Rebates likely to distributor of regional sports networks

After reporting higher earnings in the first quarter, Sinclair Broadcast Group said that core ad revenues were likely to be down between 32% and 39% in the second quarter because of the effect the COVID-19 pandemic is having on the economy.

The company also said that it is not counting on any professional sports games being played in the second quarter and said that will result in its recently acquired regional sports networks getting money back from teams it carries, but it will also have to make payments to its distributors.

The company is rebranding the RSNs and giving them a digital reboot that will also allow users to do legalized gambling through apps.

Related: Sinclair Agrees to Pay Record $48 Million Penalty

Given the economic situation, Sinclair pulled its full-year guidance until it gets a clearer picture of revenues and expenses.

Sinclair stock has been hurt by both uncertainty over advertising revenues and by the way the shutdown of games is impacting its sports business. On the company’s first-quarter call with analysts, CEO Chris Ripley said he understood that its investors have been disheartened.

“I do want to assure everyone that Sinclair is financially strong. We have taken measures to increase our liquidity not out of necessity but rather as a precautionary measure at this time of uncertainty,” Ripley said. “I do want to emphasize that we believe our securities are grossly undervalued and we have purchased a significant amount of our common equity.”

In the first quarter, Sinclair’s net income rose to $123 million, or $1.35 a share, from $22 million, or 23 cents a year ago.

Revenues rose 123% to $1.6 billion. Excluding the Fox Regional Sports networks and Fox College Sports acquired last year, revenues were up 17%.

Media revenues were up 13% to $1.57 billion, with political revenues jumping to $42 million from $2 million a year ago.

CFO Lucy Rutishauser said that the company’s legacy media business revenues were up 17% for the first two and a half months of the quarter before COVID hurt the economy.

For the second quarter, the company is expecting a 32% to 39% decline in core advertising. The company expects political advertising to be strong in the second half of the year and “that will offset some of the weakness in core advertising,” she said.

That will contribute to second quarter earnings before interest, tax, depreciation and amortization to be between $107 million and $133 million, compared to $193 million a year ago.

The company’s sports segment revenue is expected to be down 23% to 25% from last year. EBITDA is expected to be between $192 million and $202 million, compared to $440 million a year ago.

Many of the questions on the call were about Sinclair’s RSN business, which was already stressed because Dish has not agreed to a carriage agreement.

The halting of games has made the situation look worse, so Ripley took time to explain how the company’s contracts with teams and distributors work in the event of a stoppage.

The contracts have minimum game requirements.”Provisions in those agreements address shortfalls by teams including rebates tied to the number of games actually delivered,” he said.

"Conversely, certain of our affiliation agreements with distributors also include game delivery minimums. If we cannot deliver the minimum number of games under the agreements, there is a mechanism for distributors to recoup a portion of their carriage fees. Each contract is unique and confidential and therefore has different parameters and revenues,” he said.

Ripley said Sinclair has continued to pay teams and distributors continue to pay Sinclair. Generally if the minimum number of games aren’t delivered, a rebate is paid either at the end of the season or the end of the year.

“We don't know how many games will be played but we do expect less than the normal amount of games to be played and that should result in some sort of rebate situation where the teams play get paid less and they and the MVPDs get a rebate,” he said.

“Keep in mind that the NHL and NBA regular seasons] were almost complete when their seasons were suspended. So shortfalls in those weeks if any should be minor,” he added.

Ripley said Sinclair expects sports to resume sometime this summer. “There’s going to be a very large pent-up demand for sports,” he said.