A month has gone by since the last earnings report for Tegna (TGNA). Shares have added about 7.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Tegna due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Higher Political Ad & Subscription Revenues Aid TEGNA’s Q4
TEGNA reported fourth-quarter 2018 non-GAAP earnings of 74 cents per share, which beat the Zacks Consensus Estimate by 2 cents. The figure surged 131% on a year-over-year basis owing to operating income growth and lower tax rates.
On a GAAP basis, revenues increased 31% year over year to $642 million. Top-line growth was primarily driven by increase in political and subscription revenues. However, the figure came below the Zacks Consensus Estimate of $643.9 million.
Notably, GAAP revenues had a negative impact of $10 million in the reported quarter due to Premion refunds given in the previous quarters. Due to certain system issues, Premion’s service was not fully delivered to a few end users, following which the company had to issue refunds.
TEGNA’s adjusted revenues, which exclude political advertising, were up 5% year over year to $478.6 million.
Top Line in Detail
Advertising and marketing services (43.2% of total revenues): The category generated $277.1 million, down 6.5% on a year-over-year basis. The year-over-year decline was primarily due to significant demand for political advertising.
However, advertising and marketing services revenues increased in low- single digits after eliminating the effect of political revenue demand and Premion adjustment. Growth in advertising revenues from medical, retail, telecom, services and home was offset by packaged goods, automotive and restaurants. However, revenues from packaged goods, automotive and restaurants improved sequentially.
Subscription (34%): This category generated $218.5 million in the reported quarter, up 22.4% from the year-ago quarter. This was driven by growth in contract rate hike and higher paid subscribers of both multichannel video programming distributor (MVPD) and new virtual MVPD services. Moreover, increase in subscribers and revenues from OTT streaming services and increasing presence in larger markets boosted paid subscriber growth.
Further, TEGNA noted that in the reported quarter, it has negotiated higher rates in its new agreements.
Political (21.8%): This category generated $139.9 million in fourth-quarter 2018 compared with $9.9 million in fourth-quarter 2017. The year-over-year growth was primarily driven by solid political advertising revenues. Notably, political ad revenues increased 51% from the previous mid-term election in 2014 taking into account Premion adjustment of $5 million.
Other (1%): TEGNA generated $6.8 million of revenues from this category, up 19.6% year over year.
Non-GAAP adjusted EBITDA surged 61.2% year over year to $273.1 million. Adjusted EBITDA margin was 42.5%, up 800 basis points (bps) year over year.
Non-GAAP operating expenses (61% of total revenues) in the fourth quarter were $391.5 million, up 15% year over year primarily due to increased programming fees, primarily higher reverse compensation fees.
Excluding costs to generate revenues, Premion investments and higher programming fees operating expenses were up not more than 2%. Notably, reimbursement of $2.4 million for Federal Communications Commission (FCC) spectrum repacking lowered operating expenses in the reported quarter.
Non-GAAP operating income surged 66.4% year over year to $250.7 million. Operating margin expanded 830 bps from the year-ago quarter to 39%, primarily due to strong political revenues that aided the top line.
Balance Sheet & Cash Flow
As of Dec 31, 2018, total cash was $135.9 million compared with $23.8 million as of Sep 30, 2018. The increase was due to cash acquired to complete the acquisition of WTOL, a CBS affiliate in Toledo, OH, and KWES, a Comcast owned NBC affiliate, in Midland-Odessa, TX, from Gray Television on Jan 2, 2019.
Also, long-term debt outstanding was $2.9 billion compared with $3 billion in the last reported quarter.
In the fourth quarter, TEGNA generated $194.5 million of cash from operations compared with $37.7 million in the prior-year quarter.
Non-GAAP free cash flow was $166.9 million compared with $24.7 million in the year-ago period. Increase in free cash flow was primarily driven by record political and subscription revenues and lower tax payments made.
TEGNA noted that it was able to invest in new opportunities and initiatives and lower its debt burden owing to the record free cash flow generated in the reported quarter.
In the first-quarter fiscal 2019, TEGNA renewed a multi-year affiliation deal with Disney owned ABC Entertainment till 2023. The deal covers all ABC-affiliated stations that TEGNA owns and operates in nine markets nationwide.
Notably, the nine markets serve about 8 million households and cover nearly 7% of U.S. users. Additionally, following the acquisition, TEGNA now covers one-third of the United States TV households and about 87% of Texas population.
Moreover, in December 2018, the company extended its multi-year carriage agreements with both Dish TV and Verizon. We believe that TEGNA’s deal with its affiliates is expected to expand its content offerings and boost user engagement levels, thereby attracting advertising dollars.
Further, renewals in existing agreements and ongoing repricing of about 65% subscribers from fourth-quarter 2018 to the end of 2019 are expected to boost its cash flow.
TEGNA is witnessing strong advertising spending for the 2020 U.S. presidential elections. Therefore, the company expects strength from political ad revenues to continue in the upcoming quarters, which is a positive.
TEGNA expects GAAP revenues to increase in the low single-digit range. Non-GAAP revenues (excluding Olympics and political) are anticipated grow in the mid-to-high single digit range. Total operating expenses are anticipated to increase in mid-single digits.
TEGNA expects subscription revenues to increase in mid-teens on a year-over-year basis. Total capital expenditures are anticipated in the range of $70 - $75 million. Management expects about 5 to 6 of its stations to be upgraded to the latest Advanced Television Systems Committee (ATSC) 3.0 broadcasting standard.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
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