Sinclair Broadcast Group, Inc. (NASDAQ: SBGI) Q2 2022 earnings call dated Aug. 18, 2022
Corporate Participants:
Billie Jo McIntire — Assistant Vice President of Investor Relations
Christopher Ripley — President & Chief Executive Officer
Rob Weisbord — President of Broadcast and Chief Operating Officer
Scott Shapiro — Chief Financial Officer
Lucy Rutishauser — Chief Financial Officer
Analysts:
Barton Crockett — Rosenblatt Securities — Analyst
Avi Steiner — JP Morgan — Analyst
Lance Vitanza — Cowen & Company — Analyst
Presentation:
Operator
Good day, ladies and gentlemen and welcome to The Diamond Sports Group Quarterly Update Second Quarter 2022 Conference Call. [Operator Instructions]
It is now my pleasure to turn the floor over to your host, Billie Jo McIntire, Assistant Vice President of Investor Relations for Sinclair. Ma’am, the floor is yours.
Billie Jo McIntire — Assistant Vice President of Investor Relations
Thank you, operator. Participating on the call today are Chris Ripley, President and CEO of Sinclair; Rob Weisbord, President of Broadcast and Chief Operating Officer of Sinclair; Lucy Rutishauser, Executive Vice President and Chief Financial Officer of Sinclair; Scott Shapiro, Chief Financial Officer and Chief Operating Officer of Diamond Sports; and Steve Zenker, Vice President of Investor Relations at Sinclair.
Before we begin, I want to remind everyone that supplemental information for today’s earnings call is available on Sinclair’s website sbgi.net on the Diamond financials page under the Investors menu.
Now I’ll take — make the forward-looking statements disclaimer. Certain matters discussed on this call may include forward-looking statements regarding among other things, future operating results. Such statements are subject to a number of risks and uncertainties, actual results in the future could differ from those described in the forward-looking statements as a result of various important factors, such factors have been set forth on the Investor Information page on Sinclair’s website and are included in Diamond’s second quarter unaudited financial statements and management’s discussion and analysis of financial condition and results of operations, which can also be found on the Investor Information page on Sinclair’s website.
Diamond undertakes no obligation to update those forward-looking statements. Diamond uses Sinclair’s website as a key source of Diamond’s information, which can be accessed at www.sbgi.net. A webcast replay will be available on Sinclair’s website and will remain available until Diamond’s next quarterly update call.
Included on the call will be a discussion of non-GAAP financial measures, specifically adjusted EBITDA, adjusted free cash flow and leverage. Diamond considers adjusted EBITDA to be an indicator of the operating performance of its assets. Diamond also believes that adjusted EBITDA is frequently used by industry analysts, investors and lenders as a measure evaluation. This measure is not formulated in accordance with GAAP and is not meant to replace GAAP measurements and may differ from other companies uses or formulations.
Chris Ripley will now take you through our operating highlights.
Christopher Ripley — President & Chief Executive Officer
Good morning, everyone. The second quarter was an exciting one for Diamond, as it launched into the direct to consumer marketplace. On June 23, we had a soft launch in 5 regions covering the MLB teams in Milwaukee, Miami, Tampa, Detroit and Kansas City. As with most soft launches, there was minimal outside spending or promotion, while we ensure the technology and consumer experience are excellent.
We are very pleased with how the soft launch has gone so far, the product is performing well with minimal technical issues and the consumer service team response time has been excellent. Despite almost no marketing, early subscription volumes have been better than we expected and subscriber engagement on the platform is strong.
We are seeing that D2C users are viewing approximately 33% more minutes than what we’ve seen from the TV Everywhere user. We offer a 7-day free trial for the D2C service and 74% of those who subscribe to date have converted to paying subscribers as for the free trial expired. The pricing of the product is $19.99 per month for a monthly subscription and $189.99 per year for an annual subscription. These are early days for Bally Sports Plus, but the results have been encouraging.
On September 26, we expect to launch direct to consumer for all of the remaining Bally Sports RSN markets and we’ll be ramping up the advertising and promotion around the launch. Consumers will get all the content airing on the linear or sense as well as interactive capabilities like stats overlays and in game engagement features. The experience is the same as our TV Everywhere subscribers receive and enhanced capabilities will roll out in subsequent releases.
We’ve been testing some of those elements where viewers can participate in polls, trivia and other interactive experiences. The initial findings show that a significant percentage of viewers take advantage of these features, engaging activity beyond just looking at the screen. This interaction is an important aspect of this business model, engaging younger viewers and enabling us to grow incremental revenue streams.
Our first quarter actions to strengthen Diamond’s liquidity position, including raising new funds and deferring a portion of Sinclair’s management team feeing will allow Diamond to build and grow its D2C offering.
Now I will turn it over to Rob to go through some of the operating highlights.
Rob Weisbord — President of Broadcast and Chief Operating Officer
Thanks, Chris. DSV’s net revenues for the second quarter were slightly below our guidance, on slightly higher distribution, subscriber churn, fewer games played in the quarter than forecasted, which lowered the ad sales and a push back of D2C launch date by almost a month, from what we expect and in Sinclair’s last earnings call. To ensure quality control and make sure fans receive the best possible experience.
Categories that performed well and showed growth over the prior year included services, retail, sports betting, while auto and food stores were weaker. Total ad sales versus the prior year were down high single digits, excluding Marquee, reflecting 20% view of games played for second quarter of 2022 versus second quarter of 2021. On a per game basis, however, ad revenues were up mid-teens and higher rates and more favorable mix of gains.
Total third quarter advertising is expected to be up mid-teens over the same period last year, excluding Marquee in the prior-year period, driven by expectation for higher rates and higher game count versus previous year period. Upfront ad sales for the Bally RSNs were strong this year with digital up 43% and linear up 6% versus prior year’s upfront period. You may recall that the RSNs typically sell around 75% of their ad inventory during the upfronts. So it is very encouraging to see the strength in the recent upfronts.
In regards to MLB ratings, midway through the season, showed that Bally RSNs has relatively unchanged versus the prior year. This is a good showing considering high single-digit year-over-year subscriber churn and the multitude of content competing for consumers’ attention. What we continue to see, is that the RSN games are frequently the top-rated show for their time-slots and their designated markets, consistently beating general entertainment programing with which they are competing against.
Ratings for individual teams do vary according to their performance on the field. Six of our Bally RSNs plus the YES Network had double-digit percent increases in household viewership midway through the MLB season. And RSNs outperformed all other MLB coverage on other broadcast and cable networks in 12 of our 16 regions. We have successfully renewed agreements this year to carry live local games for 3 NHL teams and 2 NBA teams and are negotiating with two other NBA teams as well. No MLB contracts come up for renewal this year.
And with that, I’ll turn it over to Scott to review the financials.
Scott Shapiro — Chief Financial Officer
Thanks, Rob. Just a reminder that Marquee was deconsolidated from Diamond and changed the equity method of accounting within Diamond’s financials as of March 1. Like last quarter, we will not be giving Diamond performance due to confidentiality around deconsolidating Marquee from the Diamond results.
When the Investor Information page with Sinclair’s website, however, you can find Diamond’s second quarter actuals and third quarter and full-year guidance. Diamond’s revenues were $751 million in the second quarter, distribution revenues of $614 million included $28 million of an audit settlement that Lucy touched on last quarter. We continue to see high single-digit percentage churn.
Total ad revenues were $129 million, while advertising revenue in a per game basis for the Bally RSNs grew mid teens, per Rob’s comments earlier. Diamond’s expenses for the second quarter were 762 million, down from the prior year excluding Marquee on fewer games versus last year, which drove lower sports right amortization expense and resulted in lower production expenses.
Average production cost per game, however, increased due to a greater mix of MLB games in the quarter and some labor shortages that resulted in higher expenses. Diamond’s adjusted EBITDA for the second quarter excluding $23 million for non-recurring items and deferred management fees was 128 million, slightly below our guidance. Diamond’s cash at quarter end is $576 million and it’s $228 million revolver was undrawn, bringing liquidity to a little more than $800 million as of June 30 2022. Total debt at the end of the second quarter was $8.675 billion in the AR facility it was $193 million.
Looking ahead to the third quarter. Media revenues are expected to be $697 million to $705 million. Distribution revenues are expected to be $575 million to 576 million for the quarter. With a sequential decline from Q2 driven by the audit settlement booked in the second quarter and continued subscriber churn. Included in this estimate is continued year-over-year subscriber churn of high single digits.
Advertising revenues are expected to be $115 million to $122 million. For the full year, media revenues were expected to be $2.826 billion to $2.844 billion. Third quarter adjusted EBITDA is expected to be $229 million to $237 million, which includes management incentive fee deferral of $21 million. Full-year adjusted EBITDA is expected to be $183 million to $200 million.
With that I’d like to open it up to questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] Your first question for today is coming from Barton Crockett. Please announce your affiliation, then pose your question.
Barton Crockett — Rosenblatt Securities — Analyst
Hi, I’m with Rosenblatt Securities. I wanted to ask, I guess a couple of things and the first is, just based on kind of your early read on the soft launches you said was favorable relative to your internal expectations. Some puts and takes around timing? As we’re all intimately where you guys put some very kind of substantive guidance out on what would happen over multiple years with this? And I’m just wondering, how this tracks relative to the low, medium, high cases you guys put in your guide with the early read is on tracking versus that?
Christopher Ripley — President & Chief Executive Officer
So in terms of the number of teams that we have, that is tracking to case one currently, in terms of right set, the launch was slightly delayed versus case one. And everything we’ve seen so far, it gives us conviction around our long-term target of getting this product up to 5 million to 10 million subscribers.
Barton Crockett — Rosenblatt Securities — Analyst
Now in terms of the presence of baseball, you’ve got the 5 teams in the soft launch, now are moving out of baseball into basketball and hockey next year. That baseball season resumes obviously. Should we expect that there will be more teams on this — the teams will be fully represented on the RSNs that the D2Cs launching harsher RSN footprint. Should we expect that baseball will be fully present as we go into next season or is that uncertain at this point?
Christopher Ripley — President & Chief Executive Officer
Certainly all of our NHL and NBA teams will be launching in September, October when the full launch goes. And in terms of MLB, it’s tracking case one, which is D2C rights are added as teams are renewed.
Barton Crockett — Rosenblatt Securities — Analyst
Okay, all right. Great. I’ll leave it there.
Operator
Your next question for today is coming from Avi Steiner. Please announce your affiliation, then pose your question.
Avi Steiner — JP Morgan — Analyst
Good morning, JPMorgan. I appreciate it. I’ve got a few questions here. One, just on the lower full year guide. One if you can drill down a little bit more in terms of what’s driving that? Was it the later launch, is there more expenses may be coming in, whatever color you can give would be great and I’ve got a couple more.
Scott Shapiro — Chief Financial Officer
Hi Avi, it’s Scott Shapiro. It’s really mostly churn, the timing change on the D2C launch not particularly meaningful in terms of the downward guide, it’s really churn.
Avi Steiner — JP Morgan — Analyst
Okay. And then I don’t know, if you can maybe provide either sub numbers or some sort of penetration metrics. And if you provided, I apologize, I missed it. Just how do you look at it by market since launch or what you see? I know you said, you’re tracking the case one but any more granularity would be helpful?
Christopher Ripley — President & Chief Executive Officer
Yes, Avi. I appreciate the question. But we’re not going to disclose sub numbers at this time. As I mentioned, what we’ve seen so far, makes us feel good about our long-term target. And as we actually get into the full launch, we’ll think about and consider what we’ll disclose in terms of size, but it’s too early to be talking about those.
Rob Weisbord — President of Broadcast and Chief Operating Officer
What we can add, Avi. This is Rob, is the retention focus on that, which is one of our KPIs that we look at, we’re retaining 74% of the 7-day free subscribers and the time spent viewing the games is significant. So there is an affinity of the sports fan that are making the purchase to stay with the product, as well as the length of time that they’re viewing per game.
Avi Steiner — JP Morgan — Analyst
Terrific. Two more and I appreciate the time. And maybe somewhat to a prior question, but is there been any progress on securing D2C for teams above and beyond the 5, you have an MLB and if not, what’s the gating issue, is it just when the contracts come up for renewal or is there something else there?
Christopher Ripley — President & Chief Executive Officer
So we don’t have any updates at this time, in terms of additional D2C rights. And due to the sensitivity in terms of those negotiations, we can’t comment on specific deal points.
Avi Steiner — JP Morgan — Analyst
Okay. Last one and again, thank you for the time. I guess, you’ve been at this for a couple of months now and I may be off a little, I apologize. But early days, what have you learned from this initial launch as you prepare for the NBA and NHL launch? And I guess what might be different coming up and again thank you for the time.
Christopher Ripley — President & Chief Executive Officer
So just to reinforce some of the things that Rob had already said, which is really impressive retention off of the free trial to paid. Obviously, these are users that we picked up with little to no marketing. So we’d expect that and so expect that retention to reduce over time. But still very, very high retention, very high usage 32% more minutes were used by direct consumer users versus TV Everywhere users. Also interactive features were used significantly and more-and-more those are going to rollout subsequent releases.
So that reaffirms our thesis that interactivity, creating the game within the game and is a key avenue to engaging younger viewers and creating additional revenue streams based on — beyond just watching the game. So far, it’s all pointing to all the metrics are in line and reaffirming our thesis around going direct to consumer.
Rob Weisbord — President of Broadcast and Chief Operating Officer
And what’s also encouraging is, what I covered as far as the ratings and the local sports teams beating the general entertainment marketplace that there is that affinity for your local team. So those that have not been able to get those games, we believe, we’ll jump on the offer as well. And so the micro-soft launch without any advertising is a great indication that there is this audience to serve and what we spoke about last quarter is, you got to give the fans every opportunity to view the games, how they want to view the games. Whether it’s through distribution partner or direct to consumer.
Avi Steiner — JP Morgan — Analyst
Thanks for the time.
Operator
Your next question for today is coming from Lance Vitanza. Please announce your affiliation, then pose your question.
Lance Vitanza — Cowen & Company — Analyst
Hi guys. It’s Lance Vitanza from Cowen. Just to confirm on the baseball side. The other MLP teams aside from the 5 that you had in a soft launch, piloting one of those markets. Is there some other streaming option I can use to watch these games or is that contemplated? I’m just trying to understand, what the equation is for the other team that is presumably dealing with cord cutting and everything else and they want to have their games distributed? And are there other options aside from Diamond that they might be able to avail themselves with?
Christopher Ripley — President & Chief Executive Officer
No, there are no other options.
Lance Vitanza — Cowen & Company — Analyst
Okay. And then you mentioned the engagement we are just watching the games and that I heard your answers to Avi’s questions. I’m wondering though, do you have any visibility online? The volume of betting that might be — I know, you’re not doing the betting on your platform per se, but perhaps, do you have any visibility on how much betting is going on, on the games that are being viewed on your apps by the viewers that are using the app?
Christopher Ripley — President & Chief Executive Officer
No, we don’t have that currently, we are hard at work for watching that products for both the NBA and NHL coming up. And so, hopefully, we’ll have more information on that as those products become more developed. I will say that as it relates to sports betting, we have not seen any pullback on the advertising side for the RSNs, which is a phenomenon that other media companies have experienced in certainly broadcast side, saw a bit of a pullback. And so, if that’s any indication of that what the betting activity is and the importance of those, viewers, last users, the RSN user or viewer is the prime target and have it better that these companies coming.
Lance Vitanza — Cowen & Company — Analyst
Okay. And then I guess my last question is just with respect to the full launch coming on September 26. What could go wrong between now and then that could push that launch off, presumably there are still hurdles and milestones that you’d need to accomplish between now and then. Is that right or I was just trying to get a better sense for the timeline between here and there?
Christopher Ripley — President & Chief Executive Officer
Sure. So there isn’t really much between now and then, that we see in terms of risks for a full launch. We have a product, it’s up and running, we have secured the rights that we need and we have an upgrade cycle or release cycle that’s going to happen pretty now and then to further enhance the product. And really in terms of milestones, those are the only things that could change the timing. But to be honest with you, even if those releases don’t make their dates precisely, we probably would still launch on the 26, because the product as it exist today has been performing really well.
Rob Weisbord — President of Broadcast and Chief Operating Officer
Yeah, the wire frame that our expectations like with any tap, there is always upgrades to the software. So where Apple’s looking at their version 16.0, we hope to continue as technology advances to iterate on a regular basis. But from the way it’s wire framed and deliverables, we’re ready to go.
Lance Vitanza — Cowen & Company — Analyst
Okay. Thanks guys and good luck with the full launch.
Operator
Your next question is a follow-up question coming from Barton Crockett. Barton, your line is live.
Barton Crockett — Rosenblatt Securities — Analyst
Okay. Thanks for getting me back in. There was just a number that I wanted to make sure I understood. In your EBITDA for the first quarter of 2022, the March quarter, when you guys put out your consolidated earnings release, as I recall you reported a positive $54 million for that quarter in EBITDA for DSG. Now in the statements you just put up, it looks like it’s a negative 55. So I just wanted to understand what was happening there?
Lucy Rutishauser — Chief Financial Officer
So. Barton, it’s Lucy, so remember first quarter as reported numbers had 2 months of Marquee and their marquee was deconsolidated then March 1. And then as you move into from first quarter, second quarter, of course, you have the additional churn, you have different game counts that are going on as you move through the quarters.
Barton Crockett — Rosenblatt Securities — Analyst
Okay. All right, but maybe we can follow up more offline, but I appreciate that.
Operator
There are no further questions in queue, I would like to turn the floor over to Chris Ripley, President and CEO for any closing remarks.
Christopher Ripley — President & Chief Executive Officer
Thank you all for joining us today. Should you need any more information or have additional questions, please don’t hesitate to give us a call.
Operator
[Operator Closing Remarks]