Entravision Communications Corporation (EVC) Q4 2018 Earnings Report, Transcript and Summary

Good evening and welcome to the Entravision Communications Quarter and Full Year Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Walter Ulloa. Please go ahead.

Thank you, Izzy. Good afternoon, everyone and welcome to Entravision’s fourth quarter 2018 conference call as well as full year. Joining me on the call today is Jeff Liberman, our President and COO and Chris Young, our 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 express 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 fourth quarter results were in line with our expectations, with solid growth achieved by our television segment, partially offset by decreased revenues in both our radio and digital segments compared to the prior year period. Our balance sheet continues to be solid, with approximately $179 million in cash and marketable securities on the books and total debt of $246 million, yielding a total net leverage of 1.2x. We continued to return capital to shareholders through both our $0.05 per quarter dividend and our share repurchase program. During the fourth quarter, we repurchased approximately 2 million Entravision shares at an average price of $3.12 per share. For 2018, in total, we repurchased approximately 3.5 million shares at an average price of $3.88 per share. Turning to our consolidated financial performance for the quarter, total revenues increased 12% to $82.1 million compared to $73.5 million in the prior year. Consolidated operating expenses were down 1%. Consolidated adjusted EBITDA increased 92% to $20.9 million, and free cash flow, as defined in our press release, increased 109% to $12.2 million. For the year, total revenues decreased by 44% to $297.8 million compared to $536 million in the prior year when we recorded the results of our performance in the FCC broadcast auction. Consolidated operating expenses for the year were up 5%, and consolidated adjusted EBITDA increased 7% to $54 million. 2018 also represented a highly successful midterm election for Entravision. Total political across our media platform was $8.7 million in the fourth quarter compared to $5.8 million in the fourth quarter of 2014, our prior midterm election comparison. For 2018, total political revenues were $12.2 million, which represented an increase of 31% over the prior midterm election cycle. Turning to our television segment operating results, television revenues from advertising and retransmission consent were up 22% during the fourth quarter due primarily to increased political revenue arising from midterm elections. National advertising revenue was up 58%, while local advertising revenue was down 2%. For the year, television revenues for advertising and retransmission consent were up 1% in 2018 to $149.9 million. National was up 7%, while local advertising went down 9%. Political revenue for our television segment totaled $7 million versus $4.7 million in the fourth quarter of 2014. For the year, our television segment recorded $9.8 million in total political advertising in 2018 versus $7.8 million in the previous midterm election cycle in 2014. Retransmission revenues increased 15% to $8.6 million during the fourth quarter versus $7.5 million in the prior year. Retransmission revenue for the year represented $35.1 million versus $31.4 million in the prior year. Turning to our ratings performance, our Univision television affiliates built upon their market leadership in the November 2018 suites. For adults 18 to 49 in early local news, our Univision television stations finished ahead of their Telemundo competitor in 12 out of 17 markets where we have head-to-head competition. During the full week, our Univision and UniMas television stations combined had a cumulative audience of 4.22 million persons 2 plus in our markets compared to Telemundo’s 3.2 million persons 2 plus. We have 31% more viewers than Telemundo in our Univision television footprint. Turning to our audio division, audio revenues were down 2% during the fourth quarter compared to the prior year. Local revenues were down 3%, while national revenues were flat over the prior year period. For the year, audio revenues were down 4% in 2018 to $63.9 million compared to $66.9 million in the prior year. Local revenues were down 7%, while national revenues were flat over the prior year period. Political revenue for our audio division in the quarter was $1.6 million versus $1 million in the fourth quarter of 2014. Political revenue for our audio division for the year was $2.1 million. Now let’s move over to our digital business. Digital revenues decreased 3% to $19.7 million from $20.3 million during the same period last year. The softness in revenue growth in digital in the fourth quarter was primarily due to an increased focus on profitability in our digital business. This decrease in revenue was partially offset by performance of our demand side platform, Smadex and a boost in our mobile app promotion product in Latin America. For the full year 2018, digital revenues increased 42% from $57.1 million to $81 million due to solid consolidation of our programmatic and mobile app promotion divisions. As shown by our recent history, we strongly believe that investments in digital businesses have the potential to reinvent our industry entirely and have a fundamental impact in Entravision’s overall performance and operations. Therefore, we continue to explore opportunities to further expand our digital portfolio, where we see not only an attractive opportunity for return of capital but also a chance to foster innovation and keep propelling our company forward to the next level. Current trends and client feedback show that the value chain is shifting toward an ecosystem based on an omni-channel approach. We are currently working on key initiatives that will help Entravision stay ahead of the curve to support demand. Our digital programmatic out-of-home solution is quickly becoming the biggest network in Latin America, reaching 4,000 screens in airports, malls and public streets. We are expanding our branded content solutions to offer marketers a more integral approach and to reach their desired audiences in the U.S. and Latin America. Entravision has developed an own network to reach Latino consumers through a proprietary platform in the United States. Efforts have proven to be successful during fourth quarter as we saw an audience growth of 9% when compared to the previous quarter and 26% when compared to Q4 of the previous year. We also launched our owned influencer network in several Lat Am markets, which will support an organic amplification for advertisers in addition to our already strong publisher network solutions. We have plans to extend our influencer marketing product to the U.S. Hispanic market in the near future. Technology innovation and performance are key to our digital growth. And we are proud to say that our owned and operated DSP, Smadex, has been distinguished for exceptional app marketing performance and achieved the number two spot in the category of traffic quality worldwide, as reported by Kochava’s media traffic index in its quarterly report. This further supports the strong revenue growth on our platform, Smadex, in Q4. As I said earlier we are extremely proud of this Kochava Traffic Index’s recognition of Headway’s mobile first DSP, Smadex, for its excellent high value user acquisition and long-term retention of users. The Kochava Traffic Index is one of the principal media partner comparison resources for marketers and advertisers. Kochava’s quarterly analysis of billions of transactions processed by its mobile measurement platform makes it possible to compare media partners based on their performance. Since the first quarter is now closed, we will not be sharing first quarter performance metrics on this call. That said, we plan to review our first quarter performance within the next week or so during our first quarter 2019 earnings call. I will now turn the call over to Chris Young, our Chief Financial Officer.

Thank you, Walter. Good afternoon, everyone. Given the delayed filing of our 10-K this year, rather than cover the usual topics that I would normally discuss in the call, I think it’s best to just touch briefly on why our filing was late this year, and then we will turn it over to questions. So during our audit process, we had identified 2 nonmaterial items related to Headway’s 2017 financial results. These items related to certain liabilities of Headway that were under-accrued during 2017. Both of these items were not material to Entravision’s financial statements. And more details are provided in the 10-K that we filed today. Now the complicated factor that caused this process to drag on was that we have new auditors this year, BDO. Since the items that we uncovered occurred in 2017, we were required to bring back our prior auditors, Grant Thornton, as well as our current auditors in this complicated review process. Again, the items were deemed not to be material, and both auditors have signed off on our 10-K, which was filed with the SEC this morning. Also due to the delay of getting the K out, as we included in our press release this morning, we do expect a short delay in finalizing our 10-Q for the quarter, the deadline for which is this Friday. With that said, we don’t expect the delay to be lengthy. It is purely a function of the lateness of our K, which was pushed back for – which pushed back our first quarter close process. I will now turn it over to the operator for questions. Izzy?

[Operator Instructions] Your first question comes from Michael Kupinski with Noble Capital. Please go ahead.

Thank you and thanks for taking the questions. Just like, first of all, it looks like the cash flow was in line with my expectations for the fourth quarter. In the quarter, operating expenses were lower than I expected. I know that you outlined some cost-cutting initiatives last year. Can you talk about where you are in the cost-cutting process and whether you have identified additional areas for savings this year? And when will we begin to cycle through those cost cuts, would that be in the fourth quarter or would that be in the third quarter of this year?

No, we put those cost cuts in April of last year. So, we are cycling through first quarter of this year will be the last comp where you will see some nice expense reductions. And then moving forward, I would expect to see expenses in the flat to low single-digit range going forward.

Got it. And then if you could just identify in terms of the little revenue weakness in digital as you indicated sounds like a company decision, was that largely a function of Headway then or can you talk about the outlook for digital revenue growth and the company’s objectives for that division going over the next 3 to 5 years?

Well, I will just make a comment and – Michael and Chris may have more to fill in here, but this was an overall decision by the executives that manage Headway and Smadex and of course, Entravision corporate and that was to focus on revenue that produces better margins. And so to be a little more selective in the type of advertising campaigns we take in order to increase the gross profitability of the campaigns. So, that was why we saw a slight call it drop in revenue versus Q4 of 2017 it would be, yes. So I think that pretty much explains it. Chris, do you have anything to add there?

Yes. I mean I think what I would add to that is instead of focusing on revenue at least from an internal budget standpoint we have got a significant enhanced budget as far as cash flow is concerned, because that’s where our focus is. So we are trying to enhance the value contribution of the digital platform to our overall operation. And obviously, growing cash flow is the way to do that, not necessarily growing revenue without cash flow growth.

Got it. And I am sorry.

Just to add to that, Michael, our mantra has been revenue growth is great, but we want to see cash flow growth as well. So...

Got it. And at one point, I thought that the plan was to introduce Headway more aggressively into the United States market. Was that still the plan or has that strategy changed?

No, we are doing that. I mean we have got – we have a team working here in the United States. One of the things that we – one of our goals is to take some of the products that Headway is marketing and producing and target the U.S. Hispanic market with these products. So more on that later, but we are making some progress there.

Got it. And then my last question is can you talk a little bit about Univision being back on DISH? And have you identified the amount of revenue impact you believe you’ll be gaining from being back on the air? How much did that influence the fourth quarter numbers?

It didn’t come back online in the fourth quarter. It came back online in the first quarter, so...

Yes. First quarter, yes.

Actually, no, it was second quarter. April 1, I believe was the first day we were put back on. So that went off the air. We went dark in July of last year. That represented about $1 million a quarter in lost revenue for the back half of the year. As it’s coming back online now due to the subscriber declines with DISH, instead of that being a $1 million line item for us now, it’s probably better to think of that as an $800,000 line item with the decline in subscribers over at DISH as it comes back on.

Yes, got it. So, about $800,000 incremental per quarter?

That’s correct.

Okay, perfect. Okay. That’s all I have. Thank you.

Thanks, Michael.

Thank you. [Operator Instructions] We are showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Walter for any closing remarks.

Thank you, Izzy and thank you everyone for participating on our fourth quarter and full year 2018 earnings results. We look forward to speaking to everyone in the coming days when we announce our first quarter 2019 earnings results. Again, thank you for participating.