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Tegna (NYSE:TGNA)
Q1 2019 Earnings Call
May. 09, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the TEGNA first-quarter 2019 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 John Janedis, senior vice president, capital markets and investor relations.

Please go ahead, sir.

John Janedis -- Senior Vice President, Capital Markets, and Investor Relations

Thank you. Good morning, and welcome to our first-quarter 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 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 have 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.

Dave Lougee -- President and Chief Executive Officer

Thank you, John, and good morning, everyone. Following a record fourth quarter for revenues and free cash flow, we had a productive first quarter of 2019. This includes both organic and inorganic growth supported by our continued strength of subscription revenues, as well as the acquisition of 11 local TV stations and the announced acquisition of multicast networks Justice and Quest earlier this week. And M&A is where I'd like to begin.

In March, we announced the largest acquisition since we became a pure play in June of 2017. It's the purchase of 11 Nexstar and Tribune stations and eight markets being divested as a result of the Nexstar acquisition of Tribune. These stations are an excellent fit with our portfolio, including Big Four affiliates in each of those eight markets, and that includes two Big Four affiliates each in Pennsylvania and Iowa, both key presidential battleground states, further strengthening our positioning for the election next year. They are also a very efficient use of cap space for us as we expand our portfolio.

On a UHF discount basis, the stations will increase our reach by only about 2% but will add nearly $100 million of annual EBITDA on a two-year average basis including the synergies. Victoria will cover the financial details of the transaction shortly, but I want to reiterate our enthusiasm for this acquisition and the value it will create for our shareholders. Earlier this week, we announced the acquisition of the Justice and Quest networks. We've been minority equity owners of these networks for some time, and we got into them because of their very well thought out programming strategy, which has proven to be very successful and extremely cost-efficient.

And over-the-air audiences have increased by more than 48% over the past eight years, and that's the majority of the viewing comes on these channels. And these networks will continue to benefit from that secular tailwind. Moving on now to the financial highlights for the quarter. Our total reported company revenue grew 3% year over year to $517 million at the high end of expectations.

Revenue growth this quarter was driven primarily by 18% increase in subscription revenues for a total of $242 million, a first-quarter record, as well as organic growth in our sales, digital and content operations. Our subscription business continues to provide us stable and predictable cash flows supported by rate increases in existing and future agreements. Related to that, one trend I want to highlight is the continued stability of our paid subscribers, a credit to our attractive footprint in large markets and our large portfolio of markets with strong population growth characteristics, such as Texas and the Southeast. Adding to that, between the fourth quarter of this year and the end of 2020 next year, we will have repriced approximately 85% of all our subscribers.

That combined with our previously announced affiliation agreements with NBC and ABC through early 2021 and late 2023, respectively, give us both stability and clarity of the growth of our retransmission consent revenues and profits. And while 2019 is not an election year, I want to reiterate that we anticipate a record level of political spending overall next year for all the obvious reasons outlined on prior calls. Our expectations remain that high-margin subscription and political revenues will account for roughly half of total year revenues beginning on a two-year basis, beginning with the '19, '20 cycle and increasing thereafter. These predictable revenue and cash flow streams will continue to grow in importance as drivers of our business over time and will enhance our ability to create shareholder value regardless of the economic backdrop.

Now I'd like to provide an update on our content innovation efforts, which are showing results with audience share increases in key large markets. In the November and February ratings periods, more than half of our large market stations are up in the morning and late local news in the key demographic of adults aged 25-54. Daily Blast LIVE, the only live program in syndication, continues to grow. Produced out of our station in Denver, DBL's ratings have increased 31% year over year and, again, in adults 25-54, a significant accomplishment.

I am proud that our team's constantly being recognized for producing relevant and creative programming for viewers. Just a couple of weeks ago, we were honored with 91 regional Edward R. Murrow Awards, more than any media company in America. And many of those 91 awards were a direct byproduct of our disciplined content innovation efforts.

In addition, four TEGNA stations were awarded Walter Cronkite Awards for excellence in political journalism, again, more than any other news organization in the country. And King, our station in Seattle, also won a prestigious Peabody Award for their ongoing multi-part investigative series of special education in Washington state called Back of the Class. We have a portfolio of strong local news organizations across one-third of the country, and that number is growing. And interestingly, these stations own an unparalleled video and audio archive of solved and unsolved crimes, a genre of programming that continues to resonate with audiences on multiple platforms and is partially why we purchased the Justice network.

To capitalize on these unique archive assets, or IP as I like to call it, we recently launched VAULT Studios, a digital initiative leveraging this deep reserve of archived content. VAULT's first investigative podcast series called Bomber, leveraging the archive assets from our station in Austin, Texas, debuted last month -- debuted in March and, for weeks, was one of the most listened-to News & Politics podcast on iTunes. Looking forward, there will be new business opportunities out of the VAULT initiative and the Justice network acquisition that will allow us to capitalize on these exclusive archive assets. Returning to M&A, we've had a busy and successful year to date, in which we've announced or closed on more than $900 million of attractive assets that fit our strategic plan and financial requirements.

As we noted last quarter, we expect 2019, '20 free cash flow on a two-year basis to be 18% to 19% of revenue, and our recent acquisitions further support that guidance. Additionally, we will pay down debt following the close of the purchase of the 11 Nexstar divestitures, and we expect to return to leverage to below four times by the end of 2020, absent any for the M&A. We've spoken a number of times about our disciplined M&A process, and this transaction along with the recent purchases of WTOL and KWES are prime examples of how we target accretive acquisitions that fit our strategy and benefit our shareholders. Going forward, while we await a decision from the SEC on whether to raise the cap, it's worth reminding everyone we still have a lot of room under the cap given the UHF discounts still in place.

Specifically, following this acquisition of the Nexstar divestitures, we'll be at 30.5% under the cap on a discounted basis. In closing, we are pleased with the progress we've made this quarter highlighted by stable subscription revenue growth and execution of our M&A strategy. Our expanded geographic footprint, favorable mix of subscription and political revenues and consistent content innovation continue to differentiate us and support our growth. Thank you, and I'll now pass the call over to Victoria.

Victoria Harker -- Chief Financial Officer

Thanks, Dave, and good morning, everyone. Thanks for joining us. As Dave mentioned, we're excited about both the organic and inorganic growth initiatives we've executed on so well this quarter. In my remarks, I'll cover the expected financial impacts of both, as well as update you on our capital allocation plans going forward.

Before I cover our consolidated financial results, I'd like to review just a few special items with you. For the quarter, these included $4 million of spectrum repacking reimbursements and a $3 million gain from a real estate sale, both of which reduced operating expenses, partially offset by $4 million in transaction-related fees. Nonoperating items included $12 million net income, primarily related to the sale of our remaining interest in Captivate. I'd also like to give you an update on Premion to provide some color and context.

From an operational perspective, Premion market demand is strong, reflected in strong double-digit revenue growth during the first quarter. Our processes and platforms have been strengthened to keep up with this demand. As we anticipated in our last earnings call, during the first quarter, we issued $12 million in cash refunds relating to the specific systems issue which impacted fourth-quarter revenue by $16 million. I'm pleased to say the 2018 system issue is behind us, and first-quarter campaigns were delivered as expected.

Now onto the first-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 to provide clear insight into the financial drivers of our operational results. You'll find all of our reported data and prior-period comparatives in our press release. Now for our results.

Total company revenue for the first quarter on a reported basis was up 3% year over year, which is at the high end of our guidance range. As you've seen from our release, this was driven by subscription revenue, which grew $36 million. Total advertising revenue declined $23 million year over year, largely due to the absence of $16 million of incremental revenue from last year's Olympics and Super Bowl, which ran on our 17 NBC stations, and nearly $5 million in political advertising revenue during the same quarter last year. From a total revenue perspective, excluding the cyclical impact of these three items, revenue was up 8% year over year, also at the high end of expectations.

Notably, from an advertising and marketing services revenue perspective, when adjusted for Olympics and Super Bowl comps impacts, revenue was flat to last year. Now to provide some further color on specific revenue category performance trends. Again, adjusted for the Olympics and Super Bowl impacts, several categories were up this quarter, including professional services, banking and home improvement. Other categories, such as auto and education, were low in the quarter, reflecting macro trends in those sectors.

As Dave mentioned, our subscriber growth trends also continue to be solid. As we've discussed before, this stable, high-margin revenue stream produces annuity-like cash flows, which allow us clear forecasting visibility. As a result, we expect another year of healthy revenue growth in 2019 and remain confident in our previous subscription revenue guidance of mid-teens percent increase for the year. Moving now to expenses.

As expected, our operating expenses were 5% higher this quarter on a GAAP basis or 6% higher non-GAAP, primarily driven by higher programming fees. As a reminder, these fees include reverse compensation paid to networks. Excluding higher programming costs, expenses were flat. During the first quarter, non-GAAP corporate expense was $11 million, down nearly $2 million from last year, reflecting our ongoing efforts to streamline our cost of managing the business.

As a result, adjusted EBITDA for the quarter, excluding corporate expense, was $164 million, producing a solid 32% margin. We generated $109 million of free cash flow, roughly 21% of revenue, fully in line with the projections incorporated in our two-year guidance range of 18% to 19%. Also in line with our ongoing commitment to a strong balance sheet and growing firepower, during the quarter, we reduced debt by $53 million to $2.9 billion, ending the quarter with net leverage of approximately four times. As you saw again this quarter, the strength of our cash flows continues to allow us to both delever and invest in new products and initiatives while funding new acquisitions.

Now turning to M&A. As Dave noted, we have announced acquisitions of more than $900 million already this year, including the Justice and Quest multicast network announced earlier this week and the 11 Tribune and Nexstar stations being divested by Nexstar. As a reminder, this $740 million transaction announced on March 20 represents our single largest acquisition since becoming a pure play in June of 2017, providing us with 11 additional stations in eight markets. The purchase price reflects a 2018/'19 EBITDA multiple of 7.7 times, including run rate synergies, more than 70% of which are mechanical, tied to a retrans contractual after-acquired rate.

This multiple equates to 6.7 times when including the benefit of tax savings. We expect the transaction to close in the third quarter of 2019 and is being funded through the use of available cash and borrowing under our largely undrawn $1.5 billion credit facility. Beyond this, TEGNA will pay approximately $77 million in cash for the approximately 85% of the Justice and Quest networks that we do not currently own, valuing them at $91 million. While we previously capture the value of our stake in the multicast channels financial results below the line and equity, following close, we will fully consolidate all of their financial results in our operating P&L.

In summary, both of these acquisitions perfectly reflect the financial profile and strategic fit that are the cornerstones of our M&A strategy. Both are free cash flow and EPS accretive nearly immediately. All of the acquired stations have strong margins and will produce free cash flow in the same range as our base business, once part of our portfolio. Now turning to second quarter and full-year 2019 guidance.

As a reminder, the second quarter of last year included $26 million of political advertising and approximately $4 million of Premion revenues that was originally booked in that quarter but later adjusted out in the fourth quarter due to a systems issue. Excluding political and the $4 million Premion revenue adjustment, we expect second-quarter revenue growth to be at the upper end of mid-single digits. On a reported basis, total revenue is expected to increase low single digits. In terms of expenses, we expect second quarter's increase in the mid-single digits, down slightly excluding programming expense.

Key guidance metrics for our base business for full-year 2019 remain unchanged. As a reminder, here are the highlights, which can also be done in our press release and on our IR website. Full-year subscription revenue, up mid-teens percent based on subtrends and timing of MVPD renewals, so 50% up for renewal by year end and an additional 35% in 2020. This results in a fully 85% of our paying subs repricing by the end of next year.

Full-year corporate expense of approximately $45 million. Full-year depreciation projected to be in the range of $55 million to $60 million with amortization of approximately $35 million. Interest expense for the year is expected to be in the range of $190 million to $195 million. We also expect capital expenditures between $70 million and $75 million, which includes recurring capex of approximately $35 million to $40 million and about $35 million in nonrecurring projects, including mandatory channel repacking, our headquarters' relocation, which was completed in the first quarter, and a new facility in Houston that was completed in February.

The effective tax rate for the year is expected to be 23% to 25%. Beyond this, as previously disclosed, we plan no additional share repurchases until we delever from funding the new acquisitions. As a result of all this, we project free cash flow as a percent of revenue on a two-year basis to be in the range of 17% to 18% for 2018 and '19 and 18% to 19% of revenue for 2019, '20. Building down on Dave's comments regarding the current M&A environment.

TEGNA follows a disciplined capital allocation framework that balances our desire to enhance our growth profile for strategic, accretive acquisitions. We continue our commitment to a strong balance sheet, organic growth and return of capital to shareholders through equity appreciation and dividends. Capital allocation decisions are driven by our focus on maximizing shareholder value, and we consistently allocate capital to those options which offer the highest medium- to long-term returns. As Dave noted earlier, we continue to participate actively in M&A processes for the assets that are fit for us.

We have ample capacity to execute on our strategy further, and even with our recent acquisitions, under the current regulatory framework. We have demonstrated historically that we can and do drive significant synergies from acquired assets and have the firepower to fund both innovative organic initiatives, as well as strategic acquisitions. We remain disciplined investors, laser focused on creating incremental shareholder value. In summary, our first-quarter results, as well as our outlook for 2019 demonstrate that we're making significant progress in strengthening and diversifying our revenue and cash flow streams, reaffirming our confidence in our long-term strategy.

As a result, the continued growth of less cyclical, highly profitable and cash flow-producing businesses only serves to enhance our ability to create shareholder value. We are very excited about the opportunities ahead. With that, I'd like to open it up to questions. Operator?

Questions & Answers:


Operator

[Operator instructions] And our first question today we'll hear from Marci Ryvicker with Wolfe Research.

Se Hyun Kim -- Wolfe Research -- Analyst

This is Se filling in for Marci. I had two questions on the regulatory front. The DOJ just recently hosted a workshop into the definition of the TV ad marketplace. Can you share your takeaways on the event and maybe some color on the time line of what is next in terms of the process? And also, your view on whether the SEC will raise the national cap -- national ownership cap this year.

Dave Lougee -- President and Chief Executive Officer

Se, so yes, the Department of Justice to their credit held a panel last Friday, and the representatives on the panel were an executive from Facebook, the Head of Sales for Comcast, the General Counsel for the NAB and myself. And just for everybody's benefit, that what Se is referencing is it's a -- it was a panel on the definition of video marketplace driven by the fact that broadcasters specifically are being -- continue to be held to a, while well-intentioned, quite outdated reality of the actual marketplace. So I give credit to Assistant Attorney General and Head of the Antitrust division, Delrahim, for holding the panel. And the content of the panel was a unanimous view just because we are all in the market and we recognize it is now one interchangeable marketplace out there for advertisers, and that was 100 -- there was -- turned out to be zero disagreement about that among the panelists.

So I would hope that the DOJ got a lot -- heard that message loud and clear. But it is unclear to us and they have not indicated to us what next steps they'll take, but it certainly cannot hurt because they did sort of go backwards on this whole issue as a result of the failed transaction last year that everybody knows about. On the cap, we remain to -- we're waiting and watching and to see -- I know the chairman wants to do something about it, but we don't have intelligence to be able to confirm that it will get acted on this year. I certainly -- we certainly know we can confirm it's under consideration but don't have confirmation that it'll happen this year.

I think that the other piece of it is you have the quadrennial review coming up next year, and there'll be a lot of action and comments regarding that, and broadcasters will be -- you add to that the DOJ definition of market needing to change. The FCC is very open-minded to needing to change their definition of the market. So I think there is a lot of moving pieces that will net positive for the industry, but the timing is unclear.

Operator

Next, we'll move to Alexia Quadrani with J.P. Morgan.

David Karnovsky -- J.P. Morgan -- Analyst

This is David Karnovsky on for Alexia. Could you just discuss a little further the acquisition of Justice and Quest? How much potential do you see in the over-the-air audience? And is there anything you plan on changing for these channels from a programming perspective?

Dave Lougee -- President and Chief Executive Officer

So no. Only that as we do create programming in our own markets, that's complementary. Like on this unsolved crime genre, we'll be able to substitute that into the markets where we've put it in. But it is a very lean, well -- cost-effective operation of just a few people, and we're going to run it -- continue to run it that way, separately, and we're going to run it out of our Atlanta TV station because the current group is based in Atlanta.

And your other question about -- I apologize, David, was what?

David Karnovsky -- J.P. Morgan -- Analyst

Just the potential you see in the over-the-air audience.

Dave Lougee -- President and Chief Executive Officer

Yes. I just think that it's -- that audience is growing dramatically. You can see it in just the sales results of those multicast networks, which a lot of is direct response advertising in. It works.

So I think as -- what's kind of lost a lot in the marketplace and the discussion around cord cutting is there's actually a lot of cord shaving. And there is also -- under Nielsen's definition, if you get rid of three cable boxes in your house and go down to the one cable box because you still want to keep sports or something like that, you're still registered in Nielsen as a cable or satellite home. But for the consumer -- a lot of those consumers will then go find antennas for those other TVs. And so on any TV that is being utilized over the air, there are a lot less channels, and then so those channels get a tremendous amount of viewing on those over-the-air sets.

So it is just absolute -- sort of like our Premion OTT business, we're just drafting on a natural tailwind of a growing audience.

David Karnovsky -- J.P. Morgan -- Analyst

OK. And then just on your subscription guide. You saw 18% growth in Q1. I think in Q4, you get the partial benefit of some renewals.

Just given the full-year guide of mid-teen, wondering if this assumes any pickup in subscriber declines over the next few quarters. Or there are some seasonal factors to consider?

Dave Lougee -- President and Chief Executive Officer

Well, we always have seasonal factors in our numbers, but as far as our guidance here, we continue to be comfortable with that. We never modeled -- even though we were pleasantly surprised last year by a string of months where our total subscribers were up, we never modeled that for this full year. So we are comfortable with our guide.

Operator

And next, we'll move to David Joyce with Evercore.

David Joyce -- Evercore ISI -- Analsyt

A couple of questions on the advertising and marketing services side. On the traditional linear advertising, what are you seeing in particular markets? Is there much difference between your larger and smaller markets? Any timing shifts of when ad campaigns are coming to you? And then on the Premion side. Appreciate some of the color earlier, Victoria, on there with the double-digit growth, but are -- where are there pockets of strength there? What are some of the things that the marketers are looking for with that over-the-top service?

Dave Lougee -- President and Chief Executive Officer

Great. Thanks for the question, David, both of them. On advertising and marketing services what's safe right now is for us kind of -- we gave a little color in Victoria's comments on first quarter. It's actually very noisy for us to get actual numbers for categories because the Olympics incremental discussion is really an art more than a science for the operations.

So it's always difficult for us in Olympic quarters. But so -- I'll just -- looking forward to second Q, second quarter, what I'd say is, is that it's a tale of two cities, no pun intended. Your first question is -- your question is spot on. For us, we are doing much better in our largest markets than we are in our smallest markets, which is a bit of a turn of the tide from some previous years.

And in fact, our best-performing stations right now in traditional advertising are our markets -- our stations in the top 10 markets, of which we have four. And our smaller markets are performing a lot tougher. We believe some of that is actually really economically driven, to some extent, based on those marketplaces. Also others maybe asked another question, but I'll just offer unsolicited color to -- around categories.

In the second quarter, we are also -- we have far more many up categories than down, so we're seeing a lot of health in some tremendous categories, but auto is down. And it is not -- I mean, it's not down dramatically, but it's down, and it's not any secret why. I think it just came out now that the most recent SAAR report was the lowest SAAR since February of 2014. So it's a direct byproduct of sales.

So -- but for auto, we'll probably be seeing one of those strongest performances in years relative to the quarter. But that is what it is on auto.

David Joyce -- Evercore ISI -- Analsyt

And anything incremental on the Premion?

Dave Lougee -- President and Chief Executive Officer

Yes. I apologize, yes. And on Premion, what advertisers are looking for, is they are looking for both reaching new audiences that aren't on traditional TV and are spending a lot of their time on over-the-top platforms, and they're looking for targeting, right, which we can both -- we can offer both. So that's a -- and we are not using third-party ad exchanges.

We're directly sourcing our content from the publishers, from networks like A&E and Discovery. So we're offering also real quality inventory. So those are the three I would highlight in.

Victoria Harker -- Chief Financial Officer

And just to interject a little bit there, and again, this is sort of in the category of projecting out to the rest of the year relative to Premion. We just talked about the $4 million that came out of the second-quarter results relative to the revenue adjustment we made for the systems issue. For the third quarter, that will -- the number will be about $6 million and just slightly less than that for the fourth quarter, about $5.5 million. So you need to keep those in mind relative to the total reported results as we go through those quarters.

They were all taken in the fourth quarter last year but obviously impact the quarterly comps as we go.

Operator

And we'll move on to Kyle Evans with Stephens.

Kyle Evans -- Stephens Inc. -- Analyst

You mentioned repricing 85% between now and the end of next year. Could you talk a little bit how we should phase those into the model over the next coming quarters?

Dave Lougee -- President and Chief Executive Officer

Yes, sure. Specifically, Kyle, we'll have -- we'll do 50% this year by the end of the fourth quarter, almost all of that happening toward the middle of the back half of the quarter. And then we'll do 35% at the back end of next year. Roughly.

Kyle Evans -- Stephens Inc. -- Analyst

Roughly. Got it. You have historically given more sub count kind of clarity than your peers. It sounds like the six months of growth is now very stable.

It sounds like it's very close to zero number. Could you talk a little bit more about what you're seeing by DMA size? And any other trends that you're kind of seeing underneath that flat number?

Dave Lougee -- President and Chief Executive Officer

Yes. So the trends are DMA size is absolutely larger is much better than small on two counts, both the traditionals are -- the traditional MVPDs for us are much more stable in the larger markets than they are in the small. But the -- in the virtual MVPD, that growth has been more of the larger market. Some of that's now starting to trickle out for the smaller markets, but I'm not clear yet whether all the services are going to be offering that out there.

And the other trend is, which is no surprise because you can see that the public numbers is -- the traditional losses are all on the satellite side, right, almost exclusively, and that for us, the cable companies are doing a pretty good job hanging in there with consumers.

Kyle Evans -- Stephens Inc. -- Analyst

Gotcha. On Premion, I think Victoria said solid double digits. I was wondering if you guys could put maybe a little tighter growth brackets around that. And then from a higher level, how does operating a scale third-party ad network in over-the-top and streaming TV help inform the rest of your business? What are you seeing there that maybe those that don't have that business wouldn't be able to see?

Dave Lougee -- President and Chief Executive Officer

Well, on first question, yes. So we're not -- we said last quarter, we're going to continue right now, we're not going to give exact guidance on it because frankly we're -- we've got good -- we do have good, strong double-digit growth and we'll continue to, but we've got a lot of moving parts in it, so we're -- as I said in the past, we're just kind of letting it grow, and we'll probably in the later quarters maybe give some more guidance. We'll continue to say that we'll exit the year at maybe mid-teens on a margin basis. But we continue -- I don't think we see any -- we're not getting credit for it in our stock price, so we're running it as -- continue to run it as a growth business.

But it's doing very, very well. I think to your question about what we see, and when you say third party, it's our -- I mean, you mean with a new business. It's our business, and it's -- we'll probably -- what we get to see is a lot of consumer and advertiser trends, right? So to your question, it does sort of help inform us in some of our other sales, go-to market strategies because it's given us first-hand look at what a lot of consumer and advertiser trends are.

Kyle Evans -- Stephens Inc. -- Analyst

Any change to the competitive landscape there for Premion?

Dave Lougee -- President and Chief Executive Officer

There are competitors out there -- increasing competitors out there as we always model the new, but at the same time, inventory and demand are both exploding at the same time. So there is a lot of room for people out there. I would say what differentiates us -- and we will -- this we think will benefit us more over time because here in the early days both in terms of advertiser sophistication, especially at the local market, is that we're not a programmatic buy. There are a lot of competitors out there in our own space, including broadcasters, that are selling ad exchanges, right, third-party ad exchanges, which can look cost-effective to the advertiser, but we believe, over time, that space will become commoditized and programmatic, and that's not what we're doing.

So that would be my comments relative to the competitive landscape.

Operator

[Operator instructions] Next, we'll move to Craig Huber with Huber Research Partners.

Craig Huber -- Huber Research Partners -- Analyst

First question. This acquisition of the Justice Network and Quest, can you just size the revenues for us? Is it roughly, say, $35 million of revenues? And how are the margins relative to your corporate average? And I guess, along the same lines, Dave, what was the attractiveness to that acquisition for you?

Dave Lougee -- President and Chief Executive Officer

Your revenue numbers would be a little higher than that. We're not going to give exact numbers because we're not going to report it as a segment. But just at a starting basis, they would be a bit higher than that. But they've got nice double-growth characteristics to both revenue and EBITDA, Craig.

So right now, they're not material to the company, right, based on the size, but they're just -- if they were TV stations, we'd be thrilled to have them because of their growth trajectory. To your margin question, they have good solid margins, broadcast-like margins.

Craig Huber -- Huber Research Partners -- Analyst

Great. And then can you comment, Dave, on the 2Q TV ad pieces for your core, excluding the acquisition or anything? Is it sort of flat, slightly up year over year? How is that trending, please?

Dave Lougee -- President and Chief Executive Officer

Yes. So 2Q, it's still early. As I gave color commentary earlier on categories, I'd say that flattish to up a little bit is what we're sort of seeing relatively on a pace basis. So -- which is good given what I commented on auto.

So -- but -- and we have a number of categories that are very healthy. I mean, I'll give you a long list of them: medium and telecom, services, banking and finance packaged goods, retail is up, utilities, education, home improvement and entertainment. Just to -- so there's a lot of categories that are solid, but as I mentioned, auto is a weight on it right now.

Craig Huber -- Huber Research Partners -- Analyst

And then your digital advertising trends for your TV stations. How is that sort of tracking? I know there was a lot of noise in the first quarter, but is it sort of up, say, mid-single digits? And how is it tracking, please?

Dave Lougee -- President and Chief Executive Officer

We don't break them out, but digital continues to grow nicely.

Operator

Next, we'll move to Kyle Evans with Stephens.

Kyle Evans -- Stephens Inc. -- Analyst

Just a quick follow-up. You've mentioned down auto multiple times. Could you put some brackets around that decline?

Dave Lougee -- President and Chief Executive Officer

Yes. I'll just say single digits, not high single digits, but it's down low to mid-single digits roughly. But it's early in the quarter, and money is moving around, right? So that can change, but that would be where I'd put it.

Kyle Evans -- Stephens Inc. -- Analyst

Care to take a guess at what do you think it'll end the year at?

Dave Lougee -- President and Chief Executive Officer

No, Kyle. I --

Victoria Harker -- Chief Financial Officer

Nice try.

Dave Lougee -- President and Chief Executive Officer

No. I would just be -- it would be disingenuous of us. I mean, we -- I don't think they have an idea what their ad budgets are going to be. So -- yes, so -- but again, it's being driven by car sales not by a secular issue in media, right? And I feel very confident about our broadcasting share of that pie and, frankly, TEGNA's share of that pie.

And I did -- one thing I would comment on auto is reflective of our earlier comments is it is a small and large market issue for us too there. We actually are seeing really solid sales, Texas especially because, as you may know, in the sector, trucks are selling really well with gas prices and stuff like that. And -- but our smaller markets are really hurting on auto with a one exception of Abilene in San Angelo, where the fracking and oil business is growing so fast that they can't build enough hotels, and --

Victoria Harker -- Chief Financial Officer

But keep in mind, in terms of context, it's a much smaller proportion of our total revenue and even of our advertising marketing services today than it was even a year or two ago.

Dave Lougee -- President and Chief Executive Officer

Yes. That's the good news.

Operator

Next, we'll move to Michael Kupinski with NOBLE Capital Markets.

Michael Kupinski -- NOBLE Capital Markets -- Analyst

Going back to Craig's question on the multicast stations. I know this is a relatively small acquisition for you guys, but what is the reason that you decided to consolidate these stations now? Are you planning to build upon the offering, adding more networks? And if you can just give us some thought about the percent of the nation that the current networks cover?

Dave Lougee -- President and Chief Executive Officer

We're roughly close to 80% on Justice and growing fast on Quest. I forget the exact number, but part that -- part of the industrial logic is this is utilizing our spectrum, right? So we already own the distribution. We're growing with a number of stations we're purchasing, right? So we get that if it's not on those stations already, it's added distribution and added -- just -- it's added revenue out of the sky for those stations. So -- and it is in terms of diversifying our portfolio, over the year, it's going to continue to grow, right? And these are well-programmed networks, so it's just -- it's a real simple financial play for us.

And it's inside our knitting. We know exactly how to run the business, and it's incredibly cost-efficient. And it's frankly got very, very nice growth profiles.

Victoria Harker -- Chief Financial Officer

In terms of the investment, it is obviously operating very well today. It's got very strong margins, so there is no plan for a significant opex or capex --

Dave Lougee -- President and Chief Executive Officer

Yes. It's run very lean, and it will continue to be. So that's one -- and that's also, to your point, one of the really attractive models of it.

Michael Kupinski -- NOBLE Capital Markets -- Analyst

Gotcha. And then, Dave, I know in the past calls and in this call, you indicated about TV ownership cap and talking about how you thought that it might be lifted. It seems like the -- at least, the FCC indicated that it may take an act of Congress to change the ownership cap. But wondering -- just see what your thoughts were about that.

And then also with the UHF discount rule in place, does this make UHF stations more valuable than maybe VHF stations? And do you believe that there might be a pipeline of M&A opportunities for UHF stations? Maybe if you could just talk a little bit about the attractiveness of that opportunity?

Dave Lougee -- President and Chief Executive Officer

Sure. Look, the act of Congress conversation is not new. I mean, Commissioner O'Rielly, who is in favor of lifting the cap, has said he feels it might take an act of Congress, but that wouldn't stop him from voting on the cap. So that's -- that dialogue has been out there for a while.

But I think others at the FCC believe they actually do have the authority. And again, the timing -- it's not a matter of if but when. We think it will be done. As far as UHF stations go, it's a good question in the sense that when I talked about we still got 8.5% under the cap, obviously, when I'm buying stations, if we buy UHF, we're sort of getting more -- I do look at -- we do look at sort of return on investment per percentage point under the cap.

But that wouldn't make us choose a UHF over a V. What's more important is the characteristics of the station, right, and what that asset value is and how it resonates in the market. So we certainly look at that, and we look at acquisitions, but it doesn't -- it does not drive the decision, but I understand the question.

Operator

And next, we'll hear back from Craig Huber with Huber Research Partners.

Craig Huber -- Huber Research Partners -- Analyst

Two follow-ups, if I could. Your company for years has been really good on the cost-containment side, including recently here. I'm just curious guidance in the first quarter, slightly up costs, excluding programming. What sort of areas in your company are you attacking to keep that cost base low? Or is it just sort of across the board? And I have a follow-up.

Victoria Harker -- Chief Financial Officer

Sure. Craig, this is Victoria, and I'm happy to address that. In terms of the corporate -- and that -- which continues to come down quite nicely really since the time of the spin, I mean, in June of 2017, when we stood up the company as a stand-alone broadcast company, we've been attacking the corporate. It has become the shared service center relative to a lot of the back-office functions.

So we are consolidating a lot of the nonconsumer-, noncustomer-facing aspects of the business, and that has continued to come down in over $10 million really since that time. In terms of -- and become more efficient and more effective in terms of how we can bolt on new acquisitions at lower cost right from the start. In terms of the business -- in terms of the -- each of the stations, they've done a very nice job in terms of managing their P&L, both in terms of creating more efficient, effective position descriptions in terms of the roles themselves, as well as working to consolidate some of their purchasing. So it's been a very broad effort in support of really our M&A strategy while creating a lower cost structure.

Dave Lougee -- President and Chief Executive Officer

Yes. And as we purchase more stations, Craig, we actually -- our marginal costs in these centralized efforts continue to go down, too. So we're able to apply that to those stations, and in many cases, where we've already got existing centralized shared services, new technology's becoming available that we're applying, which allow us to produce our opex there, and we're also -- our capex has some noise in it because we've got repacking and things like that, some onetime issues. But in terms of normal capex at the stations, we've been very much embracing new technologies and cheaper technologies and taking what's really already a very low cost basis for capex and even getting that down on a per station basis.

Victoria Harker -- Chief Financial Officer

And on a -- as a great example of that, we're rolling out SAP across the company this year. And while that's not a new technology, the current iterations allow us to save almost $2 million a year in license fees alone right out of the box once it's implemented. So again, it's new order technology, but it will create a much more efficient, effective financial support platform for the whole company.

Dave Lougee -- President and Chief Executive Officer

And just for one more comment on it is not just about cost efficiencies, it's about good allocation of cost, right, because in our business, we want from a Six Sigma's perspective, we want all of our cast -- our cost, in a perfect world, allocating to creating good products and doing a great job with sales. And so the more that we can move all of our cost to those two areas, the better return on investment for all of our expenses.

Craig Huber -- Huber Research Partners -- Analyst

And then Dave, I have a broad question here. As you sort of talk to and visit with your various TV stations and your customers in various markets out there, how are you feeling about the U.S. economy right now? I mean, you've talked that a large market versus small market, but do you see any major dichotomy there, separation between the state, how well the economy is doing, local small market versus large market, but just in general, how do you feel about the U.S. economy? Put aside what hear from the economists and the pundits out there.

What are you seeing out there?

Dave Lougee -- President and Chief Executive Officer

In general, I feel fairly optimistic when you look at the unemployment rate and you look at consumer expectations, etc. I actually feel very good. I think it's -- you are starting to see in the TV industry a reflection of two Americas, right? The public dialogue about large coastal cities and big urban centers that are doing well relative to small-town America, I think that growing gap in income and overall health and economy is starting to be reflected in the large- and small-market dialogue.

Operator

And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Dave Lougee for any additional or closing remarks.

Dave Lougee -- President and Chief Executive Officer

Thank you very much. So in closing, we are pleased with the progress we've been making this quarter and highlighted by, again, that sustainable subscription revenue growth and execution of our M&A strategy. So we will continue to build on all of that and have more good news to give you on our earnings call next quarter. Thank you, everyone.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

John Janedis -- Senior Vice President, Capital Markets, and Investor Relations

Dave Lougee -- President and Chief Executive Officer

Victoria Harker -- Chief Financial Officer

Se Hyun Kim -- Wolfe Research -- Analyst

David Karnovsky -- J.P. Morgan -- Analyst

David Joyce -- Evercore ISI -- Analsyt

Kyle Evans -- Stephens Inc. -- Analyst

Craig Huber -- Huber Research Partners -- Analyst

Michael Kupinski -- NOBLE Capital Markets -- Analyst

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