Entravision Communications Corporation (EVC) Q1 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Entravision Communications First Quarter 2017 Earnings Conference Call and Webcast. [Operator Instructions] And please note, this event is being recorded. I would now like to turn the conference over to Mr. Walter Ulloa, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Nicole. Good afternoon, everyone, and welcome to Entravision's First Quarter 2017 Earnings Conference Call. Joining me on the call today is Chris Young, our Executive Vice President and Chief Financial Officer. Before we begin, I must inform you that this conference call will contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to our SEC filings for a list of risks and uncertainties that could impact actual results. This call is the property of Entravision Communications Corporation. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Entravision Communications Corporation is strictly prohibited. Also, this call will include non-GAAP financial measures. The company has provided a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's press release. The press release is available on the company's website and was filed with the SEC on Form 8-K. Our first quarter results were largely in line with our expectations with increased revenues at our television segment offset by lower revenues at our radio and digital segments. At the same time, we closely managed our cost, which allowed us to deliver flat EBITDA against last year's first quarter, which benefited from about $1 million in political advertising. Overall, we continue to execute on our strategy during the quarter, and we remain well positioned to deliver our goals in the year ahead. Our television and radio stations delivered very healthy audience shares, and we're expanding our collective digital audience, giving us an attractive and growing multimedia platform for advertisers who wish to target and interact with Latino audiences at both the local and national level. We also remain on track on our acquisition of Headway, which we closed in April. The addition of this innovative mobile programmatic data and performance digital marketing company will further enhance our digital capabilities to target audiences and consumers while supporting our goal to expand the contribution of our digital operations to 20% of total revenue within the next 12 months. Solid cash flow from operations combined with the previously announced proceeds from the FCC TV broadcast incentive auction, which are expected to recede in the second half of the year, puts us in a strong financial position. We remain committed to using a portion of the proceeds to reduce our debt while retaining the balance for possible future acquisitions and shareholder returns. We are upgrading one of our television stations, WJAL, which serves the Washington, D.C. market. On April 20, we exercised our rights under an agreement to allow WJAL to broadcast on a shared channel in perpetuity of another full power station in Washington, D.C. in exchange for a payment of $32.5 million. As part of this transaction, WJAL will locate its broadcast location from Hagerstown, Maryland to Washington, D.C., which is a significant market upgrade for WJAL signal in the number 7 largest television market in the country. We expect to announce further content plans for this station later in the year. We plan to continue returning capital to our shareholders through our quarterly dividend. Looking now to our financial results. Revenues decreased 1% to $57.5 million in the first quarter. Excluding the impact of higher political revenues in the prior year period, core revenues increased 1%. Consolidated adjusted EBITDA was flat compared to last year, while free cash flow, which we defined in our press release, was up 11% to $7.3 million. Turning to our television segment operating results. Television revenues were up 3% during the first quarter, primarily due to higher national sales as well as increased retransmission revenues. National advertising revenue was up 5%, while local advertising revenue was flat with last year's first quarter period. Retransmission revenues increased 7% during the first quarter. Excluding retransmission and political revenues, core television revenues were up 5%, with local up 2% and national up 8% during the quarter. Automotive advertising was up 1% for our television segment and represented 32% of our total television advertising revenue. Tier 1 auto revenue was up 8%, while tiers 2 and 3 were both flat. Beyond automotive, key advertising categories that generated growth during the first quarter included media, health care, grocery stores and telecom. Services restaurant and retail, 3 of our top 10 categories for television, were particularly soft in the quarter. Overall, we added 38 new advertisers to our television business to spend more than $10,000 during the first quarter, which totaled approximately $1.2 million in advertising revenue. Notable new brands in the first quarter included Path Medical, NRG Energy Inc. and Nextel, Orlando Health, Dodge Ram Retail and Jeep Retail. Turning to our ratings performance. Our Univision television affiliates built up their market leadership in the February 2017 sweeps. For adults 18 to 49 in early local news, our Univision television stations finished ahead of the Telemundo competitor in 16 of 17 markets where we have head-to-head competition. In late local news, we finished ahead of Telemundo competitors among adults 18 to 49 in 10 markets among the 17 markets when we have head-to-head competition. Additionally, early local newscast are ranked number1 or number 2 against English/Hispanic competitors in 17 markets regardless of language. During the full week, our Univision, UniMás television stations combined had a cumulative audience of 3.4 million persons 2 plus compared to Telemundo's 2.2 million persons 2 plus. And we have 53% more viewers than Telemundo in our television footprint, and we reached 73,000 more people in the February sweeps compared to the comparable quarter last year. During weekday prime time, when compared to all stations in total, we had higher ratings at 1 of the Big 4 networks in 12 markets among adults 25 to 54 and 11 markets among adults 18 to 34. The telecast for Univision's Premio Lo Nuestro award show in February 2017 was among the top 10 prime time programs for the night among adults 18 to 49 in 13 markets. Among adults 18 to 34 and 25 to 54, the show ranked among the top 10 in 9 and 8 markets, respectively. Last night, the Emmy Awards nominations for the National Academy of Television Arts and Sciences for the Pacific Southwest Chapter were released. I'm very proud to announce that our news operations in Las Vegas was nominated for 19 Emmys and our San Diego news team was nominated for 6 Emmys. Turning to our audio division. Our audio revenues were down 7% during the first quarter compared to the prior year. Local revenues were down 4%, and national revenues decreased 12% in the quarter. To break down national further, national spot was down 17%, while our national network business decreased 4% compared to the first quarter of last year. Excluding political, core radio revenues were down 6% in the first quarter. Notable new advertisers to our Spanish network audio space during the first quarter include Indeed Inc., TMK, XO Energy, Sempertex and Camelbak. These brands chose to advertise with Entravision due to our superior targeting capabilities and consistently strong audience share supported by our nationally popular talent, including Erazno y La Chokolata and Alex "El Genio" Lucas. We continue to work closely with our syndicated radio personalities to supporting their roles, not only highly successful entertainers with household names, but also as multi-platform brand ambassadors for our major advertising partners. The combination of our incredible talent and diversified platform is second to none in the Latino media industry. During the first quarter, we generated $1 million in syndicated audio campaigns that included brand endorsements. This represents a revenue increase of 25% from syndicated audio campaigns comparing Q1 of 2016 to Q1 of this year. These 11 network brand endorsement campaigns compared to just eight in the same period last year attest to the health of our business and increased ability to deepen our relationships with key advertisers. These advertisers included AT&T, Home Depot, O'Reilly Auto Parts, NAPA Auto Parts, Macy's, Telemundo, Ford Motor Company, Community Tax, Rosetta Stone and Pantheon Films. Key advertising categories for our audio division during the first quarter were services, travel and leisure and healthcare. Auto, telecom and retail, three of our top categories for radio, were down in the quarter. Looking at our audio division. Ratings performance on all stations regardless of language, the Erazno y La Chokolata Show is in the top 10 in four of the six markets released to date for the winter of 2017 book among adults 18 to 34 and 18 to 49 and in five markets among adults 25 to 54. The show of Alex "El Genio" Lucas is in top 10 in three of the five winter 2017 markets released to date among adults 18 to 49 and 25 to 54, regardless of language. The "El Genio" Lucas show has a national cum of more than 868,000 listeners based on the latest national fall Act 14/2016 release in Hispanics 18 to 49. Also I might add that the Erazno y La Chokolata show has a nationwide cum of more than 1.7 million listeners based on the latest nationwide Act 14/2016 release in Hispanic adults 18 to 49. With regard to our new format, La Suavecita Radio on KSSE-FM in Los Angeles, the station is performing well with solid book-to-book audience growth since its debut in December. When we compare March 2017 to December 2016, our audience for morning and afternoon drive among Latino adults 18 to 49 increased 95% and 113%, respectively. Among Hispanic adults 25 to 54, morning drive increased 114% and afternoon drive increased 130%. Also, in last Los Angeles, after making minor programming changes in Q1, we are pleased to report a 30% improvement in ratings 18 to 49 on our flagship KLYY station in Los Angeles for our hit afternoon drive show Erazno y La Chokolata during the first half of April. While it's early, the improvements should position our LA cluster well for improved national results later in the year. Turning to our digital business. Digital revenues increased 13% during the first quarter, which historically has less revenue than any other quarter of the year. Digital revenue accounted for approximately 7% of our company's total revenue in the quarter. The decline in digital revenue reflects an overall industry softness and the necessity to increase our video and mobile inventory for national accounts. The lack of U.S. Hispanic video and mobile inventory is an industry-wide opportunity we will capitalize on with the addition of publishers to our Pulpo network. This additional video inventory can also be used by Headway to monetize in Latin America. Our local digital growth was up 19% year-over-year. This growth is attributed to the product mix, such as Facebook for small, medium businesses and our strong presence in our local markets. Our programmatic offering grew plus 11%, as we continued to onboard programmatic offerings through our Pulpo publishers' network. Despite the soft quarter, our digital business remains well positioned to return to growth, given our robust online and mobile presence, mobile audience shares, advanced data capabilities, popular content, the strong reach of our Pulpo network and the acquisition of Headway. We continue to deliver the largest U.S. Latino reach to advertisers through our Pulpo network. This is a unique business supported by a valuable set of targeting and measuring assets, and the addition of Headway will further strengthen and differentiate our already strong capabilities. We continue to track a diverse range of well-known brands to our digital platform. Major advertisers we worked with during the first quarter include Nissan, Toyota, Charter Communications, Wendy's, American Heart Association, L.A. Care and Unilever. Our top advertising categories that showed strength during the first quarter included auto up 44%, retail was up 19% and restaurants were up 4%. Mobile remains our fastest-growing revenue stream, with mobile revenue up 12% during the first quarter and representing 35% of our overall digital revenues. Pulpo remains the number 1 digital platform for regional Latinos in the United States according to comScore, whose latest numbers show that our mobile audience shares continued to expand among the all-important bilingual millennial demographic. According to the most recent comScore data, Pulpo connects with over 26 million unique bilingual and bicultural U.S. Latinos via mobile. Our owned and operated websites have also continued to deliver robust usage levels, as evidenced by our 5.6 million unique visitors during the first quarter. During the first 3 months of the year, we have noticed a decrease in our O&O traffic when compared to Q4 of 2016. The main reason for this decrease is due to a Facebook policy change. Despite this fact, our total amount of owned and operated sessions have increased when compared to the same period last year. This allowed us to generate more than 15 million page views. In serving this massive audience, we published over 8,000 news stories during the first quarter. These stories produced over 11.7 million views across our owned and operated websites. We also had another solid quarter in achieving our objective of expanding our delivery of digital video. Our digital views on our websites increased 43%, and we delivered over 95 million views across all of our properties when you combine social platforms and our websites. During the first quarter, we streamed over 6.6 million hours of audio entertainment. This audience is comprised of an average of over 539,000 monthly unique streaming listeners. And with regard to social media, during the first quarter, our cumulative social media community surpassed 9 million followers across key networks, including Facebook, Twitter and Instagram. Overall, we continue to strengthen our digital platform through our commitment to engaging content and are focused on expanding our mobile offerings. In turn, we're utilizing our strong data analytics and targeting capabilities to drive consumer interest across multiple channels, further adding to our highly attractive value proposition for the growing number of advertisers we serve. Turning now to our pacing's. In the second quarter, television revenues are currently pacing minus 5 in the second quarter. Our audio advertising revenue is currently pacing minus 10 in the second quarter. Digital revenues are currently pacing up 30% in the second quarter, including the Headway acquisition on a pro forma basis. To clarify, Pulpo and Headway revenue in Q2 of last year combined was approximately $12.2 million. In summary, our first quarter results was largely in line with our plan, and we remain on track in executing our strategy to further build on our unique audience reach and targeting capabilities while carefully managing our cost. As we execute our multi-platform strategy and strategically invest in our content and distribution assets, we remain committed to maximizing our performance, enhancing our cash flows to the benefit of our shareholders. And now, I'll turn the call over to Chris Young, our Chief Financial Officer.

Thank you, Walter, and good afternoon, everyone. As Walter has discussed, net revenue for the quarter was down 1% at 57.5 million compared to 58.1 million in the same quarter of last year. Operating expenses decreased 2% to 38.3 million. And consolidated adjusted EBITDA was 12.6 million. During the first quarter of 2017, the company paid a cash dividend of $0.03125 per share to shareholders of the company's Class A and Class B and Class U common stock. The total amount of cash dispersed for the dividend was 2.8 million. The company also announced today that the Board of Directors has declared a quarterly cash dividend of $0.03125 per share to shareholders of the company's common stock payable on June 30, 2017. The total amount of cash to be disbursed through this quarterly dividend will be approximately 2.8 million. As previously announced, we currently anticipate making cash dividends on a quarterly basis in future periods. For the quarter, TV net revenue was up 3% to 37.7 million compared to 36.6 million in the same quarter of last year. The increase in our TV segment revenue was primarily due to increases in national and local advertising revenue and an increase in retransmission consent revenue, partially offset by a decrease in political advertising revenue, which was not material in 2017. Excluding political, core TV advertising revenue was up 5% over the prior year. Retransmission consent revenue for the quarter was 8.0 million compared to 7.4 million in the same quarter of last year. Radio net revenue for the quarter was down 7% to 15.7 million compared to 16.9 million in the same quarter of last year. The decrease in our radio segment was primarily attributable to a decrease in political advertising revenue, which was not material in 2017, and decreases in local and national advertising revenue. Excluding political, core radio ad revenue was down 5% over the prior year. Digital net revenue for the quarter was down 13% to 4.1 million compared to 4.7 million in the same quarter of last year. The decrease in our digital segment was primarily attributable to a decrease in national advertising revenue. Operating expenses for the quarter were 38.3 million, down 2%. TV operating expenses excluding noncash compensation expense, were down 1% at 20.1 million. Audio operating expenses, excluding noncash compensation, were down 1% at 15.6 million. Digital operating expenses, excluding noncash compensation expense, were down 9% at 2.3 million. Corporate expenses for the quarter were up 5% to 5.9 million compared to 5.6 million in the same quarter of last year. Excluding noncash compensation expense, corporate expenses for the quarter were 5.1 million versus 5.0 million in the same quarter of last year, an increase of 3%. Excluding noncash compensation expense, the increase in corporate expenses were primarily due to an increase in legal and financial due diligence cost associated related to the acquisition of Headway. Income tax expense was 1.9 million for the quarter, while cash taxes paid were 0.4 million. Given the elimination of our full valuation allowance in the fourth quarter of 2013, future income tax expense will run at approximately 40% of pretax income, although most of this expense will continue to be noncash, given our NOL offsets. Earnings per share on a fully diluted basis was $0.03 per share for the three-month period ended March 31, 2017, compared to $0.02 per share for the same quarter of last year. Free cash flow, as defined in our earnings release, increased 11% to 7.3 million for the quarter compared to 6.6 million for the same quarter of last year. Cash interest expense for the quarter was $3.4 million compared to $3.7 million in the same quarter of last year due to principal repayment on our debt. Cash capital expenditures for the quarter were $1.5 million. Capital expenditures for 2017 are expected to be approximately $12.5 million. Cash operating expenses for both TV and radio are expected to be flat to slightly negative in the upcoming quarter and for the balance of the year. Turning to our balance sheet. As of March 31, 2017, our total debt was $291.9 million, and our trailing 12-month consolidated adjusted EBITDA was $69.2 million. Cash on the books was $69 million as of 3/31/2017. Net of $20 million of unrestricted cash on the books, our total leverage as defined in 2013 credit agreement was 3.9 times. This concludes our formal remarks. Walter and I will now be happy to take the questions. Nicole, we'll hand it over to you.

[Operator Instructions] Our first question comes from Michael Kupinski with NOBLE Capital Markets.

In terms of the audio division, I'm going to start there first, did another competitor launch a competing national syndicated show, or is the weakness in national just reflective of generally weak national audio market?

Michael, we believe that the softness is just due to, in national is due to generally soft national market. Everything we've seen and read and people we've talked to, other companies in the industry, seem to confirm what we believe. That is just national radio soft.

I got you. And in your guidance for the, in terms, well, not guidance, but in terms of pacing down 10, that's against political, because I recall you had some political in the second quarter of last year, is that right?

Correct. We did last year, for our second quarter, radio had about $250,000.

Okay. And then in terms of your digital business, I have, looks like a pretty tough quarter. But you seems pretty confident about it coming rebounding. The digital up 30%. If you excluded Headway out of that, what kind of pacing would you be looking at without the acquisition in there?

The pacing for Pulpo on a stand-alone basis right now is negative low double digits.

Okay. And what's actually driving that, Chris, in terms of the weakness there? Obviously, the business grew pretty nicely last year. And now it seems like it hit a little bit of a wall. What's going on there?

You know what, Michael, really it's the tale of 2 different business lines. Our local business for Pulpo is actually doing really well. It's pacing in the positive double digits. The problem is on the national front. The national demand is such that they are increasing their demand for video. And video is a product that we've been scrambling to produce and to meet that demand. But quite frankly, we're not meeting that demand efficiently. So on the national side of the business, we're not as able, we're not able to execute as we had been in prior quarters because of the lack of inventory. And that's something that we're working to address right now.

Okay, got you. And then on the TV -- I'm sorry.

Michael, but we're actively in the process of acquiring more video for our digital business. And I also want to add that we believe that Headway is going to be a huge complement to our existing Pulpo business and it's going to significantly help drive growth here in the future quarters.

Got you. And in terms of your TV pacings [indiscernible] at this point. I know auto is such a big category for you. It's at historic highs. What is audio as a category still performing well? Can you just kind of give us some thoughts on maybe some of the key categories that you're seeing into the quarter?

So auto right now for Q1 in television is pacing at, we'll call it, minus 7. One of the reasons for that auto softness, it's really last year, we had a Copa soccer tournament in the month of June. This year, it's being put into the month of July. So we're going to be missing that soccer tournament, which is a heavy auto spend. So that's part of the reason for the auto softness.

[Operator Instructions] Our next question comes from Gordon Hodge of Tracker Research. Please go ahead.

First question is just on digital. I noticed you made another acquisition, I think announced this week. I'm just curious what the sort of the scope of that is and the scale of that? And then, if you could just comment, I think they're all based in Argentina, and my guess it's not too far away from each other. What sort of integration and how do they all fit together? Maybe you can just comment on that, and then I had another question after that.

Well, Gordon, we announced the Headway acquisition in early April. And we have two businesses in digital, and the value propositions are different for both national and local. However, the infrastructure and the technology, that is primarily the same for both segments. We do have a number of people working in Argentina. That's kind of the backbone of our digital business. At the national level, for Pulpo, we offer Latino digital targeting and segmentation to Fortune 1000 brands, display, mobile, audio streaming and content integration. And within our display and mobile, we also offer direct programmatic private deal environment, while we also enrich our cookie data with transactional off-line data to increase the value of the audience and it has proven to generate better results for our clients. On the national business, not for national, excuse me. At the local markets, we offer comprehensive suite of digital products to small businesses, such as display, mobile, geofencing, email, social media through Facebook, integrated content and paid search. And some -- with some large accounts, with local digital, we also serve as the digital media agency for these clients, where we strategize, plan and execute the entire campaign. Headway, I think the acquisition you're referring to, brings a suite of mobile solutions that immediately increases our product line in the areas of app acquisitions, retention and programmatic. And these solutions will be first offered to national brands and then subsequently introduced to local clients, but we want to bring particularly the Mobrain, the mobile performance product to our U.S. national clients and we'll be working on that here in the coming weeks.

Gordon, are you talking about the Headway acquisition? Because we announced a partnership.

Yes.

Is that what you're talking about?

The data expanded, as you said, is that the partnership?

Right. That's a partnership. That was the data partnership with those, okay. It wasn't an acquisition per se. They work with our Headway.

Okay. I think it was characterized in the press somewhere as an acquisition. Okay, so that's a partnership. Okay, very good. And then I think you clarified it earlier as it relates to audio, but the pacings, the minus 5 for TV, the minus 10 for audio, those are not core. Those are just pacings, irrespective of whether you had a soccer tournament or you had a political...

Correct. That's right.

Okay. So if we...

If you want to fraction TV core pace, excluding political, is around minus 4. If you want to account for the soccer tournament as well, core pace is -- it's at minus 2. So there is some offsets there. As far as radio is concerned, instead of minus 10, it would be a minus 9 right now, so it's not really material.

Got you. Okay, very good. And then last question, the channel sharing agreement, putting WJAL in D.C. So, I gather the way that works is, if we think about the spectrum proceeds, the $264 million you're getting, we should think about, in terms of the net proceeds from the entirety of the spectrum auction, we should be thinking of $264 million minus the $32 million you are paying to your partner to channel share there?

You could think about it that way, but we think about it slightly differently.

That's not how you...

This is a [indiscernible] back in April. What we're effectively doing is moving JAL in from Hagerstown in to Washington, D.C. JAL was reaching a total population of approximately 900,000, ahead pops of 900,000. They have, obviously, in Washington, D.C. you've got a population of over 8 million, and so to have a full power station with cable rights in a #7 market just seemed, when we looked at the numbers, it seemed to be more material to us. That's the way we are looking at.

Okay. I did not realize that was the magnitude. That's terrific. Okay, good. And then I think you had alluded to some channel sharing opportunities on the last call. I'm curious, are there more the works? In other words, could we see a situation that kind of is the reverse of the WJL-AL situation, where you might share your channel with somebody, say in Boston or some other market, who sold in an auction and receive some proceeds. Is that something that could happen down the road?

Yes. We are still having conversations with numerous operators on that front, but we don't anything to announce here today.

Our next question comes from [John Jung] Of Trailhead Asset Management.

I wonder if you might give a little information more about what plans you have for bringing some profitability to the radio segment?

What plans we have to bring to the radio segment? Well, the issue with the radio right now is nationally-driven. It's a tough market nationally. We saw in the first quarter. We're still seeing in the second quarter. By accounts of everybody that we speak to in the industry, we're not alone as far as this national business is concerned. We've got top talent. We've got great sales force in place and we're continuing to work against those headwinds. Now I think we'd be fools to not say that there are obviously secular pressures in hand. That's something bit out of our control, but that's something we're combating and working against. So we're just focused right now, John, on the basic blocking and tackling in this business. We continue to cultivate new talents, and we're just burrowing down and facing the facts and combating this on a day-to-day basis.

Is that an asset that's valuable to continue to keep, if there's no future profitability?

Well, the radio assets as far as we're concerned, in 11 markets, we've got radio married up with television, and that provide synergies and cash flow enhancement opportunities that we think are valuable to us. So for now, yes, radio still a valuable asset. Which still we consider to be a core asset, and that's the way we're running it right now.

But, John. The first quarter for radio always a soft quarter. So that wasn't a surprise. And we expect to, as you describe it, returning to positive cash flow here in the coming quarters.

Our next question comes from Michael Kupinski of NOBLE Capital Markets. Please go ahead.

Sorry, just 1 follow-up here. In your press release, you announced that our corporate expenses were higher because of pending acquisition cost. Was that due to Headway? Or is there an unannounced acquisition that you're contemplating and, kind of, are looking at right now?

No. That was due to Headway. That was the work that we did on the Headway acquisition. These folks are based in Buenos Aires, and it involves some international due diligence that was perhaps a bit higher on a cost basis than what you'd normally see. So that was the first quarter corporate bump was the Headway acquisition.

Got you. And in terms of deploying the 264 million at this point, Chris, it seems like to take advantage of the tax benefits that you have by putting that in escrow. It seems like maybe you need to kind of announce something soon. How is the acquisition environment looking like at this point?

Well, it's busy, and what we're going to do initially, as the proceeds come in, proceeds will be funneled into a qualified intermediary, and that's to qualify for 1031 status. And then we'll have six months. We'll have 45 days after that to come up with 4 targets per asset that we sold. And then we'll have six months to execute on those. So we are working on several opportunities, and when we've crossed the finish line with some of those opportunities, obviously, we'll make them public.

This concludes our question-and-answer session. I would like to turn the conference back over to Walter Ulloa for closing remarks.

Thank you, everyone, for participating on our first quarter 2017 earnings conference call. We look forward to reporting to all of you on our second quarter 2017 earnings results in early August. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.