Grupo Televisa SAB (TV) 2009 Q3 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's Third Quarter 2009 Conference Call. Before we begin, I would like to draw your attention to the press release, which explains the use of forward-looking statements and applies to everything we discuss in today's call and in the earnings release.

I will now turn the call over to Mr. Alfonso De Angoitia, Executive Vice President of Grupo Televisa. Please go ahead, sir.

Thank you. Good morning. We're pleased to have you join us for this discussion of Grupo Televisa's third quarter 2009 results. With me are today are Jose Baston, President of Television and Content, and Salvi Folch, our Chief Financial Officer. I will take you through the highlights of our financial results for the quarter. Then, Pepe will discuss the operating results of our television segment. After that, we'll be happy to take your questions.

During the third quarter, our core businesses continued to show resilience and our subscription-based operations carried on growing and adding subscribers. Our consolidated revenue increased 5.5% during the quarter to MXN13.1 billion and our operating segment income grew by 1.5% to MXN5.4 billion. In our television broadcasting business, revenue was MXN5.5 billion. The drop in revenues of 1.9% from last year is explained by a transmission of the Olympics during the third quarter of 2008, also by the decline on revenues of our border stations and by the tough economic environment.

Our performance during the third quarter is consistent with our full-year guidance of flat revenue growth for 2009. Operating segment income was MXN2.7 billion, which is in line with the prior quarter, and the margin was 49.3%. The lower margin resulted mostly from the depreciation of the peso. Our TV broadcasting operations continued to maintain strict controls over cost and expenses in order to protect margins while continuing to deliver solid ratings.

Total revenue in our pay television network segment grew by 29% during the quarter. This was a result of an increase in subscribers in Mexico and abroad and of the translation gain that originates in a revenue base which is denominated in foreign currency. Operating segment income reached MXN398 million, and the margin was 58%.

The lower margin in this business unit is explained mostly by the cost associated with the launch of Televisa Deportes network, our highly anticipated sports network, which amounted to MXN65 million during the quarter. As part of the launch, and as Pepe will discuss shortly, Televisa Deportes network will carry several of the World Cup games on an exclusive basis. We expect this to be an important driver of growth for this network.

Total revenue in our programming exports business grew by 37% to MXN756 million, and operating segment income reached MXN423 million. Our exports of content to Latin America grew by 35% from last quarter and by 17% from the same quarter last year.

Royalties from Univision reached $38 million and included $1.4 million earned during the second quarter, but not recognized then because our royalty number was an estimate, since Univision reported as a royalty after our second quarter results had been published. Excluding this adjustment, Univision royalties dropped 1.7% from the same quarter of last year.

Total revenue in our programming exports business also benefited from the favorable translation effect on foreign currency-denominated sales. Our publishing business continues to struggle, along with the rest of the industry. Revenue was down 12% from last year.

However, we have taken all necessary steps to remain profitable, while at the same time protecting the value of our brands. For example, we have cut down the trim size or reduced the number of pages of some magazines. Publishing tends to be more affected than other media during economic environments such as the one we're living, but should recuperate once advertising budgets do.

Publishing operating segment income was MXN35 million, and the margin was 4.4%. This quarter, our publishing margin includes the negative impact of some non-recurring items, such as severance payments related to personnel layoffs. In spite of the difficult economy, Sky experienced revenue growth of 9.2% during the third quarter to MXN2.5 billion. Total Sky subscribers grew by 23,000 to 1.8 million. This compares to a total growth in subscribers of only 9,000 in the second quarter of 2009.

Sky expanded its product offering by launching packages targeting a segment of the population new to Sky, interested in a limited lower-price pay television offering. For example, during August, Sky initiated the promotion of its Mi Sky package. It is priced of MXN219 for 25 channels, and it can be expanded by the subscriber with additional channels. The success of this offering has met our expectations and the average revenue per subscriber is higher than the MXN219.

Operating segment income reached MXN1.1 billion. When compared with the same quarter in 2008, margins declined by 570 basis points. About 170 basis points are attributable to the negative translation effect on foreign currency denominated programming expenses. The balance, about 400 basis points, is attributable to the amortization of the expenses related to the exclusive transmission of the World Cup matches next year. As in the past, this is an important driver for growth in high-ARPU subscribers, and it's in line with our strategy of positioning Sky as the leading provider of exclusive sports programming.

Moving on to cable and telco. Our cable and telco business, our third largest segment, grew by 10.6% in terms of revenue to MXN2.2 billion in the third quarter, and operating segment income reached MXN752 million, an increase of 11.5%. Our triple-play offerings continued to be very successful, with voice and broadband experiencing the highest rates of growth.

The growth in the services is being accompanied by a decline in churn, which means that the degree of satisfaction with the services is growing every day. As an add-on to Yo, which is the brand that we established between four of our cable companies, our low-priced triple-play offering we are now offering netbooks. We believe that our computer offering is very competitive, and the success of this offering has been reflected in a solid initial number of orders.

It will also assist in the expansion of our broadband subscriber base. Our cable investments will continue to cooperate with each other to find alternative ways of generating value. Yo, which is the brand that I described, is a very good example of what can be achieved.

In the aggregate, the number of Cablevision, Cablemas and TVI revenue generating units, or RGUs, reached over 2.6 million and a growth of 119,000 new additions during the quarter. Of these additions, 47% were telephony subscribers and 32% were broadband subscribers. In the particular case of Cablevision, which is a cable company operating in Mexico City and surrounding areas, and excluding Bestel, revenue grew 14% from the third quarter of 2008.

The growth in telephony was particularly strong. Telephony RGUs grew by 191%, after adding 73,000 new customers in the last 12 months. As a result, telephony revenues has more than tripled over the last 12 months. Broadband revenue grew 14% year-over-year after the addition of 45,000 new broadband customers. And video, in spite of the increased competition in the pay television market, grew 3% after the addition of 36,000 new subscribers, 11,000 of which were added in the third quarter.

Cablevision has kept deploying the capital necessary to further upgrade the network infrastructure, an investment which will continue to distinguish Cablevision with the cable operator with the most advanced cable infrastructure in the country. As part of this plan, the number of nodes has tripled over the last year. Close to 21% of its network is now fiber optic, and 84% is bi-directional.

On the other side, Cablemas revenue also grew 14% from the third quarter of 2008. The growth in telephony RGUs was over 62%, after adding 46,000 new customers in the last 12 months. Broadband RGUs grew by 13%, after the addition of 31,000 new customers and video RGUs grew 8.4% after the addition of 69,000 new subscribers.

Moving on to TVI, which is the company operating in Monterey and also in the northern part of Mexico. In a similar manner, TVI continues to benefit from the success of its triple-play offerings and the joint efforts with sister cable companies. During this quarter, TVI added 21,000 new RGUs, reaching a total of 396,000. As mentioned in the earnings release, beginning in the fourth quarter of 2009, we will start consolidating TVI's results in our financial statements.

Moving on to another subject. This week, the House of Representatives of Mexico approved, number one, an increase in the corporate income tax rate from 28% to 30%. Two, a new excise tax of 3% on telecommunication services. Three, an increase on the excise tax on gaming from 20% to 30%. Four, an increase of the value-added tax from 15% to 16% and five, new rules concerning fiscal consolidation for conglomerates.

If approved by the Mexican Senate, these new taxes and increases of current taxes will have a material negative impact on our Company and its subsidiaries. Televisa's effective tax rate for the third quarter and for the first nine months of the year was very close to the statutory corporate income tax rate of 28%. This has been the case in each of the last years.

We continued to maintain a very solid balance sheet. Our total cash position, including temporarily held to maturity and available for sale investments reached over MXN36.5 billion, of which approximately 70% is denominated in foreign currency. Our total cash position exceeded our total debt by MXN492 million. As we have shown in the past, we will continue to remain disciplined with the use of cash.

Thank you for your attention, and I will now turn the call over to Pepe.

Thank you, Alfonso. Good morning ,everyone, and thank you for joining us. We are very pleased with our results for the third quarter. We continued to be the leaders in our industry, achieving an average sign-on to sign-off audience share levels of 70.6%, and having 25 of the top 25 programs in Mexico.

Our television broadcasting segment continued to deliver strong results, due mainly to our great productions and the solid performance of Channel 2, our flagship. For example, our [AP and novella] delivered outstanding results, reaching an average audience share of 42.9% in the quarter.

It's important to mention that in addition to being a very successful telenovella, it serves as a perfect example of how we continued our strategy to increase product integration in our scripted production, productions to attract those advertising clients looking for more creative marketing strategies. Similarly, our Channel 5 in-house productions continued to be very successful. Series is a new genre that we launched two years ago in order to broaden our portfolio, offering and extending our production expertise. We are very happy with the results that we have achieved so far.

These series are programs that reach demographics that complement those targeted in our other channels, namely young adults, which is a very popular target demo among our advertising clients. The expansion of our expertise in the production of series also enables us to increase the number of platforms over which this content can be delivered, such as pay TV, and to benefit from the growing product placement opportunities in our market. This could in the future help us expand our product offering in pay television and internationally.

Our pay TV networks business continues to deliver strong results. As we anticipated in our second quarter conference call, we successfully launched TDN, Televisa Sports Pay TV network. This launch has enabled us to offer a channel in a genre that is very important to our audience, our advertising clients and our pay TV affiliates. The exclusive content offered over this channel, which includes many of the upcoming World Cup games, is an important factor that will distinguish TDN when compared with other channels in this genre.

Also, as we recently announced, we added to our pay TV portfolio Telemundo's pay TV network. With these new additions, we now offer 19 networks, 11 of which are among the top 25 rated channels in pay TV platforms in Mexico.

With regard to our programming export business, as we have shared with you in the past, our strategy to grow is to capture opportunities in high-potential markets by co-producing and collaborating in the production of telenovellas, which have successfully experimented with this new model, which allows to participate in the advertising buy of new markets in places such as China and Brazil.

This is in addition to our already extremely successful export of finished product around the world. We are the leadership in production of content in Spanish, which we have shown in the past few quarters. We will seek to continue extending this expertise into other markets, other platforms and other languages.

Thank you for your attention, and now we will be ready to take your questions.

Thank you. (Operator Instructions).

Your first question comes from the line of Andrew Campbell with Credit Suisse.

Yes, good morning. My question is about Sky, and we saw some fairly significant margin deterioration in the quarter, and I was wondering if in light of the promotional activity you're doing that we should expect this level or lower of margins going forward. And you mentioned the Mi Sky packages. We've also seen in the paper some references to the [BTV] plans as well, another lower-end package. Can you give us an update on how that plan is going, if you intend to roll it out more nationally, and how that fits into the other product offerings that you have?

Yes, hi, Andy. To your first question, Sky's margins were impacted because we took a charge for the acquisition of the rights for the World Cup next year, but -- so it's about MXN100 million which we took in the quarter. And as to your second question, we launched also this new package called BTV, which is a lower-tier package, and this we launched as a pilot.

So basically, now we have the regular packages that Sky was offering and we have Mi Sky, and also BTV. This is a low-end package. It does not replace any existing package. It's an additional commercial offering and, as I mentioned, it's a pilot and it will grow throughout the country.

It consists of 42 channels that include the over-the-air channels and also 26 pay television channels, and we're selling that at MXN169, which is about $12.50 per month, with an entry fee of MXN499, which is around $37. And we launched it in -- we started in October, and it has been very well received by customers that are looking for that low-end package type of offering.

Okay, thank you. And just to be clear, the World Cup charge that you had, will you continue to have a charge like that through, say, through second quarter of next year, due to the World Cup, or is it --?

Yes, the next four quarters.

Okay. The next four quarters. Okay, thank you very much.

Thank you.

Your next question comes from the line of Jessica Reif Cohen with Banc of America.

Hi, it's Jessica Reif Cohen from Banc of America-Merrill Lynch. I have three questions. The first one is Liberty discussed last week at their analyst meeting the potential for spinning out DirecTV Latin America. Would that be of any interest to you?

Yes, it would, depending on how they structure it, but of course it would be of interest to us.

And a cable question. You mentioned that churn's coming down with the triple play. Can you tell us what the difference would be between churn for a triple-play sub versus the single service, or the magnitude?

Yes, Jessica, I don't have the precise numbers here. However, I can tell you that the churn in triple play and double play are much lower than the churn when you have only a video subscriber. When people get used to the triple play and the pricing of the triple play and have a single bill, et cetera, the churn gets reduced substantially. I can get you the precise numbers, but I don't have them with me.

Okay, and Cablemas, just the penetration of new services or broadband telephony is so much lower than the other two companies. Is there anything -- I mean, is it -- is there any specific reason why, and do you see that as upside?

I think because of the cities in which they operate -- they operate in 45 cities in the country, and I think it's that more than anything else. Cablevision in Mexico and surrounding areas has grown more, and also in Monterey and the northern part of Mexico, through TVI. So then, in the cities where Cablemas operates, they're lower-income type of cities, where it will take more item.

Okay. And then, actually I had one other question. If Comcast is successful in getting NBC Universal, would you think of Telemundo any differently? Does that make a difference to you?

Well, it's a very interesting question. I think that that will change a lot. I think Comcast will be interested in the Hispanic market and will put a lot of effort into Telemundo and also to grow in terms of programming for pay television targeting Hispanics, so it's going to be interesting if they get to buy that company.

Okay, thank you.

Your next question comes from the line of Paul Steep with Scotia Capital.

Good morning, guys. I guess the first question would just be one on how you're thinking about investment and balancing off maybe the expansion of the cable business or wireless or I guess the question is, is it actually even an either/or at this point or are you looking to actually materially spend in both buckets over the next couple years, would be my first question.

Yes, we'd love to continue consolidating the cable industry in Mexico. I think that there will be opportunities going forward, either -- I mean, of course organically, but also either buying companies that exist and participate in the market today, or growing in the second concessions in certain areas of Mexico. As you know, in Mexico there are no exclusives in terms of concessions for a particular territory, so second concessions are granted. In some areas of Mexico, we'll grow through second concessions.

Okay. I guess the second one for me too would be just on the upfronts, what your expectations or thoughts are there in terms of early feedback you've had from the ad community? And then, the last one would be around pay TV. If we ex out FX and we think forward, the growth -- where's the bigger growth? Is the growth from Mexico in launching the new channels we've talked about today, or is it overall Latin America growth in terms of what you think comprises that business? Thank you.

About the upfront question, as you know, the Mexican economy is expecting already a decline of about [70%] during the year of 2009, so we are entering this upfront season in a very complicated economic environment. Our advertising clients are still very cautious and uncertain about the conditions, the economic conditions for 2010, so we continue this day very early, early to call, and as we speak we are in the process of the negotiations. So, that's basically the update that I can tell you about the upfront.

And as to your other question that had to do with pay television growth, I think it's both in Mexico and in the territories and in the different countries of Latin America, where growth has been quite strong. And of course, since -- as Pepe described, launching channels like the sports channel, which is going to also be sold in central America are going to be very positive news for pay television.

Your next question comes from the line of Tomas Lajous with UBS.

Good morning, gentlemen. Thank you. Thank you very much for the call. I have two questions. One is for Alfonso and one I think is for Pepe. The first one would be are you guidance and I guess you've said this before, but can you tell us a little bit about spectrum auctions in Mexico, what would be your interest and would Televisa be looking to join with someone and go into the voice business, or could this be another way to distribute your very valuable content? So, that would be the first question, and I'll wait for the other one.

Yes, as we have expressed before, we are very interested in participating in spectrum auctions. Of course, that is subject to certain conditions. The rules haven't been officialized, so we have to look at them in detail, but our main interest is to develop a wireless broadband offering that complements our existing services.

Of course, our cable assets are growing at a very good pace at the moment, but we believe that it's very important to improve the quality and also the variety of services that we're offering, and that will be key to our cable companies and for the strategy of those cable companies in the midterm. So, we're open to participate in the spectrum auctions. Also, jointly, with already established wireless operators, we're also in discussions with experienced international players.

So, we're looking into that and seeing, of course, who are the best candidates for joint ventures and for going into the auctions together. Of course, we're looking for companies that have done this in other countries, where these companies have gone in with established, with incumbent companies and have started fierce competitions in those regions. So, those are the type of companies that we're looking for in terms of joint ventures.

So, basically, it depends on the rules. It depends on the cost of the spectrum and other regulatory issues. Those will play a very important role of our decision process. But we think that it will be very important for the cable companies to be able to offer these type of wireless services in the long run.

Thank you. And my other question I think is for Pepe. In terms of very encouraging rating in weekday primetime and Channel 2 leading the recovery, is there something you can tell us about what you're doing in terms of production that is helping Channel 2 and how this can extend to the rest of the franchise? Anything specific in [Telehio] or in (inaudible) that you can talk about in terms of the process of producing these new content for your business?

Well, Channel 2, as you know, is our flagship channel and it is the channel that definitely has the most audience share, as well as the most line of revenues for the broadcast television business. The process that we follow to develop our content is a process that takes a lot of time before it goes on the air, and that's definitely the area that we spend the most time about in the development of content.

So, what I can tell you that we have been buying the best subscriptions in the world, we have the best -- definitely the production team. To always have the same quality of content in this channel, as well as in the other channels, but as you know, the channels that we will use to transmit our content is Channel 2, and, like I said, we have been planning -- I can tell you that basically the year 2010 has already been planned, so we invest a lot of time and always have in them, that quality of content.

That's why the ratings that we have been delivering, because we do invest a lot of time and of course a lot of -- the best production team that you can see in the Spanish-speaking world is definitely in Televisa, so that's why we keep those ratings and we know that we have enough planning to be able to keep in that way during 2010.

Great. Thank you very much.

Your next question comes from the line of Michel Morin, with Barclays Capital.

I was wondering, first of all, on the cable side you had very good performance in adding new subscribers. I was wondering, is this mostly due to the Yo offering, and then have you seen an acceleration during the quarter? How were the trends during the quarter in terms of new subscriber additions, considering the improvement on a sequential basis? And then, can you actually quantify how significant the netbook sales are? Is this something that we should be specifically thinking about in terms of a potential margin impact down the road? Thank you.

Yes. Thank you for your question. As to the Yo offering, it has helped the sales triple-play services in our three cable assets, as well, I believe, as is the case for Megacable. We have joined forces -- I mean, these companies have joined forces and we're being I think very successful with this package of the triple-play offering for MXN499. It's the first time which these four companies have advertised on a national basis on national television, so of course it's a very strong offering and it has helped the pickup of triple-play subscribers.

As to your second question, we started offering what we have called Yo books, or laptops, and Megacable and Cablevision Mexico were the pilots, and we sold a little less than 7,000 computers in less than a month. So, I think next year we're planning to sell around 80,000 to 90,000 computers. It will not have a material impact on the numbers of the cable companies.

(Operator Instructions).

Your next question comes from the line of Gabriel Gonzalez with HSBC.

Yes, good morning. I was wondering if you could just shed some light on rumors concerning further acquisitions of cable assets in Mexico, specifically do you believe that Megacable could be an acquisition, considering regulatory issues, given that it's the largest single cable asset in Mexico? And also, with the consolidation of TVI and the potential purchase of a fourth cable asset, will Televisa attempt to amalgamate its cable companies under a unified brand, and will it find it possible to do so with four distinct assets under its wing? Thank you.

Yes as to the first question, it has to do with Megacable. It's the largest cable company in Mexico. As you know, it's a public company. It's a well-run company, and we believe that they have a great operation and they have grown substantially, but it's not something we're looking in terms of consolidating or buying or doing something with that company in the short term.

However, something can happen in the midterm to long term. As to TVI, as I mentioned, we'll start consolidating this company in October, and of course we would love to continue consolidating the industry, and at some point it would make a lot of sense, because of synergies to put all those assets together.

Your next question comes from the line of [Mauricio Inovas] with Merrill Lynch.

Excuse me, thank you. Good morning. Just a question on -- back to the spectrum question, Alfonso, if you could clarify a little bit more, it looks like you would -- there's a possibility you could do a joint venture with someone, even if it's not present in the Mexican wireless market. The question is, would Televisa go by itself to run a wireless operation? And how do you think about investment returns on a venture like that?

I know the rules are yet to come, and as well as the price. But can you quantify that the -- how much would a new network in Mexico cost, and whether we should think about this from an income and investment return standpoint for the business on a standalone basis, but also from the fact that it works as kind of a hedge and is having another arm in the -- having a wireless broadband helps protecting the overall broadband product that the Company has.

Yes. As to the first part of your question, as I mentioned before, we are looking into doing this with a large company or a group of companies that have experience internationally and that have gone into situations where they're competing with incumbents, and that have been very aggressive in their offerings of wireless type of services. So, that's one possibility.

As to the spectrum auction in general, as I mentioned, the actual cost of the spectrum and other regulatory issues will play an important role of our decision-making process. Of course, it depends -- we believe that the ultimate goal of the authorities in Mexico with this auction should be to improve the quality and the cost of the service offerings to the end user, rather than maximizing the proceeds from the auction to the government. That is a one-shot thing. I mean, to get money out of the auction doesn't make any sense if you're not promoting and fostering competition and a reduction of the cost of those services.

So, there are many other relevant issues that the authorities have to address, like roaming agreements, reducing interconnection rates, rules in respect to tower sharing, et cetera. So, all those things -- I mean, we haven't finalized a business plan because all those things are key components of that business plan. So, it's very important for the authorities to finalize the rules, to say what they have to say in terms of roaming agreements, interconnection rates, tower sharings, et cetera, so we can finalize this. And we're talking to a lot of people that are interested in participating, so I think it's going to be exciting.

At this moment, we cannot share with you an estimate of the capital that would be likely to be required for this project for competitive reasons, but we will be strict with our use of cash and, as I mentioned before, I think having the spectrum for our cable offering and for the growth and -- for the growth of that offering is going to be very important in the future.

Okay, thank you.

At this time, there are no further questions. Presenters, you may go ahead with any closing remarks.

Well, thank you very much for participating in the call. If you have any additional questions, give us a call. Bye.

This concludes today's conference call. You may now disconnect.