.

And while due to seasonality, we don't necessarily anticipate positive month-over-month total sub growth every month this year, the trends and the relationship between traditional and new virtual MVPD subs are becoming clearer to us. As a result, we're raising our subscription revenue guidance for full year 2018 to being up in the mid-teens.

Also during the quarter, TEGNA stations dominated audience metrics in both the Super Bowl and the Olympics. For the Super Bowl, TEGNA stations ranked number one nationally in both ratings and share among all NBC affiliates and had four of the top 10 in the adults 25 to 54 demographic.

For the Olympics, TEGNA stations in Denver and Minneapolis ranked one and two in ratings, respectively, among all NBC affiliates. And TEGNA stations had four of the top seven spots overall.

Victoria will give you more context, but combined, our success during these first quarter events led to approximately $24 million in net incremental revenue for our overall portfolio. As a reminder, our net incremental revenue is what is added to our NBC stations minus the money that shifts away from our non-NBC stations for these same events.

Moving on to Premion, the business continues to meet our aggressive growth expectations. We're on track to double Premion revenue this year versus last year. And we're now leveraging our success to create new partnerships as well as expand the services we can provide.

Premion is one of many tangible and organic outcomes from TEGNA's disciplined process of innovation. As a reminder, Premion allows local, regional, and national advertisers to place ads in live and on-demand long-form OTT video program on dozens – and more than 100 programming partners, and we can do it in any market in the country.

I'll touch briefly on two Premion developments. First, as the baseball season is now underway, MLB, Major League Baseball has extended its relationship with Premion. Now, Premion has nationwide rights for local and regional advertising on MLB.TV, and we're the only ones who can sell OTT ads on MLB.TV in our 39 markets this year.

And as some of you probably know, MLB.TV is one of the most watched OTT services in the country. This partnership is especially impactful for 30 of our markets, 12 of which are home team local markets for Major League Baseball teams.

Another 18 are regional markets for MLB teams in neighboring cities, for example, Macon, Georgia, for the Atlanta Braves or Portland, Maine, for the Boston Red Sox. MLB joins many other major brands of Premion, including major sports networks, to build out our one-of-a-kind OTT sports package for advertisers and brands.

The second significant development for Premion is the launch last month of Premion's data management platform, or DMP as they're called. And it's called Premion Audience Selects. We've partnered with MadHive and 4INFO, two leading data solutions companies, to build the first true OTT data management platform.

And it will revolutionize brands and advertisers' capabilities to reach the right customer at the right time in the OTT ecosystem. This first-of-its-kind platform solves an industry-wide challenge by offering data collection on TVs and streaming devices.

Premion Audience Selects offers brands and advertisers more than 2,000 different audience segments, such as sports fans, auto intenders, travel enthusiasts, homeowners and so forth.

These developments, along with investments we made earlier in the quarter in innovative OTT companies like Tubi and Vizbee, are putting us at the forefront of this emerging advertising marketplace. On the content side of our business, we continue to invest in discipline and impactful innovation processes. Our best ideas come from our people.

And we recently held seventh Innovation Summit, a strategic process of brainstorming, piloting, testing and execution amongst the most talented employees across our company. Since starting these summits, we've launched several successful pilots and initiatives.

One of these is Team Atticus, our award-winning digital-first investigative unit based in Atlanta. Based on their success this quarter, we launched a second digital-first investigative team out of Washington D.C.'s WUSA9. This innovative digital-first journalism is scaled across our portfolio and allows us to reach entirely new audiences.

And we continue to expand the platforms we're using to distribute our valuable local content. For instance, at KING-TV in Seattle, we created new content for Amazon's Echo and Alexa devices, providing audiences snackable content that highlights the top five things you need to know each morning.

We've also partnered with Snap to bring public Snapchat stories to all our news platform, stories like the recent 9-day sit-in held by Howard University students. We use public Snapchat content created inside the Administration Building, giving us exclusive content and, again, allowing us to reach an entirely new audience.

Our content innovation efforts are being nationally recognized. TEGNA won 83 Regional Edward R. Murrow awards, the most in our history and more than any other local media company. Nine of these awards were for excellence and innovation and eight came from these pilot processes I talked about earlier.

Another way we're innovating is through the original live daily non-new programs we've launched. This fall, Daily Blast LIVE or DBL, as we call it, will expand its footprint into non-TEGNA markets, thanks to our partnership with Sony.

We have entered the distribution deals to air in 13 new markets, highlighting the popularity of the show's very unique, live, must-see format.

And as our industry moves forward with the ATSC 3.0 digital standard, we're working with our Pearl TV business alliance members, as well as national television networks to define the next generation of digital TV.

Part of that collaboration is the launch of a comprehensive test effort for the Phoenix, Arizona, market to show how ATSC 3.0 can be deployed while maintaining existing digital services for viewers, more on that to come in the quarters ahead. This quarter, we closed on our acquisition of KFMB in San Diego, and the integration has gone very well.

And our team there is already leveraging TEGNA's many content, sales, and marketing innovations, such as Premion. Our strong San Diego station should also see significant political revenue this year. Overall, the political picture for TEGNA looks very, very good.

As we said on our last call, voter energy and fundraising for these mid-term elections will be unprecedented. And also, as we said before, we've got a very competitive footprint in gubernatorial and U.S. Senate races.

But the new dynamic for us that's becoming clear is that as of today, we now expect to see more than a 50% increase in the number of competitive House seats in our footprint. And as you know, the battle for control of the House is this year's main event.

Finally, turning to M&A, recently, there has been a lot of noise, noise about the UHF discount court case, as well as noise surrounding the Sinclair-Tribune transaction. Neither of these topics are of concern to TEGNA.

First, as it relates to the discount, our ownership stake under the cap is only 5 points less due to discount due to our VHF concentration, specifically we're 27.7% with the discount but only 32.6% without it. So, we have ample headroom for vertical growth, even under the current cap with no discount.

Furthermore, our previously stated strategy leverage is end-market consolidation, which we have ample opportunity to execute within existing FCC rules and current DOJ market definitions. As I've stated before, but is worth reiterating, we are the largest independent owner of top 25 market big four affiliates in the country.

And in all but two of our 39 markets overall, we own only one big four in each of these markets. So, we are uniquely positioned to benefit from the coming in-market consolidation in the industry, regardless of the current temporary regulatory noise. And with that, I'll pass the call to Victoria..

Thanks, Dave. Good morning, everyone, and thank you for joining us. As Dave mentioned, the first quarter marked a strong start to 2018, reflecting the power of our organic and inorganic investments in growing and diversifying our revenue streams, making the highest first quarter for revenue ever for the broadcast business.

Combined with our financial discipline and operational effectiveness, this allows us to continue to generate returns that fuel growth and create shareholder value, amongst the highest dividend yield in the sector.

Before I cover our consolidated financial results and capital allocation for the quarter, I'd like to review just a few special items with you. During the quarter, we recorded a charge of $6.3 million related to lump sum pension payments.

In addition, we recognized transaction expenses of $9.5 million, primarily associated with our acquisition of KFMB, which was completed in February. All-in, special items for the quarter totaled $15.8 million or $0.08 a share.

Moving now to the first quarter consolidated financial results, keep in mind, all of my comments today will be focused on our performance from continuing operations on a non-GAAP basis in order to clearly provide financial insight into the drivers and results of our business.

You can find all our reported data and prior period comparatives in both the text and the tables contained in our press release.

Just as a reminder, when looking at our results for the quarter, due to the termination of our services agreement with Gannett in June of 2017, revenue comparisons were again unfavorably impacted by $11 million this quarter and are projected to impact the second quarter by roughly $6 million.

With that context, excluding the impact of terminated digital marketing services, total company revenue for the first quarter was up 12% over last year, at the high end of the guidance range provided on our last earnings call. On a reported basis, total revenue for the first quarter was up 9%, also at the high end of our expectations.

Revenue growth was due primarily to advertising associated with the Winter Olympics and the Super Bowl on our NBC stations, as well as subscription revenue growth and political spending. Note that, as Dave mentioned, even excluding these cyclical events and political advertising revenues, revenue was still up nearly 6% year-over-year.

Subscription revenue growth for the quarter was up 13% year-over-year reflecting both the financial benefits of agreements with traditional MVPDs negotiated in prior years, as well as continued growth in revenue and subscribers from OTT providers. As Dave mentioned, we have now seen three months of sequential growth in total paid subscribers.

As a reminder, only 6% of our MVPD subscriber base was up for renewal at the end of 2017. While there are annual escalators, the lower percentage of subscriber renewals this year will not drive the significant year-over-year growth seen in prior years.

By comparison, approximately 15% of our MVPD subscriber base is up for renewal in 2018, while almost half, or 48%, renews in 2019. As we said in the release, and Dave highlighted, we've now raised our full-year subscription revenue growth to the mid-teens.

Beyond these positive subscription revenue trends, advertising and marketing services revenue also increased 9% this quarter, driven by Olympics and Super Bowl, excluding discontinued digital marking services revenue of $11 million. On a reported basis, advertising and marketing services revenue was up 5%, higher than the first quarter last year.

Now, looking at this a little more closely, advertising revenue for these first quarter events totaled $50 million, comprised of the Olympics at $38 million and the Super Bowl at $12 million. Keep in mind, as we discussed in detail on our last earnings call, not all Olympic advertising is incremental.

Just to provide some context, we estimate that net incremental revenue generated by the Olympics across the company this year was approximately $14 million or 37%, meaning that our NBC stations gained $20 million while our non-NBC stations lost $6 million as advertisers moved dollars temporarily to the NBC station in the market to leverage Olympic viewership.

Beyond this, we also had $4 million less in unwired deals this year than we had in the 2014 Olympics. And unwired deals are 100% incremental. You'll recall that unwired dollars are brand dollars that come to NBC stations in the top 25 markets just for the Olympics.

So, excluding the impact of lesser demand for unwired advertising, our Olympics revenue was equal to 2014. By comparison to all this, the Super Bowl is largely incremental, nearly $10 million of the $12 million I mentioned earlier. Together, both these events produced $24 million net incremental revenue for the quarter.

Now, looking to second quarter revenue guidance, we expect total company revenue to increase mid-single digits year-over-year, driven by subscription, political, and Premion revenue, in addition to the first full quarter contribution from KFMB.

Keep in mind that we will soon lap the wind-down of the terminated digital business from the second quarter last year. The impact to the year-over-year total revenue comparison is only 1%.

Now, turning back to the first quarter for a look at expenses, total company operating expenses on a non-GAAP basis were 10% higher year-over-year, driven primarily by higher programming fees, investments in Premion and higher cost for events such as the Olympics and Super Bowl.

Expense increases are partially offset by the absence of the terminated digital marketing services business. As we discussed last quarter, our mix of sales expense to revenue shifts throughout the year based on our product-related cost of sale. For example, this quarter, sales in editorial costs were higher due to the Olympics and Super Bowl.

In the latter half of this year, this mix shifts significantly, with lower costs of sale, higher margin political revenue. During the first quarter, corporate expense was $13 million compared to $15 million in 2017. This reflects the rightsizing of corporate functions following the spinoff of our former digital segment businesses.

Excluding corporate expense, adjusted EBITDA for the quarter was $170 million, producing a margin from our business operations of approximately 34%. All of these factors were included in our full-year adjusted EBITDA margin range of 39% to 42%, likely at the lower end of that range with the strong growth we are projecting for Premion.

I also wanted to note that we also continue to be comfortable with the full-year 2018 revenue outlook we provided on Investor Day last May.

Now, turning to capital expenditures and capital allocation during the first quarter, capital expenditures for the quarter totaled $11 million, reflecting investments in news content, efficiency projects and maintenance, including $2 million of expenditures related to the mandatory spectrum repacking for which we expect to be fully reimbursed.

In line with our prior projections for the full year, we expect recurring capital expenditures of approximately $35 million to $40 million and roughly the same amount of nonrecurring items, including mandatory channel repacking, our upcoming headquarters relocation, and a new facility in Houston.

Now, turning to capital allocation, as I noted on the last earnings call, we funded our $325 million acquisition of KFMB through the use of our revolver and cash on hand. As a result, at quarter-end, total debt was $3.2 billion, producing net leverage of approximately 4.3 times, a slight increase from year-end.

We expect that to return to about 4 times by the end of 2018, as I noted on the last call, given our strong cash flows. Beyond this, as you know, we initiated a $300 million 3-year share repurchase program last September. We've been on hiatus since we announced the acquisition of KFMB in December, but we now plan to restart share repurchases.

With the recent compression of equity prices in the sector, we are undervalued, by any measure. As a result, TEGNA's shares represent a very attractive investment opportunity. Given our fire power and future cash flows, this did not preclude in any way our continued commitment to both M&A and deleveraging over time.

Now, let me turn the call back to Dave for some final remarks..

Thanks, Victoria. As you can see, we're making tangible progress on our strategic brands through our culture of innovation. We're well positioned for growth in both the short and long term and are uniquely well-positioned to benefit from the changing regulatory landscape. And with that, I'd like to open it up to questions.

Operator?.

Thank you. We'll go first to Craig Huber with Huber Research Partners..

Yes. Hi. Thanks for taking my questions.

On the second quarter, embedded within your guidance, putting aside the acquisition, your core advertising outlook, is it for down slightly year-over-year, 1% to 2%, say?.

Craig, we don't guide to advertising per se, and we haven't in the past and we don't, and remember we don't break our core anymore because it's advertising and marketing services writ large. But I will say that second quarter is a little bit softer than first quarter overall. So, I would give you that guide..

And then, also, can you just help us? The auto and retail categories, how did they do in the first quarter, as best you can separate out Super Bowl and Olympics, and also, how's it both tracking in the second quarter, please?.

Yeah. It's tough to break it out a little bit from Olympics and Super Bowl in categories, but when we do it, retail was still positive in the first quarter and auto was flattish when you take out Olympics and Super Bowl. They are both a little softer in the second quarter.

Some other categories are quite a bit stronger like services, media telecom, and entertainment. But auto and retail generally are softer in the second quarter than they were in the first, even when you exclude Olympics and Super Bowl..

I appreciate that.

And then on the cord-cutting worry out there that investors have, just to put a little bit more meat on the bones here, putting aside the acquisition, say, how much was on a year-over-year basis at the end of the first quarter, your traditional retrans subs, say, down year-over-year, and then, how much did the OTT add on top of that?.

Well, first of all, we don't have it through the end of the quarter yet, Craig, because we're in arrears when we get our subs. So, basically we're current through February. The bottom line is that if you put the two of them combined, which is the way we look at it, they have the trend, we had a decline into about August.

And that rate of decline has decreased each month since then. And with the two of them together, we have now as many paid subs as we did in months in the early part of last year.

On a year-over-year basis, the last numbers we have, we are basically – when, again, we have this U-verse issue, which were we're cycling through, but when you exclude U-verse, we are flat on a year-to-year basis..

Okay. Thank you..

And we'll go next to Kyle Evans with Stephens..

Hey, good morning..

Good morning..

Good morning, Kyle..

I want to dig a little bit deeper on the 1 million OTT subs. Who do you see on the traditional cable satellite bundle side giving it up? And who do you see taking the most in terms of the OTT providers? And then, I have some follow-ups..

Yeah. Kyle, sort of based on our confidentiality agreements with our providers and just good relationships overall, we really don't comment on individual companies. I will say that – but I will give some color without naming companies, all right? The terrestrial MVPDs are doing really well in the top markets and, in some cases, even increasing subs.

There is a big variance for all – on the traditional side on the market based on the market size and same, too, with the MVPDs subs. Most of our virtual MVPD subs are in our top 25 markets and a higher percentage in the top 10 DMAs. These sub losses across the ecosystem totally correlate with market size.

If you break down our company by top 10 markets, 11 to 25, 25 to 50, 51 to 100 and then markets 100 plus and we've got quite a few stations in each of those categories, it's a straight down line, right? So, we are actually up. Our subs are up on a year-to-year basis in our top 10 DMAs.

But markets 100-plus, for instance right now, are tracking negative 5% and the rate of decline is actually increasing. But for us, the strength in markets 10 through 50 is offsetting what's going on below it. So, it is a sort of a tale of two cities when it comes to market size..

Thanks. You mentioned that you only have two markets where you are already have two big fours and you kind of highlighted the opportunity for more end market. How many of your markets, based on your understanding of what the DOJ will allow, do you think are open to opportunity? And if you don't want to do it by markets, you can do it by U.S.

TV households..

What I said before was probably a little bit just under half..

And is that true for U.S.

TV households as well as number of markets?.

I'm sorry. I thought you were asking me about end market.

Were you asking about end market, Kyle?.

Yes, sir..

So, that's unrelated to households, right? Because end markets – I mean, frankly, if I do swaps, we do a swap, we'll go smaller..

Yeah, you'll take it down..

Yeah, we'll take it down. That's right..

The Premion growth is kind of the stand-out top line. Can you talk a little bit about the competitive landscape there, the barriers to new entrants? You mentioned you were the only one that could sell MLB.com in your markets. You talked a little bit about the DMP launch.

Just who do you square off against there and who do you worry about?.

Well, there's people out there selling programmatic. I'm not going to name names, but they are. They're selling it just programmatic, which is just kind of sort of like remnant advertising. What makes us stand out is we've gotten way out front on the quality of the data and we're providing to our clients.

So, they are able to target dramatically better than they can with other opportunities. Obviously, there's a lot of players out there. Obviously, the cable companies are in this business. They've got TV Everywhere. And even some of our own peer groups are getting in the business of trying to sell OTT advertising, but those are programmatic plays.

It's our data targeting that is our unique value proposition and why we're being sought out by premium publishers, because they're getting back data about their programming that they don't have themselves. So it's not just about the targeting of the advertising. They're also learning about the makeup of their programming audience.

And that's where we're going to turbocharge that data management platform business will become a separate business that will sell as a service to brands and advertisers and as well as programmers..

Great.

One last one, how and when do you expect your station in Phoenix to evolve as it relates to the Pearl and the ATSC 3.0 rollout? When will that station be materially different than the ones that aren't in the consortium?.

Well, it's a test, right? So, our Phoenix station will keep on, keeping on running our ATSC 1.0. What we're collaborating on together is we're using other people's sticks to test ATSC 3.0. And so, the consortium will be testing different aspects of the platform, different codes, different applications for different business models. So, it is a test.

It is not whether or not Phoenix lights up permanently in ATSC 3.0 or we do that in other markets first is yet to be determined. But it is truly a collective laboratory for the broadcasters..

What are the first applications you expect to see?.

I don't know. I mean, we're testing. Different applications will be tested like mobile, like targeted advertising, but as I've said all along, I believe that by the time it's fully deployed and with the rate with which things are changing, that the winning business model may not even have been thought of yet, Kyle.

And, as I said before, we view it the way our head of strategy puts it.

We view it sort of like the iPhone, that this new platform will be put out there and other money and developers will come and write some really interesting programs for it and applications, i.e., will the driverless car happen faster, sooner rather than later, and then, the entertainment in an automobile moves from audio to video, as an example.

So, I think the answer is we don't know yet..

Great. Thank you..

Thanks, Kyle..

And we'll go next to Barton Crockett with B. Riley FBR..

Okay. Great. Thank you for taking the question. It's encouraging to see an up kind of take on your subscription revenues, but I was wondering if you could be a little bit more specific on the net retrans. I think last quarter, I asked this question.

Do you expect your net retrans to pace in line with your gross? And now, you see the gross looking a little bit better.

Can the same be said of net?.

Absolutely. Absolutely, Barton. Yes..

Okay. All right. So, we can assume from that that there's not material deterioration in economics as growth transitions to virtual MVPDs.

Is that correct?.

There is zero deterioration..

Okay..

Zero..

Okay. All right. That's great. Now, one of the things also is on political, I mean, there's been some reports out there, I guess, predicting that political spend on TV overall will be down as share shifts to Internet.

You guys, I think, had less political this quarter than you did four years ago, although it's a very small period and there are some comparability issues.

How do you feel about that kind of stance that others have had, not us, but others?.

No. I don't believe that at all. First of all, when you look at first and second quarters in different years, they are sort of meaningful. If you look at history, they don't really track much with what – all that revenue comes in the third and fourth and sometimes a bit in June. No. I think that's absolute.

In fact, we've seen very detailed breakouts by people in the ecosystem that are controlling those dollars, two very specific agencies. And the amount of dollars spent on TV, we think, will be up significantly. And I think so the share shift story has been talked about for a long time.

Certainly, cable has been picking up share, especially in House races in large markets over the years. Digital has been taking dollars that used to go to direct mail, a lot of it. But the fact of the matter is the pie is going to be so much bigger.

And by every inside agency, not some somebody who has a specific axe to grind in the ecosystem or a bias in the ecosystem, but when you talk to the agencies that control those dollars, they'll tell you television is going to be up..

That's great..

And broadcast specifically will be up..

That's great. So, one final thing. You guys in your May Investor Day had flagged $150 million, I think, to $175 million potential EBITDA lift from M&A, I think, really focused on the new local end market ownership rules. You guys have just done a San Diego acquisition.

Was that included in that $150 million to $175 million, or is that kind of incremental to what you just bought in San Diego?.

No, it's incremental. That was the – we said would be the value of end market horizontal M&A over time..

And you still feel confident in that, given how the environment's shaped up to-date?.

I do. I do. Right now, we're a little bit slowed up. There's obviously been a lot of noise in the system. So, it's probably that the starting gun has been pushed back just a hair. But all the stars are still lining up..

Okay. That's great. Thank you very much..

And we'll go next to Marci Ryvicker with Wells Fargo..

Thanks. I just want to be clear.

Is the increase in your subscription revenue guidance due to the subscriber comments?.

Yeah, 100%, Marci. Yeah. We had forecasted X and it's going to be quite a bit better than what we thought..

Okay. And then....

And it's really about, if you remember, two quarters ago, we said we just didn't know what that mix was going to look like, right? And so, we had some sizable numbers under it, now, we've got some clarity on the mix..

Okay. And then....

Sorry. I didn't mean to cut you off there..

For the second quarter, how much visibility do you have, meaning how much is booked? And then, can you talk about the monthly trends at this point?.

You talking about subscriber revenues?.

No. Sorry. Advertising. Just because you mentioned it was softer versus Q1..

A lot is booked. But we still got a ways to go. So, as I mentioned, it has been softer than first quarter, although it has improved a little bit nicely in the last two weeks, so that's a trend we hope will continue through June..

Okay. And then, Victoria, just for the CapEx guidance, your total CapEx is $35 million to $40 million.

Is that inclusive or exclusive of the one-time items that you mentioned?.

No. That's on a recurring basis. It's in line with what we had previously put out in terms of our guidance on Investor Day.

So, we have incremental to that, nonrecurring CapEx, a large portion of which we expect to be reimbursed, obviously, relative to repacking, but we also have our headquarters and the Houston new facility, so all of that is just one-time.

You shouldn't bake that into recurring CapEx, and it's roughly the same size as the $35 million to $40 million recurring..

Okay. And then, my last question just on the expense side for Premion, I think maybe the Street isn't clear, hasn't really understood the investment spend throughout the year.

Is there any comment you can make for Q1, Q2 and the second half? Should it tail off in the second half of the year?.

The rate of investment should tail off, Marci. As soon as we got hot on the selling ad side of the business, we saw this data management platform opportunity, so we've invested in the technology, via (34:49) the people to do that, but that rate of what I'd call the back-end expense will slow down.

The zero margin of the business is related to that expense investment. The absolute selling and cost of goods sold is already a profitable business..

Got it. Thank you very much..

Thanks, Marci..

Okay. And we'll go next to Dan Kurnos with The Benchmark Company..

Great. Thanks. Good morning. So I guess OTT and sub is topic du jour today. So, just, Dave, just high level, maybe let me dig a little bit deeper to your thoughts on this. I think most of the CBS and Fox OTT deals will come up for renewal over the next couple years. You guys seem to be a pretty interesting test case for the space.

We had the other player who's been making a lot of noise in the space lately, maybe fire the first shot with Sony Vue.

So, I'm curious to how you think if you have leverage in those relationships, do you start to try to change the equation so you guys can try to lever up against the MVPD sort of in your traditional vein, or how do you think those negotiations will go? And while you did give some color on this, and you talked about sort of the sustainability of sub trends, I mean, ultimately, do you have a sense of kind of where this pans out in terms of picking up subs on a one-for-one or 50% or 75%, whatever it is?.

Yeah. So, let me take the last question first. Dan, over time, it's hard to say what the absolute conversion rate is going to be. But right now, it is almost like a one-for-one for us. Actually, we do know from the providers that in some of the major markets which have higher incomes, there is people who have both services.

So, you have some noise when you're doing the comps that have a traditional MVPD service, as well as a YouTube TV or something like that. But I think that rate, the data tells us it's going to look a lot better in the large markets than the small markets.

It's unclear, too, one concern I do have for our small market stations is some of these players are not fully deployed.

YouTube TV has sort of topped out right now at Market 100, and we hope to get them restarted for the industry at large to get out for the smaller markets, much like the early days of satellite, whereas DIRECTV NOW I think is fully deployed.

I think to your earlier questions, the nice thing about the process related to the OTT negotiations – I mean, I'll be frank. It's a chessboard. Every network and every relationship is different. I can't speak to Fox because we don't really have Fox, all right? We're in San Angelo and Abilene. So, I can't really speak to that.

But the nice thing is that the consumers have voted in this, right? Remember in the early days or 10 years ago, there was a discussion of having a la carte in cable and how bad that would be for the ecosystem. But, in effect, you've got a version of a la carte now.

And the consumers have basically said we want our integrated broadcast to television station in our markets, right? And they're the most viewed channels on every linear service that they're on, right, no matter whether it's OTT, streaming or traditional.

So, I think regardless of how the ecosystem plays out and who negotiates what, that we're in a good place, both on distribution and on the wholesale rate, Dan..

Got it. That's helpful. Thanks..

Yeah, just one more piece of color on that. The negotiation with the networks on the share is ongoing dialogue, just like it is on the traditional side. But we are large enough that it's collaborative discussions with our network partners where we're focused together on the size of the pie, before we argue about the share. Thanks, Dan..

Yes. Got you. So, then, shifting over just quickly to M&A, I mean, you gave great color on sort of your thoughts relative to the goings on in the space. If the politicians win the day in DC, obviously, you've addressed kind of what the market opportunity is.

Would that sort of – if you cannot scale past it, which you have discount (39:24) and forgetting the fact that the FCC will probably unilaterally do something to the cap, but would that sort of change the way that you will think about capital allocation with just focus on end market and return more capital to shareholders? Can you just kind of give me your thoughts there? Is there enough M&A to still scale up to the cap near-term and also, do the end market stuff?.

Yeah. So, the end market stuff, we can do no matter what, right? So, I mean, we'll be able to do. Obviously, there's an FCC court case, but we're very comfortable with what the future looks like in terms on the FCC on the end market side.

The DOJ – the sort of antiquated DOJ definition of 40% being a threshold for broadcast market share, that does need to change, don't know whether it will in the next year or two. But again, to my earlier point, we've got ample room to do number of deals even under that number.

I think as it relates to vertical, like I said, we still got 6% under the cap, that's a lot of room there. When we do some swaps, we'll get smaller under the cap whatever that number is. So, yes, I think we will be looking to be opportunistic in the industry.

And I think the industry will start to – there will be companies that – nobody is a seller till they're a seller. And I think that there will be a coming consolidation of the industry and appropriately so, because scale matters in this world today..

Great.

And just if I could sneak one more in not to get overly Internet-y or technical on this stuff, but on the DMP, are you thinking of that more as a sort of backdrop analytics tool for ROI, which, I mean, given that the end market opportunity for OTT ad tech is still pretty large, just from a targeting perspective or is it really more of a targeting and geolocation type of tool?.

It's kind of all of that. It's a very sophisticated data service for brands and advertisers that shows them – it ties their programming and data on their programming to consumer data, in a way that other services do not.

And its being the back-end engine that drives Premion is the same technology play that will drive this service, but it will be a separate service that we will sell, and a higher margin business, by the way, than Premion's core business. I'm not going to put a number to that yet, but it will be a higher margin than Premion's core business..

No. I would certainly expect that. I was just wondering because I don't know that we've seen a lot of other competing services out there. With YouTube TV, I wonder if there's sort of a Google Analytics comparable yet, but it doesn't sound like it in the space.

Is that fair?.

No. I think that's fair. No, that's definitely fair to say. And I think the thing, the earlier question, which is a good one, about barriers to entry and who's in the space, just a reminder, this space is exploding, right? So, there is a lot of players and there's a long tail out there. So, there's a lot of inventory, and it's growing by the day..

Got it. All right. Great. Thanks for all the color..

Thanks, Dan..

And we'll go next to Doug Arthur with Huber Research..

Yeah. Thanks. Two questions, Victoria, in terms of the double-digit cost increase in the first quarter, is there any way to unpack that in terms of what was incremental caused by Super Bowl, Olympics? And then, I mean, it sounds like you expect some seasonality benefit as the year goes on, so lower cost growth in the second quarter.

Is that a fair assessment?.

To answer it in reverse order, yes, and as the year goes on, an improvement from an E to R (43:22) perspective. To your earlier point, because of the Olympics and Super Bowl and their higher cost related to both the editorial as well as the sales cost, that was about a $3 million impact to expense for the quarter, which we won't see.

It's nonrecurring for second quarter. And on top of that, we have lower expense in general as the year goes on, both as a result of Premion, as well as higher margin political coming in the latter half of the year. So, total margin, we're still very comfortable with from a range perspective at the lower end, given the growth of Premion..

Oh, okay. I'm sorry. You said $3 million. The $3 million was what? I'm sorry..

The incremental expense associated with Olympics and Super Bowl during the first quarter related to both of those two events from a higher cost of sales perspective..

Doug, we had higher cost of sales, plus we have coverage costs. We send crews to the Olympics. And the Super Bowl was on our Minneapolis TV station as a home market, so, we had editorial costs related to that, too..

Got it. Okay.

And then, Dave, just on this MLB development, I mean, is that built-in obviously to the doubling in Premion revenues for this year? I mean, how incremental is that?.

It's a good question, Doug. We haven't put a number to it. I always just tell them to get the deal. Sell, sell, sell is what we're focusing on right now. Built into our expectations is we knew we'd be adding significant publishers. We didn't know who. So, I can't speak to whether that's incremental.

What I will point out is that Premion is proving to be very attractive to the political agencies for what is now, to us in retrospect, obvious, right, because that targeting capability and the ability to integrate some of their own data, right, that they've got on voter data, is turning out to be really, really attractive to the digital side of the house of the political shop.

So, can't put a number to that, but we are pretty enthusiastic about what that might be..

Terrific. Thank you..

And we'll go next to Barry Lucas with Gabelli & Company..

Thank you and good morning. Just a couple, Dave, for reference, political in 2014 was about $160 million..

Yeah..

Okay.

And could you talk or at least identify what the six weeks of San Diego contributed?.

We don't call out individual stations. We've talked about this on the call last time. For the quarter, it was less than double digits. So, it's embedded in our base business at this point, and we're not calling it out. But it's about that kind of ballpark for about five and a half weeks..

Okay, Victoria. Thanks.

And what do you really expect out of the Phoenix test, and what would be sort of the next milestone you would think for ATSC 3.0?.

Well, first of all, we need to prove the ability to simulcast in both, right, to utilize other sticks and to be able to simulcast in ATSC 1.0 and 3.0 at the same time. That's number one, right, to be able to provide the service to existing homes.

But then, I think the milestones are going to be how, right now, the technology applications as they're written for different applications, do they work? And that's really what this is right now. On top of that, it's a technology test. It's not, at this point, a business model test. It's a technology applications test.

So, the first milestones are going to be how well do these applications work..

Okay. Thanks for that.

Last one for me, Dave, coming right back to the swaps, trades and M&A, given the kind of obvious economic benefits to the parties and a number of parties have been talking about them, why the delay? Why haven't we really seen any yet?.

I think some companies saw the wisdom in it or became attracted to the wisdom of it later than others. And I also think that some companies have been spooked by the regulatory noise that's now clearing itself up..

Okay. Thanks a lot for that, Dave..

Thanks, Barry..

And we'll go next to Jim Goss with Barrington Research..

Thanks. Good morning. With Premion, I'm wondering how you view the process of building that business.

For example, the MLB partnership, is that a unique asset or are there other sort of things you can find like that? How embedded will Premion Audience Selects and the DMP be a part of it? And if you look at the data that is collected, how granular is that data? Are there any privacy issues? Is it more traditional broadcast-type demographic data that you'd be using that's non-individual, maybe some of those aspects?.

Yeah. Thanks for the question, Jim. Yeah. No. First of all, we don't collect any PII information, so there's no Facebook-related type of privacy issues, right. It's all anonymized. But, no, it is not like traditional audience demographic.

It's incredibly targeted in terms of the, like I said earlier, the number of audience segments that – and when we say segments, literally what consumer intentions, right? And there's literally 2,000 of them that can be cross-referenced for a brand or an advertiser to get what they want. So, that is really the secret sauce of Premion.

And it's done in a UI/UX for the advertiser and for the brands for them just to easily see the performance of their advertising, which is not something they get, even in the traditional digital space. And it's with much more transparency than existed in the previous banner advertising world of the old desktop world.

So, now, the DMP will become a separate business, but that same type of technology is what's driving this audience segmentation we can provide today. But there are other brands and advertisers that might not even be using Premion, that would want to use the DMP..

Okay.

And regarding the unique qualities of MLB, are there others like that you're thinking of trying to sign?.

I think that, look, it's a one-year deal, although I'll have other people wanting to sell their business, too. But there's other – yeah. There are other things out there that are big players that we are talking to.

And, in many cases, they're inbound calls to us now because the word is out there on the digital side of the houses about what Premion can offer in targeting..

Okay.

And not to pile on on the M&A side, but with the notion of swaps, I know there's an opportunity, but I'm wondering if your appetite for finding a like-minded type of similar market size company, a Hearst or one of those broadcasters, where you might double-down in one market, they get another market or something of that nature, or is your interest only in finding a partner for broadcast properties in your existing markets, not really getting out of any of those?.

Well, without mentioning company names, the idea is the former.

The idea would be that if your company – let's just pick markets we're not in, just so I don't start any rumors, but so, if you owned a station in Las Vegas, and let's say, and I owned a station in Nashville, right, it would be smart for us to – you to take my Nashville station, and vice-versa.

And we end up with two stations in one market rather than one station in two markets. Two stations in one market, yes, I just messed up that math, but you get the idea, right..

Yeah..

And that's how we get in under the cap. So, we actually go down a market, right, but we end up with two stations in one market. And that appetite is out there, and those conversations are happening..

Okay. I think I'll leave it go with that. Thank you much..

Thank you, Jim..

Thank you, Jim..

Okay. I think that's all the questions we have. Thanks for everyone's time. And, as always, you can call Jeff Heinz with questions at 703....

873-6917..

703-873....

6917..

6907..

17..

17. We'll say it a little louder next time. Thank you, everyone. Thanks..

And this does conclude today's call. We thank you for your participation. You may now disconnect..