Fox, Nexstar, Sinclair Say They Can Weather Virus, Q2 Seen as Difficult as Q1
COVID-19 is affecting local small business advertising and sports revenue, but won’t hurt political ads, said Fox, Nexstar and Sinclair on Q1 calls. All predicted big drops for the next quarter, saying their companies have the scale to weather recession. “We’ve seen a surge of viewership in local news and across our sites,” said Sinclair CEO Chris Ripley. Also Wednesday, The FCC announced Sinclair agreed to a $48 million penalty to resolve investigations related to its failed purchase of Tribune, sponsorship identification violations, and good faith negotiation violations (see 2005060063).
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The crisis will “put a big dent in the door, but it won’t come anywhere close to totaling the vehicle,” said Nexstar CEO Perry Sook. “Q2 will be the worst of it." The stock closed up 10% at $72.
Nexstar revenue rose 74% in Q1 as compared to the same quarter in 2019 to $1.1 billion, it reported. The company had a “promising start” before “the broadcast industry experienced a rapid change in market conditions due to COVID-19, which resulted in a significant decline in commercial advertising revenue in the last three weeks of March and into the second quarter,” said Sook. Since “the precise depth and duration of COVID-19’s impact” can’t be known, Nexstar has withdrawn guidance on free cash flow for the 2020-21, Sook said. In 2020, over fifty percent of Nexstar’s revenue will come from political commercials and distribution fees, neither of which is expected to be materially impacted by the virus, Sook said.
Sinclair’s Ripley said that political ad revenue “held up” during the quarter. Media revenue increased 17%, “aided by an increase in political advertising and higher retransmission revenues,” said a release. Consolidated media revenue was $31 million below the low end of predictions because of the virus. Sinclair conceded it expects the effects of the pandemic on its business to “intensify” in Q2: “The Company is currently unable to predict the extent of the impact that the COVID-19 pandemic will have on its financial condition, results of operations and cash flows in future periods due to numerous uncertainties.”
Sinclair can’t fully assess the effects of COVID-19 partly because of its regional sports networks and the shutdown of most professional leagues, Ripley said. Sports rights agreements typically include a minimum number of games, and if that isn’t met because those games aren’t played, the money owed to teams and MVPDs can change. “We can’t really factor the impact until we know the number of games that will be played,” he said. Sinclair assumes no professional leagues resume play in Q2.
Sook and Ripley said their companies took steps to cut costs and take precautions when pandemic-related shutdowns began in March. “We have and continue to take steps to manage our costs including deferring non-critical capital expenditures, delaying non-essential hiring actions, and reducing discretionary expenses until conditions improve," said Ripley. Sook said Nexstar redirected efforts to repurchase stock to paying down debt.
Ripley and Sook said they believed the virus' effects on local spots won’t last. Small business ads will “bounce back” after pandemic lockdowns, Ripley said. Sook said he expects growth in some areas, such as attorney ads, could help to offset categories that have been hit by the pandemic, such as travel. Sinclair and Nexstar said they were reaching out to local advertisers to help them come up with marketing solutions during the pandemic, with the aim of forming stronger relationships for when it’s over. Sook said he expects “a pretty sober Q2.”
Fox reported quarterly revenue rose 25% to $3.44 billion. CEO Lachlan Murdoch said the company’s large exposure to news is an asset during the pandemic because of increased news viewing. Fox News got the largest audience in its history, Murdoch said. Advertisers have noticed, he told investors (see webcast): "We are very confident we’ll have a strong autumn." The company's fiscal Q3 ended March 31. The stock, which rose during regular trading, rose an additional 3-plus percent after hours.
Fox has seen declines in local advertising similar to other companies, Murdoch said. Local ad pacing is on track to be down 50% as compared with the same period in 2019, Fox said. So far, the pandemic hasn't greatly affected the company’s revenue from sports, because that income is traditionally concentrated in the fall, Murdoch said. The programming aspect of Fox’s business has been affected since COVID-19 has called virtually all production of new content to cease. An exception is animation production for shows such as The Simpsons, which continued, Murdoch said.