Grupo Televisa SAB (TV) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's first quarter 2014 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, [Elsa]. Good morning, everyone, and thanks for joining us today. With me is Jose Baston, President of Television and Content, and Salvi Folch, our Chief Financial Officer.

First, I will take you through the highlights of our first quarter financial results. Then, Pepe will discuss the operating results of our content segment. After that, we'll be happy to take your questions.

As you may have seen from our earnings release, we had a very good start of the year. During the first quarter, our consolidated sales increased 9.0% and operating segment income increased 7.1%.

Our telecommunications businesses, Sky, and cable, posted solid results, and -- excluding the impact of the must-offer regulation -- so did our content business. Also, profitability remained strong across our core business segments. We are encouraged with these results, especially considering the current economic environment.

Let me go briefly over each of our different businesses. Starting with our content businesses, revenues expanded by 4.6% to MXN6.6 billion during the quarter, and the margin reached 36.1%. The decline from 37.5% from last year is more than explained by the impact of revenue foregone as a result of the must-offer obligation. Excluding this impact, we estimate that content revenue would have grown by 10% and margins would have expanded by 180 basis points.

Our advertising business grew by 8.2% year-over-year. The increase in television advertising was present across all key industries, but the health and personal care categories were particularly strong. To a lesser extent we also benefited from a calendar effect. The Easter week fell in the second quarter this year instead of in the first quarter like it did the year ago. Pepe will go into further detail on this topic.

Licensing and syndication, our second-largest source of content revenue, expanded by 10.4%. The main driver of growth, as in prior quarters, was the royalty payment from Univision. As you may recall from our last earnings call, we expect Univision royalties to reach $315 million in 2014, a growth of 15% from last year.

Our third source of content revenue, network subscription, continued to be directly impacted by the must-offer regulation. It experienced a drop of 21% from last year. The negative comparison to last year will remain throughout the third quarter of this year.

Moving on to our telecommunications business, during the quarter Sky added 139,000 subscribers, reaching a total of 6.2 million. Most of the growth continued to come from Sky's low-cost offering. Revenue grew by 9.7% and operating segment income margin expanded slightly to 46.4%.

In our cable and telecom segment, revenue grew 15.7% during the quarter, and operating segment income margin remained strong reaching 35.4%. Excluding Bestel, operating segment income margin reached 38.9%.

Our cable companies posted strong growth in the top-line and in revenue generating units, or RGUs. Following the trend of the last few quarters, the addition of voice and data RGUs drove most of the growth in this business, expanding by 20% and 26%, respectively. Video RGUs continued to grow, but at a lower pace of 6.5%, also in line with the past few quarters.

Bestel posted strong results this quarter growing revenues by 14%. Much of the growth is explained by stronger revenue from managed telecom services to businesses and institutions.

In terms of our publishing business, given its size in relation to our other operations, we have decided to report it as part of our other businesses segment rather than as a separate segment. This will simplify our reporting.

Our publishing and publishing distribution businesses continued to experience a difficult environment. All other operations within our other businesses segment posted very solid top-line growth. Our soccer business benefited from the sale of some players, our radio business from strong advertising revenue, our movie distribution business from two very successful movies, and our gaming business from better performance in both our bingo parlors and our lottery operations. In the aggregate, revenue for our other businesses segment expanded by 7.6%.

Moving on to our CapEx during the first quarter 2014, we invested about $190 million, of which $94 million were in cable and telco, $73 million in Sky, and $23 million in our content business.

In closing, we're very happy with our results for the quarter and enthusiastic about the prospects for the year. We reiterate our full-year guidance for content revenue growth of mid-single digits, which incorporates the impact of the new must-offer regulation, with a margin of close to 44%.

In our telco business, both Sky and cable continue to offer attractive services at a very affordable price in an environment of relatively low penetration. We will remain focused on maximizing, and realizing, the full potential of these businesses.

Thank you very much for your time and attention. And I'll turn now the call to Pepe.

Thank you, Alfonso. Good morning everyone, and thank you for joining us.

As Alfonso mentioned, our content business performed very well during the quarter, especially considering the negative effect of the must-offer ruling and the macroeconomic environment.

As Alfonso mentioned, also, we had a positive calendar effect during the quarter, but we also benefited from the strength of our content. Our programs continued to reach very attractive audiences in all platforms.

Our flagship network, Channel 2, delivered solid results, particularly during primetime. Similarly, the new programming we introduced on Channel 5, which is called Barra PM, is attracting younger audiences, mostly with new formats produced in-house. These formats are very attractive from a commercial point of view and generate important growth in the digital platform of these programs.

We continue expanding our expertise in the production of content to as many formats as we can, therefore reducing our dependence on third-party content.

Advertising revenue experienced strong growth. Broadcast TV advertising, which expanded by 6.5% during the quarter, it was no doubt the most efficient vehicle for advertisers. Pay TV advertising, which now represents close to 6% of total advertising revenue, expanded by 42%.

From our point of view, advertising on pay TV networks complements advertising on free-to-air channels. It gives our customers the opportunity to reach their target audiences in a narrower demographic when they need to reach it. With our large portfolio of pay TV networks, which includes a total of 24 brands, we are delivering those audiences.

Moving on to our other two sources of content revenue, network subscription revenue declined 21%. As you already know, this revenue line is suffering from the effects of the must-offer ruling. Excluding the effects of this measure, network subscription revenue would have expanded double-digits. Our networks remain very strong, and the number of subscribers with access to our pay TV networks continues to grow.

Our third source of content revenue, licensing and syndication revenue, expanded 10.4%. This line item accounts for our export of content to over 70 countries, our programming agreement with Netflix, and, as Alfonso mentioned, the royalties received by Univision.

This quarter, our export business remained relatively unchanged with respect to first quarter 2013. Nevertheless, Univision performed extremely well during the quarter, and our royalties expanded 13.1%.

Univision ended the February sweeps as the number-three network, regardless of language, beating ABC and CBS for the first time in the 18-34 adults category. And the Univision Deportes Network was the number-one Spanish-language sports network in the first quarter of 2014 in primetime among total viewers, adults 18-49, ahead of ESPN Deportes and Fox Deportes.

Finally, for several nights this quarter, Unimas, the other Univision free-to-air network, passed Telemundo as the number-two network serving the Hispanic market in the US, thanks to the broadcast of the show "Viuda Negra," a co-production between Televisa and RTI.

Thank you very much for your attention, and now we are ready to take your questions.

(Operator Instructions)

Your first question comes from Michel Morin with Morgan Stanley.

(inaudible) I was just hoping to focus on cable and Sky. I noticed your net adds were a little bit light in both businesses, so I was wondering if you can comment a little bit more as to what drove that. And in particular, it sounded a bit surprising, given that we're just ahead of the World Cup.

And then, secondly, in terms of your CapEx in cable, I noticed Cablevision CapEx was lower. And I'm wondering if that's just kind of seasonal or if it's kind of the beginning of a lower capital intensity at that particular unit. Thank you.

Thank you, Michel, for your question. As to the last part of it, CapEx for cable is a seasonal. I mean, there's nothing -- I mean, there's nothing special about it. It's just seasonal.

As to the pace of growth of Sky and cable, as to Sky, I guess we have grown about 1 million subscribers every year for the past four years. We have achieved this huge growth by penetrating lower income segments that were not traditional pay television customers. So over time, paid TV penetration has expanded materially.

But we have also had a lot of competition, including one coming from Dish Telmex, which is the same thing. So this is -- I mean, Dish Telmex, with all the support and subsidies that you can think of. So as a result of those things, penetration then has expanded materially and additional competition.

We should continue to grow, but at a milder pace than the one experienced in the previous years. We also believe that Sky will continue to be extremely profitable going forward, as we have seen throughout these years.

Moving onto cable, cable remains with a very solid number of gross additions in the three services, but this quarter, the churn rate was higher than usual. Given that the subscriber base is larger every day, this has a bigger impact on net additions.

Higher churn basically resulted from increased competition also for our cable operation, with aggressive campaigns from our competitors, and also from one of the promotions that we launched last summer that involved the sale of tablets.

There's no question that competition is very intense in all of our markets, especially in Mexico City. We believe that rather than looking at RGUs quarter over quarter, I think, Michel, it's more relevant to see the overall trend in subscribers, which is very encouraging. There, Michel, we expect that these businesses will continue delivering very solid growth rates.

Alfonso, thank you for that. It's very helpful. But just to clarify a little bit, so when you talk about competition, do you feel that you are maybe losing some market share?

No, I think it had to do basically with churn, but we're not losing market share.

Okay. All right. Thank you.

Your next question comes from Andrew Campbell with Credit Suisse.

Yes, good morning. Thanks for taking my question. I was hoping that you could touch on the preponderance rulings that went into effect, I believe, earlier this month, and if you expect to see much impact from that in second quarter and going out for the rest of the year. Thank you.

Hi, Andy. Yeah, well, we have been notified and we have been declared preponderant on the broadcasting sector. We are complying with the rules, even though we filed an injunction against the determination of preponderance as an agent in the broadcasting sector. There are a series of rules that require further adjustment or further clarification. So it is very difficult at this point to estimate what the impact will be for us.

We believe that Televisa as a whole, as a company, will continue to grow and will continue to be, of course, profitable. But it's very difficult as to certain specific rules to know the impact that this will have on our businesses.

I see. I understand. If I could ask just on one specific point, which is the requirement to make available your grid, your advertising grid, which I believe you've already complied with that, are you seeing any reaction from customers to that? Is this something that would only really have more impact in the next upfront season? Or could this already have some impact this year?

Yeah. Well, we have complied with (inaudible) to publish our rate card. We did not publish those rate cards before this new regulation. I believe that this will not have a negative impact with clients or with the negotiations of clients. Of course, those rate cards are subject to many conditions that have to do with a specific negotiation with every client, so those rate cards are not set in stone, but it depends on a series of variables, so I do not believe that this will affect the negotiations going forward.

Okay. Thank you, Alfonso.

Thank you, Andy.

Your next question comes from Vera Rossi with Goldman Sachs.

Thank you. Have you experienced an increase in provisions for bad debts in your cable business? Thank you.

Yes, as a result of churn, we have experienced additional amounts of -- in that area there.

And is this part of the reduction in margins we have seen this quarter, Alfonso?

This has affected margins, but I do not believe that it has affected the margins materially.

Okay. And do you think that the level we saw this quarter in terms of margins and in provisions will be the new normal for the company going forward in the cable division?

I think -- yeah, we experienced, as I mentioned, additional churn, specifically in this quarter, because of -- because of a special promotion that we launched (inaudible) tablets last year. So that increased the churn and increased that line item, so I do not believe that this will have an effect -- I mean, this will have a long-term effect or will effect our margins in the long term.

Okay, thank you.

Your next question comes from John Tinker with Maxim.

Thank you. You highlighted the Univision looked to be solid. As they go into the World Cup this spring, what kind of impact do you think it might have on your licensing revenue?

Yep. We believe that it will increase our licensing revenue, our royalty, but this is part of the $315 million that we're estimating we will receive from Univision this year.

Okay. And as a quick follow-up, any Iusacell updates?

Yeah, well, Univision -- Iusacell, I'm sorry, is performing better. We continue to believe that the amount of money that we have mentioned before, this is investing our remaining $300 million of what we projected is still sufficient for it to perform and to improve these key operators.

So basically, I mean, we're waiting to see what happens with the secondary legislation in Mexico. And that will help in the leveling of the playing field for Iusacell to be able to develop and grow further.

Thank you.

Your next question comes from Richard Dineen with HSBC.

Thanks very much for taking the question. Yeah, just wondering about the pretty significant swing in your other expense line, which hit your reported EBITDA this quarter. So you swung to -- is it 172 million peso loss versus a pretty substantial 334 million positive result in the year-ago quarter? And you explain in the notes there that a big chunk of that is from the US carriage rights from Univision with DirecTV. Maybe you could just remind us about that event.

And I guess the broader question is, how do you think we should sort of clean up EBITDA for this quarter? You also mentioned you have some property disposals and advisory fees. These seem, you know, again, very much more or less like one-offs. Is that fair to say? Just some kind of guidance on how you think we should be cleaning up the EBITDA.

Yeah, Richard, last year, we did have this one-off, which was a sale of a put that we had negotiated with DirecTV many years ago. This was a carriage right that we had on some of the DirecTV channels in the US So, in essence, we sold that put or carriage right to Univision, and that's why you saw this one-off.

I'll ask Salvi to go into further detail as to what you have seen this year. So he can expand on this.

Sure. In relation to the other expenses, well, we usually have the lawyer expenses and one-offs that have more to do with the cable company, as they sell part of the assets that they substitute. So I think that what is important there is that if you see the trend and take the extraordinary events -- if you want, we can later walk out -- walk with you on what is a number that you should use as a standard. We usually have these expenses, but there are some quarters where we do have one-offs.

Right, okay, thanks. Thanks, that's really helpful. Thanks, Alfonso. Thanks, Salvi.

Your next question comes from Sumit Datta with New Street Research.

Just a quick question, please, on Iusacell. Or, actually, maybe two quick questions, please. First of all, can you confirm that Iusacell is now paying the lower termination rate to Telcel, as guided to by IFETEL, which I believe was April the 6th. I just wondered whether that change has been made and, if so, could you give any sense as to what the savings could be at Iusacell?

And then I think just to go back to a comment you made earlier, talking about Iusacell performing a little bit better, could you -- sorry -- go into a little bit more detail as to what you mean by better? Is that in terms of better subscriber trends or quality of customers or profitability? A little bit more detail there would be appreciated. Thanks.

Yes, hi, Sumit. Yeah, the new interconnection rates established by IFETEL will be in effect starting for Iusacell and for other participants in the market starting April the 7th. This will amount to a cost savings of around MXN200 million per year.

We believe that Iusacell is operating -- is operating better. We still need to improve in several key indicators of performance of the company. We believe that the change in regulation will be very important for this asset, because the leveling of the playing field will allow this company to compete. Today, it is almost impossible to compete in Mexico against the preponderant player on the telecommunications front.

So as I have mentioned in the past, we see an opportunity here going forward. However, it depends on many things. It's depends on improving the performance of these key indicators that are mentioned. It depends on the regulation. It depends on how that regulation will be implemented, et cetera.

So this company has tremendous challenges going forward. However, we continue to see a huge opportunity there, especially if the secondary laws are passed soon, and if the rules are implemented correctly.

Okay. And maybe a quick follow-up, if possible, just on the (MTR) point. Thank you for the detail on the 200 million savings. Could you give a sense as to what the sort of -- what the net termination cost as a percentage of EBITDA has been at Iusacell? So maybe prior to this cut, what the net pay-away you've made for termination has been at Iusacell?

Yeah, Sumit, I don't have that detail with me, but if you want, we can answer that question on a separate line later.

Okay, lovely. Thank you.

Thank you.

Your next question comes from Michel Morin with Morgan Stanley.

Yes, thank you for the follow-up. Two quick things, actually. Regarding your deal with Netflix, I was just wondering, now that you've launched your own service over-the-top, are you maintaining the relationship with Netflix? Or how do we -- how should we think about the future of that? And if you can comment on how your new service has been trending.

And then, secondly, in the advertising segment, you disclosed that advertising on pay TV is up 40% or 41%, and it's now 5.8% of the advertising revenues. And I'm just wondering if you can give us a sense of how significant you would expect that to become over time as a percentage of your overall advertising revenue. Thank you.

Hi, based on Netflix, our relationship with Netflix is very good. We think that where content issues go to any platforms available in all the different countries of the world, so our relationship with them is very good, and we are also talking with them about developing exclusive content for them.

So we don't see that it will have anything to do the deal that we have with Netflix against our aggregator, which is called Veo. And about Veo, I can tell you that it is -- we're starting -- it's totally a start-up that we're doing with our new -- the cable systems, Sky and Televisa content. And we are, as we speak, positioning the product. We think that it's going to take a few months to really start to see results on it.

But what we have seen so far, it's looking positive for us, and I think that it will be a nice way, also, to develop new content for new platforms, knowing that it has to be -- it has to be profitable, in knowing that it is a platform that will grow, even though Netflix is here in this country, knowing that we will also produce, if it makes business sense, and that's the idea that we have with our aggregator, we think that we will be able to produce content exclusively for our aggregator, and then being able to exploit it in all of our different platforms that you know Televisa has in Mexico and internationally.

Going to the advertising growth in pay TV, we think that we -- in that case, we think we have not fully developed the opportunity of the growth in the pay TV advertising segment. We have very good networks. We have very good ratings. We think we can develop those audiences, and I think that it will be a good area of growth in advertising. And, of course, like I said at the beginning, we are right now in the way of developing a new sales team concentrated mostly in the pay TV. So we think that we will -- we will find a better way to grow the sales in the pay TV advertising arena.

Thanks. That's very helpful. And just on the ratings comment, when should we expect to start seeing some of the Nielsen ratings data?

We are, as we speak, finishing the negotiations with them. And I think that you'll be able to see those ratings very soon.

Great, thank you.

Your next question comes from Andre Baggio with JPMorgan.

Hi, good morning, everyone. So I wanted to know (inaudible) you have been posting good results on advertisements in Mexico with a high-single-digit growth. I wonder if -- what's going on there? Let's say it's advertisements has accelerated over the last year or last two quarters. So is there anything extraordinary going on? Or do you think that you're having better programming and better ratings and that's what's driving the good results?

Well, as we mentioned earlier, the growth in free-to-air advertising this quarter resulted from (inaudible) across all of the segments that we sell, although some of them, such as health and personal care, were stronger than the rest. As Alfonso mentioned also, we benefited from calendar effect as a result of Easter week. And we have to keep in mind, also, that the second quarter might be affected for that -- I mean, it might work against us. But no doubt it had to do also with the results of our ratings and our audiences that we're delivering to our clients.

Okay. Thank you. And a second -- can you provide a little bit more (inaudible) because we don't see (inaudible) get much. So, for example, the number of subscribers (inaudible) if that's in line with what you would like to see (inaudible)

Yeah, Andre, well, what I can tell you is that we closed the year with 8 million subscribers. This is about an 8% market share. And that means a growth of approximately 9% during the year.

So as I mentioned, we have improved and we have continued growing. The company delivered a positive EBITDA for the first time in a very long period of time. There are still many challenges, and the company has to improve several key indicators, as I mentioned before. This is of the performance of the company.

However, we believe that, as is also mentioned before, there's a huge opportunity there, but it depends not only on improving the performance of the company itself, but also on leveling of the playing field on the telecommunications sector as a whole, on the passing of the secondary legislation, on the implementation of the new preponderance rules by IFETEL.

So we see it as a huge opportunity. We see it as an opportunity full of challenges. However, we will continue to work on that front. We will continue to see how we can grow that company and how we can perform better, and hopefully we'll see the secondary legislation coming soon and being implemented also very soon.

Okay, thanks a lot.

Your next question comes from Richard Dineen with HSBC.

Thanks for the extra question. Yeah, just -- it was actually follow-up on the earlier question we had, which I think touched on over-the-top video. And we just had some pretty interesting news in the US, with the FCC proposing to amend net neutrality policy to permit telecom and cable operators to be able to charge content providers for prioritized delivery of traffic.

Doesn't seem to be much focus on net neutrality in the reforms in Mexico, but just really wondering, you know, obviously, if you've seen that news, what's your sort of position on that kind of opportunity or threat, I guess? It's quite nuanced for you guys, because obviously you're in both content and pipes. Any comments on that would be really interesting. Thanks.

Yeah, we believe that -- as in the case of any highway, whoever wants to get exclusive access to the highway or to go at a higher speed on the highway should pay for it. We believe that what's happening in the US is very interesting, and it will in many areas determine what happens also in Mexico, because we're looking closely at what happens in the US market.

So we believe that, as investors in networks, it is important to get paid for the use of those networks, because, of course, we have to continue investing in them. And whoever wants a higher speed should pay for it.

On the content side, that is also beneficial, because whoever wants to have a higher speed can pay for it and then benefit from -- its subscribers or its customers can benefit from that higher speed in getting the content, being offered from OTT.

So we believe that what's happening in the US is very interesting. And those changes in the proposed rules are essential for the growth and for the continued investment in networks.

Hello?

There are no further questions.

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

This does conclude the conference. You may now disconnect.