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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the TEGNA Fourth Quarter 2018 Earnings Conference Call. This call is being recorded. Our speakers for today will be Dave Lougee, President and Chief Executive Officer; and Victoria Harker, Chief Financial Officer.
At this time, I would like to turn the call over to Jeff Heinz, Vice President, Investor Relations. Please go ahead.
Thanks. Good morning and welcome to our fourth quarter and 2018 full year earnings call and webcast. Today, our President and CEO, Dave Lougee; and our CFO, Victoria Harker; will review TEGNA's financial performance and results. After that, we'll open up the call for questions. Hopefully, you've had the opportunity to review this morning's press release. If you have not yet seen a copy of the release, it's available at tegna.com.
Before we get started, I'd like to remind you that this conference call and webcast includes forward-looking statements and our actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. This presentation also includes certain non-GAAP financial measures. We've provided reconciliations of those measures to the most directly comparable GAAP measures in the press release and on the Investor Relations portion of our website.
With that, let me turn the call over to Dave.
Thank you, Jeff, and good morning, everyone. 2018 was a great year for TEGNA and we ended the year on a very positive note achieving record fourth quarter revenues and free cash flow. For the fourth quarter, total reported company revenue grew 31% year-over-year to $642 million. Fourth quarter revenue was driven by $40 million or 22% increase in subscription revenue and $130 million increase in political revenue.
When excluding political advertising, non-GAAP revenue was still up 5% year-over-year, in line with our expectation of mid-single-digits growth. Our portfolio is evolving towards the higher percentage of subscription and political revenues and we continue to benefit from the strength of our stations and industry-leading subscriber trends. Comprising approximately half of total company revenue in 2018, our subscription and political revenue streams was both experienced record fourth quarters were key drivers of the 16% increase in full year total company revenue.
Our stock [ph] trends continue to be a very positive story and a key driver of TEGNA's shareholder value. The combination of continued increases in our existing agreements and the approximately 65% of our subscribers that will have been repriced between the fourth quarter of '18 and the end of this year, as well as long-term affiliation agreements with NBC and ABC through early 2021 and late 2023 respectively give us excellent visibility into the continued growth of the stable revenue and cash flow streams.
As significantly, I'm pleased to be able to report again that TEGNA's key subscribers, again, combination of traditional and MVPDs and virtual MVPDs increased year-over-year for the eight consecutive months, a trend unique to TEGNA. I'd highlight that these high margin revenue streams, subscription revenues and political spending are largely immune to any external macroeconomic pressures giving us natural barriers and straw predictable free cash flow. Going deeper on political, we achieved all-time records in political revenue of $140 million for the fourth quarter and $234 million for the full year. 51% and 47% higher respectively than the prior mid-term election segment 2014.
As I alluded to last quarter, there are two key trends that we have from our confidence for future political growth in 2020. It starts with a fact that our strong stations are ground zero for political advertisers as '18 approved. And as '18 also approved, there is a new normal of higher voter passion and engagement and in turn, a new normal in the levels of fund raising and spending. Advertising spending for Presidential candidates next year is expected to reach an all-time high, and our local stations with our strong local news will continue to be the preferred platform to reach targeted constituents; simply put our audiences vote in very high numbers. These dynamics combined with our strong Presidential station footprint gives us confidence in unprecedented high margin political spending in 2020.
And speaking of our stations, they are the most honored and innovative stations in the country, and we are leveraging their strength for future organic growth in 2019 and beyond. Our constant innovation efforts are expanding and growing the audience as we reach. And on the client side, we continue to expand further into our local markets with an unprecedented suite of customer products through TEGNA marketing solutions, and our Premion OTT advertising solution. Together, our focus on expansion of both our consumer and client base is bringing us new audiences and new dollars.
Moving now to our capital allocation philosophy; we follow a disciplined process in evaluating opportunities to create value for our shareholders. On the M&A front, we are strategic in our analysis and proactive in our pursuit of opportunities with a completion of the acquisitions of WTOL and Toledo, Ohio and KWS in Midland-Odessa, Texas. We now cover a third of all U.S. TV households and as part of our Texas strategy, a state with one of the strongest growth trajectories, if not the strongest in the country, we now cover 87% of Texas.
In the quarter, we also deployed record free cash flows to reduce debt to under $3 billion, and an increased flexibility to capitalize on future internal and external investment opportunities. Going forward, we'll continue to focus on innovation and execution to drive growth and value creation for our shareholders.
Before I turn the call over to Victoria, I'd like to share some important -- couple of important business updates from the last few months, and included in the beginning of this year. In December, we've reached a multi-year carriage agreement with Dish TV, and in January with Verizon Fios; both of these agreements underscore the continued strength and growth of our subscription business. And as I referenced earlier, we renewed our affiliation agreement with ABC and nearly 5-year agreement through late 2023 to further solidify our very strong top four portfolio.
In closing, 2018 was an exemplary year for Tegna. Our unique and evolving mix of high margin subscription and political revenues and strong free cash flows have positioned the company to create value throughout market cycles and reinforce our operational excellence. As a reminder, we fully expect that our high margin sub and political revenues will account for approximately half of our total 2-year revenue beginning in 1920 and a higher percentage thereafter. We have best-in-class strategic initiatives in motion to support organic growth and we continue to maintain a strong balance sheet and will continue to execute our disciplined M&A strategy to drive long-term value.
And with that, I'll pass the call over to Victoria.
Thanks, Dave and good morning, everyone. Thanks for joining us. As Dave mentioned, our record fourth quarter results reinforce our operational excellence, as well as confidence in our strategy. Before I cover our consolidated financial results and capital allocation for the quarter, I'd like to review just a few special items.
The special items for the quarter included FDC [ph] sectional repacking and reimbursement of about $2.4 million which reduced operating expenses. This was offset by non-operating expense items of $4.2 million which included $2.2 million of transaction fees primarily related to our Toledo, Ohio and Midland-Odessa, Texas television station acquisition, and the $2 million impairment charge related to an equity investment.
Before I discuss our financial results, I'd like to address the Premion refunds that we announced in December 2018. Our internal team proactively identified the system issues that affected certain 2018 Premion audio selects targeting segment and determines it was not delivered correctly [ph]. In turn, we corrected the issue immediately and decided to issue full refund to impact our customers, totaling $16 million for the year. The financial impacts of the adjustments is reflected only in our fourth quarter 2018 results and also includes a total reduction to revenue and EBITDA of $10 million for previously reported quarters. This adjustment obviously would not reflect in our guidance given in November but does affect the reported growth rates for the quarter.The cash refund issued to customers will impact the free cash flow during the first quarter only by roughly the same amount.
Now, onto the fourth quarter consolidated financial results. Keep in mind, that most of my comments today are focused on Tegna's performance from continuing operations on a non-GAAP basis which provides clear insight into our financial drivers and operating results. Also as a reminder, our advertising, marketing and services revenues exclude political advertising which we've broken out separately. You'll find all of our reported data and prior period comparatives in our press release.
Now for the results. Total company revenues for the fourth quarter on a reported basis was up 31% year-over-year which is at the midpoint of our 30% to 32% guidance range provided last quarter. As you've seen from our release, this was driven by political and subscription revenues which grew $130 million and $140 million respectively. Total revenue without the benefit of political was up 5% year-over-year despite being negatively impacted by political displacement.Also, keep in mind, that the 31% total company's revenue growth rate is on a reported basis including the $10 million Premion revenue adjustment from prior periods. It's important to note that as per that adjustment, revenue growth would have been 33% ahead of guidance.
As Dave mentioned, the net year-over-year subscriber growth trends we've seen over the past eight months give us great confidence in the ability and stability of our subscriber rates. As we've discussed before, these sticky and high margin such produce annuity life cash flows which allow us strong forecasting visibility. We expect another year of healthy revenue growth in 2019 and are providing subscription revenue guidance of a percentage increase in the mid-teens for the year.
Turning now to political advertising. As Dave noted, our full year 2018 political revenue of $234 million was the highest level and type of history thus far including any presidential election year and 47% higher than the prior mid-term election cycle. Political revenue in the fourth quarter was also a record $140 million net of $5 million in Premion adjustments, substantially higher than the 2014 election, up fully 51%. As expected, strong demand for political advertising leading up to the election impact the level of non-political TV advertising. Advertising and marketing services revenue was 7% lower in the quarter compared to the fourth quarter last year due entirely to crowd out. When adjusted for this advertising marketing services revenue was up slightly and improvement from prior quarters. Notably, December, which was not impacted by crowd out experienced and even stronger advertising marketing services growth rates up low to mid-single digits.
Additionally, the outer period Premion adjustment is worth three points of advertising and marketing services. When adjusting for both political displacement and the Premion adjustments, advertising and marketing services revenue in the fourth quarter was up low single-digits.
Now to provide some further color on specific revenue category performance trends. Several categories were up or flat within the quarter when adjusting for political proud out. Retail, services, medical media, Telecom entertainment and home improvement were all positive. Other category which is automotive, restaurants and packaged goods were lower in the quarter but showed improvement from prior quarters. Lastly, we continue to see strong demand for Premion evidence that this unique offering remains a solution for advertisers looking to gain OTT inventory access and premiere targeting and reporting capabilities.
Moving now to expenses given our record political advertising, we expected to see higher fourth quarter non-GAAP operating expenses, sort of my cost of sales. Beyond this, our operating expenses was 16% higher the quarter on a GAAP basis, primarily driven by higher programming fees. As a reminder, these fees include reverse compensation paid to networks which increased alongside growth and subscription revenues. On a same-store basis, excluding higher programming costs, investments in Premion content and transformation and increased cost of sales tied to revenues cost were only up less than 2%. On a full year basis, operating expenses increased 11% year-over-year, equivalent to about a 1% increase on a similar same-store basis when you exclude the aforementioned items.
During the fourth quarter, corporate expense was $11 million down from $12 million last year. With a full year, corporate expenses on a non-GAAP basis and excluding depreciation were down 11% year-over-year, totaling $47 million in line with guidance of under $50 million.Adjusted EBITDA for the quarter was a record $273 million, fully up 61% and well ahead of consensus. Adjusted EBITDA excluding corporate expenses was $284 million producing a very healthy 44% margin. As a result, we generated $167 million of free cash flow, a record for the fourth quarter. A record free cash flow quarter was driven by significant high margin political and subscription revenues as well as description revenues.
In continuing our commitment to maintain a strong balance sheet, we reduced debt to $2.9 billion ending the quarter with debt leverage of approximately 3.9 times. The strength of these cash flows will continue to allow us to pay down debt and invest in new products initiatives while funding new acquisitions.
Now turning to first quarter and fullyear 2019 guidance; in effort to help you forecast for future growth we're providing several key quarter and year ahead financial guidance metrics. As a reminder, this quarter we won't have the benefit of Olympics revenue across our NBC stations and political advertising as we did last year, both of which we over index in. Also, Super Bowl this year aired on CBS stations versus NBC last year, on CBS portfolio reaches two thirds of the households that are in BC portfolio reaches. As a result, we expect first quarter total reported company revenue growth to increase low single-digits excluding their comparative impacts of cyclical events like the Olympics Super Bowl and political revenue. We expect revenue growth to be up in the mid to high single-digits range.
From an expense perspective, we expect first quarter to increase mid-single-digits or flats up slightly excluding programming expense. However, excluding Premion investments and acquisitions, all other operating expenses are projected to be down mid-single-digit percent's. So here's some key organic guidance metrics for the full year in 2019. We expect to see full year's subscription revenue up mid-teens based on sub trends and the timing of MVPD renewals which occur in the back half of the year. Corporate expenses are expected to total approximately $45 million. Our expectation for depreciation is in the range of $55 million to $60 million and amortization to be a roughly $35 million. We expect interest expense to be in the range of $190 million to 195 million.
We anticipate capital expenses between $70 million and $75 million, which includes recurring CapEx of about $30 million to $40 million and about $35 million in non-recurring projects including $17 million in mandatory channel repacking or headquarters relocation and a new facility in Houston, and our effective tax rate is projected to be about 23% to 25%. We project free cash flow of 17% to 18% of revenue on a two-year 2018 to 2019 basis and 18% to 19% of revenue for 2019 to 20%. Lastly, we expect to end the year with leverage of approximate four times. As a reminder, over 90% of our debt is fixed at attractive rates and therefore, not at risk in a rising interest rate environment.
Building nowadayscomments regarding the current M&A environment, TEGNA continues to follow a disciplined capital allocation framework that balances our desire to enhance our growth profile for strategic accretive acquisitions with our commitment to a strong balance sheet, organic growth and return of capital shareholders through dividends, delevering and opportunities to share repurchases. Capital allocations, decisions are driven by our focus on maximizing shareholder value and we consistently allocate capital to the actual options that offer the highest medium to long-term returns.
As Dave said, we'll continue to participate actively in M&A processes for assets that fit for us within current industry regulatory constraints. We've demonstrated we can drive synergies from the right assets and have the financial and balance sheet strength to fund them. However, we'll always remain disciplined as to our evaluation with our primary objective being to decreased incremental shareholder value on top of what we can achieve organically.
In summary, our current results as well as our outlook for 2019 demonstrate we're making strong progress in diversifying our revenue and cash flow streams and reaffirm our confidence in our long-term strategy. As a result, the continued growth of less cyclical profitable businesses only serves to enhance our ability to create shareholder value. We continue to believe the stability and growth potential of our business is under appreciated and are excited about the opportunities ahead.
With that, I'd like to open it up to questions. Operator?
[Operator Instructions]We will take our first question from Marci Ryvicker of Wolfe Research. Please go ahead.
Thanks. I actually have two topics. So, the first one is on Premion and I just want to know or understand exactly what happened. And I think I get the financial impact for the fourth quarter where you took a $16 million charge for the year. $10 million was related to previous quarters, so only $6 million for the fourth quarter. But Victoria, I did not understand what you said about the first quarter impact if there is one. And then does any of this change your outlook on Premion for 2019 or beyond?
So, let me take sort of what I'll call the first and third question there and then Victoria can talk about the first quarter issue. But simply put, one of the products that we launched last year, it did not fully deliver the impressions that we promised even though total impressions were delivered is that is discovered internally and we immediately reported at ourselves and made the decision, rather than try to go back to what impressions were delivered or not, was that the right thing to do was simply give full refunds to our advertisers, and that's what we chose to do. But the issue has been fixed and all of 2019 campaigns will be delivered is sold. So now talk about the future of the business. Actually, we're more bullish now on it than ever. For obvious reasons, with consumer changed OTT platforms, the opportunity is bigger than it's ever been, right. And so we are really, really excited about what we're seeing.
We obviously did have a little hiccup at the end of the year, so we're recalibrating what the year was going to look like, we're not going to provide guidance at this time. We broke it out last year to give the market a sense of the size and growth since it was new to TEGNA. But we don't report it as a separate line item. But the business is performing very, very well. I think we're going to see very strong double-digit growth in this year and we expect to exit the year with a mid-teens margin on the business overall.
And Marci, just to follow-up on your point, you heard exactly right relative to the P&L impact for the fourth quarter, it was about $10 million for prior periods and about $6 for the fourth quarter and all of the effect P&L impact is taken in the fourth. So we didn't push it back to prior theories and it had the result of impacting what would have been 31% to 33% growth rate became 31%. My point in terms of first word, there's no further P&L impact. I wish just to remind you that the actual refunds being given to advertisers would flow through and just the first part of it's roughly in the double-digits, sort of $10 million to $12 million. Some of it's cash, some of us [indiscernible], but just as a reminder for your modeling purposes that that would occur cash basis in the first quarter.
And then my second question is unrelated, but the given Nexstar tribune and now Cox being acquired by Apollo, how do you think about the M&A pipeline for TEGNA specifically and maybe for the entire environment for the space?
Well, you didn't ask, but I will say I think private equity interim is space sort of reinforces the value of the broadcast business model, which I think is another positive understanding of the future value of the sector. I won't speak specifically to the Nexstar divestitures, but there is a lot in the pipeline right now and we're not concerned about the pipeline over time, Marcy. I pretty think it's much better chance than not that this year the cap will be raised by the FCC and whatever that number is, let's ballpark in between 50 and high 70s, let's say, either way it's going to open up new opportunities for new collaborations and combinations. So, in the scheme of things that cap change, is probably not very far away. So, overall, we're not concerned in the long-term.
And our next question will come from Kyle Evans with Stephens. Please go ahead.
Thanks for taking my question. You gave a lot of crowd out adjusted numbers for the quarter, Victoria. Could you help us understand exactly how you were calculating those numbers?
I'll take that one, Kyle. Good morning. So, bottom line [indiscernible]. So, it's a rough estimate. Kyle, obviously, it's a little bit of an art more than a science, but if we roughly put it to be about seven points against advertising and marketing services. So is the next question sort of like where did we see how the quarter was without it?
So, we actually some more sequential improvement. I think that we spoke to when we look at December. December was up in sort of low mid-single-digits, which had none of those impacts. Auto, when we do the adjustments for the political piece, just continued to sequentially improve a little bit and improved a little bit more in the fourth quarter. It wasn't up for the quarter but it wasn't down much and it was up in December exiting the year. And we saw a lot of strength and a lot of other categories where we hadn't before. So overall, based on what we can tell when we exclude for crowd out it was a positive trend.
And, Kyle, just as a reminder we had in our previous earnings call, we had estimated that 7% to 8% in terms of the crowd out and that's basically what we saw. So we're just reconciling for you in these pockets of basically net of that crowd out that we previously had estimated. That's what the impacts would have been. So, in total, our trend in marketing services up low to mid-single-digits, net of the period Premion adjustment it was worth about three points of that.
Dave, you just said that you thought we could get the cap rates. I think we all kind of collectively thought we would get it last year and we were wrong. Can you probably weigh that and maybe talk about what do you think has changed or what might have to have the committee thinking different?
[Technical Difficulty]
I think I'm having some technical difficulties on my side with my phone here. I'm sorry, I'll get back in queue.
[Technical Difficulty]
Kyle, if you would like to redo your question.
Dave, I think you heard my question, I just didn't hear your response.
Well, which one? I…
The second one; we didn't hear the second question.
I don't think we heard your second question.
So my question was why do you think Pie [ph] and the commission are going to do the cap raise this year, we all kind of expected it last year and we didn't get it, we're all wrong. Just kind of trying to get you the probability of what your thoughts on a cap raise is a little bit more.
Yes, I think last year there was a lot of noise in the system about one particular transaction, obviously that is going through the pipeline and gotten a lot of noise, both, in the press and VOJ [ph] and even at the FCC, that kind of potentially slowed that down but now I think it's important to the commission to -- they've got a co-generative view coming up at the end of this year anyway, and I think they want to do it separate from that and they need it separate from that. And I think they don't want to get into the political cycle of 2020; so I think the commission would be poised to act this year and your probability waiting output at well over 50% in our view.
I apologize for the technology problems by the way. Sorry, Kyle.
I'm glad I didn't cause them. We used to hear quite a bit about Hatch and G/O, I know you guys have kind of consolidated those, there is a name change. I saw a kind of reduction in force in the 3Q; could you give us an update on your digital marketing services?
Yes. The only reduction in force was just to a reallocation of resources towards the products that were created in the higher margin. So we just downsized a couple of small products that weren't producing good yield for us, but we coordinated what used to be called G/O Digital, and Hatch into one coordinated group for our clients, and from both go-to-market strategy and fulfillment, called Tegna marketing solutions which I referenced in the script and [Technical Difficulty].
Please standby, we're experiencing some technical difficulties. Please standby, we're still experiencing some technical difficulties. And please go ahead.
Hi operator, this is Dave Lougee. We apologize for the -- whatever the technology problem is. As Victoria referenced in our script, we moved to a new corporate headquarters as part of our corporate downsizing, everything has been working perfectly until this call. So with that, let's recontinue.Kyle, did you -- were you able to hear my answer or not?
I was not.
Well I apologize but you can hear me now all right
Yes, Sir.
Yes, simply put I'll do a shortened version of it. You know I think the infamous transaction last year that didn't go through, created a lot of noise in the system and the press at the OJ[ph] and then sort of quite a little bit of paralysis of the FCC values that as my work but this year we have much better than 50/50 competence that they will do something with the Cap this year and they want to do it presumably well ahead of the election cycle next year.
Kyle, I'll just close the loop on your question on reductions in force that was in the third quarter. It wasn't just into the Geo digital, we also have the ongoing SPAC[ph] office. Validation and streamlining that we're doing so they were also reductions of force related to that.
Okay, thank you.
Our next question from Steven [ph] from Royal Bank of Canada.
Hey, can you hear me okay?
Yes, we can we can.
Two for me, maybe first; your 2019 free cash flow outlook as a percentage of revenue .it looks to be pretty strong I was just maybe wondering if you could let us know what your political assumption was in there because I'm guessing that's driving some of that and then one of your peers called out some weakness that one of the auto OEM. I was wondering if you could just maybe touch on auto as a category a little bit and if there's anything, in particular, you're seeing at the OEM level worth calling out? Thank you.
Now let me take the second one first at the at the OEM level was actually seen some good players being up in the tier1 side but Dodge Jeep or Chrysler is probably the one you've heard called out before. That's been affecting us all year because without that the category would be positive in of itself. And your other question was around yeah around political so we're not guiding to political as to a number but you would be right as I said in my scripts that we believe it's going to be a very strong year for political which is high margin as is our subscription revenue business which well, we're going to see some significant increases on as well.
Our next question from Daniel Kurnos with The Benchmark Company.
Dave, I guess maybe it did sort of a timely question here just on premium what kind of the refund you had to issue due to the sort of the tech issue or whatever you experienced? there's no you're not seeing -- you're not seeing any backlash in the market place from that there's no lack of confidence I'm assuming and even though you're not giving guidance can you at least sort of directionally help us think about you know expectations for growth for premium this year.
Yes, actually -- well, actually I appreciate the question because the fact of the matter is, our clients were very appreciative of the way we handled it and many of those clients had already booked orders for this year and I've kept them and other clients have come back with even larger orders. so we actually earned determine-- yes as you probably know trust and credibility in the digital advertising space is at a premium and that's always been frankly one of the hallmarks of our business because I'm like competitors who outsourced to third-party programmatic services and other, we-we get our inventory direct from a select group of publishers that we pre-qualify so our advertisers are a 100% confident that they'll be advertising in environments, the kind of environments they want to be advertising in. so it's actually certainly wasn't a way we wanted to build our trust.
I'd do over again but it's turned into a very much into a positive as I said earlier to Marci's question just why we recalibrate. We're not at the point of giving guidance relative of the full year but like I said we're very confident very strong double-digit growth overall and the demand for the product is stronger than ever for sort of the obvious consumer market place reasons.
Just to give a little more color to Dave's point and I answered Marci relative to the cash refund which will be flowing through the first quarter. just case in point and number -- most of them are through agencies much device that we did get a number of requests for credit and or make good instead of cash so it's sort of preparation of their continued confidence in the product. And so then the total number of -- from a cash refund standpoint will be lower than the PNO[ph] impact.
Got it, that's helpful, thanks.And then, I mean, Dave, like obviously you guys are outpacing the industry from a sub perspective. I'm assuming that's mostly because of your large market footprint but you know we've heard varying degrees of problems from the satellite providers and there's been some flow through on a linear for some of your peers but generally speaking you know some trends have been healthy. You guys you clearly I -- you know outperformed that. you know what gives you sort of the confidence into visibility that you know in -- embedded in your guidance which I think you know is pretty reasonable the re-trends side that some trends you know to sort of stay healthy through the balance of this year?
Yes. So to be clear we're not saying for sure that we'll continue to see your over year growth in total subs right but I think what we're clearly saying is that we're ever the industry is at, whether it's going to be a growing cater GAAP between us and the industry real large. And that because of our large market profile we'll have a lot more stability than people really assume because it is a quite a different story for our large markets compared to our smallest markets where -- which is not in the smallest markets aren't much of our sub account overall but it's -- again we're not saying positive overall we're just saying that we're going to have a different trajectory than a lot of...
And then just maybe one more if I could since you're [indiscernible] on the SCC mode today I guess. just out of curiosity do you suspect that they will eventually rule on Gray's acquisition of Sioux falls because that could theoretically set precedent for you guys to go after too big force in a market even though clearly there are you know economic benefits to Gray making that acquisition and it's clearly a much smaller percentage of revenue in that market.
Yes, I have no point of view or opinion on a specific matter involving other company.
Yes, but in general, you think they'll actually start allowing to be forcing markets, it's really more of the general question.
Yes. I can't speak to that as a result of that I think the two Big Fours in market have been more or a little bit held back temporarily by some more of DOJ activities, but on that fronts, it was heartening to hear that head of the Antitrust Division is going to hold a public hearing, I think on May 3, if I recall, suggesting that broadcasters may have a point that the current DOJ Antitrust Division's definition of the video marketplace is outdated and that as -- for instance, the big Internet players should be considered when considering the definition of market. So I think that's pertains to be a good sign, potentially releasing that [indiscernible] on the two Big Fours over time.
And we will move on to our next question from David Joyce with Evercore ISI. Please go ahead.
If you could please provide some commentary on other aspects of the addressable advertising like where you are in the tip initiative. When do you think that will start having an impact on your ad sales? And then just more broadly, are you seeing a shift of advertisers who had been allocating to digital wanting to come back to TV for the broad reach? Thanks.
Yes. To the back end of that question, I don't think we know yet, because I don't think we have yet -- we're going to it, but I don't think we've yet successfully solved the problem for all the agencies as an industry. The good news as we can, but it's a little bit, it's taking obviously, technology to get there, that's why the tip initiative has been so important. The tip initiative has been very successful in creating open standards, so that it's not -- no single platform is the gatekeeper. On the buy side, the agencies have been using a company called Hudson MX, which they have -- we're starting to put a lot of money through. It's now -- upon us to start to create the same efficiencies on our end, but I think you'll see, I can't say how much dollars will move this year in '19, but I know that there is a lot of consensus among the Broadcast Group's, it's really about the large markets in the near term where the big national dollars are, and I think there is a very growing consensus among those companies, as well as the agencies that it's in our mutual best interest to get this figured out. So, I think the tip initiative has been working sort of on the technology piece. And now, we need to work on the business rules and business terms as an industry.
And we'll move on to our next question from Craig Huber with Huber Research Partners. Please go ahead.
My first question, if I could, what percent of your paying subs are for renewal this year and what about next year, please?
We've got about -- by the end of this year, mostly in the fourth quarter at the end of the year, Craig, about 50%.
And what about next year, please?
On the next year about another 35% I believe. So between the end of this year and the end of next year which is important to note to the question asked earlier about our free cash flow as a percent of revenue will be repricing 85% of our subs between the end of this year and the end of next year.
And just some clarity, you're suggesting nearly all that 50% is in December this year or is there some more earlier on?
I'm not. So there is a little bit of it that will be at the beginning of the quarter, less than half. So there will be some impact in the fourth quarter, the majority of that though won't be impacted till next year.
I'm sorry, I'm just so unclear, that mean it's almost all in the fourth quarter, you sort of...
There will be no impact on any of those subs in any quarter, but the fourth, but of the 50% probably about a third at most will impact the fourth quarter.
And then on, maybe I missed this, but your total paying sub count in the latest period, what was the percent change year-over-year, please, with and without the OTT subs?
Actually, I don't have the breakout right now with and without the OTT. But I'll give it, the total numbers can -- again work these are in a bit of in arrears, but we've been averaging in different months between plus 1.5 to plus 0.4, they've been varying month by month.
And then also, can you just talk a little bit further if you would the outlook for advertising -- core advertising in the first quarter year-over-year. I think, a year ago, you said the Super Bowl and Olympics was $24 million incremental a year ago, but maybe with or without that adjustment, I'm curious how things are pacing for ad revenues?
Yes. So the Olympics last year and against a little bit of an estimate, but we put that at about $14 million incremental for us last year. Craig, I remember, that's what we get on our NBC stations minus what we lose on our CBS and ABC stations. And then the Super Bowl was -- the NBC last year, which we have more homes. So, we did about $2 million more last year on the Super Bowl than we did this year, so the net impact for the two events together, we're putting a roughly $16 million as a negative impact quarter-to-quarter.
And then, how is the core advertising?
It is.Again, we've got a lot of noise because of the Olympics, but overall, notably we're positive in January and March and auto, which continues to incrementally improve. We're positive in those months. With auto, we think we're probably exclusive of the sports events around flattish on auto for the quarter, and notably, Media and Telecom is a lot of turnaround from us, I don't know about the industry. But we've got a lot more competition in the video space with OTT charter and COGS now and home improvement, banking, finance, medical, package goods and travel tourism are all very, very strong as well.
And then my last question if you sneak it in Dave, you mentioned you've expected subscription revenues up mid-teens this year, what about the net retrans for the year?
Expect that to be up in low double digits as well.
And our next question will come from Michael [ph] from Noble Capital Markets. Please go ahead.
Thank you for giving me the opportunity. Other broadcasters have indicated CapEx, upgrades ATSC 3.0. At this point, have you allocated any CapEx upgrade to stations?
We have. We just -- we've got a few stations in for this year, we've already part of Phoenix test. We got about $2 million total allocated right now, that might flow a little bit based on the timing of some market tests. But we are prepared to be opportunistic as we see the opportunity to move to a change markets.
When I talked about the recurring versus non-recurring CapEx, the bulk of the $35 million sort of non-recurring -- the $70 million repack but there was a little bit as Dave mentioned as well.
Got you. And how many stations will you have upgraded then?
I don't have the number off the top of my head. I think it'll be around 5 to 6 probably by the end of the year if I recall, so we counting Phoenix, which we did last year. But that number could change again depending on opportunities. It won't have a significant -- even adding a few stations that will not have a significant impact on CapEx overall, if we have to wholesome dollars from somewhere else to do it.
And of course, you just renewed your ABC contract, can you update the time line for the other networks?
Yes. We've got CBS up at the end of this year and then, as I said before, we've got NBC up in early '21 and ABC in '23 and Fox, what you -- it's less than 2% of our homes is actually up middle of this year.
And then just as a reminder, if people weren't writing that down, we have updated on the website on our investor presentation.
And the Company's guidance, corporate expenses for 2019 still coming down a little bit, is that still flowing through the corporate headquarters and reductions there or can you -- is there any other color that you can add there?
No, it is. It's basically the ongoing consolidation and back office support. In addition, once we fully run through the double rent for our new operating facility here approximately 10% that's another $2 million or so of reduction year-over-year in expense.
And so we should still see our corporate expenses in 2020 to be kind of flat to down?
Yes.
Yes.
And then following on Marci's question about the M&A environment, the Company previously talked about swap opportunities, can you talk about station swaps at this point, is that still on the table?
Yes, I think it is. To the earlier question about the Big Fours opportunity, I think the little bit of the paralysis on that relative to the issues I said earlier, probably slowed that down a little bit. I also think because there is vertical M&A happening out there right now and there are opportunities. Groups are kind of looking at that vertical M&A, but I do think, as you will more and more, you may see opportunities for groups to do things together, but they've got overlaps, there needs to be divestitures and swaps could be a way to get that done. But I think right now because of the vertical M&A focus and I think a shared industry belief that the cap is going to get raises as the people are focused much more on vertical right now.
And our next question will come from Doug Arthur with Huber Research. Please go ahead.
Yeah, thanks. There was a lot of discussion. I think about political in 2020. Given the heated environment, could you see a better kind of off-year political number in 2019 than you have traditionally or is that not realistic?
We're not -- it's a great question, Doug. We're not forecasting it. I think when we are as good as our presidential footprint is we don't have a lot of exposure to the very early primary markets, right now we don't have, we got a little bit of money in Maine from New Hampshire. But we're not in the Maine and we're not in Boston, in Manchester. So I think if you're in those markets, you see stuff in the fourth quarter of this year, but I wouldn't be surprised if toward the end of the year, there's even presidential stranding for states after that, that starts in December but we're not counting on it.
And then Victoria, in terms of the cadence of subscription or retrans, you had a nice step-up in the fourth quarter, you cited escalators and OTT. I mean what sort of was the primary driver of the pickup in growth in the fourth quarter, I mean clearly most of your big renewals are on the comment this point?
Yes, we had a renewal relative in that period and I think we've previously discussed that externally as well.
Yes we had disagreement, as well as -- but the disagreement was retroactive to its expiration date, which did affect the quarter, Doug.
Addition of Verizon, -- I get it where Q4 impact and I mean is the OTT, I mean, you obviously you've talked a lot about the sub impact of that, is that a meaningful driver of these numbers at this point?
It's not a huge number overall to our dollars, but it's meaningful to the gap with traditional MVPD, its Craig's question earlier, because it is helping. Our traditional sub losses are not the same as other companies, but again because of our large market exposure, but we also have more virtual MVPD than others, but it's still on a relative basis, it's not that large.
And we will take our next question from Jim Goss with Barrington Research.
I think back to the time as network television viewing was declining in terms of numbers of people are viewing individual shows and there is a scarcity premium for the advertisers that cause them to pay higher prices. I'm wondering if all the trends you're seeing, including the OTT, subscription aspect it's stabilized your viewing, has had any impact on ad rates?
I think ad rates were a function of supply and demand in the quality of the programming, Jim. So I think as it relates to network programming per se, it's absolutely true that there are more and more options for consumers for scripted programming, right. And so I can't speak to the network's ad rates, but we still get very good rates for premium prime time programming, but a lot of that program doesn't have the same ratings it once did a few years ago, right. So, but the big event still though, right, you still got a great premium for the Grammy's, the Oscars and live sporting events like the NFL etcetera. So on a cost per point basis, on a cost per viewer that we still get very good rates because even with reduced ratings of network programming, it's still by far the broadest reach vehicle to advertisers.
And as a reminder, tying that question together with the subscription trends, individual cable channels are losing distribution at very fast paces, so there's growing CAGR in GAAP and delta of distribution between broadcasters and cable channels and that's got implications on where ad dollars go overall. And a reminder for us that network prime exclusive of sports is now down to like around 11% of our total revenue, 11% to 12%, so we're not as affected by that. Our local news is really, not as exposed to some of those same trends and we continue to get very good rates for that.
And sort of in a related event [ph], aside from the local news and some of the other day part programming initiatives like DBL Live and a few other things; are there -- can you talk about how that is catering a bigger share of the potential dollars, net of whatever programming cost you might have? And also, are there other programming initiatives who are working on to serve a supplement of the initiatives announced to this point?
Yes, we are looking at other programming initiatives, none to be announced yet at this point but we do have some interesting ones in the pipeline, we are always -- and we are going to be very focused on targeted content opportunities because we do see some unique opportunities in the marketplace, we'll talk -- we will probably be talking more about on upcoming calls. DBL is doing well, they have to be patient with shows like that, I thought I was just looking at the ratings last night, that around our markets in February and we're seeing some nice growth in day time which is not an easy place to find an audience, performance is better in some parts of the country, now they are [indiscernible] but it is growing. And -- so for us it's not a significant investment and of course it's replacing prior programming cost. So, we're being patient with it and we also think that as we do M&A, the ability to leverage that initiative along with our other strategic initiatives is very cost effective and strategic way for us.
And we will take our final question from [indiscernible].
I just wanted to see if you were able to provide a little bit of quantification around your comment that your subs are growing; can you give us a sense of how much and has there been any change in the pace of growth over the past few months? And could you unpack a little bit about what's happening with traditional versus the new kind of online bundles? And is there -- I know your -- I think your revenues are subcounted something on a lag; is there anything you see -- I know this gets to a point you can't grow the grace [ph] earlier about the projection for the year but is there anything you see that would cause that trend in sub-growth to be somewhat different as we look into the first quarter?
Yes, I think we're only about two to three month lag, so I don't know. I mean, we actually -- we do have seasonal cyclicality, so it's worth it, but it doesn't look exactly like the MVPD, so sales have to take that into account. We've got people in the Tampa's and Phoenix's that are there in the winters and not in the summers. So we've got some cyclicality and it doesn't always look like the MVPDs for that reason plus we're on a 60-day lag sometimes. But in terms of the overall trends, so yes, our traditional is declining although the rate of that decline is not increasing. And then add in, so it's starting about a year ago, the virtual MVPD subs and so we've seen -- again, over the last 8 months, a pretty steady trend. We've got -- 8 months ago we had a plus 0.3, we had a month with plus 1.1, we had plus 1.5, we had plus 0.4; so you have all the months in the last 8 months that had been in that range and it's not been a downward trend, right.
So -- but that being said, based on what the MVPDs have been reporting on the traditional side, we're prepared for the fact there could be some increase and the rate of decline in the traditionals, and we take that into account into our assumptions but my earlier point is, regardless our trends will be better than people think.
Okay, that's great. Thank you.
Did that help?
It did, for sure.
Thank you.
Thank you.
With us no more questions, thank you everyone for joining us and to conclude, we had a very successful year as indicated by the results we just went through. Our revolving mix to these higher margin revenue streams that we just talked about in detail and our sustained execution of our organic and inorganic growth opportunities and initiatives position us to grow significant share value for our shareholders. So we look forward to speaking with you on our first quarter earnings call on a different phone system. If you have additional questions, please reach out to Jeff Heinz at 703-873-6917. Thank you, everyone.
And this concludes today's conference. Thank you for your participation, and you may now disconnect.