Grupo Televisa SAB (TV) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to Grupo Televisa's Second Quarter 2018 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, Co-Chief Executive Officer of Grupo Televisa. Please go ahead, sir.

Thank you, Elsa. Good morning, everyone, and thanks for joining us today. With me are Alex Penna, CEO of Sky; Carlos Ferreiro, Corporate Vice President of Finance; and Antonio Lara, Corporate VP of Administration.

I will walk you through the highlights of our 2018 second quarter results, and following my opening remarks, we will answer all your questions.

First, let me address our consolidated numbers. We're happy to report that second quarter growth in consolidated sales was the highest of the last 13 quarters at 16.2%. Similarly, growth in consolidated operating segment income reached 14.1%, resulting in a margin of 38.7%. It was an atypical quarter due to the transmission of the World Cup. This is a very important event for us and it benefited our 3 core businesses. Growth was particularly strong in our Cable and Content businesses, while Sky's top line remained stable.

Let me address each of our core businesses in detail, beginning with Cable. During the second quarter, our Cable division posted a remarkable growth in revenue and in operating segment income of 9.8% and 8.2% respectively. This is the fastest pace of growth in terms of revenue in 6 quarters. The opening segment income -- operating segment income margin reached 42.2%.

During this quarter, we ended -- we added 329,000 revenue-generating units, or RGUs. This is the fastest pace of growth in RGUs in more than 2 years and the fifth conservative quarter with an accelerating pace of net adds.

Broadband remains the strongest source of growth. During the quarter, broadband RGUs expanded at an annualized rate of 15%, and voice and video also grew at a very healthy pace.

We have assembled very compelling offers that are driving solid gross additions. For example, starting in March, we introduced a disruptive voice and high-speed broadband package offering 50-megs at an attractive price. The level of interest in high-speed broadband is very encouraging. We have made many changes in our offers and in our sales channels, and the number of new customers getting all 3 services has doubled year-over-year.

Our transmission of the World Cup further fueled our strong RGU growth, and we also leveraged on the World Cup to promote our Cable OTT app. This is a very compelling app with true Television Everywhere capabilities, offering live access to more than 60 linear channels, catch-up content for daily programming and an extensive library of movies and series from Televisa, HBO, Fox, Disney and others.

As you can see, the acceleration in growth has been the result of both very solid gross additions, driven by attractive offers and by the ongoing reduction in churn, which continues to be at historically low levels. In addition, the market dynamics continue to be very favorable to us. Current broadband penetration in Mexico is low at 51%, and the service that broadband customers receive has much room to improve. Mexico's telecom regulator has reported that 54% of broadband customers in Mexico complain about having low speeds. According to the OECD's most recent report, Mexico is a country with the lowest broadband speeds out of its 36 member countries. With our network, we are well positioned, and I would say, with -- like no other company to deliver a reliable, high-speed broadband service and capture those customers that seek faster speed and better quality.

As anticipated, we continue to face some headwinds in our enterprise segment, but we expect better results during the second half of this year. As of the second quarter, our enterprise segment represented 14% of Cable revenues and 11% of operating segment income.

Moving on to Sky. During the second quarter, this division benefited from the World Cup. We added 51,000 subscribers, and top line growth remained flat. Recharge rates on our prepaid package continue to be low, so we continue implementing offers and incentives to help us bring these rates up to more normalized levels.

Operating segment income dropped by 4.3%, which is mostly explained by the cost of the rights purchased by Sky for the exclusive transmission of 24 matches of the World Cup. Notwithstanding, the margin remained incredibly strong at about 45%.

During the month of June, Sky launched the rollout of a plug-in broadband offer with our partner AT&T. And, by the end of the month, Sky had already enrolled 10,000 customers. This is just the beginning of what Sky's management considers to be a great opportunity, not only by itself but also as a complement to its existing video business.

Moving on to Content. Revenue expanded by 36% and operating segment income expanded by 35%. Within Content, Advertising Sales grew 9.1%. This is a result of the ongoing efforts to improve our Advertising Sales business under the new pricing methodology and our successful transmission of the World Cup. It is very difficult to determine what was the actual contribution of the World Cup to advertising sales given that part of the growth came from the shifting of some advertising budgets from other quarters in the year to the second quarter.

Growth in Network Subscription revenue was also solid at 27.6%. This line of business continues to benefit from the repackaging and repricing of our linear pay TV networks and related VOD rights. This came into effect in the fourth quarter last year.

Licensing and Syndication revenue also posted solid growth of 20.5%. Univision royalties reached US$103 million, a year-over-year growth of 25%, and exports to the rest of the world remained flat.

During the second quarter, our Content business also benefited from the licensing of broadcast and digital rights of the World Cup to companies in Mexico and other countries throughout Latin America. Since these revenues and expenses are non-recurring, we decided to account for them separately. During the second quarter, this contributed with approximately $44 million in operating segment income. This is the first time that we have monetized these rights. We expect to record an additional benefit in operating segment income during the third quarter.

Excluding the nonrecurring benefit of the licensing of these digital and broadcast rights, growth in Content revenue and operating segment income was also strong at 14.5% and 9.2% respectively. Also, excluding this non-recurring benefit, the operating segment income margin was lower by 180 basis points year-over-year.

This is explained by the fact that a very relevant portion of the increase in Content costs and expenses anticipated for 2018 happened in the second quarter, and approximately half of this increase is explained by the non-recurring costs of the World Cup and the coverage of the elections.

In terms of our digital platforms, the World Cup was a big driver, and we have achieved great results, both in terms of users and in terms of additional advertising revenue. For example, the number of viewers across our digital platforms averaged 1.3 million matches in which Mexico played and about 500,000 across all matches. This is an increase of 211% and 113% respectively when compared with the 2014 World Cup in Brazil.

Moving on to our ratings. The second quarter was very good on many fronts. During the World Cup, which our main broadcast competitor is also transmitting, Televisa delivered a larger viewership in 19 of the 25 matches. Also, the viewership of our primetime World Cup show was on average 29% higher than that of the competition.

Similarly, Televisa's coverage of the election was superior. Televisa's programming involving the elections and the interviews and debates with the top 3 candidates delivered 3x more ratings than our closest broadcast competitor.

In our traditional programming, ratings in our flagship network remained healthy and in line with the first quarter. As a result, Televisa transmitted all top 10 non-sports program in Mexico's free-to-air television during the second quarter. In addition, in our Channel 5, ratings increased substantially, thanks to our new programming.

Mexican free-to-air television is undergoing a very unique transformation. For the first 6 months of the year and for the 2 years in a row, the number of people watching free-to-air television has gone up. According to Nielsen, prime time viewership in the 19 to 54 age demo increased by 9% in 2017 and by 7% in the first 6 months of this year. The growth in free-to-air viewership has been at the expense of viewership in paid television, which is mostly composed of U.S. pay TV networks. This is proof that good content drives viewership even in traditional free-to-air television.

In other matters, we concluded the sale of our asset in Spain for US$341 million and are advancing our plans to sell our nonstrategic assets, such as gaming, radio and live entertainment. We will keep you updated about -- up to this.

Also, 2 weeks ago, S&P reiterated Televisa's BBB+ global scale and AAA national scale ratings, highlighting Televisa's healthy balance sheet and competitive position in Content and Telecommunications.

In closing, we had a good quarter, and the World Cup was an important contributor. We are cautious but optimistic about the outlook of our other businesses, especially Content and Cable. Bernardo and I believe that the very hard work by everyone at Televisa is paying off.

With that, we'll now turn the call back to the operator and open the line for any of your questions.

(Operator Instructions) And your first question comes from the line of Rodrigo Villanueva with Merrill Lynch.

My first question is regarding presidential elections in Mexico. I was wondering if you could share with us your thoughts regarding the outcome of this election. And if you see any opportunity or threat as a result of it? That would be my first question.

As to the presidential elections, I guess, Televisa is a company that has been around for almost 80 years. We have worked with governments of all parties in the past, both at the federal and local levels. In this case, it will be no different. It will be the fourth time that Bernardo and I lead to a presidential transition here at Televisa. We're encouraged by the first speeches of virtual president-elect López Obrador, where he highlighted the importance of, among other things, freedom of speech and enterprise. He also has made reference to the autonomy of Banco de Mexico, the central bank. He has also talked about the fiscal and financial discipline. So all those things are pretty encouraging. Of course, here at Televisa, we strongly wish the president-elect to have a successful term. As we have always mentioned, if he's successful, Mexico and also Televisa will also do very well. So in addition, I don't know if you looked at -- I mean, at the coverage and the interview he gave the morning after the election, but he has publically thanked the media for basically its objectivity, and he also mentioned professionalism during the coverage of the electoral process. And in particular, in the interview he gave the morning right after the election, he thanked Televisa for its news coverage. So I think we're in a pretty good footing. And we wish the President-elect well, that would be great for Mexico and great for Televisa.

Understood. Very clear. And my next question is regarding the Advertising business. Advertising revenues increased by 6.5% in the first half of the year. So I was wondering if it's reasonable to assume that Televisa can achieve revenue growth of mid-single digits for the full year. Or do you expect to see a stronger hangover effect after the end of the World Cup?

Yes, thank you, Rodrigo. Very good question. I'm not going to provide additional guidance, but I guess let me go over the different businesses or main businesses.

Starting with Advertising. As I mentioned before, it's very difficult to determine what was the actual contribution of the World Cup to Advertising Sales in the second quarter. I guess, as in prior World Cups, part of the growth in the second quarter came from the shifting of some advertising budget from other quarters in the year to the second quarter.

Now going to the macro environment. As I mentioned before, the election of Manuel López Obrador has been well received, and his different messages have been very positive and encouraging, look at the exchange rates and how it has behaved right after the election. However, there are still macroeconomic uncertainties, I would say, that -- especially in what has to do with NAFTA and trade in general.

So what I can say about the Content business is that ratings are strong, and the new pricing mechanism has been adopted by our clients. It is allowing us to -- for a better utilization of our inventory, and is giving our clients, basically, I would say, the tools to plan their campaigns more effectively. However, I mean, we're still cautious. And I would say also optimistic about our expectations for this business for the rest of the year, considering basically the viewership -- the expanded viewership of over their television, and as I mentioned, our strong ratings.

Then moving on to Cable. As I also mentioned and as you know, we do not provide RGU guidance. But I would say that the trend is very positive. Keep in mind that, as I mentioned, our Cable business is benefiting from the transmission of the World Cup during the second quarter. Especially, we believe that the churn in our video services might increase temporarily right after the conclusion of the World Cup. So that is the effect that we're expecting in terms of video churn.

And so lastly, in terms of Sky, as it happened in the prior World Cups, especially in the Brazil World Cup, we can expect a temporary slowdown of gross additions and income in -- and I think an increase in terms of churn following that event. However, also good news as to the nonrecurring income. I would say, that in terms of license fees and what we sold in Latin America and the digital sale of rights that have to do with the World Cup, which has been very successful, we would expect having an additional positive impact in operating segment income in the third quarter of approximately $20 million.

Your next question comes from the line of Fred Mendes from Bradesco.

I have two questions as well. My first question here, if you can just give us an update about the rating points for Univision. It looks like that in beginning of the year, we started to observe a better trend, so any updates would be great? And then my second question, on the Cable segment, net adds were really strong, mainly of course, on voice and video. And then on video, of course, you do have the impact of the World Cup. But look at voice, really got our attention here. So I was wondering if you guys launched a new plan, a more aggressive plan on that. Or better in other words, just a punctual result?

Yes, thank you, Fred. In terms of the rate -- Univision ratings, we continue working closely with Univision to help them improve their ratings and their trends. Univision has continued to make changes in its programming, and they have also continued exploring ways to benefit the most from the closer collaboration with Televisa. As we have been mentioning in the past, Univision is a priority for us. Both Content teams continue working together so that the production that we're now making in Mexico appeals to both markets. There are productions that are more contemporary stories with more action scenes and are faster-paced. And of course, as we have mentioned in the past, we're making shorter productions. So even in some instances, we are maintaining the same storyline but we're producing additional or alternative episodes, targeting the U.S. Hispanic audiences in particular. So I would say, on that front, we're moving in the right direction. As you have probably heard, Univision has a new management team in place. Vince Sadusky has taken over as a CEO of Univision a few weeks ago. He's a seasoned media executive. He has the mandate from all of us shareholders in Univision to maximize revenue and to look for efficiencies in the operations to increase profitability. Our -- what I can tell you is our relationship with Vince has been great. He is a professional that is a hands-on operator. He visited Bernardo and I in Mexico City last week, and we're fully aligned regarding the content that we will produce and provide to Univision. We believe that this content will be very attractive to the U.S. Hispanic audiences. As I mentioned, we're making many changes for that to happen. And so we're very excited about the changes to come there. Some of those changes are long overdue. I would say that this year will be complicated for Univision because Telemundo has a transmission on an exclusive basis for the World Cup in Spanish, so it makes for a difficult comp. However, I would say that Univision continues to be very strong in general in the sports area. Univision, basically, if you compare all its portfolios of networks has outperformed Telemundo, exceeding Telemundo by about 90% in prime time and with a widening gap from about 77% a year ago.

So finally, I would like to mention that timing during the second quarter, all of Univision networks got like over a 56% share of all Spanish language viewing across prime time among the demo 18 to 49. And the closest competitor is Telemundo with a distant 29%. So I think we'll be able to regain speed there and to make that -- continue making Univision a very successful asset.

I guess as to the second part of your question, we're selling more and more triple play packages. So basically, that has to do with voice service increases and subscribers. About half of the subscriptions that we sell are nowadays triple play.

Your next question comes from the line of Richard Dineen from UBS.

Maybe just on Network Subscriptions. In the first quarter, you had 13% growth, I think. And I think you'd mentioned that was driven mainly by the price increase in December and a little bit of pay-TV subscriber growth. But then we, obviously, saw a very impressive jump to 28% or so growth in Q2. Just wondering what that delta is? Is that World Cup? Is that just a sort of spike in pay-TV subs caused by the tournament? Is it some additional element of pricing? And just wondering how that might trend in the rest of the year, given some of that seasonality? That would be very helpful.

Yes, I think it has to do with the repackaging of the channels and also of additional rights that -- like every -- the Television Everywhere rights that have been included in those packages. But also, it has to do with the exchange rates when comparing this quarter versus other quarters.

Okay, great. So it's not really -- it's more FX, not sort of anything special about the World Cup, particularly?

Not World Cup, specifically. It has to do with, I mean, basically, the repackaging and also additional rights that we're selling to the MSOs.

Great, that's super helpful. And just maybe if I could ask just a clarification. I'm not sure if I heard your comments correctly, but I think you were talking about the impact of the World Cup and the election expenditure on Content and Sky margins, and how that might trend in the second half? Did you -- did I hear you correctly, Alfonso? You said that about half of that incremental cost will sort of disappear in H2? I just didn't hear you correctly. I would be -- it was an interesting comment.

Yes, that is the Content side. Basically, out of the $100 million of incremental cost, about half of that is the World Cup and the election. And we have booked most of that in the second quarter.

Your next question comes from the line of David Joyce from Evercore.

I have a couple of questions. First on the capital expenditures. Presumably, a lot of the increase was from the strong Cable and satellite customer additions, but was there any other particular step up in spending going on there? And then I have a second question after that.

Yes. No, there was nothing particular.

Okay. And then if we could just drill down on how the advertising played out? When -- earlier in the year, you said the upfronts deposits were up 1.8%, was that exclusive of any World Cup advertising? And I was just wondering, you did say that some budgets were allocated to the second quarter that maybe hadn't been last year. Was World Cup spending somehow differentiated from the core advertising that you got in the upfronts and in the spending? Just wondering what all you played into the growth this quarter?

Yes. Well basically, David, the World Cup -- advertising on the World Cup, both games and shows that we produced around the World Cup, was included in the upfront. And there are also clients that have bought specific packages on the scatter market. Basically, it's both, but I would say most of the large advertisers were part of the upfront. So those -- I mean, the advertising packages that they bought then included the World Cup. However, the World Cup and the programs around the World Cup have a different pricing than the general or ordinary prices. That did not form part of the -- of how we're selling advertising now, of the new methodology. So basically, those were specific packages that were put in place around the World Cup.

Okay. And then finally on that topic, how much did the political parties use of their allotted advertising inventory? Did they fully use what was available to them? Or was the -- or was it something lighter than that?

Yes, they pretty much used everything that they had available, which was a huge amount of advertising minutes.

Your next question comes from the line of Soomit Datta from New Street Research.

Yes, a couple of questions, please. One, on the fixed wireless offers, which you've had in the market through Blue Telecomm and also the wholesale fixed offers through Blue Telecomm. How is that product going? And how far are you in terms of transitioning that towards the full Sky brand? I think at the moment, you're not yet fully offering that through Sky. I just wondered how that process was developing, please. And then secondly, just a quick update, if you had one, on the strategic review. Is that still something which is kind of happening? Or is that being back burnered?

Yes, so the fixed wireless plug-in product, I think that Sky is extremely well positioned to be able to position that product. It's a great product, the one that we have launched with our partner, AT&T. Basically, we're using their spectrum. I would say that, that, together with unbundling of the preponderant operators' local loop, got us to 10,000 subscribers this quarter, and it's only the tip of the iceberg. We have 8 million subscribers at Sky. Sky has a tremendous brand. And therefore, I think that it is uniquely positioned to be able to continue selling this product. I think that the results throughout the year will be excellent. Mostly, it has to do with the AT&T product. As I have mentioned in other quarterly calls and meetings, the unbundling of the local loop continues to have many issues, and it's not effective yet. The pricing mechanism that has been established is not right, and there are many obstacles yet. But -- so it's mostly -- I mean, what we believe will be a successful product is a plug-in with AT&T.

As to -- basically, as to the strategic options that Televisa has, which was your second part of the question, I guess the review is ongoing actively. And basically, we're taking a close look at the consolidation of content and distribution happening now in the U.S. Of course, such as the -- in the AT&T/Time Warner deal or the Disney/Fox deal or, who knows, Comcast/Fox deal, there are basically 2 different schools of thought in this regard. On one side, the companies that I mentioned, which believe that value can be created by putting together content and distribution or telecom and content. On the other side, there are, I mean, brilliant people, such as John Malone, that believe that it is better to maintain those apart because he even mentioned that a merger of apples and oranges doesn't make a lot of sense. So I mean, this is a very important decision for Televisa, and we're taking our time to view our options, always with a view towards maintaining optionality and also creating the value for our shareholders. But I mean, the main conclusion and the main analysis that we're making is that we have to get to a place where we feel comfortable as to, in this consolidating world, if Televisa will be more valuable as a whole as it is today or whether the pieces will be more valuable than Televisa as a whole.

Okay. And that's a process which should conclude this year, do you think?

Yes, that's a process that will conclude this year.

Your next question comes from the line of Andre Baggio from JPMorgan.

So Alfonso, we have seen Televisa improving its ratings. And if you could give a little bit more details actually, what have been changing the programming that's making the program more enticing? And second, how can that flow into revenues over time? Like say, is there a limit in the budget of advertisers in relate to what they want to spend in the free-to-air television? Or if the free-to-air continues to do well in terms of viewership, do you think that could be an expanding area over time as people go back to the realms which they used to spend on the free-to-air not spending anymore?

Yes, to your first question, we are producing shows that we believe to be more attractive to the -- to our audiences, both in Mexico and in the U.S. We are producing more reality shows. We produced one that has been very successful, called [Cuatro Elementos]. And as to what used to be a traditional programming, we have changed that for a more contemporary approach where it's basically faster paced programming, where there's -- it involves more action. They're shorter versions of these shows, so it's more type of series-oriented than the traditional telenovela that lasted for 4 months. So we are avoiding, in general, the Cinderella -- the traditional Cinderella story. So I mean, basically, those are the things that we're doing. We are airing La Piloto, which is a soft version of narco novella that has been very successful both in the U.S. and in Mexico. And so we will continue to base our productions in that genre. So I guess those are basically the changes. It's a complete revamping our -- of our productions, and we can see that -- and the audiences are reacting to those changes and are liking the new products. So we'll continue to do that. It's not something that we have concluded yet, and we're -- we have done it partially. We want to expend it to all our programming.

On the sport side, we are also changing many things. I don't know if you saw, but basically what we have done is to consolidate, basically, the sports teams of Univision and Televisa. And we're going to have Juan Carlos Rodríguez to lead that effort. So on that side, he's going to make many changes. And I think we're going to be successful on the sport side as well. So I mean, it implies a lot of changes, but I mean, we're getting there. And I think that we will have stable and strong ratings throughout this year and next year.

In terms of budgets of advertisers as to free-to-air, I think that having this additional viewership coming back to free-to-air, what I can say is that we expect to receive more money. The audiences are there. I think that many of these large advertisers are pretty disillusioned about the net effect that advertising on digital and many digital platforms has. So once you see that our audiences are growing and viewership is growing, as I mentioned before, on over-the-air television, I think we'll be able to convince clients that the most effective way of advertising and the most effective in terms of reach and in terms of frequency is over there. So as I mentioned -- as I have mentioned before, our flagship, which -- with their new -- with its new content has an audience share which is larger on a single night on prime time, which is larger than all the universe of paid television channels put together. So I believe that it's -- I mean, that has a tremendous effect. And little by little, we have been convincing advertisers to repurpose their budgets and to come back to over-the-air television.

Your next question comes from the line of Diego Aragão from Goldman Sachs.

Maybe a follow-up to Andre's question related to your new Content products and all this digital debate in Latin America right now. headed Global, one of the largest content producers in the regions, announced a few months ago their intentions to start producing shows in a specific programming for YouTube in 2019. So I want to get your views about that? And whether Televisa could eventually think about this kind of product and format in the future?

Of course, I mean, all these new platforms, especially the disruptive ones, are (inaudible). They are requiring a lot of content and high-quality content. And being Televisa, the largest producer of content in Spanish in the world, of course, all those platforms come to us for attractive products. We have signed, on the Televisa side, a deal with Amazon where we're going to produce 3 series for them. As a matter of fact, 1 series is being aired now, and Amazon used it to launch its Prime product in Mexico, and it has been very successful. We're going to produce 2 additional ones. We're in the process of producing one, and then we'll produce another one next year. So -- and we will continue to sign deals with all of these platforms. Of course, on the Univision side, we produced the series El Chapo, which is high-quality product that has been very successful for Netflix. So that was a -- I mean, a Univision/Netflix deal in Spanish. So this -- to conclude, I mean, we will continue. I mean, we're content producers, so we will continue to looking at deals with these platforms that require content, especially high-quality content.

The partnership with AT&T to offer broadband service for Sky clients. I know that this is still very embryonic, but can you provide more detail on the economics of this offer? I mean, is there any discount to buy a kind of bundle? And if so, how much it will be related to Sky, and how much it will be related to AT&T?

Yes, I guess today, Diego, we're not bundling the wireless plug-in service together with Sky's video product. We are thinking about it. We're developing a package. The economics have to work for Sky and also for AT&T. So we're working on that. It might make sense to bundle, but we're not there yet. So -- and basically, we're not sharing any additional, I mean, targets in terms of the number of customers at this moment. What I did share is that -- I mean, in the original -- I mean, in this month, we were able to sell 10,000 subscriptions. And as I mentioned before, this is what we believe to be the tip of the iceberg. So we're being very careful with the rollout because it's using third-party infrastructure and spectrum. And Sky has, I think, the best brand in Mexico in terms of video products. So in terms of putting that together, we have to be extremely careful. So basically, that's what we're working on.

We have no further questions at this time.

I would like to thank all of you for joining us today. Please feel free to contact us at any time with any additional questions.

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