Grupo Televisa SAB (TV) 2014 Q2 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's second 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 would now like to turn the call over to Mr. Alfonso de Angoitia, Executive Vice President of Grupo Televisa. Please go ahead, sir.

Thank you, Elsa Raquel. Good morning, and thanks to everybody for joining us today. With me is Jose Baston, President of Television and Content.

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

During the second quarter, consolidated sales increased 7% and operating segment income increased 3.6%, with a margin reaching 40.7%.

Starting with our content business, revenue increased by 4.4% to MXN8.6 billion during the quarter, and the margin reached 46%. Revenue in our advertising business increased 6% year-over-year.

While we had some incremental revenue from the transmission of the World Cup, we had a difficult comp to the second quarter last year, given that Easter week holidays took place during the second quarter this year instead of the first quarter.

Licensing and syndication revenue, which includes the royalty from Univision, expanded by 15.2%. Univision royalties during the second quarter reached $84 million, a growth of 19% from the year before.

We maintain our estimate of $315 million, this is 3-1-5, in royalties for the full year, equivalent to a growth of 15% from last year.

Our network subscription revenue, in line with the prior two quarters, continued to be impacted by the free must-offer regulation. Accordingly, it experienced a drop of 23.8% from last year.

Organically, the business continues to perform well in terms of reach and ratings. As in the prior World Cups, the pressure on content margins resulted from the costs associated with the transmission of that event during the second quarter.

We have contemplated this effect from the beginning of the year and continue to maintain our guidance for full year margins in our content business of 44%.

Moving on to our telecommunications businesses, during the quarter Sky added over 200,000 new customers, reaching over 6.3 million subscribers. This is in contrast to the close to 140,000 added in each of the last two quarters.

To a large degree, the interest in the World Cup drove this growth. The top line also benefitted from the slightly higher recharge rate on our prepaid packages from our strong pay-per-view revenue from commercial establishments who wanted to transmit the World Cup.

As a result, Sky delivered record revenues of MXN4.3 billion and record operating segment income of MXN2.1 billion. During the quarter, operating segment income margin reached 48%.

Revenue in our cable and teleco segment grew 14.7% during the quarter and operating segment income reached 37%. Excluding Bestel, revenue grew by 14.4% and operating segment income expanded to 40.7% from 38.5% from last year.

During the quarter, our cable companies added 190,000 RGUs, of which 27% were in video, 25% were in voice, and 47% were in data. In the aggregate, our cable companies reached 5.4 million revenue generating units, of which 48% were video customers and the balance were voice and data customers.

In regard to our other businesses, revenue decreased by 1% and operating segment income reached MXN198 million.

Our publishing business continues to face a difficult environment, and our soccer business experienced a drop in revenues, given lower ticket sales. However, our radio and gaming businesses performed well during the quarter and posted solid results.

Moving on to our CapEx, during the second quarter 2014 we invested about $246 million, of which $120 million were in cable and teleco, $90 million in Sky, and $36 million in our content business.

As in the past few years, much of the capital expenditure in Sky and cable segments continued to be driven by growth in subscribers and in the number of services sold per subscriber.

In closing, in spite of the difficult macroeconomic environment, our businesses performed well. We believe that once the economy turns around, then our performance will be even stronger.

Over the last few years, we have made important investments in the Mexican teleco industry, and we continue investing in the content we produce. As such, we are well positioned, like few companies in Mexico, to benefit from the rebound in the economy and in consumer demand.

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

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

Our content business performed very well during the quarter, especially considering the negative effect of the must-offer ruling, the macro environment, and the negative calendar effect of the Easter holiday.

Our programs continue to reach very attractive audiences in all platforms, and were complemented with strong viewership from our coverage of the World Cup. Our flagship network, Channel 2, continued to perform extremely well, particularly during the access prime and primetime.

Although both Televisa and our competition transmitted the same matches of the World Cup, our commentary shows produced around this event delivered significantly better results than our competitors' equivalent shows and reached two-thirds of the World Cup audience.

This is a great example of how having good third party content is not sufficient. Our experienced team of producers, commentators, and entertainers made a significant difference.

Barra PM, the new programming grid that was launched on Channel 5 a few quarters ago, has been gaining traction both in viewers and in advertisers. Barra PM is very important for Televisa's content business because it is serving as a platform to test production and broadcast of new shows.

These shows target a younger audience that traditionally is not covered by Channel 2. Barra PM differentiates Televisa from its competitors and also allows it to develop new talent and content for traditional and digital platforms, build a library of alternative content, and create new show formats that could be exported in the future.

Before we move on to each revenue line of our content segment, I'd like to mention that at Televisa we understand the importance of online viewership, even though it is still limited in Mexico.

As a result, we now have several Internet properties in Televisa.com plus more than 60 YouTube channels in which we make our content available. Through these properties and YouTube channels, we now capture an important share of the Mexican online video market.

As we continue expanding our online capabilities, we are also looking at entering into strategic partnerships with third party content providers to aggregate and commercialize their content.

Moving on, advertising revenues experienced strong growth and closed the first half of the year up 6.9%. The World Cup and the success of our shows around this event contributed positively to this revenue line.

However, part of the growth came from the shift of some advertising budgets from the second half of the year to the second quarter. Advertising on our pay TV networks expanded at 25.1%.

With our large portfolio of pay TV channels, which includes a total of 24 brands, our advertising customers have the opportunity to reach their target audiences in a narrower demographic when they need to.

Regarding our other two sources of content revenue, network subscription revenue declined almost 24%. This is the third quarter that this revenue line suffers 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 both in Mexico and abroad. Our coverage of exclusive matches of the 2014 World Cup allowed our pay TV sports network to lead the field in this category.

Also during the quarter, we officially launched two new networks, UFC Network and Golden Premier. Both of these networks are being sold al a carte. We think there is a big opportunity with al a carte channels, and we will be developing these types of networks over time.

Our third source of content revenue, licensing and syndication revenue, expanded 15.2%. This line item accounts for our export of content to over 70 countries, our programming agreement with Netflix and, most importantly, the royalties we receive from Univision.

This quarter Univision performed very well and our royalties expanded 19.1%, thanks in part to the coverage of the World Cup.

Also, for several weeks this quarter Univision was able to beat at least one of the other broadcasters in terms of audience. And Univision was the number one network during the last two weeks of the quarter, in both cases during primetime.

Similarly, during the quarter Univision delivered the most viewed telecast in US Spanish language television history among total viewers with the Mexico against Netherlands soccer match.

Finally, in the current season Unimas, which is the other Univision feed to our network, reported primetime audience growth among total viewers of 17% over the comparable weeks in the previous season.

In closing, we are very pleased with our results for the first half of the year but remain cautious for the remainder of the year and, as Alfonso mentioned, maintain our guidance for content growth of mid single digits.

Thank you so much, and now we are ready to take your questions.

Thank you. (Operator instructions.) Rodrigo Villanueva, Merrill Lynch.

Good morning, everybody. I was wondering if you could share with us the strategy at Iusacell now that the secondary laws of the teleco reform have been approved by the Senate.

And related to this question, I was wondering if there are any 2014 and 2015 targets that you could disclose at this point related to Iusacell's subscriber growth, revenues, EBITDA, CapEx, etc. Thank you very much.

Yes. Hi, Rodrigo. Well, we're fully respectful of the legislative process. And since the secondary laws are still being discussed even today at the House of Representatives of Mexico, I would not like to speculate on this matter.

Understood. Thank you very much, Alfonso. Well, just another question then on a different subject. I want to confirm if Televisa received royalties from Univision related to the extra revenues that Univision received from the World Cup.

I am asking this as, in the end, it seems to me that TV did not provide this content to Univision. So, I just want to make sure if there were any royalties received from these extra revenues. Thank you.

Yes, I can confirm to you that, as part of the negotiation of the new program license agreement, we included the revenues of the World Cup in the royalty formula.

So, it is part of the royalty formula, and we got a share, a percentage of the World Cup sales.

Gordon Lee, BTG.

Good morning. Two quick questions. First, just wanted to follow up on Iusacell, not so much on the outlook but on the improvement that you saw in the losses, which became gains from joint ventures. I was wondering if you could give us any color regarding how Iusacell performed during the quarter and how important a driver it was of that turnaround.

And the second question is just on Univision. There's been a lot of commentary in the press about the process to maybe sell Univision or to potentially do an IPO speeding up. So, I was wondering if you could provide any color on that. Thank you.

Hi, Gordon. Thank you for your question. First as to Univision going public or being sold, no decision has been made at this point. However, I can tell you that Univision is performing extremely well and is becoming a more appealing asset every day.

The company, as you have seen, is delivering very solid results in terms of growth and profitability, and I believe that their outlook is very attractive. The Hispanic population remains underrepresented in terms of advertising spend, and Univision is very well positioned to benefit from that.

In addition to that, I would say that the prospects of stronger retransmission revenue are very good for Univision. So, we believe that it's a very attractive asset, but no decision has been made at this point as to whether the company will go public or whether the company will be sold by the sponsors.

As to Iusacell, Iusacell did perform better during the quarter. What I would say is that we closed -- and just to give you numbers, we closed 2013 with 8 million customers. That is about an 8% market share, and that represented growth of approximately 9% during the year.

However, the company continues to have some operating challenges, and these challenges are keeping it from growing to its full potential. So, we'll continue to work on addressing these issues.

What I can say about the quarter is that we had positive EBITDA, and that's why you saw the change and the swing in joint venture results.

Andrew Campbell, Credit Suisse.

Yes, good morning. Thanks for taking my question. I wanted to continue on a similar line. Thank you for that additional color on Iusacell.

But, I believe on the previous call that you gave some guidance for the expected cost savings based on the preponderance ruling and the MTRs that went into effect. So, I wanted to confirm if that previous guidance was still valid, given what you actually saw in the second quarter.

And then, I was wondering if you are providing any guidance on what the additional cost savings would be from a zero MTR for the preponderant carrier, given that it seems that that's what's in the law that the Congress is debating right now. Thank you.

Yes, Andy. Well, we can confirm what we mentioned in the previous call in terms of cost savings.

Now, as to the interconnection rates, we would not like to speculate until the law becomes effective. Once again, we want to be respectful of the legislative process. And since the secondary laws will be discussed today at the House of Representatives, we would not like to make any comment about them for the time being.

Okay, understood. Then I would just like to ask one other question, which is related to the general economy and the macro outlook. Through the second quarter and so far, have you seen any indications via spot sales or indications from your customers that would suggest some kind of turning point or acceleration in the economy to this point? Thank you.

Not to this point.

Michel Morin, Morgan Stanley.

Thank you. Good morning. There was a change in ownership at DirecTV, or there will be a change in ownership at DirecTV, your partner in Sky. So, I was wondering if you could tell us whether or not you already have had any conversations with AT&T and how you see that relationship evolving over time.

Yes. Thank you, Michel, for the question. Yes, we have had several conversations with AT&T. We have remained in touch. We are very happy to welcome them as partners. AT&T of course is a world-class company with a great management team.

We also maintain a very good relationship with Mike White and his team. Mike is one of the top executives in the industry, and they will be in charge of leading the transition.

For the moment, as you know, AT&T is going through their own regulatory process. Once their transaction is concluded, I'm sure that we will find many opportunities to do things together in Mexico.

Terrific. Thank you. And if I can ask a second question just to follow up on the earlier question regarding Univision and its plans, there was some speculation in the press recently about a potential sale to a strategic buyer.

And I'm wondering if you could comment on how you would view that from your perspective and whether or not you yourself might be in a position to either increase or decrease your stake if there were that kind of a transaction. Thank you.

Yes. Well, there has been a lot of speculation, as I mentioned before, about the sale of the company, whether -- the sale to a strategic or going public. As I mentioned before, no decision has been made at this point.

Of course, as you know from the structure that we put together and the new deal that we have with the sponsors, we have a tag-along right and they don't have a drag-along for our stake. On a fully diluted basis, we have about 38% of the equity of the company, which, on a fully diluted basis again, we're the largest shareholder and the content supplier to Univision.

So, I mean, if they decide to go ahead and sell to a strategic, of course we would -- we have very good relationships with the top media companies in the US. And we would not like to speculate as to who the buyers could be, but, I mean, we would of course talk to any of them.

And then, as to going public, then, I mean, it's also an alternative for the sponsors if they want to sell their stake. So, that's a decision they could take at any point going forward, and we would support it also.

Mauricio Fernandes, Merrill Lynch.

Good morning and thanks for the question. Alfonso, I know in the past you've commented about the potential for injecting more cash into Iusacell depending on the outcome of the regulatory changes that are ongoing in Mexico. And it looks like with the draft that has come out of the Senate and now being discussed at the Lower House, as you said, points towards a good solution for -- or a good outcome for Iusacell sort of as a regulatory framework.

So, as long as it stays in the -- is approved in the Lower House as it came from the Senate with zero MTRs, would you be -- would Televisa still be interested in and would Iusacell still need a cash injection to continue to grow?

And the second is assuming -- and I know you don't want to speculate on strategy and so on. But, again assuming, and it's just an assumption that MTRs will stay at zero, is the plan on Iusacell to save on those costs or to pass that on to customers and become more competitive with the pricing plans? Thank you.

Yes. Well, as to the last part of your question, Mauricio, we would not like to speculate as to what we would do going forward depending on the new secondary laws and whether they will pass or not or the form of them, and the plans that we would be launching going forward.

However, I mean, as I mentioned, Iusacell is performing better although it has, as I mentioned, many operating challenges. And as I mentioned also before, I think it has a lot of potential.

But, as a result of the lack of the secondary legislation and as a result of these operating and internal challenges, we have been unable to grow this company to its full potential. We have not invested money into Iusacell this year.

So, we would invest more money if we see an opportunity going forward and if it makes financial sense. It will all depend on the regulatory changes and also it will all depend on the performance of the company.

Okay. Thank you, Alfonso. And one more question on the regulatory changes still. On the declaration of dominance as to whether by sector or service, what came out in the Senate, as everybody knows, is by sector, not by service.

And I was wondering if you would expect that to continue in the Lower House. I think this is relevant in the sense of your ability to continue to consolidate the pay TV industry. And therefore, if it stays as dominance related to sector and not service, would you still be interested in consolidating the cable industry in Mexico?

Yes. Well, I guess, Mauricio, as I mentioned before, at this point in time we would not like to speculate as to the outcome of the secondary legislation.

However, as we have said for many, many years, we continue to be interested in the consolidation of the cable industry. It will be important for the country to have a national cable system that can compete against the preponderant company in the telecommunications sector.

So, we believe this to be important for the country itself and of course for us. We need a competitor that has the size and the scale to go front -- I mean to compete against the preponderant in that sector.

So, we have been saying this for years, that of course we are very interested in the consolidation of the cable industry. But, we would not like to speculate as to specifics of the legislation until it passes.

John Tinker, Maxim.

The Sky sub increase was impressive, partly due, I assume, to the exclusive soccer games. How sustainable is that, in the sense do you see many people cancelling going forward, or can that be continued?

Yes. Well, we have grown about 1 million subscribers at Sky every year from 2010 through 2013. We have achieved this outstanding growth by penetrating lower income segments that were not traditional pay television customers.

Over this period of time, pay television penetration expanded materially to almost 50% nowadays. But, we also have a lot of competition including the one coming from Dish-Telmex, which we take as a single company. Dish has all the support and subsidies that you can think of.

So, as a result of higher penetration and competition, we should continue to grow but at a milder rate than the one that we experienced in these years. We also believe that Sky, as you have seen this quarter from their margins, will continue to be extremely profitable going forward.

Thanks. And just as a quick follow up, your pay TV advertising remains strong with a 25% increase. But, that was actually down, I think, from the first quarter of 41%. Is that partly due to the Easter effect, or what should we think about as a sort of a run rate growth rate?

Well, the base is really small, so it would be moving a lot. But, since it's such a small quantity, we think that the movement will be pretty often.

Andres Medina Mora, GBM.

Congratulations on the results. I was wondering if you could give us a little bit of your outlook on the pay TV growth and the margins, particularly in the Sky part going forward.

And also, if you could expand a little bit on the strategy for the mobile side, if consolidating or joint ventures would be in the possibilities in the near future. Thank you.

Hi, Andres. Yes. Well, the margins for Sky will -- I mean the sustainable margins will be in the mid to high 40s%, as we have experienced throughout these years.

And as to cable, the margins are in the high 30s%, low 40s%. Those are the sustainable margins.

As to mobile, there are no -- I mean we would love to consolidate. We believe that, in the mobile industry, you need scale to compete. So, we would love to consolidate at some point in the future and to compete actively with a company that has the scale to do that.

Soomit Datta, New Street Research.

Hello. Yes, a couple of questions, please, both on Iusacell. Just on Q2, I know there have been a couple of questions on this already, but can you -- I think you'd said the MTR effect or the saving was potentially MXN200 million on an annualized basis. So, should we assume MXN50 million was saved in Q2? And were there any other incremental savings booked this quarter coming from, I guess, things like national roaming? A bit of sort of quantification there would be helpful.

And then secondly, just on the general outlook for Iusacell, I appreciate it's difficult given the laws haven't yet been passed. But, in principle, are you considering only, if you like, a traditional macro cellular network solution or are you entertaining a hybrid business model incorporating perhaps an MVNO into that, or even have you looked at small cells and a Wi-Fi solution piggybacking on the back of the cable infrastructure? Any kind of commentary around that would be helpful. Thank you.

Hi, Soomit. Yes. Well, I can confirm to you that the savings this quarter were around MXN50 million, a little less. I mean, it was like MXN45 million.

And as to strategy, we would like to share and give you more light as to what we are trying to do with Iusacell going forward once the new laws are in place and we can see what the plans are, because today, as I mentioned before, the House of Representatives will discuss the new laws.

And those laws are extremely important for Iusacell. So, we would like to sit with our partner and discuss the future of Iusacell once the laws become effective.

A follow up from Rodrigo Villanueva with Merrill Lynch.

Thank you for the question, Alfonso. Just very quickly, I was wondering if, on Iusacell, when you have a chance to take a look at the secondary laws once they are approved, similar to what you did before, that you did a write-off on the value of Iusacell, if these secondary laws are very favorable for Iusacell could you be able to reflect the positive impact on the balance sheet of Televisa as a result of the positive outcome from the secondary laws? Does it have to be only at year-end? Any feedback in this respect would be helpful. Thank you.

Yes, Rodrigo. I don't think we would do anything material in the short term. The impairment that we took had to do with the performance of the asset. And so, we are not foreseeing any change there in the near future.

There are no further questions at this time. Mr. Alfonso de Angoitia, the floor is yours for any closing remarks.

Well, thank you for participating in our call. And we are very excited about the prospects of Televisa going forward, especially once we know the details and once the secondary legislation is passed and becomes effective.

So, please give us a call with any questions you may have once these laws are passed. Thank you very much. Bye.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect. Have a great day.