Entravision Communications Corp (EVC) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the Entravision Communications Corporation Second Quarter 2018 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Walter Ulloa. Please go ahead.

Thank you, Andrea. Good afternoon, everyone, and welcome to Entravision's second quarter 2018 earnings conference call. Joining me on the call today is Jeff Liberman, our President and COO; and Chris Young, our Executive Vice President and Chief Financial Officer.

Before we begin, I must inform you that this conference call will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to our SEC filings for a list of risks and uncertainties that could impact actual results.

The call is the property of Entravision Communications Corporation. Any redistribution, retransmission or rebroadcast of this call in any form without expressed written consent of Entravision Communications Corporation is strictly prohibited.

Also, this call will include non-GAAP financial measures. The company has provided a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's press release. The press release is available on the company's website and was filed with the SEC on Form 8-K.

Our second quarter results were in line with our expectations, with increased revenues overall, thanks to solid growth achieved by our digital segment, particularly, partially offset by decreased revenues at our television segment, while our radio segment revenue was flat over the prior period. As we communicated during our last earnings call, we continue to carefully manage our expenses to help offset the prevailing revenue headwinds across the broadcasting industry.

During the quarter, we took approximately $8 million of annualized expenditures out of the business. These actions resulted in onetime severance charges of approximately $782,000, which are excluded from our calculation of EBITDA as defined in our credit agreement. We will continue to focus on additional cost reductions throughout the balance of the year as business conditions warrant, and we'll provide an update for investors on this matter.

Meanwhile, our balance sheet continues to be solid with approximately $242 million in cash and marketable securities on the books versus a total debt of $297.8 million.

We were also active in buying back our stock in the second quarter, with approximately 1.1 million shares having been repurchased during the quarter at an average price of $4.81 per share.

Turning to our financial performance. Revenues increased 5% to $74.3 million in the second quarter. Consolidated operating expenses were up 4%, and consolidated adjusted EBITDA was flat at $14.9 million.

Free cash flow, which we define in our press release, was up 54% to $8.7 million compared to $5.7 million last year, while net income was up 38% to $4.8 million versus $33.5 million in the prior year.

Turning to our television segment. Television revenues were down 3% during the second quarter due to lower advertising sales and slightly offset by increased retransmission revenues. National advertising revenue was down 7%, while local advertising revenue was down 12% compared to last year's second quarter period.

Retransmission revenues increased 22% to $9.1 million during the second quarter versus $7.5 million in the prior year.

Political revenue for television in the quarter was $938,000. Excluding retransmission revenue and factoring out the loss of Telemundo, our Telemundo station affiliation last year, television advertising revenues were up 1%. Excluding retransmission revenue and political revenue and factoring out the loss of our Telemundo station affiliation last year, core television advertising revenues were down 3%.

Automotive was down 20% for our television segment and represented approximately 29% of our total television advertising revenue. Excluding the loss of our Telemundo affiliate in July 2017, automotive advertising for our TV unit was down 13%. We saw growth in only 3 of our top 10 auto brands. They were Hyundai, Subaru and Audi.

Breaking up the various auto tiers. Tier 1 manufacture auto revenue was down 52%, while tiers 2 and 3 were down 13% and 22%, respectively.

Nationwide, the forecast for annual new car truck sales is 16.7 million to 16.9 million units, below 17 million units for the first time in years. Headwinds in the auto industry include record-level incentive programs to move new units. These incentive programs negatively impact ad budgets. A high volume of fleet sales, which produce no profit; and a surplus of used cars and lease returns are contributors to the soft auto ad market.

Grocery stores and product brands are the only top 10 advertising categories that generated growth during the quarter, with 8% growth in both categories over the prior year.

Services, travel and leisure, retail and restaurants, 4 of our top 10 categories for television, were particularly soft in the quarter, producing declines of 2%, 3%, 3% and 19%, respectively, compared to the second quarter of last year.

Overall, we added 32 new advertisers who spent more than $10,000 during the second quarter, which totaled $690,000 in advertising revenue. Notable new brands returning to our spot markets in the second quarter included Audi, ScholarShare529, American Signature and Yvonne Welsh.

Turning to our ratings performance. Our Univision television stations built upon their market leadership in the May 2018 sweeps. For adults 18 to 49 in early local news, our Univision television stations finished ahead of their Telemundo competitors in 14 of 17 markets where we have a head-to-head competition, plus one tie. In late local news, we finished ahead of Telemundo's competitors -- we finished ahead of our Telemundo competitors among adults 18 to 49 in 8 markets among the 17 markets where we have a head-to-head competition, plus 4 ties. Additionally, among adults 18 to 49, our early local newscasts are ranked #1 or #2 against English and Spanish competitors in 10 markets.

During the full week, our Univision and UniMas television stations combined have a cumulative audience of 2.8 million persons 2+ in our markets compared to Telemundo's 1.8 million persons 2+. We have 51% more viewers in Telemundo in our television footprint.

During the weekday prime, we had higher ratings than at least 1 of the big 4 networks in 9 of our markets among adults 18 to 34 and adults 25 to 54.

Now turning to our audio division. Audio revenues were flat during the second quarter compared to the prior year. Local revenues were down 3%, while national revenues increased 8% over the prior year period.

Political revenue for our audio division in the quarter was $180,000. According to Miller Kaplan, we outperformed the market in 8 of the 13 markets we subscribed to the service.

Grocery and finance were the 2 categories in the top 10 that experienced growth in the second quarter, with grocery increasing 10% and finance increasing 9%, while automotive was flat for the quarter for our audio division.

In the audio -- in the auto category, we saw growth in Tier 1 and Tier 2, which was offset by a decline in Tier 3 spending.

Services, travel and leisure, retail and restaurants, 4 of our top 10 categories for audio, were particularly disappointing in the quarter.

Overall, our audio business added 24 new advertisers who spent more than $10,000 during the second quarter, which totaled approximately $500,000 in advertising revenue.

Notable new brands in the second quarter included Superior Grocers, Audi, Wilshire Law Firm, Nissan West Region and The Universal Church.

Moving to Los Angeles, the largest radio market in the country. In the second quarter, we developed a plan to better compete in the most competitive Spanish language radio market in the country. The first phase was introduced on May 2 when we ended the KLYY, KSSC simulcast of La Suavecita and reintroduced the Jose format back to KLYY. We enhanced KSSC's La Suavecita lineup with the strongest on-air talent at Entravision: Genio Lucas in a.m. drive, Piolin in midday and Erazno y La Chokolata in the afternoon drive. The response from local clients and our audience was swift and conclusive. KLYY returned to the #1 station in Riverside–San Bernardino regardless of language in our key demos adults 18 to 49 and adults 25 to 54 Between the hours of 6 a and 7 p., Monday to Sunday. Our Los Angeles radio cluster saw revenue improvement in the month of May and June as a result of these format changes.

The next phase of the plan came on July 26 when KDLD FM and KDLE FM switched from its Tricolor Mexican region format back to the popular classic rock, super straight retro. Again, the response from local clients has been very positive as this format appeals to a broader age spectrum of listeners and has great brand loyalty in the market.

Looking at our audio division ratings performance for spring 2018 among Spanish language radio stations. Erazno y La Chokolata show is ranked #1 or tied for #1 in 9 of 11 markets released to date among the Spanish adults 25 to 54; #1 or tied for #1 in 8 markets among adults 18 to 49; and #1 in 7 markets among Hispanic adults 18 to 34.

Across our 11 O&O radio stations release for spring 2018, the Erazno y La Chokolata show reached more than 570,000 Hispanics 18 to 49.

On our Tricolor network, a.m. drive and midday program ranked as the top choice among Hispanics. During midday, La Plebe ranked #1 or #2 among Spanish language stations in 7 out of 11 markets released to date among Hispanic adults 18 to 34 and #1 or #2 among Hispanics 25 to 54 in 6 markets. For a.m. drive, our stations ranked #1 or #2 among Spanish language radio stations in 6 out of 11 markets released to date among Hispanic adults, including ties.

Suavecita, our new format brand that replaced Jose in January this year, has had encouraging results during the second quarter on the air. El Genio Lucas as well as Piolin anchor our morning drive and midday spots across our 11 markets released. For spring 2018, El Genio Hispanic adults 18 to 49 cum audience is up 37,000 and Piolin's 18 to 34 Hispanic cum audience is up 7% from the same time last year.

And additionally, in May, we relaunched the fan favorite José Network in our Los Angeles Riverside markets. June results were favorable, with Los Angeles ratings doubling compared to May among Hispanics 18 to 49 in a.m. drive and midday.

Now let's move over to our digital business. Our second quarter digital revenues increased 32% versus the same period last year. On a pro forma basis, including the impact of the Smadex acquisition during the second quarter, digital revenues grew 29% in the quarter. Operating cash flow from our digital businesses grew 119% in Q2.

Focusing on our digital business units. Headway has seen its core platform, Mobrain, extend its geographic footprint beyond Latin America and was recently launched in the United States. The company also closed on June 11 the strategic acquisition of Smadex, a leading programmatic mobile demand-side platform for advertisers powered by machine learning. Smadex proprietary technology allows advertisers to execute branding and performance campaigns on mobile devices via realtime bidding using its machine learning engine to understand the best combination of creative assets targeting and pricing for each audience cluster. This acquisition will be fully integrated into Headway's technology stack, creating revenue and expense efficiency synergies and will enhance the mobile growth solution, strengthening Headway's programmatic capabilities. The acquisition of the Smadex demand-side platform is part of an ongoing strategy to sustain a leading position within the mobile performance space industry.

A couple of more comments about Smadex. We're in the process of integrating Smadex and Headway for stronger revenue growth and better efficiencies. That process is going well -- extremely well, I might say. For example, we budgeted that Smadex would accrue -- would achieve its first $1 million month of revenue by November this year. I'm pleased to announce that we achieved that goal in July, the first full month that Smadex became part of the Entravision family. Congratulations to the Headway team led by Martin Kogan and the Smadex team led by Jordi de los Pinos for this impressive achievement.

Also, Smadex was recently recognized by Analytics Insight, a leading tech publication, as one of the 10 most innovative companies in machine learning in the world.

As we continue growing our digital and data-enriched client-centered services, we continue focusing on 3 business pillars. First, we are strengthening our existing brands portfolio and their own communities reach and engagement. This effort has become a critical branded content tool that enables our advertisers to reach their desired customers together with their television and radio audience.

Second, we are adding new creative insights and data capabilities to our existing ad stack to provide more impactful, accurate, efficient and rapid results to our clients. On this front, we continue enhancing our mobile programmatic and demand-side performance with rich data platforms, clear attribution and machine learning optimizations to better support our clients and margins.

And third, we are committed in further developing our digital sales by maximizing the efforts of a sales force of over 300 professionals working in 14 emerging economies with a combined population of 680 million people and a total GDP of $7.6 trillion.

Moreover, additional exciting projects are happening within our tech data and business units as we add capabilities and seek economies of scale.

Within Headway, Pulpo, and now Smadex, we are driving essential synergies in the digital advertising ecosystem by connecting the supply and the demand side of business to technology. These platforms are allowing us to advance our existing strategy, our existing media data sets and business intelligence efforts when combined with our integrated media and digital services unit -- digital service units, including Pulpo and Headway. These synergies will improve our overall digital product offerings, our digital margins, our digital growth and our R&D and product development capabilities.

On this front, Entravision continues to build a solid database of Latino users by collecting behavioral and purchasing data. We are using this data to build segments in our data management platforms to enable efficiencies, productivity and powerful, insightful product offerings to our clients for broadcast, digital and integrated solutions. The number of brands working with us on digital campaigns continues to grow. Major brands that have chosen to work with Entravision's digital products during the second quarter include Spotix, zoom.com, Johnson & Johnson, Toyota, Easy Taxi, Walgreens, Chick-fil-A and DoubleDown Casino.

We generated strong year-over-year performance in the second quarter in a number of key advertising categories, including our top categories: services, we saw a 68% increase; auto repair increased 33%; finance increased 47%; and telecom saw a 233% increase.

Overall, our digital platform continues to benefit from our unique combination of assets and expansive reach. According to Appsfire rankings, Mobrain is the third mobile ad volume platform in Latin America and the 12th worldwide.

As it is well known, the digital industry is currently demanding the expansion of audiences through owned and operated properties. Entravision keeps investing in the growth with managed platforms to serve the Latino population at a local and national level. Through our online verticals, we have published over 6,300 original stories and videos during the second quarter, which are aligned with our top categories such as news, entertainment and sports. These stories produced over 15 million views across our owned and operated websites and over 63 million views across Facebook, Instagram and Twitter.

During the second quarter, we have seen a significant increase in engagement on our digital audio streaming initiatives. We reached over 1.1 million unique listeners, which generated 7.3 million hours of listening in Q2.

As we head into the third quarter, we're exploring new audio opportunities through AudioEngage, Entravision's owned digital audio advertising company, and the expansion of products such as podcasting and programmatic partnerships with digital demand platforms.

Our social media strategy to create and strengthen bonds with local community is showing positive results as we are nearing the 11 million followers mark across key platforms such as Facebook, Instagram and Twitter.

Overall, Entravision continues to strengthen its digital platform through its commitment to produce high-quality content, increase community engagement and above all, to provide the most powerful set of Latino data and digital services to our advertisers. We will continue to form strong alliances, acquisitions and digital scale developments.

Turning now to our paces for the third quarter. Television revenues, including retrans, are currently pacing at minus 6% in the third quarter. There is no political revenue included in this pacing. Our audio advertising revenue is currently pacing at minus 2% in the third quarter. Also here, there is no political revenue included in the pace for the audio division. And digital revenue is currently pacing up in the 20% range.

In summary, our second quarter results were largely in line with our plan, and we remain on track in executing our strategy to further build on our unique audience reach and targeting capabilities while proactively managing our costs. With many mid-term election races heating up across all of our markets, we remain focused on maximizing our revenue potential in this important election cycle. As we execute our multi-platform strategy and strategically invest in our content and distribution assets, we remain committed to maximizing our performance and enhancing our cash flows to the benefit of our shareholders.

I will now turn the call over to Chris Young, who will review our second quarter numbers.

Thank you, Walter, and good afternoon, everyone. As Walter has discussed, net revenue for the quarter was up 5% at $74.3 million compared to $70.5 million in the same quarter of last year. Operating expenses increased 4% to $43.8 million, and consolidated adjusted EBITDA was $14.9 million.

Onetime severance costs relating to our workforce reduction efforts during the second quarter totaled $782,000, and they're excluded from our calculation of EBITDA during the quarter as per the terms of our 2017 credit agreement.

For the quarter, revenues in our TV segment were down 3% to $36.5 million compared to $37.8 million in the same quarter of last year. The decrease in our TV segment revenue was primarily attributable to decreases in both local and national revenue, offset by an increase in retransmission revenue.

We generated retrans revenue of $9.1 million for the 3-month period ended June 30, 2018, compared to $7.5 million in the same quarter of last year.

Radio net revenue for the quarter was flat compared to the prior year period at $17.2 million. National revenue was up 8%, while local revenue was down 3% compared to the prior year period.

Digital net revenue for the quarter was up 32% to $20.6 million compared to $15.6 million in the same quarter of last year. The increase was primarily attributable to the strong performance of our Headway digital operations.

For the quarter, cost of revenue in our digital media segment was up to $11.4 million compared to $8.8 million in the same quarter of last year. The increase was primarily attributable to increased cost of goods sold at Headway during the second quarter of 2018 related to the increase in revenue over the prior year period.

Operating expenses increased 4% to $43.8 million for the 3-month period ended June 30, 2018, from $41.9 million last year. The increase was primarily due to the increase in revenue from our digital segment during the quarter, partially offset by a 1% decrease in radio operating expenses.

Excluding noncash comp expense, cash TV expenses for the quarter were $20.5 million versus $20 million in same quarter of last year, an increase of 2%. Radio cash expenses, excluding noncash comp expense, were down 1% versus last year.

Corporate expenses for the quarter were up 12% to $6.3 million compared to $5.6 million in the same quarter of last year. Excluding noncash comp expense, corporate expenses for the quarter were $5.2 million versus $4.8 million in the same quarter of last year, an increase of 7%. The increase was primarily attributable to legal and financial due diligence costs associated with the Smadex acquisition.

Income tax expense was $2.7 million for the quarter, while cash taxes paid were $0.6 million. Given the elimination of our full valuation allowance in the fourth quarter of 2013, future income tax expense will run at approximately 35% of pretax income, although most of this expense will continue to be noncash given our NOL offsets.

Earnings per share for the quarter were $0.05 compared to $0.04 in the same quarter of last year. Free cash flow, as defined in our earnings release, increased 54% to $8.7 million for the quarter compared to $5.6 million in the same quarter of last year.

Cash interest expense for the quarter, net of interest income, was $2.5 million compared to $3.4 million in the same quarter of last year. Cash capital expenditures for the quarter were $2.7 million. Excluding capital expenditures expected to be reimbursed by the FCC, we anticipate that our capital expenditures will be approximately $9 million during the full year 2018.

Turning to our balance sheet as of June 30, 2018. Our total debt was $297.8 million, and our trailing 12-month consolidated adjusted EBITDA was $46 million. Cash and marketable securities on the books was $242 million as of June 30.

Net of $75 million of unrestricted cash on the books, our total leverage, as defined in our 2017 credit agreement, was 4.87x as of June 30. Net of cash and marketable securities, our total net leverage was 1.22x.

This concludes our formal remarks. Andrea, we're going to turn it over to you. Walter, Jeff and I will now take your questions.

(Operator Instructions) And our first question comes from Michael Kupinski of NOBLE Capital Markets.

There are a number of TV stations on the market now. I was wondering if you can talk about your appetite for TV stations, whether Spanish or Network, in the current environment.

Michael, it's Walter. I mean, we will prefer if we were to buy television stations to buy Spanish language stations. But if only English language stations are available, then we would look at markets where we have high-density Hispanic populations. For example, we bought an NBC affiliate in Palm Springs, which is about a 50% Latino market in terms of population. If we could find English language affiliates along the U.S.-Mexican border, from San Diego all the way to McAllen, in those 5 broader markets that we operate in, that would be certainly, I think, a positive development. But unless it's a high-density Latino market with populations pushing 50%, it's probably not the right investment of our capital.

Got you. And what are the current NOLs at the company? And then if you can just give me a little color in terms of the taxes. Can you -- particularly, as it relates to the spectrum auction proceeds. And in the event that the company doesn't make a like-kind acquisition, at what rate would you have taxes? And how much of the proceeds are going to be taxed, so to speak? And just a little color on where the tax situation would stand on that.

Sure, Michael. We've got about $360 million in NOLs on the books. We have, under the 1033 ruling, until the end of next year to redeploy the proceeds of the auction for like-kind exchange assets; in other words, to avoid having to burn through those NOLs. If in the events we were not able to burn through those NOLs, the tax rate that would apply would be 22%.

Got you. And you took a nice chunk of expenses out of TV. The $8 million in annualized cost savings, will that be spread evenly over the next few quarters? Or can you give us some thoughts about whether the second quarter is a good run rate? Do you expect further cost reduction efforts? Could you add a little color there?

Sure. That's an annualized number. You didn't see it in the second quarter, the full effect, because you had about $800,000 in severance charges that were offset against that. It did come out of EBITDA, but it's still in the expense. We make that adjustment with the EBITDA calculation. But for radio, on a run rate basis, per quarter, it should be about $1.1 million beginning in the third quarter. And for TV, it should run about $1.8 million.

Got you. And then political in the second quarter piece nicely above the last cycle, I believe, albeit you get most of your political in the second half. Would you care to comment about how the third quarter is shaping up on political advertising and whether or not you have some thoughts about full year political advertising at this point?

Well, I think we told our investors and the markets, Michael, that we are looking to achieve the same amount of political revenue that we generated in 2014, which was about $9 million.

$9.3 million, that's right.

$9.3 million. And so we've kept that goal this year. Not sure about which way the wind was going to blow, but I'm pleased to announce that so far, through the first half of the year, we're at budget. We've got 2 big quarters of political coming up between the third and the fourth quarter, I mean, October, for sure. But we're on the right track, so we feel good about it.

Our next question comes from Gordon Hodge of Tracker Research.

Just had a question on the retrans of $9.1 million. I'm just wondering, is that a -- was there any kind catch-ups or anything in there that wouldn't necessarily recur going forward? And then I was curious, also, I believe at the end of the quarter Dish and Univision got in a little spat, I guess. And I'm just wondering if that's impacting you on the refinance front in Q3.

Yes. So the retrans in the quarter did have some catch-up payments. But the way you should think about retrans going forward, particularly given that we're getting some traction on the English language side with respect to the retrans growth, that run rate number quarter in, quarter out should be around $9.5 million in revenue. I would caution, though, not to factor that $9.5 million in the coming quarters because, to your point, we're dark on Dish across the country as Univision works through their negotiations. And that has a price tag of about $340,000 a month for us. We're already in 2 months of 2 of that issue of us being dark. So you should factor in at least what we're thinking is at least 2 months of that $340,000 coming out of that $9.5 million quarter run rate -- quarterly run rate.

Okay. And the $9.5 million run rate you talked about, that's a gross number, not net, obviously, because NBC you got to pay non-Hispanic networks something out of that, presumably, so it's not all margin, I understand that. But I'm curious, is that -- does that reflect increases you've now negotiated in, say, Palm Springs, et cetera? Or is that -- those are just natural increases and the renegotiation comes up later?

We're getting traction on some increases. You break out that $9.5 million. $7.5 million of that $9.5 million is Univision-related retrans, and then the balance, that's $2 million, is based on the English language stage. Now on the reverse comp side, you've got about $1 million, a little bit more than $1 million a quarter against that $2 million as far as the retrans is concerned in expense.

Great. Okay, cool. And then I'm just wondering, I know that one of the issues you've been grappling with is just the border economy is having some challenges of late. And I'm just wondering if you're seeing any stabilization of those economies in terms of advertising or just general business, thinking of El Paso, McAllen, et cetera. And whether or at least are you seeing any sign of that getting less worse?

Gordon, in spite of the recent, I'll call it, downturn, the impact of the retirement of our Telemundo affiliation in San Diego, our dominance along the U.S.-Mexican border continues, from McAllen all the way to San Diego. And last quarter, our TV stations along the border performed quite well despite the fact that there's a lot of controversy along the border, particularly in the McAllen area.

Okay. Good. And I guess, just finally, just on the buyback, glad to see you buying back some stock. How much is left of the authorization? I think it was $15 million. Can you state how much…

Yes, we've got almost the full $15 million that was announced in the last quarter. We were just burning through the remnants of our prior $15 million (inaudible) approval. So you virtually -- you pretty much have all of the $15 million of the renewed approved amount as dry powder.

Okay, great. And then just last comment, I just -- if I'm not mistaken, I think because of the World Cup, Univision's ratings really were a challenge, I think, in the second quarter, presumably for you guys as well. So process that you're able to outgrow the ratings declines, just anything to comment there. Is it news that's tolling up? Or is it just your sales guys just locally being able to deliver through the ratings? Or anything you can comment would be great.

Well, the news held up pretty well during the World Cup period. We did get the benefit, by the way. We've got a couple Fox stations. So we've got some benefit there. And then we also had World Cup on radio. So we got some benefit there as well. But I think, generally speaking, our local news really carried us through the difficult ratings period. Telemundo, to your point, did really well in the ratings, good for them. We just basically continue to focus on those operations which we have ultimate control over, which is our local news content. And we did pretty well, so we're pretty pleased.

I commented, Gordon, that in the recent survey where we compete with Telemundo, we -- our adults 18 to 49, we were #1 over Telemundo in 14 of the 17 markets. Now that was in May. But our news has always been a very strong product, and we didn't see any decline in advertising support for our news.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Walter Ulloa for any closing remarks.

Thank you, Andrea. And thank you, everyone, for participating on our second quarter earnings call. We look forward to talking to all of you in November when we will announce our third quarter earnings results. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.