TEGNA Inc. (TGNA) Earnings

Management highlights

- Regulatory progress: Positive developments for local broadcasters, including Eighth Circuit Court vacating top 4 prohibition rule. - Key priorities: Building team culture, leveraging station strengths, deploying tech/AI, growing digital revenue, cutting unnecessary spend. - Local news expansion: Announced 7-9 a.m. streaming programming in over 50 markets, adding over 100 new hours of local news daily, using automation and AI for productivity. - CTV streaming: Focus on overhauling sales process for $30B growing market. - Lynn Beall's departure: Chief Operating Officer Lynn Beall retiring after 35 years in the industry.

Guidance

- Adjusted free cash flow: Reaffirmed guidance of $900 million to $1.1 billion over 2024-2025. - Interest expense: Lowered full-year 2025 interest expense guidance to $160 million to $165 million. - Third quarter revenue: Expected to decline 18%-20% year-over-year. - Non-GAAP operating expenses: Expected to decline 2%-3% year-over-year.

Segment performance

Total company revenue in Q2 was $675 million, down 5% year-over-year. AMS revenue was $288 million, down 4% year-over-year (excluding Gray Media impact, down 2% year-over-year). Distribution revenue was flat at $370 million year-over-year. Non-GAAP expenses were down 3% year-over-year, with compensation and outside services cut, but programming expenses up due to local sports rights. AMS revenue contribution: ~42.7% of total revenue; Distribution revenue contribution: ~54.8% of total revenue.

Risks & headwinds

- Economic uncertainty: Impact on advertising revenue due to advertisers delaying spend. - Regulatory uncertainty: Pending full impact of vacated top 4 rule. - Premion partnership change: Impact on AMS revenue due to Gray Media's shift, affecting year-over-year comparisons for several quarters.

Analyst Q&A

• Q: Appreciate the color as always, guys. Mike, I guess, two, I know you did NBC last year, but obviously, they've come under some more scrutiny from Chairman Carr and given how much they're continuing to shift exclusively on to Peacock. I just wonder if you think that anything might evolve in terms of the structure of that deal or if you're just simply locked in because of the deal that you did last year? And then secondarily, I know that you have a lot of wood to chop, and you've done a great job kind of reorganizing the business towards internal growth initiatives. I'm just kind of curious where you're headed at in terms of a sense of urgency from an M&A perspective, especially since you've got both in-market and out-of-market opportunities. You don't have quite the same duopoly portfolio that others have and so it kind of broadens the spectrum for how you can attack the M&A landscape. So I'll just stick with those 2 because that's probably already mouthful.

  A: Thank you, Dan. So I'll start with NBC. First, it's important to say that the network affiliate relationship is important and it is symbiotic, and we value our network partners, and we approach those partnerships with a constructive mindset, in particular around the preservation of the linear bundle, which has served this industry so well for such a long time. I'm also grateful that Chairman Carr is so focused on the good work that local broadcasters [Technical Difficulty] communities and is looking to continue to help us or public interest to those communities. Beyond that, there's nothing to comment on in our network relationships. You saw that we had a constructive engagement with FOX this quarter, and you should expect to see us to continue to work collaboratively with our network partners. Your second question -- and specifically you asked how much urgency we feel. Forgive me for being repetitive, but I'll come back to it. First, we believe that deregulation is necessary important and coming. Our industry is up against big tech competitors who have absolutely no encumbrances in how they compete across the country and in our markets. Secondly, we believe that when [Technical Difficulty] create a significant profit pool for the broadcast industry, and we have every expectation that we will participate. We've told you that we are either a buyer or a seller, depending upon how the opportunities present themselves. And you've already heard and in the last few weeks from some of our peers in the industry about swaps, which are great opportunities to be both the buyer -- parties. We believe that it's a great opportunity, but we also have a strong balance sheet and a great set of assets, and we are going to be disciplined in how we approach this. And so we are continuing to take that approach. We're excited about the possibilities and the team is doing their work.

• Q: I got a couple of questions. Maybe I'll start with the first one. You've spoken a lot over almost the last year now about significant cost savings at TEGNA using technology. Can you give us some of the biggest areas where you've used AI and technology to take out costs? What are some of the biggest wins you've had on taking costs out using technology, just some examples, please?

  A: Sure, Craig. Higher-level examples, but I won't for today's call, contextualize those and Julie's sort of specific cost-saving numbers that she's been sharing with you. First, I'll make an important distinction often think about AI's involvement in the content creation itself, and that's not where we are playing. We believe you need good journalists [Technical Difficulty] and we have done -- I'm sorry about that. So let me come back to the examples. We [Technical Difficulty] and we are doing analysis of the workflows of every person and every business process in the company, that there are a number of activities that are sort of wrote and could be automated, and we're looking for opportunities to automate those. One example is transcription. We've had a lot of journalists who finish an interview and then handwrite the interview. Another example is video editing. It takes a lot of time to edit videos, and we have found ways to deploy AI to do the video editing. Another is identifying new stories before the team gets to the office. We receive lots of e-mails from sources and those can be summarized and presented to the team so that they can jump on the hottest opportunities. We see opportunities on the sales and go- to-market side as well, creating draft campaigns for prospects, warming up leads with new advertisers through e-mail campaigns and others. It's not 1 or 2 or even 3 potential AI automation initiatives. It's a full company mindset around demanding that our people spend their time on the high-leverage activities that only good smart people can do and have an expectation that when they can offload road tasks, they will. Julie A. Heskett: One thing I would add, right, this is Julie. Just on the cost side and future leveraging cost of capital coming down, both from a technology perspective as well as space is real estate. And we're finding really good progress on building, if you will, stations of the future, which is a smaller footprint from a square footage perspective, spending potentially 80% less in CapEx utilizing the new technology and the virtual technology that is available to us and also identifying about 50% less in operating expenses by taking advantage of these opportunities.

• Q: Great. I appreciate that. I also wanted to ask you, can you talk a little further about your outlook for core advertising here in the third quarter year-over-year. What's it trending like right now, please?

  A: Yes. Let me -- I'll touch just first on the sort of macro piece of that is, as we look at it, the economy seems to be strong but choppy and so far as first quarter was close to flat year-over-year growth. Second quarter, you saw a spike to 3% growth and tariffs certainly played a role in all that. As we look to Q3, the blue-chip consensus was for GDP growth around 1% in the Atlanta Fed outlook based on the latest data is about 2.5%. So overall, we think the economy is heading in the right direction. At the same time, and as I've shared with you all on these calls before, my experience is that uncertainty in the economy, is not good for collecting advertising revenue. The advertisers tend to sit on the sidelines a little longer until they feel confident in the direction of the economy. It's also been my experience that they always come back and you get to reclaim the dollars you didn't take when advertisers were feeling that uncertainty. So at a high level, we sort of understand that the ad market might be a little bit softer right now relative to our view of the macro economy. It's also been my experience that the advertisers tend to catch up with -- they tend to catch up and they tend to catch up with more in their pockets from the money that they kept on the sidelines in the previous quarter or quarters. Julie A. Heskett: Yes, I agree with that, Mike. And I would add, Craig, another thing that is specific to TEGNA, a couple of things, one is Q3 is a tougher comp with our NBC portfolio being the largest NBC affiliate group, up against the Summer Olympics last year. So that is unique to our Q3 advertising trends. It's probably a disproportionate impact. Second thing is, as I said in my remarks, is the change of our Premion reseller partnership which is also impacting our AMS trends going forward that began in Q2 and now it will take 3 additional quarters to lap that. That was also about 200 basis points and positive growth in our digital unique audience and minutes streamed every month and is creating a real and significant opportunity for us on both fronts. And then I would say while July and August are substantially weaker because of more of the Olympic and the trickle down of the tariffs. I can tell you, exiting Q3 September is in a positive direction and pacing up on a year-over-year basis.

• Q: So when you roll that all together, Julie, where is the overall quarter looking like advertising might end up being the core advertising percent changed, I guess, down year-over-year?

  A: Yes. So we don't guide to advertising specific. You saw the comments of total revenue is projected to be down 18% to 20%. And I would say advertising is going to be in that low doubles to mid-teens range.

• Q: So Mike, helpful comments about how you kind of think about the M&A market and I know there's a lot of options there between being a buyer or seller. One of your peer CEOs is just saying that everybody is talking to everybody right now. So I was wondering if you could give us some perspective as to whether or not you think this is more of a buyer's market or more of a seller's market. When I kind of look at things, it seems like there are quite a few things maybe for sale, not that many with at least cash for purchasing which may skew those conversations in a particular direction, but just wanted to know if that's correct or if some things that maybe we've missed in that characterization. And again, I know whatever deals you do will be subject to those exact terms. And then maybe just secondly, on reverse comp. Are you seeing any sort of paradigm shifts in the way that these are done, whether it's the pricing algorithm, fixed versus variable, I know the renewal you did was relatively small in terms of your household, but just wondering if there's any trends that you've seen in reverse that you think are sort of bigger picture for the next few years.

  A: On the first question. I can't answer the market. I can only answer the market through our perspective. And our perspective is we have a strong balance sheet and strong relative to the market, and we have great assets. It should create significant value creation opportunities for our shareholders. And so we're engaged in the market, as you would expect us to be seeking to identify the way to create the most value for our shareholders. And as we've noted, there are acquisition swap and sale opportunities that can benefit across the board. We have a wide aperture on this. And at the end of the day, it is our job to be dispassionate capital allocators and do what's best for the shareholders. The second question Julie, do you want to jump on the sort of reverse retrans. Julie A. Heskett: Yes. So Steven, I'll take that one. If you recall last year, I think we were one of the initial companies to identify a bend in the curve of what used to be a steep growth expense line item of programming fees with the network is as they come up for renewal, there are opportunities to renegotiate and have favorable terms for both parties, quite frankly on the partnership of those deals. So that continues to play out. Our reverse comp programming fee line item continues to be flattish as we look at year-over-year trends of each of those agreements.

• Q: I just have a follow-up question on Premion. Just with the exiting of the reseller relationship, can you just maybe talk about like just overall, how advertisers view that product with kind of just focus more on the TEGNA footprint and any just sort of broader impact that might have within like for national advertisers or wider political buys.

  A: On Premion, something I've shared with you all before, I've spent a lot of time with our sales team and our customers on Premion. And it is a real value to local advertisers who have a relationship with our sales teams and trust our sales teams and have had that consultative partnership in helping them to reach their audience and reach their business objectives on television. Half of the audience left the traditional linear television bundle and went to streaming. And we're able to go to those advertisers and offer them not only the reach that they've gotten historically at buying TV because now they can buy from us both TV and connected TV streaming. But in addition, a layer of demographic, psychographic and location-based targeting that helps them to enhance their buy and improve their return on investment. The Premion business is also highly synergistic with the efforts that we've leaned into very hard this year around our owned and operated streaming apps. It's driving significant growth in our total digital unique audience and minutes streamed every month and is creating a real and significant opportunity for us on both fronts. So we're excited about Premion. It is -- and we are engaged in conversations with folks around expanding the Premion service. As you can imagine, we had a good and constructive partnership with Gray and we're keen to have more like that.