Gray Media, Inc. (GTN) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Gray Television Third Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Hilton Howell, Executive Chairman and CEO. Thank you. Please go ahead.

Thank you, Cheryl. Good morning, everyone. Thank you for joining us this morning for our third quarter 2019 earnings call. As usual, I'm joined by our President and co-CEO, Pat LaPlatney; our Chief Legal and Development Officer, Kevin Latek; and our Chief Financial Officer, Jim Ryan. We'll begin this morning with a disclaimer that Kevin will provide and at the end of our comments, we will open up the line for questions. Kevin?

Thank you, Hilton. Good morning, everyone. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Those statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports filed with the SEC and included in today's earnings release. The company undertakes no obligation to update these forward-looking statements. Gray uses its website as a key source of company information. The website address is www.gray.tv. We also will post an updated investor deck to the website within the next few weeks. Included on the call will be a discussion of non-GAAP financial measures, and in particular, broadcast cash flow, broadcast cash flow less corporate expenses, operating cash flow, free cash flow, adjusted EBITDA and certain leverage ratios. These metrics are not meant to replace GAAP measurements but are provided as supplements to assist the public in their analysis and valuation of our company. Included in our earnings release as well as on our website are reconciliations of the non-GAAP financial measures to the GAAP measures reported in our financial statements. I'll now return the call to Hilton.

Thank you, Kevin. We are extremely pleased to report the results for the third quarter of 2019. This is a quarter of exceeding expectations, both on the high end and the low end of our guidance. Our as-reported total revenue for the third quarter was $517 million, which was at the high end of our previously issued guidance. At this level, our total revenue increased by approximately 85% from the third quarter of 2019. Our broadcast and corporate operating expenses were each below the low side of our guidance. Our adjusted EBITDA significantly exceeded the high side of our guidance. For the past several quarters in a row, we have set new records for broadcast cash flow. The third quarter of 2019 also set another all-time record for a third quarter at $192 million, increasing $57 million or 42% from the third quarter of 2018. This figure also set a new best broadcast cash flow for any quarter in our company's history. Our political advertising was a distinct high point of the quarter. Political revenue, again, greatly exceeded our expectations, especially for an off-cycle year. In particular, our political revenue was $22 million for the third quarter of 2019. Political revenue throughout the year and our expectations for the fourth quarter, certainly point to a record political revenue year in 2020. Our net income available to common stockholders for the third quarter was $46 million, and our net income per diluted common share was $0.46. Excluding transaction-related expenses and noncash stock compensation, our net income available to common stockholders would have been $0.50 per diluted common share. This figure represents a strong increase over the second quarter of 2019, which was itself a strong increase over the first quarter of the year. We ended the quarter with a total leverage ratio as defined in our senior credit facility at 4.59x on a trailing 8-quarter basis, netting our total cash balance of $326 million and excluding transaction-related expenses. Stepping back from these numbers, we continue to see local advertising improve across our company and look forward to finishing up the year with the best quarter of the year for local advertising. We continue to see double-digit growth in retransmission revenue on both gross and a net basis over last year. Over the past few months, the headlines have certainly had a lot to say about both broadcast retrans and cable channel fee disputes. Nevertheless, we remain very optimistic about our ability to continue to close the massive gulf between the value we deliver and the value we receive from distributors. Finally, political revenue has exceeded our expectations every quarter for the past several quarters in a row, and this time was no different. For a number of reasons, we now believe that 2020 is shaping up to be another year in which we will set new political advertising records. Our balance sheet has hardly ever been better than it is today. When we announced the Raycom transaction in June of 2018, we committed to paying down our debt and predicted rapid deleveraging, resulting from robust free cash flow. 3 quarters after closing that transformative transaction, we were able to demonstrate how we have again done exactly what we told you we would do. In particular, as noted, our net leverage is now in the middle 4s and continuing to decline rapidly. We remain on target to close out next year with a net leverage ratio somewhere in the 3s. Last Friday, we made a voluntary prepayment of $100 million of the 2019 term loan outstanding under our senior credit facility, using cash on hand. Today, we have roughly $200 million of cash in the bank. As always, we remain quietly busy exploring numerous and various opportunities to continue growing the company through small and large transactions that would make Gray an even stronger player in the broadcast industry. We are now in the latter innings of the consolidation phase in our industry, and that makes good M&A opportunities hard to find in the future a bit harder to see. Still, we have been guided and will remain guided by our focus on finding the path that will lead to the highest shareholder value in the long term. Now while I cannot completely rule out the possibility of an excellent opportunity for further M&A over the next year, I can confirm that absent an excellent transformative opportunity, deleveraging remains the first priority of Gray for at least the next 12 months. Finally, we have been frustrated with the underlying value of the company in the public markets, despite the results we have posted in our plans for the future. We are rightly proud of the company we have built. The people who work with us, our margins and efficiency, the quality of our assets and the opportunities that lie ahead for all of us. We believe that recent market prices have not fully reflected the actual value of Gray Television stock and that the market continues to undervalue the company. Accordingly, the company and some insiders purchased Gray stock during the limited periods of time during the quarter in which we legally could trade. Yesterday, our Board of Directors adopted a new $150 million stock repurchase authorization through December 31, 2022. This new plan supersedes all prior plans, including one from 2016 that was scheduled to expire at the end of this year. It is our intention to return to the market to acquire Gray common stock opportunistically and always in balance with our commitment to deleveraging the balance sheet. That's a difficult balancing act, but one that we are confident we can handle. We're extremely happy with how the company has performed and the people of Gray and Raycom have come together through the first 3 quarters of this year. We truly are one company pulling together. Pat, Kevin and Jim will now add some additional color to today's earnings release.

Thank you, Hilton, and good morning, everyone. In September, Hilton accepted Broadcasting and Cable's Broadcaster of the Year award at the TVB Forward conference in New York. In accepting this award, Hilton announced that Gray would join NBCU, CBS, ABC, Hearst and Graham Media in moving from household ratings to a cost per impression model for selling advertising. Impressions provide more granular data for advertisers and is the accepted metric used by the digital media platforms with whom broadcast television companies compete. Last week, we were happy to see Nexstar announced that it too would move to impression-based selling. Selling ads based on impressions will allow us to monetize all of our inventory, better meet the needs of advertisers and, therefore, should help us and our industry improve local television's share of video ad sales across the competitive landscape of broadcast, MVPDs and digital platforms. In addition to the move to impression-based selling, Gray is also rolling out a targeted sales strategy across the group against a couple of key categories, auto and health. We have seen some success here and believe this effort will have a positive impact on core advertising sales. We've also been working on adding capabilities around the sale of OTT advertising. As you know, it's the fastest-growing sector in advertising, we are going to broaden our focus in this area. Recently, our joint venture with Opry Entertainment Group, a subsidiary of Ryman Hospitality Properties, announced a name for the JV's new 24/7 premier linear multicast and SVOD service dedicated to the country music lifestyle experience. We chose Circle, in a nod of the wooden Circle with Grand Ole Opry stage. As you probably know, Circle will feature original programming centered around artists, music, hobbies, outdoor and offstage adventures, food, family and friends. We are on target to launch a linear channel in January 2020 across multicast channels in all of Gray stations as well as numerous stations owned by third parties. We expect to launch the network in over 50% of U.S. TV homes. The venture is hard at work finalizing new and library programming, sponsorships and ad sales as well as technology, marketing and staffing. Our other new program venture is Full Court Press with Greta Van Susteren. Since the new show debuted in September, we've attracted high-quality guests such as Secretary of State Pompeo; democratic presidential candidates, Amy Klobuchar and Tulsi Gabbard; Senator Lindsey Graham and other members of the House and Senate Judiciary Committees. In fact, this week's guest is presidential candidate and Mayor of South Bend, Indiana, Pete Buttigieg. We're also staying true to our mission of highlighting issues impacting local communities. Tapping into our station resources with stories like an investigation into the high and inconsistent price of health care to an Alaskan town literally washing away due to coastal erosion. We've now cleared Full Court Press in more than 75% of the country. We're also very pleased with the show's solid ratings performance. Full Court Press routinely posts higher rating than longer runnings established network Sunday news shows. In Birmingham, for example, Full Court Press consistently posted a 4 or higher rating. And just 2 weeks ago, hit a 6.8, which means that our brand new show was the highest or second highest-rated Sunday political talk show on the air in Birmingham each week. I now turn the call to Kevin.

Thank you, Pat. We posted a 113% year-over-year increase in retransmission revenue on an as-reported basis, and that's a 15% increase on a combined historical basis. While we should be very pleased with double-digit growth at these rates, the numbers could have been a bit stronger. Virtually all of Gray's retrans contracts reset our rates on January 1 rather than at different points during the year. As a result, our retrans revenue in any month is simply a function of the rate on January 1, times the number of subs for the month. If we reprice some major agreements during the year, our retrans revenues would naturally increase at those different points during the year. In fact, these small spikes could mask sub fluctuations. But because you have no such repricings during the year, you can see subscriber fluctuations and billing adjustments pretty clearly in our results. In the third quarter, our retrans revenue declined by about 2% from expectations due to sub declines primarily at 2 very large MVPDs. Not coincidentally, these 2 operators over this summer dropped or publicly threatened to drop non-Gray local television stations, cable channels and regional sports networks from their offerings across our markets. Of course, when local viewers lose -- when local viewers drop an MVPD because they no longer can get a local station or a cable channel or an RSN, all the stations in that market lose those subscribers. Those sub reductions slightly reduced our Q3 retrans revenue and caused us to slightly reduce our retrans estimates for Q4. We have no doubt that a good number and probably most of the subs who left 1 of these 2 operators in Q3, signed up with a new provider soon thereafter or as soon thereafter as summer ended, and the new providers could get them hooked up. The Q3 sub defections from MVPDs do not immediately show up in Q3 retrans revenue. Rather, they will show up in sub reports and payments that arrive in Q4 and early next year. We do expect to regain most of the lost subs in revenue in the near term. Nevertheless, we cannot accrue for subs moving to new operators until we actually get sub reports telling us where these folks went. For context, we now have sub reports from virtually all operators for the first half of the year. Our overall sub count was largely stable in the first half. Our sub count for the first half excluding these 2 very large MVPDs, grew a little bit. In short, we currently anticipate that retransmission revenue for calendar year 2019 will be approximately $795 million. We currently anticipate retransmission expense will be approximately $421 million and our net retrans revenue will be approximately $375 million. Looking further ahead, as Hilton said, we believe that our current and net retrans revenue will continue to grow strongly as we keep chipping away the massive gulf between the value delivered and the value received. As a reminder, we renew about 22% of our MVPD subs at the end of this year and about 56% of our MVPD subs at the end of 2020. Turning to our Q3 political revenue, it was obviously a much stronger political revenue environment than we had expected. We pointed out numerous positive developments and trends over the last several quarters, and this momentum just keeps building and blowing past our already robust expectations. After excellent results in the first 2 quarters of the year, we guided to an increase in clinical revenue for the third quarter of about 40% over 2017, the last off-cycle year on a combined historical basis. We ripped through even that high expectation and finished the third quarter of 150% over 2017 on a combined historical basis. This resulted from a number of factors. 3 governor races all turned more competitive than anticipated, we had strong special state and local races, more early -- very early presidential primary money in the first contest aids, more issue ads. In short, we continue to see political buyers rely on the power of local television stations to convince to sway and to get out to vote. Look, we cannot be excited -- I cannot but be excited about the prospects for political revenue over the next 363 days. For the current quarter, we are comfortable guiding to what we believe is a very conservative range of $25 million to $26 million in political revenue, which would represent a roughly 80% increase over 2017 on a combined historical basis. In short, we see historical levels of fundraising, engagement, strong candidates and likely competitive races across our footprint. And now that this week's election is behind us, we expect to see presidential ad spending began in earnest. In fact, we now believe that our political revenue for calendar year 2020 will set a new record by exceeding the $235 million that we achieved in 2018 on a combined historical basis. Thank you for your time. I'll now turn the call over to Jim Ryan.

Thank you, Kev, and good morning, everyone. I am going to pre-apologize if my voice is a little bit off or if I'm coughing, I managed to pick up a cold in the last couple of days. Our earnings release is obviously got a great deal of detail and the 10-Q will be filed a little bit later today. Keeping with the way we've always reported. We report on a GAAP basis, which we call as reported in our disclosures. In addition, we presented results and guidance in the earnings release on a combined historical basis, which gives effect to the acquisitions and dispositions, as if the transaction occurred on January 1, 2017 I'm going to keep my comments on the results of operations for Q3 and our guidance for Q4 to a combined historical basis. Please note that Q3 combined historical does include the 2 stations acquired from United Communications earlier this year. And also please note that our Q4 combined historical guidance does include not only the United stations, but also our acquisition of KDLT in Sioux Falls, which occurred in late September. And the Charlottesville station transactions, which occurred on October 1. Overall, we're pleased with the results for the third quarter. In general, our third quarter revenue was in line with the higher side of our guidance and core revenue, especially local TV revenue, did show modest sequential improvement over the first half of 2019. Factoring in the much heavier political revenue in Charlotte, Mississippi, Louisiana and Kentucky, we believe our core local was flat to 2018 in Q3. In Q3, we did see strong growth year-over-year in several categories with financial advertising up 8%, legal up 9% as well as continuing strength in our home improvement category, which was up 9% compared to 2018. Third quarter broadcast operating expenses were better than expected with an overall quarter-over-quarter increase of $12 million, but that $12 million included an increase in retransmission expense of $16 million which was then partially offset by decreases in other operating expenses. The production companies and corporate expense lines came in within expectations. In the third quarter of 2019, we had a total of $2 million of transaction-related expenses, of which $1 million hit the broadcast expense line and the remaining $1 million was a corporate expense. Year-to-date, we have an aggregate of approximately $72 million of onetime only costs -- transaction-related costs, comprised of $28 million of third-party contract termination fees, $24 million of professional fees and approximately $20 million of incentive compensation and/or severance. Of these costs, about $38 million was included in our broadcast expense line and $34 million is included in our corporate expense line. In the fourth quarter, we currently anticipate at least $2 million of additional transaction-related expenses split approximately evenly between the broadcast and corporate expense lines. As discussed on our last call, we reaffirm again our belief that the Raycom merger will result in approximately $85 million of annualized first year synergies which is $5 million more than originally estimated. And those synergies fall into 2 basic categories. Operational synergies of about $42 million in contractual arrangements of about $43 million. We're always looking at opportunities to streamline our operations and to make them more efficient. As such, there may be a few more synergy-related projects that we'll be able to accomplish before the end of this year. Turning to the balance sheet. As Hilton had already mentioned that our total leverage ratio at the end of September was 4.59x based on a trailing 8-quarter cash flow of $791 million with an aggregate principal amount of outstanding debt of $3.96 billion. We had cash on hand at the end of the quarter of $326 million. And again, as Hilton said, we used $100 million of that cash last Friday to voluntarily prepay $100 million of our outstanding Term Loan C. We continue to anticipate leverage decreasing lower into the 4s by the end of this year and comfortably into the 3s by the end of 2020. Turning to our fourth quarter guidance on a combined historical basis, we currently anticipate that local broadcast revenue will demonstrate improvement over the first 9 months. National broadcast revenue, while still challenged, especially with lower auto advertising is still expected to show continuing improvement over the first 9 months. And as Kevin already mentioned, our political revenue guidance, we think is very conservative and we are cautiously optimistic that the political number will pick up as we move through the rest of the fourth quarter. Core broadcast expenses are expected to decrease between $22 million and $25 million compared to Q4 '18, that excludes an anticipated $50 million of increased retransmission expense, transaction-related expenses and noncash stock compensation, are also excluded from that overall decrease. In addition, corporate expense is currently anticipated to decrease $2 million to $4 million from 2018, reflecting -- excluding transaction-related expenses and noncash stock compensation. These decreases demonstrate in part the realization of our Raycom synergies. Considering the full year '19, based on our Q3 results to date and our Q4 guidance we currently anticipate that full year 2019 revenue will approximate $2.1 billion. Our total operating expenses for the year before depreciation, amortization, gain and loss and disposal of assets including the $74 million of transaction-related expenses will approximate about $1.5 billion. Full year noncash stock compensation is anticipated to approximate $14 million. Our operating cash flow for 2019 is currently anticipated to approximate $700 million. We currently anticipate our capital expenditures, excluding repack related capital expenditures will approximate $80 million, and cash taxes are currently expected to approximate $25 million. Finally, as we said on our Q2 call that we believed our free cash flow would be comfortably over $300 million for this year, and we're pleased to say at this point that we anticipate that our free cash flow will range between $315 million and $325 million for 2019. At this point, I'll turn the call back to Hilton.

Thank you, Jim. Operator, we're now open for questions.

[Operator Instructions] Your first question comes from the line of Kyle Evans of Stephens.

I can hear the excitement of people's voices over there around political. That's traditionally kind of been a blitz after Labor Day, but it looks like we're starting early, spending a little bit more. Could you tell us what you kind of think the spending curve will look like as we approach the big spend in the 6 weeks before the race. Then I've got some follow-ups.

So historically, cycle after cycle, 50% or more of the total political spend has always shown up in the fourth quarter. 2020 could be a little bit different for us because of our exposure to the early primary states, and so there might be a little bit more, we think, in the first quarter than normally would be there, but we still think that the bulk of the spend is going to be in that traditional post-Labor Day, September, October time frame. But we do believe that our first quarter will probably see a positive benefit from the early primaries, I don't know.

My recollection is that when we were trying to put brackets around '18, we were thinking about some difficult comps that were in the '16 numbers from Alaska. Are there any big pieces we need to be thinking about as we grow '20 off of your CHB '18 number that you gave?

Alaska was $25 million in 2014, not 2016.

Okay.

Kyle, there's a lot of good news out there. So there's nothing that stands out like the Alaska, $25 million was a huge percentage chunk of what we had on a CHP basis that we were referring back to in 2016. There's nothing that really stands out like that this time.

Got you. You are now in some larger Raycom markets. Could you comment on any notable market size change or difference that you see in terms of core and maybe even retrans sub counts?

I want to make sure I understand the question, Kyle, it's Pat LaPlatney. So are you asking about core performance of larger markets relative to smaller markets?

I am, I am.

So look I mean as with last quarter, we didn't see a huge differential between our performance in larger markets versus the smaller markets. And sub counts, I have to ask you guys. I mean we really didn't see any -- yes, I didn't see any real difference in Charlotte relative to -- or Charlotte or Cleveland relative to smaller markets.

Great. And are you I guess this is hard for you to answer, but I think it's only feasible to ask it on a relative basis, how exposed to satellite are you versus your peers? More, less, roughly.

Yes, Kyle, I have no idea. I don't know how exposed our peers are, so I don't know how to compare that. I mean there are 2 of our -- 2 of our 3 largest operators are satellite providers, I suspect that everyone else can say the same thing. But I don't -- I'd have to ask everybody else if that's true.

Okay. Great. One last one, the obligatory auto question, have to ask it, kind of how is it pacing in 4Q? And what's your 2020 outlook?

Fourth quarter, it's, again, on a relative basis, looking a little bit better right now. Now again, it's pacing but I would say, yes, a little bit better from the first part of the year, which is encouraging. Next year -- we're still in our budgeting process, so it's -- we're still kind of framing our expectations for next year. But I -- but we have been encouraged by the sequential -- auto seems to be getting a little bit better each quarter this year. So that would kind of be our expectation going into next year, at least the first part of next year. That continues to get a little bit better. Now with massive amounts of political show up later in the year, as you've seen many, many times with us, it'll be a different story, but that's a high-class problem to have.

Your next question comes from Aaron Watts of Deutsche Bank.

A couple of questions for me. Maybe I'm parsing things too closely here, but it looks like a little bit of a slowdown in kind of the core advertising environment from 3Q to 4Q. Is that just the impact of a little more political? Or is there some other levers that are kind of pulling the strings there?

Well, there definitely was in a sort of a tight part of our geography core displacement due to political. So in Charlotte, with the NC 9 race in Louisiana, Mississippi, and to some degree, in Kentucky, with the gubernatorial races, there was some core displacement. So if you're -- if you take that into account, you're relatively flat there for the quarter on local.

And I think part of it may be just in the guidance ranges and rounding large numbers. I mean my personal expectation is that Q4 core, especially the local is, again, at the end of the day, going to be slightly better than what we've seen the first 6, 9 months of the year. So maybe a little bit more optimistic that it's -- again, getting a little bit better. And again, if our political ends up in Q4 doing what it did in Q3 and greatly exceeding expectations, then we're probably going to see some displacement a little bit, which will impact the core. But if that happens, again, it's a problem I'm happy to deal with.

And putting political aside, what would you say the biggest overhang is, as you speak with your salespeople who have feet on the ground in the markets that -- the concerns they're hearing from your advertisers?

I mean if you go on a category basis, auto is challenging. On the upside, legal has been very, very healthy for a long time, and we've got some upside on the finance side, which includes insurance, but generally, activity is, while, it's not great, it's not awful either.

Okay. And then just -- I had a bigger picture question for you guys. Curious if you anticipate the launch of a couple of these heavily promoted new streaming services this month and then obviously, a couple more coming next year to have any real impact on your business, whether it's from kind of audience rating standpoint or on the sub base and cord cutting. Just curious your thoughts on that?

I think we kind of -- we saw a note that said there are 27 over-the-top providers that have launched or are launching. It seems like a pretty crowded field. So I guess our takeaway is, whether it's -- whether there's 27 or 26 or 15 of these over-the-top providers in 2020. The economics of pushing people or should push people to get a cable or satellite bundle. It's a heck of a lot easier and it seems more cost-efficient than signing up for a bunch of these providers. The splintering off of the ecosystem, we're cautiously optimistic that's going to actually help us retain subs in the ecosystem.

Your next question comes from Steven Cahall of Wells Fargo.

So Kevin, maybe first, just on retrans. So to be clear, do you expect Q4 to be the low watermark for gross retrans between what you're seeing on the subscriber accruals and the repricing that you're doing the end of the year? And then I think net retrans decelerated a little more in the quarter. Is that just due to the FOX deal, and I was wondering if you have any commentary on maybe what net retrans might look like next year? Is it mid- to high single digits, low doubles? I don't know if I can pin you down, but I figured I'd try.

So Q1 started with a lot of billing adjustments coming in from the prior year. A lot of catch-up payments. We audited some providers. We explained it on the call for the Q1 results. And we're cautiously optimistic that Q4 is going to turn out better than what we've predicted. As I said, we think these folks who left the 2 big operators over the summer are going to start showing up again with payments, but we don't -- we can't accrue for it until we know it's there. Come Q1, we will have repriced roughly 1/5 of our sub base, and all contracts that don't reprice will have an escalator in the low -- very low double-digit range. So if we do nothing, our growth should grow by low double digits. And again, about 1/5 of the subs will be repriced under new schedule. So yes, I'd say, looking at this year, next -- this year or next year, Q4 is absolutely -- should be the low watermark as you referenced it. Two things happened, second half of this year. FOX repriced on July 1, for all markets. And if you go back to 2014, when we signed our last CBS deal, it was a 5-year deal that went through August 31, 2019. That -- we did a contract with CBS, that added a couple of years to all of those CBS market affiliation agreements about 2 years ago. The new prices kicked in on September 1, 2019. So our CBS has stepped up to a market rate on September 1 instead of the rates that we negotiated back in 2014 that we were paying in August of this year. So we have the CBS impact coming in the middle or 2/3 of the way through the third quarter, and we'll certainly see that impact through the rest of the fourth quarter. So that's why you'll see the net retrans is sort of ticking up a bit in Q3 and then especially in Q4 as we have a full quarter of CBS and a full quarter of FOX market rates. And looking at next year, our numbers show us growing net in gross, but we're not prepared to give any guidance. We have, again, some significant negotiations coming up in this year. And don't think it's appropriate to be giving guidance that may be used against us in those negotiations.

And then maybe a quick follow-up for either for Hilton or for Jim. When we think about the new share repurchase authorization, how much is this about just seeing the value in your shares in the market versus incremental positivity on the free cash flow that you're generating? And I guess if I think forward with more than probably $400 million in average 2-year like blended free cash flow. Do we think about like maybe 1/3 of this is something that you would want to put to repurchases versus debt reduction? Or any way to kind of frame debt reduction versus share repurchases would be helpful?

I think Hilton was very clear that the first priority, absent some sort of compelling M&A would be to debt reduction and delevering. But you are right that there is -- it's nicely over $300 million of free cash this year and in '18 we did over -- it was around 500-ish. I don't have the number right in front of me, but it was very healthy. So your 400-ish is maybe even be conservative as you move through '20. So I think we do clearly think the stock has been undervalued. And as Hilton said, we intend to be opportunistic from time to time. And -- but we also have the capability and the free cash to be able to do a little bit of both at the same time of reducing our debt and being maybe a little more strategic from a stock buyback standpoint. So I think you'll see us being -- trying to be balanced and a little bit will depend, I think, on -- especially over the next 12 months, where the broader market is valuing us. And if we're getting what we think is a reasonably good value. That might be one answer. And if we think we're being significantly undervalued, we may tip the scale in favor of the other direction a little bit.

And Steven, I think -- I do, I think that's fair. I think we're going to try to balance this out, but we're going to have to see how everything sort of matures out, but we're seeing the benefits of the synergies from the Raycom transaction, and our free cash flow is coming in really in a superb fashion. So we think we've got ample free cash flow to meet our targets to delever, while at the same time, giving some return to our shareholders through stock repurchases.

Your next question comes from Marci Ryvicker of Wolfe Research.

Kevin, do you get the Sling sub numbers on a delay from when you get the Dish DBS sub numbers? Or do both of those numbers come at the same time for the same month. And I'm obviously asking you because Dish reported this morning and Sling had a pretty big gain.

Yes. We were encouraged to see the DISH number for Q3 was a lot better than what we had expected. So that bodes well for the reports we're going to be getting over the next couple of weeks and months. We do not get Sling numbers though, Marci, because Sling is carrying O&O stations and not carrying affiliates. So they won't give -- there's no carriage of local TV stations, and therefore, no reason to send us reports or payments.

Got it. And then I am not complaining about the share repurchase at all, but at some point, Gray was a dividend payer. So curious if there's been discussions about returning to paying a regular dividend if that would depend on your leverage ratio. And why repo over dividend, why not both?

Marci, I will tell you, honestly, our Board discussed that subject matter yesterday in our Board of Directors' meeting. The question is when, not if, we will be returning to paying a dividend, and relatively soon. It's something that the Board weighs very seriously and something we are likely to give you some news on at some point in the future.

To follow-up, Marci, on that very quickly. If you recall a couple of years ago prior to the Raycom transaction, several quarters in a row, Hilton said exactly the same thing as we began to bring leverage down. So this was kind of like the '17, '18 cycle, and we were thinking ahead to the -- towards the end of '18 and he said -- kind of the same things then. And so I think we're -- now having done Raycom that shot clock got reset 2 years forward, and it's really kind of looking through the '19, '20 cycle and as we go farther and farther into '20, I think those discussions will pick up more and more importance.

Your next question comes from Jim Goss of Barrington Research.

And this might tie into what you've just been talking about, it seems to me that if you get leverage -- you're successful in getting leverage down to 3s by the end of 2020. That's really low relative to anything I can remember for lots of years. At some point, do you have to reprioritize your whole notion of what is sequencing of capital allocation because it -- I don't know that you want to get much beyond 3?

Jim, I think that point is very fair that if -- when we get leverage down to a very, very comfortable zone, it does allow the company then to reconsider and reprioritize its free cash flow, right? In the immediate short term, we're going to be a little more balanced. But if we end up in 2020, where we absolutely expect to be then I think are -- I think it would be very appropriate to be reconsidering those allocation priorities.

Okay. And this might be at Kevin, but I'm wondering, in terms of the sub reductions you've experienced, is there any greater move to antenna usage as some choose to try to find OTT services that would retain your exposure for advertising, but you'd lose some retrans sellers from that?

Jim, I think that's been going on for a number of years, probably going back to when broadcast just put up digital signals and we put out a very high-quality, high-definition signal that is much better than what you can get on a lot of cable and satellite systems. Folks have been discovering antenna. So we've certainly seen the OTT -- OTA penetration, over-the-air penetration, increasing every year, every market. The estimates are kind of all over the place. No one really knows. There's probably a lot of folks who have both the pay-TV subscription and an OTA TV somewhere around their house. You're right, as people move to OTA, that helps us with our multicast business, which is available to those folks and not generally available on cable. And it continues to reinforce the message to advertisers that we are the only provider that can reach 100% of the homes in the market. Our reach is better than advertising on the cable satellite folks who also sell against us because they can only reach a portion of the market. So it helps us with the sales. I will caution that we don't have real confidence that the rating agencies are measuring any of those OTA households yet, and that's a challenge that -- for the industry and a challenge for the rating folks. So we do need to capture those. And we think if we were -- if we had actually measured the OTA homes, we would see our ratings be a lot higher than what the ratings agencies are showing us now.

Okay. And my last question is, I think everyone has seemed to embrace the notion that political is going to be great in 2020. I'm wondering, is there anything that you think could go wrong that could derail everyone's optimistic assumptions?

President's getting impeached right now, the House and the Senate are in play. Virginia just split the state legislature. No. I mean the President is not going to get unimpeached. I don't see a momentum that would make the House or the Senate less competitive. If anything, I think the bias is in favor of becoming more competitive. Impeachment is only just starting. We don't have public trials yet -- public hearings. We don't have we don't have a trial in the Senate. This is going to become more of an issue and more divisive. And at any moment, a Supreme Court justice could retire. And that will bring out even more interest in the 2020 elections. So I think all the bias is in favor of being better, not weaker. So it has to go back to Trump. Trump's raised more than $150 million. That's about $150 million more than he'd raised at this point in the 2016 election, and they are -- every expectation is that they will be playing aggressively on broadcast television this time around, and the democrats are not going to make the mistake of skipping states like Wisconsin, Ohio, Michigan. And in fact, if anything, we see that the number of toss-up and competitive presidential states this time is wider than it was 2016, which is more, frankly -- more states in play. So that's good for us.

Even if you take what we announced this morning in terms of our political, that's an all-time historical record. And this is an off off-year. So we have absolutely no indication that there's anything other than robust optimism for next year's presidential election year. I know that I'm probably the biggest optimist on this call. But I expect really large numbers.

Let me just give you 2 data points, Jim, on Richmond, which we didn't even call out on this call earlier. Our NBC station in Richmond had 14 separate candidates on the air for State House. That's -- we've never seen that. We typically don't see a lot of spending from State House candidates. We had 14 on the air and -- on our NBC in Richmond. And it's another antidote election day, we all talk about -- it was Tuesday this week, but not Louisiana. Their governors' race was a couple of weeks ago, there's a runoff that takes place a week from Saturday. So we are still seeing spending in Louisiana. In fact, on Tuesday, we had -- we got -- remember, in Louisiana, we have very strong stations in New Orleans, Baton Rouge, Shreveport, Monroe and Alexandria. So we cover almost the entire state there. We got another $300,000 worth of orders in just 1 day, and that was an election day when everything else was quieting down and the money was still coming in. So the bias is in favor of it being better, not weaker.

Okay. Well, as concerned as you sounded a few years ago, you sound 180 degrees, the opposite this time around.

Thanks.

So guys, I would say '16 was the strangest year that I think any of us has ever been through in terms of political spend. I mean Hillary didn't spend in the blue states, she thought she had them. Trump was able to do rallies and get free coverage. It was a unique position that I don't really think we'll ever see again. And so I think 2020 is going to be -- I think it's going to blow through the ceiling.

Your next question comes from Dan Kurnos of Benchmark.

Just a couple of questions. Slim picking to you, Jim, I don't know if you announced the -- what synergy capture you had, had through Q3. But I mean you guys are crushing it on the expense side. So I mean you sort of mentioned that you could exceed that number even in year 1. So I'm just trying to get a sense of where you're at and how much of a delta we could see heading into Q4?

I think it's going to be hard to see much more in the Q4. Again, that core number, which you can see from the guidance table, when you back out the transaction related you move -- back out the reverse comp, is down significantly year-over-year. So I think that's your real indicator of your synergy realization. We've got a few more automation projects. One at a couple of stations that have a potential of still being completed this year, which will allow us to reduce staff a little bit in those places, but it's getting in -- it's kind of -- at that point, you're into the weeds, and it's -- while it's helpful, and it increases our efficiency, it's not really going to move those numbers, especially when year-over-year we're down $20-ish million already.

Got it. That's helpful. And then I guess, Hilton, probably the only question you haven't been asked is on the M&A front. Do you think there needs to be larger consolidation at this point in the later innings and your willingness to be on the other side of the table as a recipient of a bid?

Sure. I'm glad you asked. The answer to your first question is yes. The answer to your second question is, Gray is not interested in putting itself out for sale, but it is interested and candidly, I'd say, very interested in any one of a number of permutations that would grow the footprint of our company larger than it is today. And in the best long-term interest of our shareholders, I suggest that you look at what we did just 3 months ago with Raycom, we handled lots of social issues, we handled lots of political issues, we handled lots of operational issues in a very seamless, tactile and professional and personally professional way. You didn't see us coming in with those synergy numbers and raping and pillaging our TV stations because there's too many of them that are too dang good. But Gray is interested in any number of permutations. There's a million ways to get a deal done, and we are interested. Are we interested in picking up the phone and calling a banker and putting us up for sale? Not a chance. But we'll see what the future brings. And Gray can move on a dime, and has demonstrated its capacity to do so. Our Board is certainly in favor of different potential ideas, whether or not any of those come to pass, we don't know. We're also stubborn. It took us 16 months to get Sioux Falls done, but we stuck with it for 16 months, it damn near killed Kevin Latek, who wants everything done by the end of the day, all right? But we stuck with it. And so I hope I've answered that question on both sides, Dan?

Yes, no, that's super helpful.

Your next question comes from Michael Kupinski of NOBLE Capital Markets.

And first of all, I want to applaud the company for moving towards a cost per impression model. I think it's a logical move. It makes sense. But I have a couple of questions, I'm just trying to get my head around that. Historically, TV pricing has always been the umbrella to other mediums in the local market. And in moving to a cost per impression sales model, can you talk a little bit about the challenges of moving to this model, how have advertisers accepted it, how does your pricing stack up against the other mediums that offer cost per impression? Can you just give us some sense of what the variance in pricing might be?

Yes. So we're early in the game, right? I would -- I think the real upside is that when you sell local television, you have -- you're on the air 24 hours a day. And all of those quarter hours actually draw audience. And in the world we live in today, it's difficult to sell a 0.6 rating at 01:45 in the morning, even though there's an engaged audience there. And so the good news for local TV is that we have a big audience relative to -- relative to most other media. And being able to take our very large linear audience and ultimately, combine it with what's becoming an enormous digital audience is a great benefit to us. Again, when you're -- you've got a bunch of different measurement systems that you deal with today across these different platforms. Ultimately, the goal would be able to bring it all together. And once you can aggregate all those impressions in the same place, it's a significant advantage.

Got you. And does the move increase the potential revenue opportunity? I mean I'm just kind of looking at it from the potential positioning of the company to get a larger piece of programmatic or automatic buys. And then I'm just wondering, in terms of moving towards the cost per impression model, do you now compete with other broadcasters in terms of their rates? I'm just trying to understand how the industry is moving in that direction.

Yes. No, you'll still be competing with other broadcasters. But again, I think it's not just Gray, I think most of the other broadcasters, the news business, have other platforms where they get their audience. And ultimately, it's good for the entire industry to be able to utilize all that audience in a single sale. And by the way, it's really better for -- in my opinion, better for the buying community, too. One of our challenges is getting our large linear audience allowing or making it more accessible to buyers, and that's something that you probably read about the TIP initiative and other efforts in that area. So it's all sort of -- again, early stage, but it's all moving in the right direction.

Your next question comes from John Kornreich of JK Media.

Yes, Jim, real quick. Can you repeat what you said about the full year $2.1 billion estimated revenue. What did you say about expenses?

I said estimated expenses including the $74 million of transaction-related and that would also include noncash stock comp is about $1.5 billion.

So adjusted for that, it's more like $1.4 billion, but is that after corporate overhead? Or is that a BCF kind of...

No, that's -- that would include the corporate overhead number. And I also said that the full year operating cash flow, as we've defined it for years is tracking to be about $700 million this year.

Right. And that's an OCF? Is the $700 million an OCF, not a BCF?

Which would make a 2 year blend -- That's correct. That's an L.A. OCF, which would put the 2-year blended at call it, 800-ish zip code.

Right, so BCF?

No, OCF, on a 2-year blended average.

Two-year blended? Okay.

It may be around $800 million. In the '19 straight up OCF, just for the 12 months of '19, is looking to be around $700 million.

Right. And on free cash flow, I think you gave a range of $3.15 to $3.25?

Yes.

Is that just fiscal '19?

Yes.

And is that net of the $75 million transaction expenses?

It excludes the transaction expenses.

It already excludes it? Okay. That's it.

Your next question comes from Kyle Evans of Stephens.

One quick follow-on. I believe, Pat, you mentioned broadening the OTT focus of the company. I was hoping for a little bit more detail there. You have 3 competitors that have named OTT ad exchanges. Was just kind of wondering where you might go with this new focus on OTT.

Yes. So can't be terribly specific today, Kyle, but I would tell you that we're moving in that direction as quickly as we can.

There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Well, thank you, Cheryl. And I just want to take one quick moment to thank all of you again for attending this morning. We're very excited about what we have achieved so far this year. The synergy numbers are clear. But more importantly, the operational success of bringing these 2 great companies together, I think, has been sterling. We truly are one company, and we are working as one. And I'm enormously proud of the team of professionals in our stations and our shared services and our corporate headquarters and across the country, and what they've achieved and what they're building. And it really is an exciting and invigorating time for our company. Thank you for being here, and we will talk to you at the end of the year.

This concludes today's conference call. Thank you for your participation. You may now disconnect.