Entravision Communications Corporation (EVC) Q1 2018 Earnings Report, Transcript and Summary

Good day. And welcome to the Entravision Communications Corporation First Quarter 2018 Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Mr. Walter Ulloa, Chairman and CEO. Please go ahead.

Thank you, Andrea. Good afternoon, everyone. And welcome to Entravision's first quarter 2018 earnings conference call. Joining me on the call today is Jeff Liberman, our President and COO; and 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 in line with our expectations with increased revenue overall, thanks to our digital segment partially offset by decreased revenues at both our television and radio segments. To be clear, this was a difficult quarter. The acceleration seen with industry platform changes has negatively impacted our linear delivery, creating significant operating headwinds across the country. As a result, during the quarter we began taking some necessary steps to realign our cost structure, given this new market reality. These steps resulted in over $8 million of annualized expenditures been removed from the business effective Q2 of this year. We will continue to focus on additional cost reductions and provide our investors with an update on our Q2 earnings call in August. Looking beyond the general business environment, our balance sheet continues to be solid with approximately $248 million in cash and marketable securities on the books versus the total debt of $298.5 million. During the quarter we also -- we are also active in buying back stock with epoxy 1.5 million shares, having been repurchased during the months of March and April at an average price of $4.82 per share. On this note with approximately 2.3 million of our existing $15 million repurchase plan remaining, we are announcing today the Board of Directors has approved a new stock purchase plan for an additional $15 million effective immediately. We also continue to return capital to our shareholders to our quarterly dividend. Now turning to our financial performance. Revenues increased 16% to $66.8 million in the first quarter, consolidated operating expenses were up 16% and consolidated adjusted EBITDA was $6.9 million, compared to $12.6 million last year. Free cash flow which we defined in our press release was $1.6 million, compared to $7.3 million last year. Turning to our television segment, operating results, television revenues were down 9% during the quarter, primarily due to lower national sales, slightly offset by increased retransmission revenues. National advertising revenues were down 17%, while local advertising revenue was down 11% compared to last year's first quarter period. Retransmission revenues increased 11% during the first quarter. Excluding retransmission, political revenues and factoring out the loss of our San Diego Telemundo affiliation last year, core television advertising revenues were down 8%, with local down 9% and national down 8% during the quarter. Automotive advertising was down 19% for our TV segment and represented approximately 30% of our total television advertising revenue. Breaking up the various auto tears, Tier 1 auto revenue was down 46%, while Tears 2 and 3 were down 11% and 21%, respectively. Beyond automotive, top 10 advertising categories that generated growth during the first quarter, retail up 7% and travel and leisure up 11%; services, restaurants and healthcare, three of our top 10 categories for television were particularly soft in the quarter producing declines of 11%, 34% and 8%, respectively, compared to the first quarter of last year. Overall, we added 39 new advertisers who spend more than $10,000 during the first quarter, which totaled approximately $964,000 in advertising revenue. Notable new brands in the first quarter included FedLaw Insurance, Rising Corporation, Knight Law Group and Women Vote. Turning to our radio performance, our Univision television affiliates built upon their market leadership in the February 2018 sweeps. For adults 18 to 49 in early local news, our Univision television stations finished ahead of the Telemundo competitors in 15 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 11 markets among the 17 markets where we have head-to-head competition with Telemundo. Additionally, our early local newscasts are ranked number one or two against English and Spanish competitors in 11 markets. During a full week, our Univision and UniMás television stations combined had a cumulative audience of 2.8 million persons 2-plus compared to Telemundo’s 1.8 million persons 2-plus. We have 53% more viewers than Telemundo in our television footprint. During weekday prime time when comparing – compared to all stations, we had higher rating than at least one of the big networks in 10 markets among adults 25 to 54 and 11 markets among adults 18 to 34. Telecast for Univision's Western Award Show in February 2018 was among the top 10 primetime program for the night among adults 18 to 49 in 15 markets. Now looking at our audio division, audio revenues were down 10% during the first quarter compared to the prior year. Local revenues were down 12% and national revenues decreased 6% in the quarter. Excluding political core radio revenues were down 11% in the first quarter. According to Miller Kaplan, we outperform the market in six of the 13 markets that we subscribe to. Advertising categories increased their ad spend with us year-over-year during the first quarter. These categories include retail up 4%, media up 21% and grocery up 8%. Services, auto and travel and leisure three of our top 10 categories for audio were particularly disappointing in the quarter producing declines of 15%, 12% and 8%, respectively, compared to the first quarter of last year. Overall, our audio business added 25 new advertisers who spend more than $10,000 during the first quarter, which totaled approximately $482,000 in advertising revenue. Notable new brands in the first quarter included G.N.G. Events and Entertainment, Coloradans for Responsible Energy and the Wondries Auto Group. Looking at our audio division ratings performance for winter 2018 among Spanish language radio stations, [inaudible] Show has ranked number one in eight of our nine -- in eight of nine markets released to-date, among Hispanic adults 25 to 54, number one in seven markets, among Latino adults 18 to 49 and number one in six markets among Hispanic adults 18 to 34. Across our nine 34 O&O stations released for winter 2018, the Erazno y La Chokolata show reached more than 600,000 Hispanics 18 to 49. On our [inaudible], EM drive and Midday Programming ranked as a top choice among Hispanics. During Midday La Plata ranked number one or two among Spanish radio in seven out of nine markets released to-date, among Hispanic adults 18 to 34. For AM drive our radio stations ranked number one or two among Spanish radio stations in six out of nine markets released to-date among Hispanic adjusts 18 to 34. Across our new format brand that replaced Josh in January this year had encouraging results during its first quarter on the air. High profile shows Lucas and shows ability ANCSA Morning Drive and Midday Sports. Across our nine markets released for winter 2018 [inaudible] Hispanic adults 18 to 49 cum audience is up over 26,000 and Piolin Hispanic 18 to 49 cum audience is up over 33,000 from the same time last year. Now let’s move to our digital business. Our first quarter digital revenues increased 347% versus the same period last year, primarily attributable to the Headway acquisition. On a pro forma basis, accounting for the Headway acquisition, digital revenue grew 32% in the quarter. Our digital revenues accounted for approximately 27% of our total revenue in the quarter. We are driving consistent growth in our digital revenue by the combination of our robust online and mobile audiences -- mobile audience shares, our engaged communities and our white glove service standards within our Pulpo and Headway platforms. With the Headway acquisition, Entravision has further enriched its powerful ad stack of services, all of which are fully advertiser centric, covering 14 additional countries, a market that is five times bigger than the US Hispanic total purchasing capacity and 12 times bigger regarding target population, a market where Internet, smartphones and e-commerce penetration are strong drivers of growth, because Latin America is not yet as digitally mature as the United States. This acquisition is part of an ongoing strategy to sustain a leading digital position, not only within the US Hispanic market, but also in less mature markets abroad. As we continue growing our digital and data enriched client centered services, we are focusing on four business development lanes. First, we are strengthening our existing brand portfolio and their own communities’ reach and engagement. Second, we are adding new capabilities to our existing ad stack to provide more accurate, efficient and rapid results to our clients. Third, we're enhancing our mobile programmatic and performance demand side with data rich platforms, clear attribution and machine learning optimizations to better support our client and our margins. Fourth and last, we are committed to further developing our digital sales by maximizing the efforts of a sales force of over 300 professionals across 14 countries with a combined population of over 680 million, a total GDP of $7.6 trillion. Moreover, additional existing projects are happening with all of our tech data and business units as we add capabilities and seek economies of scale. With the Headway improvement, we are driving essential synergies and value as we advance our existing legacy media data assets and business intelligence, as well as our integrated media and digital services, Pulpo and Headway. These synergies will improve our overall digital product offerings, our digital margins, our digital growth and our R&D and product development capabilities. On this front, Entravision continues to build the leading database of Latino online navigation and purchasing behavior. Also, we are building our data management platform to enable efficiencies, productivity and powerful, insightful product offerings to our clients for broadcast digital and integrated solutions. The number of brands working with us on digital campaigns continues to grow. Major brands we worked with during the first quarter include L.A. Care, H&R Block, Covered California, Sprint, Mobile Action, 99 Taxi, Drive Kings and Xoom.com. We generated strong year-over-year performance in the first quarter in a number of key advertising categories, including our top category of services, which saw a 2000% increase, travel and leisure increased 500%, retail increased 323% and healthcare saw 14% increase. Overall, our digital platform continues to benefit from our unique combination of assets and expansive reach. In fact, it remains the number one digital platform to reach Latinos in the United States. Based on the most recent comScore data, we connect with 41 million unique US Latinos across all acculturation levels, delivering the total Hispanic market to our advertisers. According to Appsfire rankings, Mobrain is the third mobile and volume platform in Latin America and the number 12 worldwide. As it is well known the digital industry is currently demanding the expansion of audiences through owned and operated properties. Entravision keeps investing the growth with managed platforms to serve the Latino population at a local or national level. There are online verticals we have published over 6,300 original stories during the first quarter composed of stories and videos aligned with our top categories such as news, entertainment and sports. These stories produced over 7 million views across the owned – our owned and operated websites and over 65 million views -- video views across Facebook, Instagram and twitter. During the first quarter we have seen a significant increase in engagement on our digital audio stream initiatives. We reached over 700,000 unique visitors, which generated 7.2 million hours of listening. This represents a 13% increase in hours listened per user when compared to the previous quarter. As we head into the second quarter we are exploring new audio opportunities such as programmatic partnerships and broadcasting. Our social media strategy to create and strengthen bonds with local communities is showing positive results as we are nearing the 11 million followers mark across key platforms such as Facebook, Instagram and twitter. Overall, Entravision continues to strengthen its digital platform through its commitment to produce high quality content, increased community engagement and above all to provide the most powerful set of Latino data and digital services to our advertisers. Turning now to our pacing for the second quarter, television ad revenues are currently pacing minus 9% in the second quarter. Factoring out the loss of our Telemundo affiliation in San Diego last, TV ad revenue are pacing minus 2%. Our audio advertising revenue is currently pacing minus 6% in the second quarter. Digital revenues are currently pacing up plus 30%. on a pro forma basis with the Headway acquisition. To clarify, total pro forma digital revenue in Q1 of last year, including Headway was approximately 13.7 million. Our digital business is continuing its strong momentum from Q4 in to Q1. We expect our digital business to represent over 25% of total revenue in Q1. In summary, our first quarter results were largely in line with our plan and we remain on track in executing our strategy to further build our unique audience reach and targeting capabilities while proactively managing our costs. With many nationwide political primary heating up, we remain focused on maximizing our revenue potential in this important mid-term election cycle. 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. I will now turn the call over to Chris to give you a financial report.

Thanks, Walter, and good afternoon, everyone. As Walter has discussed net revenue for the quarter was up 16% to $66.8 million, compared to $57.5 million in the same quarter of last year. Operating expenses increase 16% to $44.3 million and consolidated adjusted EBITDA was $6.9 million. For the quarter revenues in our TV segment were down 9% to $34.5 million, compared to $37.7 million in the same quarter last year. The decrease in our TV segment was primarily attributable to decreases in national and local advertising revenue, partially offset by an increase in retransmission consent revenue and an increase in political advertising revenue, which was not material in 2017. We generated retransmission consent revenue of $8.9 million for the three-month period ended March 31, 2018, compared to $8 million in the same quarter of last year. Radio net revenue for the quarter was down 10% to $14.1 million, compared to $15.7 million in the same quarter of last year. The decrease in our radio segment was primarily due to decreases in local and national advertising revenue. Digital net revenue for the quarter was up 347% to $18.2 million, compared to $4.1 million in the same quarter of last year. The increase was primarily attributable to the acquisition of Headway during the second quarter of 2017, which did not contribute to our results prior year period. For the quarter cost of revenue in our digital media segment was up to $10.6 million, compared to $1.8 million in the same quarter of last year. The increase was primarily due to the acquisition of Headway during the second quarter of 2017, which did not contribute to the cost of revenue in the prior year period. Operating expenses increased to $44.3 million for the three-month period ended March 31, 2018 from $38.3 million for the prior year period. The increase was primarily due to the acquisition of Headway in our digital segment during the second quarter of 2017, which did not contribute to operating expenses in the prior year period, as well as an increase in salary expense and an increase in expenses related to the acquisition of station KMIR-TV in the fourth quarter of 2017, which did not contribute to operating expenses in the prior year period. Excluding the KMIR and Headway transactions, operating expenses were down 2% for the quarter. Corporate expenses for the quarter were up 2% to $6.0 million, compared to $5.9 million in the same quarter of last year. Excluding non-cash comp expense, corporate expenses for the quarter were $4.9 million versus $5.1 million in the same quarter of last year, a decrease of 3%. Income tax benefit was $0.9 million for the quarter, well cash taxes paid was $0.1 million, given the elimination of our full valuation allowance in the fourth quarter of 2013 future income tax expense will run at approximately 35% of pretax income, although most of this expense will continue to be non-cash given our NOL. offsets. Earnings per share for the quarter were negative $0.02 per share, compared to a positive $0.03 in the same quarter of last year. Free cash flow as defined in our earnings release decreased to $1.6 million for the quarter, compared to $7.3 million in the same quarter of last year. Cash interest expense for the quarter was $3.3 million, compared to $3.5 million in the same quarter of last year. Cash capital expenditures for the quarter were $3.0 million. Excluding capital expenditures expected to be reimbursed by the FCC we anticipate that our capital expenditures will be approximately $9 million for the full year 2018. Turning to our balance sheet as of March 31, 2018, our total debt was $298.5 million and our trailing 12-month consolidated adjusted EBITDA was $45.8 million. Cash on the books was $89.2 million as of 3/31/2018. Net of $75 million of unrestricted cash on the books are total leverage has defined in our 2017 agreement was 4.88 times as of 3/31/2018. Net of both cash and marketable securities our total net leverage was 1.1 times. This concludes our formal remarks. Walter, Jeff and I will now be happy to take your questions. Andrea, I will hand it back over to you.

Thank you. [Operator Instructions] And our first question comes from Michael Kupinski of Noble Capital. Please go ahead.

Thank you. Good afternoon. Thanks for taking my questions. I was wondering if you can give me a little color on radio expenses in the quarter is it -- were they seemed to little elevated -- would -- can you just give me some color on that.

Yeah. Just a quick comment on that, you're correct radio expenses were elevated and when we -- as I mentioned in my remarks, we have taken a good look at radio and taken steps to reduce debt that expense line and you'll see the results of that action in Q’s 2, Q3 and Q4 going forward but anyway that's…

Where the one type of cost in there Walter is that or any one time cost in the direct operating expenses?

No. The cash expense was a minus 3 over the prior year that's what you're talking about Michael?

Yeah. I was just looking at the total operating expenses for radio in total?

Yeah. It’s $15.2 million.

$15.2, okay…

Yeah.

And SG&A expenses were a little elevated in the quarter, is that right, is that or should we use that going as the run rate going forward?

No. We have been working on taking expenses out of the radio model. I'd be reducing that going forward, Michael, but I'm not really ready to give you a run rate number at this point.

Okay. And then in terms of political, what was political on TV and radio in the quarter?

Political was 400 for TV and 100 for radio.

Okay. And then in terms of with a lot of cash sitting there, any pipeline of acquisition prospects, do you think you might just hold on to the cash, where are your thoughts at this point?

Michael, we will continue to look at a number of opportunities, but we're using a pretty strict – we are using strict models when we assess any acquisition opportunities. And so, like I said, we have a pipeline of certainly of digital opportunities that would complement our existing digital platform. Occasioned that we see some television that might work and then, of course, if there is anything with regards to radio, but that's kind of the order in terms of which -- how we're looking at the future?

And I know that auto such a big factor for you guys especially in television, can you give us a little color on what it's looking like in Q2 in light of your guidance or your pacing guidance?

Pacing better than Q1, Q1 was…

Q1 was a minus 19…

… for TV and radio was a minus 12 and I believe that Q2 for auto is minus 12, is that correct, minus12. So it has improved, I mean, like I said, earlier Q1 was a very tough quarter. We are seeing some improvement across the different categories. We continue to use all of our assets to drive better results for our advertisers.

And Walter, you mention about the ratings in terms of the station performance and I think you said 11 in the late night news of your ‘17 markets were ratings leader. How does that compare with previous quarters, has it been trending better, the same or can you just give me a flavor on the ratings.

Well, we've been giving this type of information for a long time.

Right.

And I would say, I mean, I didn't go back and look and compare, but I've been doing this a while, so I can have a feel for it. I mean, I would suggest that our ratings performance for our news products was as good or better than it's ever been. So we're quite pleased with our results for our early and local -- early and late news in our Univision television markets.

Great. Okay. That's all I have. Thank you.

Thank you, Michael.

[Operator Instructions] Our next question comes from Jason Crawshaw of ‎Polaris Capital Management. Please go ahead.

Hi, guys. A couple of questions, I guess, just when you look at the digital business and roughly looking at the numbers, obviously, that's where the growth is. It seems like that business leads in the first quarter run sort of at breakeven at the EBIT level. Is the idea to continue to run that business really for growth and anticipation is minimal probability for the foreseeable future or I guess, ultimately, when did that business starts to become profitable on and will it be more profitable business than the two other businesses, I guess will be the first question.

Well, Jason, the statement you made I think is a correct one, which we are investing steadily in our digital business and we're pleased with the revenue growth. At the same time, we’re investing in technology, we're investing in more products, we're expanding our market penetration. So -- and then we've got expenses in our radio -- in our digital that are tied to the acquisition that we did last year. So, to answer your question, we will continue to invest, we will see some cash flow production from our digital businesses, particularly the second half of the year. But I think you'll see that cash flow accelerate certainly as we move into the second half of 2018 and then into ‘19.

And to be clear we had about $600,000 in onetime expenses in digital in the first quarter that obviously by definition are non-recurring. And then to Walter's point, yeah, we're expecting this business to generate margins at least in the high-single digits by year end.

Yes. But I guess going forward, I mean, structurally would seem that, a double-digit margin out of a well managed digital business should be kind of a feasible target or is there something specific that makes this structural high single-digit margin?

No. I think this year I don't think that's feasible but certainly not going beyond 2018 getting into the double-digit range is certainly the goal of ours.

Got it. And then, I guess, the other question or rather another question would be just looking at the M&A opportunities out there in digital. I mean my guess is anything that is remotely interesting or certainly has at the high level of growth opportunity or high level probability. The multiples on that must be fairly pricey, I guess, A, that a fair comment and then how do you kind of reconcile, I mean, clearly enough cash to do a cash deal, but when you kind of reconcile the fact that the stock itself is obviously quite cheap relative to what you have to pay cash digital assets how higher are these multiples.

Well, I’ll answer this way. I mean the multiples anywhere from, let's say, 8 times to 10 times. The ones that we're looking at. But we're making every effort to structure any acquisition we do in digital around two, well, around a very strong management team to begin with. And number two digital assets to complement our existing digital platform. And three, we want to sell us to have a skin of the game. We want to be able to bring these digital assets into our platform and make sure that the management team that we are merging with has every intention to grow these businesses as strong as they, as well as they can going forward. So there's an earn-out model that we use and we've -- I’ll say perfected but we've had good results with it.

Okay. And then just the last question really, I guess, on the balance sheet. So, I mean, clearly, I assume you have aspirations to continue to add pieces of the business and certainly that cash gives you a lot of flexibility. I guess the one thing you kind of look at the interest cost leakage between what the debt services relative to what you're on the cash, somewhere probably in the two roughly of kind of $8 million a year, which is not insignificant given the current probability of the business now. Clearly, if you're going to fully deploy that cash in there, new properties or share buyback, and obviously, get the $30 million. But it just seems like a big delta given the size of the business, given the profitability of the business. I mean, how would you kind of reconcile or address that comment or criticism?

Well, it's a function of what's out there as far as deploying the capital. I mean, we've put the bulk of our cash to work. We should generate on an annualized basis somewhere in the range of about $5.5 million in interest income that will continue to monitor and then what we do with the cash, going forward, we're really be a function of what the operating environment. But the opportunities thus far, clearly if there's nothing out there that what’s our appetite as far as M&A is concerned we will take another look at possibly using a good chunk of that cash towards some kind of debt repayment into that. We're not there yet…

Okay.

… just sit back and watch what happens.

All right. Thank guys. Appreciate it.

Thank you.

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

Thank you, Andrea and thank everyone for participating on our first quarter 2018 earnings call. Please join us in August when we will report our second quarter earnings results. Thank you.

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