Last week, Sinclair Broadcast Group (NASDAQ:SBGI) reported its fourth-quarter earnings. Sort of, anyway, and I’ll get back to that in a minute. They were pretty ugly, with net income down almost 80% Y/Y. Not long after, management got on the line for the customary earnings conference call. Which is when things got a little weird.
It’s not unusual for a company’s management to filter out certain line items to produce a “core” metric in their earnings reports, and following the DISH-RSN body blow that I described in my last article, a search for a more optimistic “core” number was to be expected. But I frankly wasn’t prepared for the level management took it to. They filtered so much out of the key subscriber figures that the final core metric they described was all but useless to us as investors.
Worse, however, was the statement from management that “misinformation” was pressuring its stock, which had already fallen 50% in 9 months even before the earnings were reported. It fell another 16% in one day after the numbers came out. While admittedly Sinclair is not entirely without possible upside, those like myself who are skeptical of it are most certainly not spreading “misinformation.” It’s the numbers, the operating results, that are driving this decline.
This article will examine Sinclair’s new numbers for new insights into the company’s prospects, as well as try to provide more detail about the mathematical underpinnings for my skeptical stance on the company. It most certainly is not based on misinformation. Some of it is based on inference and extrapolation – but that at least partly comes from the lack of clarity on some of management’s own figures.
8-K Is Not 80% Of 10-K
Before we get started, one important note.
Technically, Sinclair’s earnings aren’t in yet – the form it submitted to the SEC was an 8-K, not a 10-K. But this isn’t particularly unusual and most of the relevant information appeared to already be available, so I figured it wasn’t too soon to do an analysis.
I quickly ran into problems, however. While most 8-Ks are basically 10-Qs in all but name, this was a true 8-K – a partial submission, with limited data that wasn’t really formatted to SEC standards. There is nothing inappropriate about that, but until the formal report is in, it does make evaluating management’s spin on the numbers difficult.
While the last table in the submission gives a pretty good summary of the final income statement for the quarter, the tables breaking down the performance of Sinclair’s two segments – its legacy broadcast segment and its new sports segment – are far less complete, and raise as many questions as they answer.
But they’re what we have, so I’m going to do my best. And I think they do tell us just enough to draw some conclusions.
Adjusted Subscriber Numbers Are Too Adjusted
Now, back to that conference call. First, there were the numbers themselves that were being reported. And management had a rather unique way of sorting them and characterizing them.
On the subscriber front, with the exception of one MVPD that is experiencing above average subscriber losses, our subscriber churn to the fourth quarter was less than 1% on annualized basis and we actually added subscribers sequentially when excluding this one MVPD.
Just to be clear, that “one MVPD that is experiencing above-average subscriber losses” is almost definitely AT&T (NYSE:T) – the largest pay-TV operator in the country and Sinclair’s biggest distributor for its content, which lost almost 20% of its subscribers in a single year and is expecting another rough quarter to open 2020. It also accounted for over one quarter of total pay-TV subscriptions in 2019. While Sinclair is boasting about what happens to its subscriber count if you simply ignore AT&T’s deluge of subscriber losses, that number is so slanted as to effectively be meaningless.
Also, it’s not entirely clear to me what this AT&T-free boast even means. “Our subscriber churn to the fourth quarter was less than 1% on an annualized basis.” Does this mean that Sinclair lost fewer than 1% of its subscribers Y/Y, excluding AT&T? That hardly seems possible – DISH Network (NASDAQ:DISH) alone accounts for almost one-seventh of the market and they’re all gone since this time last year. To say nothing of subscriber losses at other, non-satellite operators.
I thought I would simply check the subscriber counts to see what Sinclair is talking about, but I ran into a problem – there are no subscriber figures disclosed in Sinclair’s partial report in the 8-K. Management is talking during the conference call about a metric that they are not yet disclosing. Presumably, they intend to do so in the official 10-K they’re going to submit later, but in the meantime, we simply don’t have the data.
I think what they mean is that subscriber losses in the fourth quarter, excluding AT&T, come to less than 1% of the remaining base if you extrapolate at the same rate for full 12 months. But if that is so, this metric becomes even more worthless.
The reason is that fourth quarter was the first quarter where DISH Network was out of distribution for the full quarter.
The reason this matters is issues of sequencing. When DISH was in with Sinclair, the higher prices on DISH service from paying the RSN fees would have presumably been driving higher churn and would have continued to drive higher churn had DISH extended the arrangement. This would have led to a steady drip-drip-drip of subscriber losses at well over 1%.
But DISH didn’t stay. It left. And because it left, Sinclair’s third-quarter saw a massive subscriber loss as all DISH customers went dark on the RSNs. Meanwhile, by fourth quarter, the DISH subscriber count was already at zero. Essentially, DISH took subscriber losses for a dozen or more quarters to come and “front-loaded” them all into Q3 of 2019. So, there were “no losses” from DISH in fourth quarter. Nor will there be such losses in future quarters, if DISH never comes back.
In fact, there might have even been gains. DISH has generally not suffered for dropping the RSNs, but presumably what subscriber losses they have driven did not all simply stop paying for pay-TV. Instead, they migrated to other pay-TV operators who do offer the RSNs, temporarily reducing churn at those operators and boosting Sinclair’s count.
So, if I’m right in how I’m interpreting this, Sinclair’s “less than 1% boast” actually comes from excluding two of the four largest pay-TV operators from its count, both of whom delivered massive subscriber losses to Sinclair.
The Next Battlefront
Sinclair will find that when it comes to RSNs, there is no rest for the weary. No sooner is DISH behind them than negotiations with another pivotal pay-TV company, Comcast (NASDAQ:CMCSA) are upon them. Management’s take on that follows:
We remain in negotiations with Comcast and ultimately given the value of these properties and demand for local viewers we are confident that we will come to an agreement and they will allow their subscribers to watch and enjoy their favorite home team. We continue to have discussions with Dish for the carriage of the RSNs and remain confident that our two companies will eventually reach mutually acceptable carriage agreement.
My own take is that the Comcast negotiations are considerably more fraught. I take that position because I actually agree with management’s implication in the quote above that Comcast and DISH are in similar strategic postures going into negotiations – both are major pay-TV providers about to enter a high-stakes negotiation with the largest RSN company in the US, for high-value but also high-cost content.
And DISH negotiations ended without a deal. I don’t completely rule out the possibility that the Comcast ones could, too.
I agree that Comcast will have a harder time walking away than DISH did. Comcast works mostly with urban customers who live close to sports franchises and are devoted to their teams, unlike DISH which caters largely to rural areas that don’t really need the RSNs because they don’t care about the teams the RSNs broadcast.
On the other hand, Comcast will have all the more leverage going in knowing that Sinclair has already lost one of the Big Four TV providers and can’t really lose another. It might secure a substantial cut in prices if not a full-blown end to payments – and financially, there would be little difference for Sinclair between the two.
Management’s “Misinformation” Claim
I bring this up because it is the vital context in which management’s final quotation for this article must be examined. It came during CEO Chris Ripley’s initial statement before questions opened.
I do want to mention that there has been some misinformation in the marketplace that has unfortunately depressed our stock evaluation. In fact, if you do a sum of the parts on us, you will find that our current stock price [ascribes] no value to our Sports segment despite having over 70% of the RSN subscribers locked in, including multi-year deals completed with Charter, AT&T DIRECTV, MediaCom as well as 200 other completed deals with medium and small distributors, having very few team renewals on the horizon, $1.6 billion of liquidity as of year-end 2019, exclusive rights on linear and digital and future sports betting and synergy opportunities.
I won’t belabor dictionary points here, but I can’t help but point out, that is not “misinformation.”
“Misinformation” implies that something is being said by those skeptical of the company – such as myself, for instance – which is either false or, at the very least, misleading. But management’s only real beef seems to be that the market is ascribing a low value to its new sports segment. Potentially, even as low as zero. There is no suggestion that this low valuation is being driven by false information – that litany of strengths CEO Chris Ripley is describing simply don’t impress some of us as much as they impress him.
But never mind definitions. Ripley is mad that the market seems to actually be suggesting that his sports purchase, that he has effectively gambled the company on, might be worthless! This is, in his view, so unfounded as to be ridiculous. Is there any support for the suggestion that it is in fact worthless?
Crunching Hard Numbers – Sinclair’s Own
Like I said, Sinclair is about to lock horns with Comcast over a new distribution deal – and do so in the shadow of DISH’s refusal to carry the RSNs, and its complete lack of losses for having done so. The possibility of an outright failure to reach a new deal can’t be ruled out, but even more likely is some sort of substantial repricing. That alone could drive the value of the sports segment to zero.
We will use only management’s own reports for this calculation. Sinclair reported that its sports segment took in $788 million in revenue last quarter. Management indicated on the conference call that there isn’t much seasonality to these figures – makes sense, since cable fees don’t usually fluctuate month to month – so we will use that figure.
Assuming Comcast is 30% of Sinclair’s remaining subscriber base – the 30% that is not locked in – now that DISH is off the rolls completely, there is $236 million in fees at stake in this pending negotiation. If Comcast were to drop the RSNs completely, Sinclair would be looking at $552 million in revenues as its new sports baseline.
How bad is that? Well, put it this way – Sinclair also reported that operating expenses in the sports segment came to $599 million. There was also $111 million in interest expense on top of that. Total: $710 million
Granted, management indicated in the conference call that unlike revenues, expenses do have some seasonality, since payments tend to be higher in the winter months going into spring when baseball, the biggest non-football sport in the US and the RSNs largest content partner, starts charging its fees again as spring training opens.
But that doesn’t help too much. Even if we take Sinclair’s overall 2020 number of $2.05 billion in sports content costs – that doesn’t even include other operating expenses – we have $513 million in costs plus the interest, still well over $600 million per quarter and well above revenues ex-Comcast.
More Than One Way To Cut
Much the same effect is produced if Comcast secures a 30% cut in rates, instead of going dark with its 30% of customers. MFN clauses in most carriage deals would quickly replicate such cuts across Sinclair’s entire distribution footprint, producing numbers very similar to the ones outlined above.
In other words, if Comcast negotiations fail, or even just produce a sufficiently large shortfall in revenues under new contractual terms, Sinclair’s sports segment will be taking in less money than it is paying out – the very definition of worthless.
Again, this is not “misinformation.” The market simply seems less optimistic than Ripley about the upcoming Comcast negotiations. Not surprising, since one major pay-TV provider has already walked away from him.
At this time, I am not contemplating a short on Sinclair – it just dropped 16% in a day, so I think a fair amount of the short-term downside is already priced in. A brief bounce is not even out of the question. But its long-term prospects will remain very murky until we know what Comcast is going to do with these RSNs.
I am avoiding Sinclair stock.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.