At our NAB investor meetings, Commissioner Michael O’Reilly and former Commissioner Harold Furchtgott-Roth, offered insights into the prospect of relaxation of media ownership rules. Both seemed sanguine about the prospect that the FCC will move to relax ownership rules for radio in the quadrennial media ownership review expected later this year, but pushed back on the prospect that there will be relaxation of ownership rules for television. Lifting the current ownership cap from 39% of total TV households for the television industry may take an act of Congress, with both Commissioners agreeing that there is no political will to push for it. Given that the courts recently ruled that the UHF discount rule may remain in place, (which was surprising to the Commissioners), the ownership cap would theoretically be 78% if all stations were UHF. The discount rule allows owners of UHF stations to count the households covered by 1⁄2. It was the interest of the FCC last year to do away with the UHF discount rule and to raise the ownership caps.

Now, the FCC is likely to keep the UHF discount rule. Nonetheless, the prospect that there will be no movement in ownership caps for TV will 1) likely throw some cold water on the pace of television consolidation, 2) make UHF stations more valuable, and 3) slightly tip the hand of negotiating power for retransmission fees back to the satellite and cable operators. The FCC offered some wiggle room in that companies may try to push the cap higher through acquisitions that put companies above the current cap. Such a move would be a protracted process given a left leaning Department of Justice that utilizes archaic media methodologies and almost certain court battle. The radio industry seems to be in a better position to benefit from the Quadrennial review. The FCC indicated that it plans to lift radio ownership rules, including in-market rules that would allow a company to own more FM stations in a market. In our view, investors should focus on television companies that are below the current caps that have the capacity to make acquisitions and enhance its competitive position, which include Entravision, Tegna, and E.W. Scripps. In radio, we would focus on companies that could benefit from in-market consolidation including Salem Media and Townsquare.

OUTLOOK - TRADITIONAL MEDIA

TELEVISION BROADCASTING
Deal activity propels stock valuations

Television stocks were on fire in the last quarter, up 18% versus the S&P 500 Index of up 13% in the comparable time frame. Interest by investors was fueled by better than expected political advertising and heightened M&A activity. Some of our closely followed companies significantly outperformed both the TV Index and the general stock market. The shares of Gray Television (GTN: Rated Outperform) jumped 65% and the shares of E.W. Scripps (SSP: Rated Outperform) and Tegna (TGNA: Rated Outperform) soared more than 50% from lows in December 2018. All of the companies were involved in announced acquisitions or station sales late in the quarter. The groundswell of interest, we believe, was set earlier in the quarter with the sale of Cox Media’s broadcast stations for a deal valued at a hefty $3 billion. The transaction of 13 television stations was estimated to be at a strong 11 times cash flow, well above public market valuations of roughly 8.4 times blended 2019/2020 cash flow estimates.

While the transaction at 11 times cash flow was supportive of public market valuations, we caution investors that the multiple is likely not the new benchmark for private television transactions. Financial buyers typically “pay up” to establish a position in the industry, but then pay more “normalized” multiples to build out the TV platform. So, what is in store for the TV stocks for the rest of the year? Without the prospect of the FCC lifting ownership restriction, we believe that the M&A market will ease somewhat, even though we believe it will remain elevated. In this environment, investors likely will focus on the current fundamentals, with an eye toward the upcoming 2020 political season. Based on the updates we received at the NAB, we believe that advertising trends are somewhat tepid. Auto advertising seems to be holding together despite the likely lower unit volume sales this year. Television companies that focus on used cars, which is an area of focus for dealerships, are likely to fair better in this important category. In our view, it will be a long summer and investors are encouraged to be opportunistic in adding or building positions in the sector. Our current favorite for the upcoming quarter is Entravision (EVC: Rated Outperform).

RADIO BROADCASTING
Is it a multiple problem?

Radio stocks under performed in the last quarter, not getting a strong first quarter bounce like other mediums. Radio stocks were essentially flat, up 0.5% versus the general market that was up 13%. The underwhelming performance of the industry masked the stand outs in the quarter. The shares of Townsquare (TSQ: Rated Outperform) increased over 40% from its lows on December 31, 2018, a reflection of the company's above average revenue performance in 2018. Even more remarkable, the shares of Cumulus Media (CMLS: Rated Outperform) increased a significant 70% in the comparable time frame, a reflection of the company's recently announced asset sales and aggressive debt pare down. The disappointing performance for the radio stocks is despite the fact that many companies indicated improving revenue trends in the first quarter 2019. We pondered the problems with traction in radio stocks in a presentation at the NAB. The radio stocks trade in the middle of the pack in terms of cash flow multiples, an estimated 7.1 times 2019 estimates. Notably, the industry has struggled to reflect significant revenue growth, a modest 1% over the past 10 years.

In our view, the industry needs to drive improved revenue growth or it may suffer the prospect of a contraction in multiples more in line with the publishing stocks, currently roughly 5.1 times 2019 cash flow estimates. What is notable about the prospect of a contraction in the enterprise to cash flow multiples? Many companies in the radio industry given the enhanced debt levels from acquisitions on average have debt to cash flow of 5.0 times, with most of the the companies trading at roughly 6.5-7.5 times. This implies that a contraction in cash flow valuations would imply very little equity value for the industry. As such, it is not a surprise that most managements are highly focused on reducing debt levels, and, at the same time, on enhancing revenues through digital, programmatic, data, and attribution strategies. We are encouraged that many radio managements indicated that revenue trends appear to be improving into the second quarter, with one management team indicating that pacings were up as much as 4%. We believe that the radio stocks should show improved performance in the second half 2019 as investors focus on improving revenue trends in 2020, bolstered by political advertising.

OUTLOOK - TRADITIONAL MEDIA

PUBLISHING
Will investors look beyond takeover attempts?

Noble’s publishing index outperformed the general market, as well as all advertising driven mediums in the latest quarter, up a solid 21% versus a 13% gain for the S&P 500 Index. The stand out performance in the industry was driven by Lee Enterprise (LEE: Not Rated) and the New York Times (NYT: Not Rated), both up nearly 50%. Other publishing stocks have been buoyed by take over attempts, including the shares of Gannett (GCI: Rated Outperform), up roughly 21% for the quarter. Despite all of the noise regarding takeovers in the industry, there are some fundamental bright spots. Terry Jimenez, the CFO of Tribune Publishing, participated in the NAB investor meetings, providing his view of the publishing industry.

Notably, Mr. Jimenez indicated that advertising declines in the publishing industry should further moderate in 2019, a function of easing comparables with the year earlier advertising disruptions and strength in national print. While the print advertising business is likely in a perpetual state of decline, the company believes that in larger markets that it has some ability to impact the slope of the decline. Importantly, the company indicated that there is a far greater amount of a fragmented advertiser base. The company has already had the big hits from the likes of Macy's, Sears and others. While the company still has some big advertisers, most of those advertisers already restructured and are in a better financial position. National print advertising seems to be benefiting from mobile communications companies from E-Cigarette advertising, with some companies introducing in-home nicotine products. On the cost front, Mr. Jimenez indicated that there are further areas that the company can cut costs, especially fixed costs. Consequently, it appears no surprise that financial players may be hunting in the publishing group given the favorable cash flow dynamics. Now, it is a question whether investors will recognize the value of a publishing company. We believe that the publishing stocks will reflect the improving revenue trends in the industry and remain constructive on the industry.

OUTLOOK – INTERNET AND DIGITAL MEDIA

INTERNET AND DIGITAL MEDIA COMMENTARY
1Q 2019 – Regulatory Issues Take Center Stage

While FCC ownership rules were a focus of traditional media companies at the NAB meetings, regulatory issues weighed heavily on the internet sector as well. First, net neutrality reared its head again. In 2018, the FCC lifted its rules on net neutrality, but last week, the House passed a pro-net neutrality bill called the Save the Internet Act of 2019. The debate will now move to the Senate, where the bill is unlikely to pass. Second, Senator Mark Warner (D-Va) rolled out the first of a series of bills aimed at regulating Facebook and other social media companies. The bill would ban online platforms with over 100M monthly active users from using “dark patterns”, which refers to interfaces designed to coax users into taking actions that often results in giving up more information than the user realizes. The legislation, known as the Deceptive Experiences To Online Users Reduction (DETOUR) Act, would also create a regulator within the Federal Trade Commission that would enforce best practices as platforms evolve to protect users’ interests. The bill is one of several that are expected to address social media practices in the wake of data breaches, privacy scandals, and the dissemination of harmful content (“hate speech”).

This new legislation was announced on the same day that Social Reality (NADSAQ: SRAX) announced that it had 11 million registered users for its Big Token app, which allows consumers to own and earn from their own data. SRAX had announced its earnings the prior week and noted that it had half a million users. Within days the service went viral and within a week, another 10.5M users signed up for the service, validating the company’s contention that consumers value their privacy and are seeking tools to own their own data and to be compensated for it. The app also enables Big Token consumers to delete data and opt out of data sales. SRAX’s Big Token initiative is GDPR compliant and the company will begin monetizing its scalable audience in 2Q 2019.

Sector Performance: All four of Noble’s internet and digital media sectors outperformed the S&P 500 in the first quarter of 2019. While the S&P 500 was up 13%, Noble’s ad tech, social media, marketing tech, and digital media indices were up 45%, 28%, 20%, and 16% respectively.

INTERNET AND DIGITAL MEDIA COMMENTARY

Digital Media

Noble’s digital media sector also outperformed the S&P 500, but by far less than the other sectors. All six stocks in the sector outperformed, led by Netflix (NFLX, +33%) and Spotify (SPOT, +22%). Netflix performed well based on strong 4Q results and 1Q guidance, driven by strong net additions despite announced price increases. However, at last week’s Disney investor day, the company announced the launch of Disney+, a competitive OTT service to Netflix. Disney introduced the streaming media service at a $6.99 price point (considerably lower than Netflix’s lowest price service of $8.99) and forecasted 60-90 million subscribers by year- end 2024. Disney’s service will include over 7,500 TV episodes, 35+ original series/movies, and 500+ licensed movies from Disney classic animated films to Marvel, Pixar and Lucas Film (Star Wars) film libraries.

Advertising Technology
Following a rough 4Q 2018, ad tech stocks rebounded dramatically, with 10 of the 12 stocks in the sector posting share price gains, led by Telaria (TLRA, +132%), Sito Mobile (SITO, +102%), The Trade Desk (TTD, +71%), Social Reality (SRAX, +67%), Rubicon Project (RUBI, +63%) and Fluent (FLNT, +56%). Given that Noble’s sector returns are market cap weighted, The Trade Desk had by far the biggest impact on the sector. As usual, TTD significantly outperformed expectations, with 4Q 2018 revenue and EBITDA results exceeding Street consensus estimates by 8% and 25% respectively. Telaria also significantly beat Street consensus estimates, with revenue and EBITDA beats of 25% and 400% ($4M vs. $0.8M in EBITDA) in 4Q 2018.

Marketing Technology
Noble’s marketing technology sector finished the quarter up 20%, with 10 of the sector’s 11 stocks up for the quarter. Performance leaders include LivePerson (LPSN, +54%), Cardlytics (CDLX, +53%), Survey Monkey (SVMK, +48%), and Yext (YEXT, +47%). As usual, beating Street consensus estimates was the driver of each of the sector’s strongest performers.

Social Media
While social media stocks outperformed the broader market again, for once, it wasn’t solely due to Facebook. The real sector outperformer was Snap, Inc. (SNAP, +100%), which posted stronger than expected results, and allayed investor concerns over user growth, as daily active users (DAUs) were flat vs. the year ago period, when investors were concerned that DAUs would decline. While Facebook (FB, +27%) came under intense regulatory scrutiny, the company’s business continued to exceed Street consensus expectations.