[Operator Instructions] It is now my pleasure to turn the floor over to your host, Billie-Jo McIntire, Associate Vice President of Investor Relations for Sinclair. Ma'am, the floor is yours.

Billie-Jo McIntire - Assistant Vice President, 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; Scott Shapiro, Chief Financial Officer and Chief Operating Officer of Diamond Sports; and Steve Zenker, Vice President of Investor Relations of Sinclair.

Before we begin, I want to remind everyone that supplemental information for today's call is available on Sinclair's website, sbgi.net on the Diamond Sports Group page under the Investors menu.

Now I'll 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 of Sinclair's website and are included in Diamond's third 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 these 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 of valuation. This measure is not formulated in accordance with GAAP and is not meant to replace GAAP measurements and may differ from other companies' usage or formulations. Also just a reminder that Marquee was deconsolidated from Diamond and changed to the equity method of accounting within Diamond's financials as of March 1. Like last quarter, we will not be giving Diamond pro forma due to the confidentiality around de-consolidating Marquee from the diamond results. On the Investor Information page on Sinclair's website, however, you can find Diamond's third quarter actuals and fourth quarter and full year guidance.

Now Chris Ripley will take you through our operating highlights.

Christopher S. Ripley - President & Chief Executive Officer

Good morning, everyone. The third quarter was a busy one for Diamond as it prepared for the full launch of Bally Sports+, its D2C product, encompassing all of the Bally Sports RSNs. The launch occurred on September 26 and we could not be more pleased with the performance of the product and user engagement. We have seen encouraging demand for the service despite relatively low product awareness in the marketplace. The conversion rate after the free trial period is strong at approximately 70%, consistent with what we saw after our June soft launch. D2C sub-engagement continues to outperform a TV Everywhere user streaming 1.3 times more minutes on average since our full launch. In addition, the D2C subscribers return more frequently to the app and have longer average session times.

We are seeing particularly impressive results at Bally Sports North, where the Minnesota Wild and Timberwolves games have had over 23 million minutes streamed through the first month of the season with average unique streamers per game routinely exceeding a 1.0 rating in the Minneapolis CMA. These early data points not only indicate robust engagement, they underline our significant opportunity to generate revenue beyond D2C subscriptions as we continue to iterate the platform to include gamification elements, targeted ad capabilities and e-commerce components.

I would also like to give kudos to our D2C team, the strong early adoption of Bally Sports+ speaks to the quality of the product they have built and that is reflected in the 4.5 average app store ratings since full launch. We would also note the fantastic support we received from our team partners. Our coordinated marketing efforts are helping them increase their reach and we anticipate future partnership arrangements will allow us to be efficient with our marketing dollars.

Now I will turn it over to Rob to go through some operating highlights.

Robert D. Weisbord - Chief Operating Officer & President of Broadcast

Thanks, Chris. Media revenues for our third quarter came in a little below our guidance and lower than expected distribution revenues primarily due to higher than expected subscriber churn as well as slightly lower than expected advertising revenue due to fewer games in the quarter than forecasted. On a per game basis, ad revenues were up mid-teens percent, driven by healthy demand in many categories with the largest gains in service, retail, food and entertainment. Looking forward, we see some positive signs for advertising demand. The upfronts were successful and we're seeing substantial commitments from the auto category, which is expected to benefit from a lessening of supply constraints and building inventories. We continue to face the prospect of a difficult macroenvironment that could accelerate churn as well as potential for higher interest rates, which could impact consumer behavior.

Impressions continue to hold up as well for the RSNs for the just completed MLB season. Impressions for all RSNs were up low single-digits percent. And for Diamond's RSNs including Marquee and Yes Network, impressions were even better, up mid single-digits percent. And many of the Bally RSNs continued to average the highest ratings for all stations and their DMAs for times when they game there. The ratings and ad demand validates the continued value and attractiveness of live local sports.

Finally, during the quarter, we executed multi-year rights renewals with the Clippers and Pacers, continuing our long relationships with both teams. I also want to thank our direct-to-consumer team led by Mike Allen and Michael Schneider, they've done a tremendous job getting the app shipped and having terrific early results.

With that, I will turn it over to Scott to review the financials.

Scott Shapiro - Chief Financial Officer

Thanks, Rob. Diamond's revenues were $684 million in the third quarter. Distribution revenues of $565 million reflect an increase in subscriber churn to 10%. Total ad revenues were $112 million, an increase year-over-year excluding Marquee, driven by higher digital revenue and political revenue. Advertising revenue on a per game basis for the Bally RSNs grew at a mid-teens percent.

Diamond's media expenses for the third quarter were $664 million, up from the prior year excluding Marquee on slightly higher sports right amortization, a higher management fee and promotion expenses related to the D2C launch, partially offset by lower engineering expenses due to the absence of facility transition costs that were in the year ago period.

Average production cost per game increased mid single-digits percent due to an increase in certain labor expenses. As compared to guidance, media expenses were lower by $9 million in part due to 40 less games in the quarter produced and forecast and the timing of certain expenses. Diamond's adjusted EBITDA for the third quarter excluding $23 million for non-recurring items in the deferred management fees was $233 million, within our guidance range of $229 million to $237 million.

Diamond's cash at quarter end was $585 million and its $228 million revolver was undrawn, bringing liquidity to a little more than $800 million as of September 30. Total debt at the end of the third quarter was $8.674 billion. The AR facility was $193 million.

During the quarter, we took a non-cash impairment charge of $1 billion related to our customer relationship intangible assets as well as other intangible assets brought on by elevated levels of subscriber growth.

Looking ahead to the fourth quarter, media revenues are expected to be $634 million to $640 million. Distribution revenues are expected to be $553 million to $555 million with a sequential decrease from 3Q driven by continued subscriber churn. Included in the estimate is year-over-year subscriber churn of approximately 10%. Advertising revenues are expected to be $76 million to $80 million. And for the full year, media revenues are expected to be $2.778 billion to 2.784 billion.

Fourth quarter adjusted EBITDA is expected to be negative $48 million to negative $42 million, which includes an adjustment for the management and incentive fee deferral of $22 million. As a reminder, the first and fourth quarters are typically the lowest in terms of EBITDA as those quarters have a higher percentage of sports rights payments. Full year adjusted EBITDA is expected to be $158 million to $164 million, lower than our prior guidance due to the acceleration of subscriber churn previously mentioned.

With that, I'd like to open it up to questions.

Question & Answers

Operator

[Operator Instructions] Your first question for today is coming from Avi Steiner at JPMorgan.

Avi Steiner - JP Morgan - Analyst

Thank you. Good morning. I have a couple here. One, if I could start just on the D2C launch and thank you for the early info. But now that both the NHL and NBA seasons have begun, I'm wondering if you can extrapolate anything from the numbers, just what it might mean for the full season and maybe how these early results compare to what you had been expecting when you provided an outlook with different cases in our 8-K? And then I've got a couple of follow-ups. Thank you.

Christopher S. Ripley - President & Chief Executive Officer

Thanks, Avi. I think it's too early for us to extrapolate. I mean, we've really just got through sort of a month, month and a half of being up. And we're very pleased with the results in terms of engagement, app ratings, the quality of experience, engagement of the subscribers and I think it bodes well for the future. But at this point just extrapolating I think would be - give you a false indication.

Avi Steiner - JP Morgan - Analyst

Okay. Fair enough. My second question, there is growing consensus that we're moving into an economic downturn at some point in '23, albeit mild and again consensus doesn't mean it's right. But I'm curious how that might impact both kind of your linear traditional part of the business and then that you launched DTC side?

Christopher S. Ripley - President & Chief Executive Officer

Well, it's an interesting question, Avi, because we have continued to outperform on the advertising side quite significantly, especially relative to what we've seen on the broadcast side. Our advertising per game continues to go up on - at Diamond and that's despite some macro weakness that we've seen. So that tends to be where the business gets hit first is on the advertising side when you have a downturn and we're just seeing the strength of sports continue to shine through any sort of weakness in the macro-economy. Beyond that, the business is driven primarily by subscriptions, as you know, from either the D2C side or the pay-TV side, which with the vast majority being pay-TV and those tend to also be fairly sticky. And so we'll have to see how things play out in '23, but this model should be fairly resilient at least relative to expectations.

Robert D. Weisbord - Chief Operating Officer & President of Broadcast

Yes. Avi, I would add from the app side is that over the last couple of years, the sellers and what we've instituted from digital knowledge, they have been able to capitalize not only in the linear ad market, which tends to even now and the tough times being moving the live sports on the app side, but also from the digital expenditures that take place on sports, not only through this D2C launch, but through the TV app, as well as marketing services. So the team is a much more well-rounded sales organization. And everybody loves the fandom of the local team. So they're able to capitalize on large scale deals.

Avi Steiner - JP Morgan - Analyst

Appreciate the color. Very last question from me and thank you all for the time. So if I'm not mistaken, your heaviest team payments on a cash basis are due in the first quarter that's coming up. I'm curious if anything DTC wise or maybe recent negotiations have changed that? And then in the 10-Q, in order to have sufficient liquidity for the coming 12 months and I'm curious if - just thinking through the first quarter, if you might need to draw on the revolver to get through that? And thank you all for the time.

Scott Shapiro - Chief Financial Officer

So as it relates to your first question, nothing has changed there in terms of heavy payment flows. We do expect those to continue in Q1 and we'll have to follow-up with you, Avi, on revolver draw. We don't know off hand, I would suspect no, but we'll follow up with you.

Avi Steiner - JP Morgan - Analyst

Thank you.

Operator

Your next question for today is coming from David Hamburger at Morgan Stanley.

David Hamburger - Morgan Stanley - Analyst

Hi. Thank you very much. A couple of questions if I may. So looking back when you first gave guidance for 2022, your EBITDA guidance was kind of well north of $300 million. And now your updated guidance is about half or less than half of that for 2022. And I was wondering if you can unpack kind of what's transpired between that initial guidance that you gave, couple of those case studies you gave for the D2C. Importantly, I guess, one thing you're calling out is churn. So can you give us some specificity about how churn has increased significantly this year?

And then secondly, I know not necessarily comparable when I look at your sports rights payments. Again, in that initial guidance you gave for 2022, you expected sports rights payments to increase about 2% to 3% annually. If I'm just looking at your financial statements and I don't know if it's because of the Marquee deconsolidation or not, but it looks like year-over-year for the nine months, your sports rights payments were up like 9%. So could you help kind of reconcile maybe all of that in the context of where you are with your EBITDA guidance this year?

Christopher S. Ripley - President & Chief Executive Officer

So let's start with the guidance question. So I do think a chunk of that relates to or piece of it relates to Marquee's deconsolidation and it used to be included in obviously full year guidance as we entered the year and then it came out. And in terms of churn, which is really the underlying, I think for us here that's pushing the guidance down. When you look at our expectations as we entered '22, it was for somewhat stable to moderating churn, which was based on well-known industry resources. So this was a pretty sort of significant macro concerns and inflationary environment and we have seen quite a bit of acceleration over the year and that's probably driving at least 75% of the change to guidance when you look at the magnitude of where churn expectations were at the beginning of the year to what we're projecting for the full year. So I think that addresses your guidance question.

Sorry, what was the…

David Hamburger - Morgan Stanley - Analyst

Sports rights.

Christopher S. Ripley - President & Chief Executive Officer

Sports rights, yes. So we'll circle back to you certainly the moving pieces with the deconsolidation and certainly part of it. I would add that I think on a go-forward basis, even though we're not providing an outlook, that that range is probably fair. But we'll…

David Hamburger - Morgan Stanley - Analyst

I know you have a big step up in the -

Christopher S. Ripley - President & Chief Executive Officer

There's also quite a bit of rebates that make that number move around. So we have to be - make sure we're comparing apples-to-apples and clean numbers.

Scott Shapiro - Chief Financial Officer

Yes, David, when you compare 2022 to 2021, you got to remember 2021 had a lot of rebates in it from the teams because of COVID. So that is creating this increase year-over-year that you're seeing, but the underlying deals would be on a pro forma basis well within that previous indication.

David Hamburger - Morgan Stanley - Analyst

And I guess, just stepping back and looking at the trajectory as you mentioned churn accelerating on the linear side of the business. What's now your level of confidence? As you gave those cases when you did the transaction earlier this year, your level of confidence that the uptake on the D2C offering, your ability to pivot the business in that direction is going to offset what you're seeing now as an accelerated churn on the linear side of the business that you say that being 75% of your EBITDA expectation. I guess, as you look into 2023, some of those large payments in early part of the year, I know there's a step-up like in the Atlanta Braves payments next year. Otherwise, I guess, wonder your level of confidence that the DTC offering is going to be a sufficient offset.

Christopher S. Ripley - President & Chief Executive Officer

Well, look, I think we'll have to see how 2023 plays out. And right now, we're very happy with the product. We think it's performing exceptionally well. We got great response from our team partners and it's only going to build from here. So the great thing about this D2C strategy is that the freight - the biggest cost of this strategy is already paid for is sports rights. Now we're not - we're spending significantly on the app and the experience and marketing, etc., but the single biggest cost was already paid for. So the incrementality of the strategy we believe is quite strong. And as this brand builds, as market awareness builds and as more and more people that are outside the bundle come in to watch their favorite home teams, that should definitely make up for some of these losses that we're taking.

Robert D. Weisbord - Chief Operating Officer & President of Broadcast

The first goal is to ensure video quality, because that's what the hardcore fan is looking for and it proved out in the app ratings. The app ratings for the D2C product is significantly higher as Chris pointed out than when we first launched the TVE and the team continues to iterate. This is 1.0 version that came out with a very high rating in the app stores and we expect to get nothing but higher ratings as we add features to the apps as the months go on. So it's very encouraging to see the app coming out of the gate with such a high rating from the hardcore fans.

David Hamburger - Morgan Stanley - Analyst

And if I could just one kind of balance sheet question. So I'm just curious like, given where the securities are trading, the coupon payment on your unsecured notes in the first quarter of 2023, I mean, you could buyback more than half of that bond issue in theory in the open market with that coupon payment. I'm just curious like are you having any discussions with bondholders or any contemplation of any liability management here with the balance sheet given you do have some liquidity?

Christopher S. Ripley - President & Chief Executive Officer

Yes. I appreciate the question, David. And I think it's mathematically certainly true what you said. I can't speak to discussions specifically because those are subject to confidentiality arrangements and - but we have - we're very focused on liquidity and deleveraging over time. Those are our two key goals. And as previously reported, we have advisors involved, LionTree and Moelis, who helped through our last transaction earlier in the year. And it's - we're very open to any and all strategies to effect deleveraging.

David Hamburger - Morgan Stanley - Analyst

Okay. Thank you very much.

Operator

Your next question is coming from Lance Vitanza at Cowen.

Lance Vitanza - Cowen and Company - Analyst

Hey, guys. Thanks for taking the questions. Maybe a couple on the OTC platform and then one on programming expense. The first on OTT, how are you guys thinking about price point versus penetration? I mean, you could obviously - if you charged $1 a month, right, you could have 100 million subscribers or some crazy number. And if you only wanted 10 subscribers, you could probably charge $200 a month. But is the strategy that you're employing here, could you talk about what's the right number of subscribers for you? What's the price point that you think is going to maximize revenues? Is the strategy to lower more subscribers with a lower minimum and then boost the effective ARPU with gamification and advertising or is it really just something else? I guess, how are you thinking about that math?

Christopher S. Ripley - President & Chief Executive Officer

It's a great question, Lance. So this is something that we thought a lot about going into this strategy and did significant amounts of market research with Bain actually being our key consultant there helping us out. And we wanted to maximize revenue, not maximize subscribers. And given this was about adding extra incremental cash flow to Diamond, the maximum revenue was the objective and a $15 to $20 price point per month, which it's around $15 for our annual and it's about $20 for our monthly was the - that was the range for revenue maximization, not subscriber maximization.

The other consideration in the pricing was giving enough of a gap in retail pricing to the wholesale pricing that we give the distributors since this is a hybrid strategy. We don't believe the pay-TV linear channels will be going away anytime soon and so you need to have a wholesale price that's significantly lower than the retail price. And so those two factors played into decision around pricing. But independent of the wholesale/retail dynamic, we are currently priced at what all the evidence that we've seen and all the research we've done delivers maximum revenue from a subscriber perspective.

Now over time, pricing obviously may change. I feel like the - when we did this research, which was about two years ago, relative pricing has increased in streaming land. And so the relative value of what we're offering I think has only increased because we essentially are using the same price points that we envisioned two years ago. The rest of the streaming marketplace has gotten more expensive. So arguably, we might have some pricing power to go up, but we're in the early stages right now. And until we build out the rest of the monetization around gamification, commerce, various social sharing, etc., that is I think going to be a major driver of ARPU going forward since these sports fans are so passionate. They spend multiples more than regular streaming users on these ancillary items. And so I think over time, you'll see the ARPU skew more into these other areas of the ecosystem as we develop the app further and there'll be less reliance on subscriptions. Now does that mean we reduce our price over time? Perhaps or that means that just that the most of the growth is coming from the other areas.

Lance Vitanza - Cowen and Company - Analyst

That's really helpful. Thanks, Chris. Let me ask you the other streaming question. You mentioned that you've had some advisors helping you on the balance sheet, but we've obviously seen some press reports that you've also hired or maybe they're the same advisers, but they are working with advisers to potentially market the Diamond Sports Group is and that the leagues are perhaps interested. Is there any truth to that? Can you comment on that at all?

Christopher S. Ripley - President & Chief Executive Officer

So the advisors that I have mentioned are the same ones that were commented on in the press, the LionTree and Moelis & Company. And there is no sale process, but they are talking to parties about deleveraging, strategic partnerships and things of that nature.

Lance Vitanza - Cowen and Company - Analyst

Okay. Thanks. And then my last question, just in terms of the sports rights, the contract rights, I mean, churn going up, revenue is going down and yet these sports rights are increasing and whether it's low single-digits or high single-digits or wherever it is, it seems like it's out of proportion to the economic propose - to the economic realities. And I'm wondering am I missing something there? Or is - are you having discussions? Is there room to have discussions with some of the sports partners? I mean, I would not - I guess I'd be a little surprised if there were other groups beyond Diamond that were out there that were willing to pay as much let alone more for the rights to broadcast 150 daily baseball games in Cleveland as an example? And I'm just wondering if you have any opportunities there to address what in my opinion at least look to be potential disconnect in terms of what you're paying versus how you can monetize this stuff? Thanks.

Christopher S. Ripley - President & Chief Executive Officer

Thanks, Lance. So in those - you're right in that there discussions are occurring. Now they're largely timed with renewals. It's hard to have those off-cycle discussions, but certainly something that is used in renewal discussions and is the reason why the percentage growth in rights if you've tracked over time has been declining because those renewals have been coming in at lower levels. And the other thing you need to remember though in the broader context is that national rights and sports rights in general have increased in value tremendously and relative to local rights have - there's been a massive change there. And so what I think is happening on the local rights side is we're just - we're going through this transition of going from a single source of revenue, linear pay-TV to a hybrid approach. And we've just made that first step of doing that. And so it just - it takes some time for the model to play out, but that transition we believe will ultimately make these rights even more valuable in the future. And we just have to bridge through that moment in time.

Lance Vitanza - Cowen and Company - Analyst

Understood. All right. Thanks, guys. Appreciate it. Thanks.

Christopher S. Ripley - President & Chief Executive Officer

Thanks, Lance.

Operator

There appear to be no further questions in queue. I would like to turn the floor over to Chris Ripley, President and CEO for Sinclair, for any closing remarks.

Christopher S. Ripley - President & Chief Executive Officer

Thank you all for joining us today. Should you need more information or have additional questions, please don't hesitate to give us a call.

Operator

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Q3 2022

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