SSP - Steeper cord-cutting likely to weigh on pay TV media - Wells Fargo

Cord-cutting is speeding up in a "turn for the worst" for pay TV providers, Wells Fargo says, and the news isn't likely to improve any time soon.

The exodus from pay television will remain "elevated given all the content shifting to streaming, and consumers looking to trim their subscriptions due to macro and/or subscription fatigue," analyst Steven Cahall said.

That's led him and his team to negatively revise the outlook for subscriber declines, while looking to the upcoming football season as the next catalyst.

Pay TV subscriber declines worsened in the second quarter to -5.2% year-over-year, vs. a decline of 3.7% in the first quarter, with "linear" (traditional) TV driving that slide: -8.2% in Q2, vs. -7.4% in Q1 and -6.9% in Q4.

Overall subscriber declines of 2.256B marked Q2 as the worst in Wells Fargo's tracker - worse even than the first quarter of 2020, which saw a decline of 2.075B subs.

And Cahall is now estimating steeper losses than before for coming quarters. For 2022, 2023 and 2024, Wells Fargo had expected annual rates of -5.8%, -5.6% and -5.6%; Cahall now sees those figures at -5.8%, -6.7% and -6.9% respectively. That trajectory isn't a surprise for anyone tuned in to earnings reports, but "it creates a downside bias to affiliate-related revenues and adds to macro fears surrounding the durability of (calendar 2023) EBITDA," Cahall said.

Which names have the biggest exposure to the domestic bundle? That makes up some 40-50% of revenue for Nexstar Media Group ( NXST ), Fox ( NASDAQ: FOX ) ( FOXA ), Tegna ( TGNA ), Sinclair Broadcast Group ( SBGI ) and Gray Television ( GTN ); more like 30% exposure for E.W. Scripps ( SSP ) and AMC Networks ( NASDAQ: AMCX ); and then about 20% for Paramount ( NASDAQ: PARA ) ( PARAA ) and Warner Bros. Discovery ( WBD ). (Meanwhile, materiality is lower for Disney ( DIS ) and Comcast ( CMCSA ) due to their other businesses, Cahall said.)

Sensitivity in EBITDA is highest for TV media names like Fox ( FOX ) ( FOXA ), Paramount ( PARA ) ( PARAA ) and AMC Networks ( AMCX ), which have "little/no offsets to cord cutting," vs. broadcast names.

The next catalyst on the radar is any effect the National Football League has on the trends, Cahall said. The return of college and pro football typically benefits virtual MVPDs, so he'll be watching how YouTube TV ( GOOG ) ( GOOGL ), Hulu Live ( DIS ) ( CMCSA ) and fuboTV ( FUBO ) trend in the second half.

FuboTV logged a 45% stock gain as it wrapped up its first Investor Day Tuesday .

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