Grupo Televisa SAB (TV) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's first quarter 2010 earnings conference call. Before we begin, I would like to draw your attention to page 8 of 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, and good morning. We are pleased that you have joined us for this discussion of Grupo Televisa's first quarter 2010 results. With me 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 first quarter, our consolidated revenue increased 6.9% to MXN12.1 billion. Our operating segment income grew by 2.2% to MXN4.2 billion, and our net income grew 15.4%, to MXN1.3 billion.

Sales in our Television and Broadcasting business grew by 3.4%. However, the economic environment in Mexico continues to show signs of improvement, so we are maintaining our guidance of a growth of 5% for the year.

Our Broadcasting margins decreased by 81 basis points, which is very close to our guidance for the year. The slight drop is explained primarily by the lower margin contribution from the transmission of some series and sports content.

Our Pay Television networks business continues to perform extremely well. Revenue grew 15.3% during the quarter. This growth came from an increase in the number of subscribers to 23.5 million, and the number of channels per subscriber to 5.2 channels, and from stronger advertising revenue, the potential of this business line, and the continuing growth of our Pay Television subscribers throughout the region, and in the expansion of the number of channels per subscriber.

We are investing accordingly. As we shared with you in the last conference call, we recently launched two new channels -- TDN, an all-sports network, and ForoTV, a dedicated news network.

As with any new network, the financial benefits of this investment is not immediate. During the quarter, margins declined. The declining margins is explained by the cost of producing and launching these two new channels, with much [light] exclusive programming, including the cost of ten matches of the Soccer World Cup, which will be transmitted exclusively by TDN.

Our Programming Exports business had a strong quarter, and grew 7.9% in dollar terms to USD$52 million. In peso terms, exports declined 3.8%, to MXN660 million, primarily as a result of the strengthening of the peso.

The operating segment income margin in the business remained strong, at 44.7% for the quarter, but was down from 49.6% the year before. And this is explained by the appreciation of the peso, and also by our ongoing investment in the co-production of soap opera in Asia and in Brazil, which Pepe will tell you are doing very well.

Revenues in our business -- in our Publishing business declined 10.6% during the quarter, as a result of both the strengthening of the peso, and of the lower advertising and circulation revenues. Operating segment income, however, grew 9.8%, to MXN25 million, despite the fact that 7% fewer copies were sold. Most of the decline in the number of copies sold came from our operations in the United States, while in Mexico, our core market, we were able to compensate the overall decline in circulation with a launch of two new titles.

We continued working on the restructuring of this business. It seems to be having good results.

Our DTH operations, Operation Sky, continues to exceed our expectations. It reported another quarter of record growth in number of subscribers, adding 238,000. As expected, much of the growth came from the success of our new, low-cost pay television offering. The number of Sky subscribers reached 2.2 million, and revenues grew 9.5%, to MXN2.7 billion.

In addition to growing its share of a low cost segment of the market, we want Sky to continue to distinguish itself as the leading provider of premium pay television offerings. We have taken several steps which are important towards this end.

First, Sky launched a new satellite in February, which expands Sky's channel offering. Second, we started offering 17 high definition channels this month, and demand has been strong. And third, Sky will transmit exclusively for 24 days of the 2010 World Cup.

As a result of these investments, operating segment income margin declined to 42.2%, from 46% one year ago.

In our Cable and Telco segment, which includes our investment in Cablevision, Cablemas, and TVI, which is the company that operates in Monterrey, revenue generating units grew 126,000 during the quarter. Most of the growth in RGUs resulted from the ongoing success of our triple-play offering, and the resulting conversion of video customers to double and triple-play customers.

The number of services per customer is now 1.61, compared to 1.44 one year ago. Average penetration of voice and data services among our Pay Television subscribers is still low, at 38% and 22% respectively, so we expect to continue seeing solid RGU growth. As part of the introduction of a new low cost offering, RGUs have declined -- I'm sorry, ARPU has declined somewhat, but the revenue per subscriber has gone up.

We continue to invest in the growth of our network. In the aggregate, our three cable investments now reach close to 5.8 million homes, equivalent to a growth of 9% from last year, and the total network now reaches 44,000 kilometers.

In terms of revenue, which includes Bestel, our fiber-optic network, and TVI, which we began consolidating last quarter, revenues grew 23.8% to MXN2.7 billion. Excluding these two items, revenues grew 13.3%.

Operating segment income grew 33.5% to MXN907 million, and excluding Bestel and TVI, the gross was 24.7%.

Compression in the long distance business has been affecting Bestel, along with other long distance providers. However, we're working hard on expanding its sources of revenue.

Moving on to our two most recent initiatives, Mexico's Federal Electricity Commission will auction this year two threads of 21,000 kilometers of dark optic fiber. Last month, we announced our intention to participate in this auction jointly with Telefonica and Megacable. This investment could expand our network infrastructure slightly, and become an important provider of data transportation services for our cable investments.

In terms of our recently announced potential investment in Nextel Mexico, the spectrum auction is scheduled to start on May 25. In the meantime, we continue working with Nextel to refine our strategy and jointly approach the market upon the successful participation in the auction.

Both of these investments highlight our commitment to grow our presence in Cable and Telco by expanding both our infrastructure, and the services offered by our Pay Television operation.

Finally, we continue to maintain a very strong balance sheet. Our total cash position, including temporary held to maturity and available for sale investments reached MXN42.6 billion, of which 67% were denominated in foreign currency, and our net cash position reached MXN1 billion.

Thanks for your attention, and now, I'll 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 first quarter in our Television and front end business.

In Television, in Mexican television, we continue to demonstrate the strength of our content and our leadership in the industry.

During the quarter, we remain, and produce seven of the top ten rated shows. In our core business segment, Television Broadcasting, we continue to draw excellent audience shares. Our average sign-on to sign-off audience share during the quarter was 70.4%.

00 to 10:30 pm daily. Weekday average primetime audience share for Channel 2 was 38.4%, compared with 35.9% in the first quarter of 2009.

00 -- our 7:00 pm, 8:00 pm and 9:00 pm novelas generated an average of 40.8% audience share during the quarter.

Our programming on Channel 5 keeps successfully reaching an important and (inaudible) target audience for our clients. Another important area of growth is developing programs together with our advertising clients to help them to achieve their commercial goals. We have been able to do that with great efficiency in cost and strong margins.

In our Pay TV networks division, we continued to expand our portfolio of channels, and improve on high quality content. On February 15, we launched ForoTV, our 24-hour news channel, which focuses on debate and analysis and uses social networks such as Twitter and Facebook to interact with viewers.

With this, we complete our portfolio of Pay TV offerings, since we now target all of the audiences that our advertising clients want.

TDN, our all-sports network, performed very well during the quarter. This channel reaches an important demographic, one that is very attractive to our advertising clients, and have grown our share of the audience. As of the end of this first quarter, it has reached close to 3 million subscribers in Mexico and Central America. Even though this channel was launched just nine months ago, its ratings in Cablevision, our Pay TV sister in Mexico City, are already higher than those of our higher sports competitors. We attribute this excellent performance of our Pay TV segment, in part, to our TDN early success.

As of the end of the first quarter, our revenue generated units totalled 122 million. That's an increase of 5.4% over the previous quarter, and 18.3% more than its first quarter of 2009.

In our Export business, we continued to advance our goals of expanding our presence in high growth and high potential markets. We have been in China for a few years, and now in Brazil. We are learning to add value with Televisa's know-how and format, and we are very happy with the results.

We remain committed to producing the most compelling and high quality content, and we will continue to maximize its value by integrating and cross-promoting it to all of our business segments.

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

(Operator instructions) Your first question comes from the line of Vera Rossi of Morgan Stanley.

Thank you. My question is about your Television Broadcasting business. Why do you think TV Azteca had an increase in the double digit rate in revenues, there's 3.5% for Televisa? Is Televisa losing market share to TV Azteca?

Actually, we have not analyzed their numbers. I really don't know how. The real information that we have based on ratings do not show any kind of increase. Actually, it shows the opposite. We have done higher than our expectations in the quarter, so I don't know how to answer your question in the area of TV Azteca.

When I look at the press release, when you show the rating in prime time, we see the share that last year was around the 71%, 71.5%. It declined to around 69% this year. So it seems there was a decline of 200 basis points in the audience share, year-over-year.

In the IBOPE numbers, that's not right. I mean, we can analyze them with more detail. But in the ratings of IBOPE, that is not the result that we have.

I'm sorry, I don't think I understood the answer. You -- it's not the results you have based on your measure, or based on what IBOPE is showing us?

Well, my measure is the same measure that -- it's the actual official measure in Mexico, and -- I mean, you can analyze the numbers the way you want. At the end, if you go to households -- I am answering based on households -- that's -- the ratings in that, measured, is not less than 70%.

Okay, thank you.

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

Hi, morning, guys. Maybe we can do two questions. First one, why don't we talk big picture, more importantly, but the ad market and visibility in terms an economic recovery, how it's feeling. There's obviously a bit of a different year with World Cup, but anything anecdotally you can tell us towards the end of this year, and even thinking about next year, how Mexican companies are feeling.

The economy in general feels much better than last year. I think that last year was one of the best -- the worst years for the Mexican economy in general, so all the problems -- because of all the problems we had, including the flu, including the loss that we had in the tourism sector, including remittances, the economy in general as a result of the decline of the US economy, etc.

So this year, in comparison to '09, feels much better. And we expect the next quarters to be much better as a result also of this special event that we have, which is the World Cup, which is very important for us.

How is the visibility? Has it started to -- you know, obviously, with your upfronts, you're in a much better position than other folks in North America. But has visibility started to slowly improve as well?

Yes, it has improved. So -- I mean, all the environment is much better. And we're sticking to the guidance, because, as you know, we like to be conservative. But we're on the right track. It feels much better than last year.

Fair enough. One last one from me, just -- you know, I guess more on the micro side here. With Cable, we talked about moving this lower cost RGUs. Is that more a temporary promotion within one of the companies, or is it a concerted effort that we should start to think about, that the focus is, ARPU is going to maybe incrementally move down, but you're going to look to really try to drive out the sub base over the next year. I just want to try and understand the moving parts there.

Yes, we're expanding the base, so of course, we're having more subscribers, but we are adding more C&D segment subscribers. So in fact, yes, you're right, in the sense that we are expanding the base. We have, as I mentioned before, more homes passed, because we have improved and also expanded our network, so of course, by having more homes passed, we're expanding that base.

Okay. And just, to finalize that one, so we don't have to come back to it. The C&D side, it's more -- you've actually introduced offers aimed to C&D, versus a temporary promotion? So this is something we should expect going forward as sort of the new normal?

I think you're right. We have new packages, which we have launched for the C&D market.

Okay. Thank you, guys. Have a good weekend.

Thanks.

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

Good morning. Just shifting over to Sky Mexico. You had very strong subscriber growth, obviously, in the quarter, but without that much uplift on the revenue side. So I was wondering, what kind of ARPU you think these incremental subs can contribute, if there was any discounting, really, that took place as you bring these people in for the initial months of service?

And, on the other side, regarding the HD offering that you've launched, do you have a sense for how big the market opportunity could be for that? Perhaps a target for how many HD hubs you'd like to have by the end of this year, and what kind of ARPU uplifts it could contribute?

Hi, Andy. As to your last question, we have sold about 25,000 HD boxes, and we expect to sell, in total, about 80,000 boxes. Of course, they are the highest ARPU clients that buy those -- or, the highest tier that buy those boxes.

As to the Sky new packages and its impact on ARPU, I can say that even though the subscriber base of traditional and premium packages continues to be Sky's core business, of course, our low end offerings have the potential to become important. It's going to become an important part of the total subscriber base. So of course, ARPUs and margins will be lower in total for Sky. However, we do not see that it's going to affect Sky materially.

In essence -- I mean, the price of (inaudible) [today] is MXN169 per recharge, because it's a prepaid plan. So, of course, there will be some downgrading, and of course, that will mean a lower ARPU. But because of the volume in that package, we think it's going to be great for Sky.

Okay, and was there any -- in terms of the timing of those subs, were they more backloaded, or were they fairly equal throughout the quarter? Was there an issue with them not contributing maybe a full quarter of ARPU in the quarter?

It's ramped -- of course, it's ramping up, so -- I mean, I haven't looked at the numbers for a week. But it might be the case that it started kind of slow and it's ramping up.

Okay, thank you.

Your next question comes from the line of Rodrigo Villanueva of Merrill Lynch.

Hi, good morning. I have a question regarding your new sports and news channels. I was wondering if you could share with us, when do you expect it to be EBITDA-neutral? And also, on these two channels as well, what is the potential revenue that you're seeing from this business? Thank you.

Yes. I think both of our offerings are very strong, especially Televisa's sports network, TDN. It's going to be a very strong channel. We should break even during 2012, and of course, it will depend on the performance of the channels. So far, distribution is growing strong, especially it has to do with TDN, and we believe that because of the special content and exclusive content that both channels are going to have, there will be a significant interest for the audience and for the advertisers.

So of course, we just launched them, so it takes a while for them to pick up, and for the cable and satellite providers to pick them up. But I think they are very strong channels in terms of content, and they will be very interesting for -- both for subscribers, and also for selling advertising.

Okay, thank you. And did you just mention that you're offering these channels already to around 6 million subs in Mexico and LatAm? Is that right?

Yes, 3 million is what we mentioned.

I'm sorry? The -- yes, the sports channel. So could we consider this as a potential market, 6 million subs?

Yes, the potential market is -- well, it's larger than 6 million. But it has reached -- the sports channel has reached close to 3 million subscribers in Mexico and Central America.

Okay, okay. And just a final question, please. It is regarding the Publishing business. And what I was wondering if you could share with us, when do you think we could see an [inflection] point in this business? Thank you.

Yes, I think we have moved a long way, and we have taken very -- a huge deficient there, and so -- it will take a while. We've [got close] some titles, we restructured the whole portfolio of magazines, we restructured the operations in several countries.

As you know, this company -- 60% of the sales in this company are outside of Mexico and 40% in Mexico, so our most important market is Mexico, but outside of Mexico is larger in total than Mexico.

So I think we have stabilized the company, and the results in April were much better in terms of selling advertising. So I think we'll be able to see margins of around 15% going forward. So it will take a while, because we just stabilized this company and we restructured it. So I think -- but this year is going to look much better than last year.

Okay, Alfonso. Thank you very much for the call.

Thank you.

(Operator instructions) Your next question comes from the line of Michel Morin of Barclays Capital.

Ah, yes, good morning, everyone. First, just to follow up on Sky, and the fact that it seems your subscriber growth is really ramping up, can you share with us kind of your thoughts as to the potential size of the market there that you're trying to go after in the C&D segments?

And then secondly, is it fair to say that in your cable business, you saw a little bit of an impact from the new taxes that went through? It seems like your RGU net adds were maybe a little bit lighter than we were looking for, and I'm wondering if that might have been a factor. Thank you.

Yes, to your last question, of course, there was an impact as a result of the tax increase, because we increased prices, and that, of course, hurts our offering of packages. So -- however, I mean, cyclically, the first quarter is always slower. But I am sure that there was an effect because of the tax, and as a result because of the price increases.

As to Sky, we have been very happy with the result of the regular package that we launched. I think that has been very attractive for many subscribers that did not have DTH service. I think this year it will grow to about 1 million, that package itself. So we're extremely happy with the results that we have had as of this date.

And is that something that you think can be in a few years' time a 10 million subscriber type of market size? I mean, how should we think about this, longer term?

I think -- well, I would like to focus on this year. I think that we'll reach 1 million subscribers, just on that package, which is huge, and it represents huge growth for Sky. So I think that -- I mean, the penetration is still low in Mexico of paid television in general, so Sky has great service, and also great content.

So I think our packages are being very successful, and will continue to grow in the years to come. But for the time being, I am focusing on this year. I would say that we'll reach 1 million subscribers just on that package.

Okay. And then, if I may, also, in the Other segment, your profitability there deteriorated, and I was just wondering if there was anything specific, because obviously, you did lose some revenue. I think you alluded to film distribution and publishing distribution. But I would have thought that some of that revenue would have been less profitable, and yet your losses increased.

So I'm wondering -- I know that there was some new taxes on the gaming business. I don't know if you can walk us through what's happening there, and how should we think about the rest of this year in that segment?

Yes. Well, as you mentioned, we lost an important movie distribution agreement with Warner that we have had for many years, and it was really important for that segment.

Then our publishing distribution business continued to have an impact, because of the problems that the publishing industry is having in general, so we distributed less magazines both in Mexico and in Latin America. And also, that publishing distribution business was affected because of the appreciation of the peso, because 60% of sales take place outside of Mexico.

And then, Televisa Direct Media, which is called [TDM], decreased in sales due to lower traffic in SMS services, and the costs increased as a result of the soccer rights that they bought. So they're going to have exclusive rights for soccer games and for other soccer properties related to the World Cup. So they have part of the costs taken in this quarter. So that affected the Internet segments.

And our gaming operations account for close to half of our Other Businesses revenue. We started several Bingo parlors in this quarter, so of course, when you start a Bingo parlor, it starts slow, and it picks up afterwards. So that affected also our gaming operations.

So as gaming grows, and as the publishing industry improves, as I mentioned, I think publishing this year will look much better this year than last year -- the results of our Other Businesses line will also look better.

That's terrific. Thank you.

Thanks.

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

Good morning. Thank you for the call. Just one quick question. Maybe if you can walk us through, or help us a little bit in understanding the seasonality for the year in Broadcasting, in terms of what the quarter looked like, and what could the following quarters look like in terms of shape, so that we get to the guidance of revenue growth in Broadcasting? That would be very helpful.

Well, we expect definitely a very, very good second quarter because of the World Cup, and then we expect a little bit slowdown in the third, but then pick up on the fourth. And based on the guidance that we have, that's basically the way that we see the -- the way the year is going to be. But at the end, I think that the second quarter will be a very important one to reach the guidance of the year.

Okay. Thank you very much, Pepe.

Thank you. That does conclude the Q&A portion of today's call. I'll now return the call to management for any final remarks.

Well, thank you very much for participating, and please give us a call with any additional questions. Bye.

Thank you for participating in today's Televisa first quarter 2010 earnings call. You may now disconnect.