Gray Media, Inc. (GTN) Q4 2019 Earnings Report, Transcript and Summary

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

Thank you, operator. We've been informed that we have several people still in queue. So we've decided to start since we need to go through some preliminary things before we get into the meat of our discussion this morning, but I'd like to welcome you all to our fourth quarter 2019 earnings call. I am Hilton Howell, the Chairman and CEO of Gray Television. And during the week, when our markets continue to melt down, we're exceptionally pleased that you have chosen to join us this morning and spend your time with us. As usual, I'm joined today by our President and Co-CEO, Pat LaPlatney; our Chief Legal and Development Officer, Kevin Latek; and our Chief Financial Officer, Jim Ryan. We will begin this morning with a disclaimer that Kevin will provide.

All right. Thank you, Hilton. Good morning, everyone. Certain matters discussed in 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 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 will also post an updated investor deck to the website within about 2 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 our website are reconciliations of the non-GAAP financial measures to the GAAP measures reported in our financial statements. And now I'll turn the call to Hilton.

Thank you, Kevin. We are exceptionally pleased to report the results of the fourth quarter of 2019 and our full year results. As those of you who follow Gray already know, we completed our acquisition of Raycom on January 2, 2019, as well as several smaller acquisitions subsequent in the year. These transactions have positively affected our results. Our as-reported total revenue for the fourth quarter was $579 million. And our net income was $94 million. Our broadcast cash flow was $229 million. And our adjusted EBITDA was $216 million. This was simply a fantastic quarter in which we set new best ever records for quarterly revenue and broadcast cash flow and our adjusted EBITDA significantly exceeded our collective expectations. For the full year 2019, our revenue topped $2.1 billion, which was a $1 billion or 96% increase over 2018. Our net income for 2019 was $179 million. Our broadcast cash flow was $729 million. And our adjusted EBITDA in 2019 was $714 million. Our performance this year has set new records for annual revenue and broadcast cash flow. Our 2019 free cash flow was $273 million, which was 4% higher than in 2018 and 60% higher than 2017, the last off year of the 2-year political advertising cycle. On a combined historical basis that adjusts for our acquisitions and dispositions, our free cash flow for full year 2019 was $358 million, which was 19% higher than our free cash flow in 2017, which also significantly exceeded our previously issued guidance range. Turning to political. We again posted political advertising revenue that well exceeded what initially had seemed to be very high expectations. The fourth quarter produced $38 million of political advertising revenue. And for the full year 2019, our political advertising revenue was $68 million. For comparison, on a combined historical basis, which, again, adjusts for our M&A activity, our political advertising revenue was 171% higher in the fourth quarter of 2019 than the fourth quarter of 2017. And 2019's full year political revenue was 119% greater than 2017's full year political advertising revenue. We are bullish about political revenue prospects for 2020 and are off to a fine start this year. Our net income available to common stockholders, excluding transaction-related expenses and noncash compensation was $91 million or $0.91 per share for the fourth quarter and $198 million or $1.98 per share for the full year 2019. 2019 was not only a year of new milestones and records for Gray Television, it was also another year of Gray's local television stations and their great journalists making a real difference in their individual communities. Last year, our stations collectively won nearly 1,000 prestigious awards, including 281 AP awards, 200 State Broadcasters Association awards, 59 Edward R. Murrow awards and 73 Emmy awards. We could not be more proud of the great work of our colleagues from Hawaii and Alaska to Maine and Florida and a whole lot of places in between. In terms of the business, we finished the fourth quarter with the best showing for local and national core advertising in several quarters. Both local and national core revenue stabilized in the fourth quarter. And when you factor in the political displacement that crowded out our core advertisers in an awful lot of our markets, the quarterly results reveal that core advertising demand is growing again. Likewise, the first quarter of 2020 is showing the same stable core revenue despite heavy political demand and the greater-than-usual displacement this year felt by our ABC, CBS and NBC stations resulting from FOX broadcasting the Super Bowl this year. In short, we are very pleased with how the fourth quarter and the year finished, and we are very much looking forward to the new year. Pat, Kevin and Jim will now add some additional color to today's earnings release. And thereafter, I will make some concluding remarks and then open the line to any of your questions. Pat?

Thanks, Hilton, and good morning, everyone. Yesterday, Gray and Tegna jointly announced a strategic partnership of which Gray will acquire a minority ownership interest in Premion, and our local stations will gain access to Premion's OTT inventory as local resellers of its service. As many of you know, Premion is Tegna's industry-leading OTT advertising platform. In fact, Premion is one of the most prominent and probably the most local advertiser-friendly ad platform in the marketplace today. Through Premion, our stations will be able to sell inventory to their local advertisers on a broader way of streaming networks, platforms and devices other than our own station websites and apps. By using Premion to place their clients' messages alongside premium, long forum, live and on-demand video channels, our stations will be able to grow their ad revenue and better compete in the very competitive digital video space. To be clear, Premion does not change our digital strategy as we still control all the inventory in our own websites and apps. And in that regard, we have completed the integration of 2 really fine digital teams at Gray and Raycom, brought in-house the work previously done by outside digital vendors and now have a much stronger business under Gray digital media. These efforts are producing clear results. Just in terms of traffic in December of '19, we crossed 100 million unique users across our digital platforms for the first time. For the full year on a same-station basis, we saw a 20% increase in sessions, a 31% increase in video plays and a 32% increase in unique visitors. Then following a record-breaking December, we saw traffic grow even more in January, primarily because of severe weather events, to 119 million visitors. Clearly, our own digital products are resonating with local viewers. Just as importantly, we're doing a better and better job each quarter of monetizing this traffic, particularly video. In short, our own digital products plus the Premion reseller arrangement ensure that Gray's content and sales operations are exactly where consumers and advertisers are moving today. In terms of our 2 national programming initiatives, we started the year strong, and we continue to surpass our own internal milestones earlier than expected. First, the new linear multicast service called Circle launched on January 1 has made quite a splash among its target audiences. Recall that Circle is a 50-50 joint venture with Opry Entertainment Group, which is a subsidiary of Ryman Hospitality Properties. We and Ryman are investing intelligently to make Circle a success right out of the gate. The network launched with 17 original shows, and we have more in development. For comparison, the average basic cable network runs about 10 originals per year. You may recall that we were aiming to launch Circle in a bit more than 50% of U.S. television households. Today, just 2 months in, Circle is distributed by television stations reaching roughly 66% of total U.S. TV households, thanks to Circle's distribution partnerships with CBS, Tegna, Meredith, Gray and other broadcasters. Our second national program initiative is Full Court Press with Greta Van Susteren, which launched in September with a number of high-profile guests. The production is top-notch, and Gray is doing a great job of melding Washington policymakers with the resources of local television stations to create a different kind of Sunday political show. We're very pleased to report that Full Court Press is now cleared in over 82% of the country, including each of the top 25 markets. Circle and Full Court Press are off to great starts. We do not, however, envision launching any additional national programming networks or programs in the near term. Instead, we're focusing our efforts on making sure that these initiatives meet and surpass the goals we set for them. This brings me to our video production companies. This group comprises Raycom Sports, RTM Studios and Tupelo Raycom. Collectively, their revenues and expenses were flat between '18 to '19, and they produced about $12 million in annual positive cash flow. In the first quarter of '20, we're anticipating a decrease of approximately $16 million of revenue offset by a drop of $15 million in expenses. Revenues at the production companies will be down primarily because Raycom Sports no longer distributes and sells advertising in certain collegian football and basketball games. The revenue loss is offset by a decline in rights fees and associated production expenses as well as additional production revenue. After the first quarter, the production company's margins should improve, so we expect to see them produce a higher margin in 2020 than the last couple of years. I'll now turn the call over to Kevin.

Thank you, Pat. I'll begin as usual with retransmission. For the full year 2019, you saw in today's release that we posted $799 million of gross retransmission revenues on our combined historical basis. That figure was slightly ahead of our guide of about $795 million for the full year. Looking ahead, we currently anticipate gross retransmission revenue of $213 million to $215 million for the first quarter 2020. Retransmission revenues will be higher in the second, third and fourth quarters due to rate increases that are phasing into place during the first several weeks of this year. We are negotiating 2 major retransmission agreement at this time. Upon the successful conclusion, we will be able to provide guidance for full year retransmission revenue and retransmission expense. I do want to emphasize, though, that our gross retransmission revenue will be higher in each of the last 3 quarters of 2020 when compared to the first quarter of this year. At the beginning of this year, we had retransmission consent agreements expiring that comprise about 20% of our current paid MVPD sub base. The vast majority of our retrans contracts will be up for renewal and repricing over the next 10 to 11 months, covering about 56% of our current paid MVPD sub base. In mid-2021, we will renew and reprice contracts covering the remaining 24% of our MVPD sub base. These percentages are updated from the figures we provided earlier because they incorporate the movement of MVPD subs among providers as well as sub losses and the terms of recent agreements reached with MVPDs. I also want to add that our total sub base in 2019 was essentially flat from the beginning -- from the end of 2018. Turning to political revenue. We announced in our last call that we anticipate that 2020 will be strong enough to break the all-time high for political advertising revenue that we set in 2018, when we booked $235 million on a combined historical basis. Today, we are raising our full year political advertising revenue guide to a range of $250 million to $275 million. We feel very comfortable with this new full year guide. The fourth quarter of 2019 was only the latest in the string of quarters in which we encountered a much stronger political ad environment than we had expected going into the period. In the last call, we pointed out numerous positive developments and trends that we thought would support our then aggressive guide for the fourth quarter. And then soon after our call ended, Mike Bloomberg entered the presidential race and Tom Steyer noticeably increased his spending in South Carolina, where we have a very large presence. They had a noticeable impact on our results. Mr. Bloomberg and Mr. Steyer, in fact, were our top 2 political advertisers in the fourth quarter, but they did not account for all of the over-delivery on our fourth quarter political guide. To the contrary, if we exclude the spending from both Mr. Bloomberg and Mr. Steyer, our political advertising revenue in the fourth quarter still exceeded our guidance, the high end of our guidance by more than 20%. This tells us that their 2 campaigns are adding incremental money to a market that is already very robust. In 2019, we received about $13.5 million political advertising revenue from presidential campaigns, which is about 46% of the total. While a large figure for an off-year in the political cycle, remember that Gray has a strong presence in the 4 early presidential campaign states of Iowa and New Hampshire, Nevada and South Carolina. We also performed quite well last year in terms of the share of political buys that came into our markets. 62 of our 93 markets are audited by an outside accounting firm. The audit review at the legacy Raycom stations, which on the whole operate in larger markets than legacy Gray stations, increased their share of political spending in the market by slightly more than 1 percentage point in 2019 over 2018. The legacy Gray stations increased their political shares by 2 points in 2019 over 2018. Given that our stations in both of these groups are comprised of lots of top-rated local stations facing very strong competition, it is always an achievement to maintain shares. The fact that we increased shares on both sides of the company is a remarkable achievement that we believe is due in part to the new scale of Gray Television. Our earnings release puts 2019's political numbers in context by looking back at 2017, the most recent non-presidential election year. We've also gone back and looked at political advertising revenue in 2015, the most recent year prior to a presidential election. For this exercise, we created a same-station dataset consisting only of the stations owned by Gray prior to Raycom, United, KDLT and WVR -- WVIR acquisitions that all occurred in 2019. The same-station comparisons are striking. Fourth quarter 2019 political advertising revenue was 48% higher than the fourth quarter of 2015. Full year 2019 political advertising revenue was 37% higher than full year 2015 advertising revenue. In short, the-just-completed pre-presidential year was significantly better than 2015 and 2017, and that all bodes well for 2020. Moreover, the political landscape looks very different now than it did in 2016. This time around, both parties seem fully engaged and fully committed to the presidential campaign this year. Control of the Senate is very much in place. The Democrats need to flip just 3 or 4 seats to take control. The Senate is a political firewall by both parties if they lose the White House, which means we should see significant issue in super PAC spending in the most competitive Senate races. And Gray has the most top-rated local news stations of any broadcaster in the most competitive Senate races: Colorado, Arizona, Maine, Alabama, North Carolina, Kentucky and Georgia. In addition, some believe that Republicans have a real shot at flipping the House and thereby ending the Democrats' control of investigative impeachment powers against a reelected President Trump. Right or wrong, that perception could fuel even more political engagement in advertising. In total, the Republicans need to flip 18 House seats to take back control. In terms of Gray's footprint, we have 16 markets with an open house race this year. We have 12 markets with a democratically held seat in a district that went for Trump in 2016. For the current year, we estimate a range of $35 million -- sorry, for the current quarter, we estimate a range of $35 million to $40 million in political advertising revenue. By comparison, on a combined historical basis, we had just $9 million of political advertising revenue in the first quarter of 2018 and $26 million of political advertising revenue in the first quarter of 2016. In closing, it should now be clear that we are very excited about the prospects for political advertising revenue over the rest of this year. I'll now turn the call over to Jim Ryan.

Thank you, Kevin. Good morning, everyone. As usual, the earnings release and the 10-K that will be filed today provide a great deal of information. As always, we report results on a GAAP basis, which we call as-reported in our earnings release, and then we present additional information on a combined historical basis, which gives effect to the acquisitions and dispositions as if all of those had occurred on January 1 of '17. As we've already mentioned, we're very pleased with the overall results for the fourth quarter and full year '19, core local was flat to '18 in the quarter. But if you factor the political displacement, we think it would have been up low single digits. Core national was up 2%. We showed a marked improvement over previous quarters of 2019. As already mentioned, political was -- at $38 million was far ahead of what we anticipated. Our operating cash flow for full year 2019 was $718 million and free cash flow was $358 million, and both were nicely ahead of our previous guides of $700 million and $325 million, respectively. And as expected, our leverage ratio continued to decline to 4.35x on a trailing 8-quarter basis, netting all cash on hand at December 31, 2019. Turning to Q1 2020. Core local and national continue to demonstrate improvement after considering the continuing political displacement in select markets and also the year-over-year impact of the 2020 Super Bowl on FOX versus the 2019 Super Bowl on our much larger slate of CBS affiliates. FOX Super Bowl in 2020 was about $2.7 million for us versus $4.7 million on our CBS stations in 2019. But the FOX Super Bowl in 2020 was up 9.5% over the last FOX Super Bowl in 2017, which generated $2.5 million for us. As Kevin already mentioned, our Q1 gross retrans guidance of $213 million to $215 million is not indicative of the full year 2020. And the political guide of $35 million to $40 million reflects the increased exposure to the early primary states and is dramatically above prior year amounts. Looking ahead at the full year 2020, we are currently forecasting $2.375 billion to $2.425 billion of revenue, total revenue. Political advertising revenue, again, the range is $250 million to $275 million. We still expect the vast majority of that will fall in the fourth quarter of 2020. Total operating expenses before depreciation, amortization, gain/loss or disposals, we currently anticipate to be in a range of $1.53 billion to $1.545 billion. That range would include $20 million of noncash stock comp. And that $20 million, it would be split evenly between television and corporate. Based on the high side of our operating guidance, our operating cash flow for 2020 will be approximating $900 million. Our primary uses of the 2020 operating cash flow are currently estimated to approximate $194 million of cash interest; preferred dividends of $52 million; our capital expenditures, excluding the reimbursable repack expenditures of $80 million; and our cash taxes, we have increased our estimate to $80 million for 2020. That's a $40 million increase from our previous estimates of early to middle 2019. And it's based on updated tax forecast as we concluded the year. Our free cash based on those cash uses and a $900 million approximate OCF number will approximate $500 million. Our leverage ratio net of all cash at the end of 2020 is currently anticipated to range between 3.7 and 3.8x on a trailing 8-quarter basis, netting all cash and assuming no material M&A transactions in 2020. At this point, I'll turn the call back to Hilton.

Thank you, Jim. We are now a bit more than 1 year into owning and operating the much larger Gray Television. The integration of our companies and our people could not have gone better, and the integration is essentially complete. As we predicted when we announced the Raycom transaction in June of 2018, we have smoothly integrated 2 great companies, made the combined operation more efficient, generated robust cash flow, launched new programming and revenue initiatives and have rapidly delevered the balance sheet. Today, this team remains on the lookout for more and large and small M&A opportunities that would grow our company in a prudent fashion and make Gray an even stronger player in the broadcast industry. However, we think that the M&A market is and will likely remain fairly quiet for the rest of the year, as political advertising revenue opportunities keep potential sellers on the sidelines. We are exceptionally proud of the company we have built. We have among the best margins, efficiency, portfolio quality and people, most importantly, people at any media company today. While the market had begun to raise its valuation of the company prior to all of this macroeconomic news and virus concerns over the past week or so, the market still has not shown a full appreciation for the right future that we see ahead. Quite simply, we believe that recent market prices do not fully reflect the value of Gray stock because the market continues to undervalue our company. The broadcast business for all of our many challenges and deep-pocketed unregulated competitors remains an exceptional and great business. As you know, we have recently reported some insider stock purchases, a $150 million stock repurchase authorization, the purchase of 1 million shares in the open market and $200 million of debt paydown. These moves should all confirm our collective belief in the future of our company in 2020 and beyond. In fact, this year, I have personally invested in excess of $1 million in the common stock of this company. Absent an opportunity for further significant M&A over the next year, deleveraging remains the first priority for Gray for at least the rest of this year. At the same time, our Board believes that in the near future, we may be able to continue our deleveraging activities, while at the same time begin returning more capital to shareholders by reinstituting a quarterly dividend. Our Board has not reached a decision to resume the dividend just yet. It has, however, decided to take up this issue formally when our total leverage ratio, as defined in our senior credit facility, falls below 4x on a trailing 8-quarter basis after netting our total cash on hand. If this were to occur in the second half of this year, as we anticipate it will, the Board will then consider whether conditions will permit us to return to paying quarterly dividends. So operator, at this time, we would ask that you open the line for questions.

[Operator Instructions] And our first question comes from the line of Dan Kurnos from The Benchmark Company.

Nice print, guys. Just, Kevin, thanks for all the color around retrans. I think timing was certainly an issue. I know you have at least one big one in Q2. Is it all -- are the 2 major ones you're negotiating now, are they both Q2? Or can you give us some more color on that? And then just around -- just generalized sub assumptions. I know you guys are probably not going to talk too much since you have -- you've got to have the discussions on rate first, but just your generalized sub assumptions for the year, and if you're willing to go back now ahead of these negotiations and talk about sort of the modest net improvement in net that I think you guys called out last year would be helpful.

Dan, like I said, we have 2 major agreements that are under negotiation. We expect you will see the impact of those starting in the second quarter of this year. That's why Q1's retrans -- gross retrans will be lower than the gross retrans you'll see in Q2, 3 and 4. Our sub trend for the year was down very low single digits. If you exclude the 2 providers who had a number of drops, high-profile drops this summer, our sub base was actually completely flat, and that includes MVPDs and OTT. Internally, we model declines because as you know from our guides and working with us for many years, we are always conservative. What we have said on retrans and gross is we expect to see both increasing this year, not given -- and cannot give a more specific guide until we have the bigger deals resolved. We also reminded folks that we essentially renewed all of our retrans contracts in 2014 with the networks. And those imposed -- those were great rates when we -- looking back in retrospect. But each of those deals expired at a certain point in 2019 and had to be repriced. And we repriced all of our NBC's new modern days or sort of market rate on January 1 of last year. FOX repriced in July 1 of last year. CBS repriced on September 1 of last year. And there are some ABCs that were randomly scattered throughout the year. Point being, our net retrans took a step-up last year because we were -- we knew this. We've been telling folks about this for a couple of years, that 2019 would be a step-up year. And then 2020, the impact of those step-ups will be felt by all 4 networks, the entire year. So net retrans is going to be more challenged this year, certainly much higher than -- rephrase that, our reverse comp will be higher this year certainly than it was in 2019 because of the full year impact of the higher rates. That's how we've been saying for some time. We expect net retrans will grow and gross retrans will grow this year over the prior year.

Got it. That's super helpful. And then just Hilton, appreciate all the color on the capital return, especially around the dividend. I just -- not to put words in your mouth or paraphrase the wrong way. I just want to understand if this is more of just a timing issue. Because obviously, the stock market right now being uncertain is presenting you with a rather hefty free cash flow yield. And so just the decision to maybe get more aggressive on the buyback early on, is that maybe being tempered by your expectations around political and how the year shapes up because it's so early? Or I mean are those conversations really just ongoing and fluid?

Well, they're really ongoing and fluid. We look at things every quarter. Our Board discussed it yesterday. We have been quite aggressive in the fourth quarter with our stock repurchase and bought in an excess of 1 million shares and then have reduced debt. We'd like to see debt come down even more aggressively, and we think, in the first and second quarter, it will. And then I think we'll be able to do even more in terms of shareholder return, absent any sort of really significant M&A activity.

Our next question comes from the line of Kyle Evans from Stephens.

A few core questions. Could you, Jim, maybe take a minute and talk about some of the underlying drivers behind the growth in local and national, and maybe some special attention on national, given how weak it's been kind of on a trailing 3-year, 4-year basis? And I have a follow-up.

Yes. In fourth quarter, we definitely saw some -- again, some sequential improvement in auto. It was still trailing, but it was better than the first 3 quarters of the year. Local services had been very strong and continue to be strong, both in fourth quarter and first quarter. So that's your legal, your medical your financial category is really kind of driving it there. And I think in national, again, auto is a little bit better, looking a little bit better in Q1 than certainly it had been in '19.

What is the overall pacing looking like for 1Q?

It's -- if you factor for the political displacement and the lower revenue on FOX for the Super Bowl versus CBS, I think we're up somewhere around low single digits. I think the January was a little bit soft out of the gate. February, look -- I'm sorry, January was a pretty good month, I misspoke. February was soft. That is -- a lot of the Super Bowl flip-flop based on footprint. And then March is looking pretty good right now, but it's still a little early.

Kyle, it's Pat. To underscore what Jim said about the services piece of our business, if you just combine legal with the health side, those 2, in aggregate, are roughly the same number, will be close to the same number as auto in first quarter of '20. So that should give you an idea of the growth in those areas.

Got it. And you gave a 4Q auto, Jim, could you kind of talk about where it's pacing in 1Q and what your outlook for 2020 is?

I think we -- for all of 2020, excluding the fourth quarter, we'd probably expect to see it up very low single digits, flattish to up a little. Q4, we'd expect it to be down because of the crowd-out. We expect all core to be down in Q4 because of the crowd-out. Just how much crowd-out would be, almost anybody's guess right now. For the quarter, still a little soft out of the gate, but better than it had been most of last year. So it's down -- it's pacing right now down just a little, which, again, is better than the mid-singles or worse paces than it had last year.

Our next question comes from the line of Steven Cahall from Wells Fargo.

Maybe, Jim, first, we could unpack the $500 million free cash flow guidance. If I just kind of think about on a combined historical basis, you've got political revenue up around $200 million in 2020. I think the 2019 free cash flow base is around $360 million. I know political revenue isn't 100% margin. But maybe just help us think about what else might be going on, on the cash flow side, such that, that free cash flow number doesn't look more like $360 million plus $200 million or a high percentage of $200 million. Then I've got a follow-up.

Well, as I said earlier, we're expecting an operating cash flow number of about $900 million. As Kevin commented earlier, we're getting full year impact of all the network agreements we renewed and extended last year, this year. And we've said that repeatedly for over a year now that that was going to be a pretty big impact in 2020. The $194 million of cash interest, $52 million of preferred dividend is pretty straightforward. The $80 million of CapEx, excluding reimbursable repack, is pretty consistent with what we've been saying all of last year that would be for this year. I think the -- really, the biggest change is the approximate $80 million of cash taxes we're now expecting versus if you had asked me that question about this time last year, mid-summer last year, my expectation would have been it was probably more like $40 million. So that -- the change in the cash tax estimate is probably the biggest delta from what you're expecting and what we're now pointing to. There's really not much cash taxes. We still have a -- just to add to that, we still have a sizable NOL as of 12/31. And we're still taking the benefit of that through '20, and my expectation would be '21, it's probably gone by the time we start '22 but that was certainly a valuable asset that we picked up in the Raycom acquisition. And we are making -- we made good use of that in '19, and we'll be continuing to make good use of that in '20 and '21.

Okay, that's very clear. And then, Kevin, I think Q4 retrans was a few percent below where you were at the beginning of 2019. And you said subs were roughly flat. Is the delta in there like some of the just flow-through or the blackouts? Or anything else you can help us with, just to think about that cadence in 2019?

Yes. Steven, in Q1, we had a number of billing adjustments from 2018 that were the result of sort of a number of things that came in. We had some estimated payments that turned out to be too low. We had some results of audits of MVPDs that resulted in makeup payments. We also had changed some of the collection and processes for a portion of the MVPD piece that Raycom had. So we had received -- I think we addressed this in the second or the third quarter call, the first quarter benefited from a number of onetime-only positive adjustments. Every first quarter, we go through more adjustments, than the rest of the year as some of the distributors audit their numbers, and it's a sort of an adjustment true-up. Sometimes that is negative, and sometimes it's positive. Last year it was several million dollars of positive. So that was a onetime only-Q1 event. And we said it is generally almost a steady state last year, but for some subs moving around, right? If somebody leaves a very, very large MVPD and goes to the smaller MVPD and paid us a higher rate, that's beneficial. If they move from a smaller MVPD to a bigger MVPD, that could keep the sub but reduce the revenue. So those fluctuations have always occurred. That MVPD marketplace is competitive. Those guys are big advertisers on television. So it's a competitive market, and subs do move around. And that's why we're not going to have sort of a perfect quarter-to-quarter. But Q1 was definitely higher because of positive adjustments that were made that quarter.

Great. Very clear. And then just a last one maybe for Hilton. I mean the whole space has been devalued over the last few weeks. Could you maybe talk to us a little bit about what you might see in the private market? And is there still an active private market do you think in broadcast with different valuation metrics for companies like yours?

Yes, and I'm sure Kevin will follow up with me. First, in terms of this, I kind of look at the broadcast stocks as they should be a safe haven. If people get quarantined, they're going to be watching television, all right, guys? So this is a good place to move your money. We have no exposure to China or South Korea or Iran or Italy, for that matter. I know this morning's announcement of something in Sacramento has sort of discombobulated the markets. But at the end of the day, guys, I mean, we have 15,000 people just this sort of in the last 12 months that have passed away from the flu, and we have yet to have a fatality in the United States on any of this new virus that's out there. We're always looking at any kind of M&A opportunity. There still is absolutely a private market out there. We don't have anything to tell you about right now, either large or small, but we're always looking for good opportunities and quality operations. Kevin, do you want to follow up with that?

Yes. I will just say, remember, there's not a lot of data points to say what's the multiple in the private market because there's just, frankly, people are sitting on the sidelines, as Hilton said in his remarks. And so there's not much that people are talking about selling. You're going on data points that can vary from an operator of some TV stations with no local news or maybe local news produced in one location 3,000 miles away to a robust local news heritage station like the kind that we would typically buy. So it's a little hard to kind of figure out to say what multiples might be in the private market today because there's a complete dearth of data points. So I just want to make that clear. It's not that we -- it's not that we're unable to answer the question, because we don't want to answer the question that's there's just no data points to answer the question right now.

Our next question comes from the line of John Kornreich from JK Media. John Kornreich;JK Media;Analyst: Quick questions. That $900 million number, that's -- is that BCF or OCF?

It's operating cash flow, John. So it's -- John Kornreich;JK Media;Analyst: Okay. Right. On retrans, you said that 56% will be done by the end of the year

I said 56% over the next 10 to 11 months. John Kornreich;JK Media;Analyst: Okay, okay. So there's a good case to be made, I guess, that OCF in '21 should be higher than '19 because the gross retrans will be much higher than '19, and I assume the programming costs will be somewhat stable because it hits you in '19 and '20.

Well, John, we're not going to have $250-ish million of political.

No, he said 2019. John Kornreich;JK Media;Analyst: No, versus '19

Oh, sorry, '19.

So John, yes, it would certainly be our expectation that '21 would be better than '19. Just as we said -- we had said we expected '19 would be better than '17 on a combined historical basis. John Kornreich;JK Media;Analyst: Right. And one other question on retrans. You made very clear that gross retrans should be higher second, third, fourth quarters. Two questions in regard to that. By the end of the year, could you be approaching $250 million?

I don't know until I know what the rates are in these last 2 deals, I don't know how to do that. The ones that are up are very, very large MVPDs. John Kornreich;JK Media;Analyst: Okay. And so all you're willing to say right now is it will be higher than $215 million?

It will definitely be higher than $215 million each quarter going forward. John Kornreich;JK Media;Analyst: Okay. So it's very clear that the gross will be trending up near term. The net margin, which was 42.5% in the first quarter versus 45%, 46% last year as the contracts worked in, is 42.5%, going to be going lower in the next few quarters? Or is it stable?

It should be, if the gross goes up. Remember, half of our contracts are fixed fees with 2 networks and half our percentages with 2 networks. So at a high level, I would expect that if gross goes up, our margin should improve a bit. John Kornreich;JK Media;Analyst: Should improve? I was thinking down?

I believe we will keep a little bit more of the additional dollars that we bring in because some of that retrans space, the CBS, FOX space is fixed. So we bring in an extra penny on a CBS or FOX, we keep it. So some of -- obviously, some of the retrans contracts are going to bump up CBS, FOX revenue. Others, have bumped up ABC, NBC, while obviously trigger a percentage basis. So that's not going to be necessarily helpful. John Kornreich;JK Media;Analyst: I got it. Your clarification in this call on retrans was extremely helpful. As you know, investors get super spooked on any little change in retrans.

[Operator Instructions] Our next question comes from the line of Jim Goss from Barrington Research.

Kevin, as long as you're continuing to get into retrans, I thought I'd ask a couple more things. Are the latest deal time frames in retrans getting shorter? And can you compare it with the length of the contracts you're doing with the networks, whether they're about the same length or longer or shorter? I know they don't happen at the same time.

Yes. One of the networks only does 3-year deals with few exceptions. The other network for us has generally been on 5-year terms, sometimes a little bit longer if we're trying to catch up some of the stations that we acquired or a little bit shorter to get everybody on the same end date. So generally, the big 3 contracts are on 5-year terms. Our retrans contracts are 3 years, and we have been very generous with extensions. We extend our negotiations a lot. We don't believe in arbitrary deadline. I think since our -- typically, when we extend a retrans contract, the agreement is that the new rates will apply retroactively. So whether we get a deal done on January 1, 1 minute into the year, we get the deal done on March 15, in the long run, it doesn't matter to us from a dollars and cents standpoint. From a relationship standpoint, we think it's helpful to be respectful of the fact that MVPDs may have other negotiations that are more sensitive, more time-consuming. And frankly, sometimes negotiators actually have to deal with personal issues and want to take vacation or deal with their kids. So we try to be very, very accommodating. At the end of the day, we're going to get the contract done. We need them. They need us. We like to keep a very positive relationship, and I'm happy to say, the time that I've been here, many years now, we've only had one dispute. That lasted 4 days, and we have renewed with that operator, I think, 3x since without any problems whatsoever. So I say they're roughly 3 years, but keep in mind, sometimes it takes us a bit longer to negotiate it. I don't think the period to get those done has taken -- I don't think it takes any longer than it used to. The issues we deal with are, I think, more complicated than they used to be even just 3 years ago. The nonfinancial issues of distribution and rights are, frankly, it's just a lot harder to think through all that and word it and come to agreement on terms. But we're getting there. I don't think it's necessarily extending the time period for negotiations. Is that helpful, Jim?

Yes, I'd expect nothing less than respectable negotiations out of Gray Television. The -- maybe one other thing on political. I was wondering it is getting pretty interesting, and there is a lot of extra money from Bloomberg and Steyer. Have you -- are there any assumptions you've made as to how long everybody is in this fight, whether it runs through the conventions or whether it's short? Is there any assumption that goes into what you've been talking about in that regard so far?

Yes. From our standpoint, it's kind of -- if a nominee is essentially known after Super Tuesday, that theoretically means that we see general advertising spending on both sides starting pretty early because the candidates are framed. On the other hand, if the candidate is not known by the Super Tuesday and it takes another month or 2 or it even goes to convention, then you've got a lot more primary spending. And maybe the other side spends more money attacking a variety of opponents. Our view is it's 6 one way or half dozen another. There is not much way we could really say one is better than the other from a Gray standpoint. Gray standpoint, we're uniquely positioned to benefit kind of either, I think, whatever happens in presidential. And remember the presidential, as important as it is, still it's less than 1/2 of our political revenue. And this year, I don't think will be any different. We have really, really high-profile Senate races, and frankly, a bunch of House seats as well that are going to be the majority of our political revenue this year.

Let me just -- if I could just add to that. I think in Kevin's comments, there were a couple of things that I think are really quite remarkable. If you take our fourth quarter numbers that we released on political, and you exclude the Democratic billionaires, we're still up over 20%, excluding them, from our highest level guidance across the board in Q4. And then with regard to what we have, obviously, we are in a remarkable position that we have such strong stations in states where big Senate races are coming up. And then we've got, in our markets, 16 House seats that are open, which are going to be massively competitive. And once again, just to reiterate, out of the 12 markets, out of the 18 the Republicans have to retake, where they've got a Democrat currently in that seat, the Trump period in 2016, we've got 12 of the 18. So I think it's going to be big across the board and for the duration.

Our next question comes from the line of Davis Hebert from Wells Fargo.

Just 2 questions. One is with some comments from Discovery about the Olympic Games potentially being canceled, I don't think that's the base case right now. But can you give us a quick one-on-one on Olympics inventory for a typical NBC affiliate? And then second question is encouraging to hear the leverage commentary be below 4x by the end of the year. Are you comfortable there, and what's your sort of long-term leverage target?

Well, we actually heard that the Olympics are going to continue. I think that Japan and the Olympic Committee actually have confirmed that recently this week. And so it's going forward. We had to battle the Zika problem in Brazil the last time around, and that was a bunch of hullabaloo that didn't -- never really materialize.

As far as the leverage goes, yes, we think it will be by the end of the year, 3.7 to 3.8 range on an L8 basis. Certainly, in the 3s like that, we are -- if we're not the lowest levered in the peer space, we're among the very lowest levered. I mean I don't know exactly how everybody else is going to come out, but it's getting down to very comfortable levels for us. If there wasn't any large M&A, it probably still come down a little bit more. At some point, a little farther down the road with leverage coming down, we may be up, maybe, and I stress the maybe, maybe opportunistic on the preferred stock. So we'll look at that. But certainly, anything south of 4 is getting into a very comfortable range.

Okay. And the preferred is redeemable at par, is that correct?

Yes. In whole or in part, at our sole discretion at par. I don't know if Kevin wants to answer your -- you had a question about inventory in Olympics.

No, I will let Pat take that. So the inventory load in Olympics, NBC this summer, I mean it will be meaningful, will be meaningful revenue for us.

Yes.

We should probably have some political advertising in there. But if Olympics goes away, we're still going to see political advertising. Political advertisers will find the way to our local news and our syndicated content. It could be -- no way to quantify what happens.

Yes, it would be difficult to quantify. Look, you usually get a little left in Olympics, but there's going to be a ton of money out there either way. And so -- and we're quite a ways off. So we'll see what happens.

And we have no further questions in queue. I'll turn back to the presenters for closing remarks.

Well, listen, I just want to thank everyone for taking your valuable time today during another tumultuous day in our markets. Like I said, we're a great safe haven, so come back to the broadcast stocks. Thank you, and we'll talk to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.