Yahoo Finance TEGNA Inc. (NYSE:TGNA) Q4 2023 Earnings Call Transcript
TEGNA Inc. (NYSE:TGNA) Q4 2023 Earnings Call Transcript February 29, 2024
TEGNA Inc. misses on earnings expectations. Reported EPS is $0.43 EPS, expectations were $0.47. TGNA isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Q4 and Full Year 2023 TEGNA Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Kirk von Seelen, Vice President and Treasurer. You may begin.
Kirk von Seelen: Thank you, operator. Good morning, and welcome to our fourth quarter and full year 2023 conference call and webcast. My name is Kirk von Seelen, and I am TEGNA's Treasurer. Today, our President and CEO, Dave Lougee; and our new CFO, Julie Heskett, will review TEGNA's financial performance and results and provide TEGNA's full year and quarter ahead outlook. After that, we'll open the call for questions. Hopefully, you've had the opportunity to review this morning's press release. If you've 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 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. With that, let me turn the call over to Dave.
David Lougee: Thank you, Kirk, and good morning, everyone. Coming out of the merger termination last May, we've been laser-focused on returning capital to shareholders, driving increased efficiencies and evaluating opportunities for future growth. As our announcements this morning show, we have the necessary assets, the team and the industry-leading balance sheet required. By leveraging the strength of our assets and our culture, we've proven time and time again, our ability to navigate challenging market and industry dynamics. We saw the current industry trends coming, and we positioned the company accordingly. Our portfolio of leading local station brands are in predominantly large, economically thriving metropolitan areas.
They generate high-margin revenues and durable, predictable cash flows. Local broadcasting remains an essential distribution channel for irreplaceable, local and national content. The vast and powerful reach of our broadcast distribution is a growing advantage compared to more fragmented competitors in the ecosystem, most specifically cable channels and programmers. As glaring evidence to that, a reminder that the most recent Super Bowl distributed on our CBS stations was the most watched live event since the moon landing, something that's still sinking in even with me. We now have network affiliate agreements covering almost all of our Big 4 subscribers through late '26 or beyond. The majority of these subscribers are now tied to a variable payment model when it comes to our reverse compensation payments tying payments to subscriber counts.
That fact, combined with the completed renegotiation of retrans agreements for approximately 30% of our traditional subscribers give us enhanced visibility into our revenues and future cash flow, which Julie will provide more detail on later. Now to capital allocation, which has always been a key pillar of our strategy. Following the merger termination last May, you may recall, our Board and management team committed to nearly $800 million of share repurchases, and increased our dividend by 20%. This morning, we're announcing a new comprehensive capital allocation framework, outlining our capital return commitments with predictable, durable and sustained shareholder value creation going forward. Under this new framework, we expect to return 40% to 60% of free cash flow over the next 2 years in the form of buybacks and dividends, with the remaining free cash flow expected to be used for organic investments, bolt-on M&A, and prepare for long-range debt maturities.
We expect to maintain our industry-leading balance sheet with no near-term maturities and very attractively priced fixed rate debt while continuing to return significant capital to shareholders. As we outlined in our release, based on our current projections, we expect to generate free cash flow in the range of $900 million to $1.1 billion during the period of 2024-'25, 2-year period. Applying our new capital allocation framework to this guidance, we expect to return $1.3 billion to shareholders since the merger termination last year through 2025. As outlined in our release, TEGNA has also received approximately $153 million in pretax cash proceeds for our interest in the sale of BMI. While these proceeds are not included in our free cash flow guidance, they will be included under the newly announced capital allocation framework.
On the cost side of our business, we have a proven history of operational excellence and innovation, and that's also a pillar of our durable cash flows going forward. We're leveraging our scale and embracing new technologies like AI to drive new efficiencies across our company, providing further financial flexibility. Initial benefits of these initiatives are expected to occur in the second half of this year and be completed by 2026. Turning to our financial performance. Julie will cover our fourth quarter and full year 2023 performance in greater detail, but to provide a few highlights. First, we met or exceeded all of our full year '23 annual guidance metrics. In the fourth quarter, advertising and marketing services revenue continue to see sequential improvement, driven by improving trends in automotive and services, our 2 largest ad categories.
Auto has steadily recovered and is generating strong year-over-year growth for the sixth consecutive quarter. We've got some big events in 2024 that leverage our portfolio of large market Big 4 stations that are in the right geographic regions and states. This includes our portfolio of CBS stations, which recently aired the Super Bowl I highlighted earlier. This summer, another big event for us. The NBC Olympic Games across our portfolio of NBC stations, which as a reminder, is the largest affiliate -- we're the largest affiliate partner for NBC. And we're thrilled, they'll be in Europe, with a timezone affording great live coverage for our audience. Now, as for 2024 political, our stations continue to play a fundamental role in political marketing strategies for all large races, whether at the national or state level.
Our stations are in nearly 3/4 of the battleground streets, including Arizona, Georgia, Michigan, North Carolina and Pennsylvania. As for Congress, we'll, of course, have elections for every house races across our markets, including very competitive seats in Arizona, California, Colorado, Connecticut, Iowa, Maine, Ohio, Oregon, Pennsylvania, Virginia and Washington State. That's a long list, and I gave you a long list for a reason. In terms of competitive U.S. Senate seats, our footprint has fewer races than in 2020 or 2022, with 4 of the 17 races currently consider competitive. But that number could increase if the race in Texas remains close with all 11 of our Texas stations potentially benefiting. And here, just outside our headquarters in Northern Virginia, Maryland also has a lot of interest with 2-term governor -- Republican governor, Larry Hogan, just recently jumping into the race, which could boost spending here for or CBS affiliate WSA in D.C. In the governor's races, 5 out of 11 total races are in our footprint, including highly competitive North Carolina and New Hampshire, as well as in New Hampshire, we benefit from -- because of our strong station in Southwestern Maine and Portland.
In summary, as in the past, political spending will be very healthy and glad to take more questions on that in a bit. Now for a few recent strategic actions at TEGNA that highlight our efforts to capitalize on consumer and advertising trends. First, in February, we announced the acquisition of Octillion Media, a proven connected TV platform that further enhances Premion's capabilities in serving local and regional advertisers. Both Premion and Octillion will benefit from each other's strengths. Octillion's cutting-edge and proprietary tech platform will boost Premion's product innovation. Octillion is already helping brands and agencies in key categories like home goods, automotive and quick-serve restaurants, helping them reach the right consumer on the right channel through precision marketing and their platform.
We're thrilled to welcome them to the Premion and TEGNA team. Premion reports up to Tom Cox, our new SVP of Digital and Chief Growth Officer; and Tom is with us here this morning to take any questions you have on the new future of Premion. In sports, given our portfolio of strong stations in big pro sports markets, we are very well positioned for the shift currently happening in local sports distribution. As you recall, last October, we announced an agreement with the San Antonio Spurs. And more recently, we completed agreements with the Dallas Mavericks and Milwaukee Bucks to bring additional games some of our stations broadcast schedules. Look for some more announcements to come as the Diamond Sports situation plays out. As we look for additional ways to reach local audiences, we also closed on a strategic investment in 6AM City, a local media digital brand that sends daily newsletters each morning to subscribers across 26 different markets.
As part of the agreement, 6AM City will be including news and weather from our stations in their product as well as promoting our stations warning newscast and integrating headlines from our locked-on local podcast and video sports business into that 6AM City service. Finally, before I turn it over to Julie, a comment or two about who we are as an organization as we embark on this new chapter of TEGNA. We remain focused on delivering on our commitments to all stakeholders. In 2023, we made further progress on embedding equity and inclusion as a cultural and business imperative at our company. Ensuring our content teams and editorial decision-making is inclusive as a key strategic priority, enabling us to represent the perspectives and experiences of all of our audiences in the many communities we serve across this country while fostering trust in those same communities.
We are a company with a passion and a purpose. The purpose of serving the greater good of our communities. Our local newsrooms are doing hard, very important work in a very challenging environment. and I want to thank them, every one of them, for all they do everyday. I encourage you to review our 2023 impact report that highlights all efforts to serve the greater good, which you can find now on our website. With that, I'll now turn the call over to Julie to walk you through our results in more detail.
Julie Heskett: Thanks, Dave. Good morning, everyone, and thank you for joining us. Before I discuss our fourth quarter and full year 2023 financial results, I would like to reiterate our Board and management team's ongoing focus on capital allocation, as Dave highlighted earlier. As you've heard from us in the past, we manage our business to create long-term shareholder value. Our predictable and dependable free cash flow as well as industry-leading balance sheet generates significant return of capital to shareholders through ongoing share repurchases and dividends. As you recall, following the merger termination in May of 2023, we committed to quickly returning nearly $800 million of capital to shareholders, which accumulated over the pendency of the deal.
As of Thursday, February 22, we achieved that commitment when our second $325 million ASR program completed. As a result, we have repurchased approximately 50 million shares or 22% of outstanding shares since May of 2023. In addition, we also increased our dividend by 20% in May last year, resulting in a 63% increase since March of '21. We expect to revisit our dividend with the Board on a regular basis. Now that we've completed the return of capital we committed to last year, we are pleased to announce our new comprehensive capital allocation framework to support long-term shareholder value creation. Under this new framework, we expect to return 40% to 60% of our 2024 and 2025 free cash flows to shareholders in the form of share repurchases and dividends.
The remaining free cash flow may be used for organic investments, bolt-on M&A and preparing for future debt retirement. To facilitate repurchases, the Board has authorized a new 2-year $650 million share repurchase program. In addition to the new capital allocation announcement, we are providing a 2-year free cash flow guidance range of $900 million to $1.1 billion cumulatively for 2024 and '25. Based on our free cash flow outlook and capital allocation framework, we expect to return at the midpoint of our ranges $500 million of capital to shareholders in share repurchases and dividends over the next 2 years. We are also committing to approximately $350 million in the first year of 2024, which is incremental to the previously announced ASR program that completed last week.
Altogether, this represents an expected return of capital to shareholders of $1.3 billion at the midpoint since the date of the merger termination through year-end of '25. In addition, we recently received $153 million of pretax cash proceeds from the sale of our interest in BMI that will be included in the newly announced return of capital to shareholders and/or pursuit of bolt-on M&A, as you've seen with our recent acquisition of Octillion Media. Further, our financial discipline, coupled with low leverage below 3x and a manageable debt structure, position us with an extremely strong balance sheet. All of our debt is fixed rate at an attractive 5.2% on a weighted average basis and includes no near-term bond maturities until March of '26. In January, we amended and extended our revolving credit facility, rightsizing it to $750 million and reducing the fees of undrawn balances by half.
Let's now take a look at the drivers of our fourth quarter and full year 2023 financial performance, which met or exceeded all of our full year guidance metrics. My comments today are primarily focused on TEGNA's performance on a consolidated non-GAAP basis to provide you with the visibility into the financial drivers of our business trends as well as our operational results. You can find all of our reported data and prior period comparatives in our press release. As you are aware, our fourth quarter results were impacted by the temporary disruption of service with a large distributor during our retransmission consent negotiations. The disruption in service began on November 30, and was successfully resolved on January 13. Absent the unexpected disruption, our fourth quarter results would have met or exceeded consensus and finished within our guidance range.
Total company revenue for the quarter was down 21%, primarily due to the absence of cyclical political revenue from midterm election in 2022 as well as the temporary service disruption I just mentioned. For the full year of 2023, total revenue finished at $2.9 billion, down 11% year-to-year due to the cyclical reduction of political ad revenue from the midterm election cycle in 2022. In addition, the absence of Winter Olympics and Super Bowl [indiscernible] on our large NBC portfolio in 2022 versus the Fox Super Bowl, our smallest portfolio in 2023, also had an impact on the even-to-odd year comparison. Now for some additional details on the components of our revenue. Full year 2023 subscription revenue of more than $1.5 billion was in line with prior year, driven by rate increases, partially offset by subscriber declines as well as the temporary disruption of service I've mentioned.
Excluding the service disruption, subscription revenue would have been up 2% compared to 2022. At [indiscernible] approximately 30% of traditional subscribers since November's earnings call and expects to renew 20% at the end of this year, and another 45% in 2025. Beyond this, 2024 in January of this year, we successfully renewed our affiliation agreement with NBC, which covers 20 TEGNA markets across the United States, including 10 of the top 25 markets. The 20 markets renewed serve more than 21 million households and covers nearly 17% of the U.S. As a reminder, TEGNA is the largest independent owner of NBC affiliates. Moving to advertising and marketing services, advertising trends in the fourth quarter showed sequential improvement compared to third quarter, partially due to political crowd out in the fourth quarter of 2022.
Nonetheless, advertising trends showed continuous sequential improvement throughout the entire year of 2023. Underlying trends, excluding Premion for the fourth quarter were up mid-single digits above last year. Nearly all categories of advertising trends were positive in the fourth quarter, including automotive, services, retail, home improvement, entertainment, media and telecom, travel and tourism, and packaged goods. Now turning to Premion, which continues to strengthen its position in the convergent TV marketplace through additional local advertising who -- advertisers who are increasingly allocating dollars to streaming advertising. During the quarter, Premion continued to innovate with its sales conversion attribution offering. This solution enables advertisers to directly link their streaming advertising spend to business outcomes, which demonstrates Premion's superior return on ad spend.
Similar to previous quarters throughout 2023, Premion revenue was down year-over-year, impacted by the loss of a large national account in fourth quarter of 2022, which we've now cycled through. However, Premion local revenue was up year-over-year in the fourth quarter. Premion's primary focus on the growth is local OTT revenue, where it is uniquely positioned to win. Premion's local revenue growth remained strong and finished up double digits for the full year. In February, Premion announced and simultaneously closed on the acquisition of Octillion Media, a next-generation demand-side platform focused on local streaming advertising. We are enthusiastic that the acquisition will expand our capabilities by combining Octillion's cutting-edge technology with Premion's advertising solutions.
Ownership of these technologies will further enable product innovation, improve operational efficiencies and drive accelerated growth. The transaction is expected to be accretive to TEGNA's free cash flow and EPS within 12 months. Turning now to expenses. For the quarter, non-GAAP operating expenses of $577 million were down 2% compared to fourth quarter of 2022. Excluding programming costs, non-GAAP operating expenses for the quarter were down 4% compared to 2022, driven by lower variable cost of sales for digital revenue and operational expense management improvement. Adjusted EBITDA was $177 million, producing a 24% margin for the quarter. For full year, non-GAAP operating expenses of $2.3 billion were up slightly year-over-year, driven by higher programming costs, mostly offset by lower variable cost of sales with digital revenue and operational expense management improvements.
Full year adjusted EBITDA was $742 million, producing a 26% margin. We continue to generate strong free cash flow, $130 million for the quarter, and $459 million for the full year, driven primarily by our high-margin, durable subscription revenues and continued thoughtful expense management. We ended the year with total debt of $3.1 billion and cash of $361 million. Net leverage ended the year at 2.8x, well below our 3x full year guidance. Turning to our forward-looking outlook. As I mentioned earlier, we are providing a 2-year free cash flow guidance range of $900 million to $1.1 billion cumulatively for 2024 and '25. This is the first time we're providing a 2-year guide to reflect confidence in the visibility and durability of our cash flows.
To discuss some of the drivers of this outlook, 2024 will be a strong year at TEGNA, driven by our favorable portfolio of stations in key markets, benefiting from the always robust presidential election cycle, the Summer Olympic Games in Paris, and Super Bowl that just aired on CBS. Also driving our outlook is the renegotiation of network agreements Dave mentioned earlier. With 93% of our Big 4 subscribers under long-term network agreements through late 2026, we expect the growth of reverse compensation fees going forward to be negligible. The majority of our reverse compensation payments are variable, tied to subscribers, providing financial stability with downside protection during this evolving media landscape. TEGNA's high-margin subscription and political revenues produce annuity-like EBITDA and free cash flow, which comprised more than 50% of our total revenues.
Lastly, as Dave noted, building on our track record of being a best-in-class operator, our transformation initiatives to improve operational efficiencies and reduce costs are underway. We expect the benefits of these efforts to occur in the back half of 2024 and will continue through 2025. We will provide updates to sizing of these initiatives in coming quarters. Let me give you an overview of full year 2024 guidance elements. Corporate expense is expected to be in the range of $40 million to $45 million. Depreciation is projected to be in the range of $56 million to $60 million. Amortization is projected to be in the range of $46 million to $48 million. Interest expense is expected to be in the range of $170 million to $173 million. We expect capital expenditures to be in the range of $62 million to $67 million.
We forecast an effective tax rate in the range of 23.5% to 24.5%. Finally, we expect to end 2024 with net leverage below 3x. In an effort to help forecast our mid-term results, I'll provide quarter ahead financial guidance metrics as follows. We expect first quarter total company revenue to be down low to mid-single-digit percent year-over-year due to lower subscription revenue, which includes being [dark] with a distributor at the beginning of the year. We forecast operating expenses for the first quarter to increase in the low single-digit percent range compared to first quarter of 2023, driven by increases in stock-based compensation and programming expenses. With that, we'll now turn to Q&A and take your questions.
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