Entravision Communications Corporation (EVC) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Entravision Second Quarter 2019 Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Walter Ulloa, CEO. Please go ahead, sir.

Thank you, Nancy. Good afternoon, everyone, and welcome to Entravision's Second Quarter 2019 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 a 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 second quarter results were in line with our expectations, with increased revenues at our TV division being offset by a decrease in revenues at both our digital and radio segments.Looking beyond the general business environment, our balance sheet continues to be solid with approximately $166 million in cash and marketable securities on the books versus a total debt of $245 million. During the quarter, we were also active in buying back our stock with approximately 439,000 shares repurchased at an average price of $2.95 per share. We also continue to return capital to our shareholders through our quarterly dividend. We are very proud of our local TV news teams in Denver, San Diego and Washington, D.C. In these 3 markets, we have won a total of 44 Emmys. We'll update you on the next call about our additional Emmys is Orlando, McAllen and El Paso.Now turning to our financial performance. Revenues decreased 7% to $69.2 million in the second quarter. Consolidated operating expenses were down 1%, and consolidated EBITDA -- adjusted EBITDA was $12.6 million compared to $14.9 million last year. Free cash flow, which we defined in our press release, was $1.9 million compared to $8.9 million last year due to CapEx related to the FCC television repack in this year's second quarter.Turning to our television segment operating results. Television revenues were up 4% during the second quarter compared to the prior year period. Advertising revenue was down 7% during the second quarter, primarily due to lower national sales. National advertising revenue was down 10%, while local advertising revenue was down 4% compared to last year's second quarter period. Retransmission revenues remained flat during the second quarter compared to the same quarter in the prior year. Revenue generated from spectrum usage rights totaled $4 million during the second quarter, arising primarily from nonadvertising revenues related to a service agreement with a local telecom operator as well as spectrum leasing initiatives or multicast. Excluding retransmission, spectrum usage rights and political revenues, core television advertising revenues were down 4%, with local down 3% and national down 5% during the quarter.Automotive advertising was down 1% for our television segment and represented approximately 31% of our total television advertising revenue. We saw an increase of 5% in Tier 2 expenditures that were offset by declines in both Tier 1 and Tier 3. The growth in Tier 2 was a result of increased spending by Ford Dealers Association, General Motors, Chevy Dealers and Gulf Coast Honda Dealers. Beyond automotive, top 10 advertising categories that generated growth during the second quarter were services, which increased 2%; media, which was up 2%; travel and leisure, up 5%; restaurants were up 2%; and telecom increased 57%. The telecom growth was a result of AT&T increasing their spending by 583% in the quarter.Overall, we added 32 new advertisers who spent more than $10,000 during the second quarter, which totaled approximately $784,000 in advertising revenue. Notable new brands in the second quarter included San Diego Gas & Electric, Tenet Healthcare and California -- and the California Department of Health Services. Turning to our ratings performance. Our Univision television stations built upon their market leadership in May 2019. For adults 18 to 49 in early local news, our Univision television stations finished ahead of the Telemundo competitor in 13 of 17 markets where we have head-to-head local news competition. Additionally, among in adults 18 to 49, our early local newscast are ranked number one or number two against English-Spanish competitors in 10 markets. Our late local newscast are ranked number one or number two against English-Spanish competitors in 8 markets regardless of language.During the full week, our Univision and UniMás television stations combined had a cumulative audience of 4 million persons 2-plus in our markets combined compared to Telemundo's 3 million persons 2-plus. We have 33% more viewers than Telemundo in our Univision and UniMás television footprint. During weekday prime time, when comparing to all stations in total, we had higher ratings at least 1 of the big 4 networks in 10 markets among adults 18 to 49 and adults 25 to 54 and in 12 markets among adults 18 to 34.Turning to our audio division. Audio revenues were down 70% during the second quarter compared to the prior year. Local revenues were down 9%, and national revenues decreased 28% in the quarter. Excluding political, core radio revenues were down 16% in the second quarter. Two key areas have contributed to this decline in national revenue. The first is in Los Angeles, where we combined KLYY, along with KSSE and KSSD to form a superstation, which, based on Nielsen audio simulcast rules, can be combined into one set of call letters. Based on this change, we saw a decline in national revenue. The change in format, national agencies needed to see results usually 4 to 6 months prior to placing national spot business on the station.We are pleased to announce that our Jose station has already built its audience, ranking as the number one Spanish language radio station in the metro during morning drive and afternoon drive among Hispanic adults 18 to 49 and Hispanic adults 25 to 54 for the month of June 2019. Jose also ranked as the number one Spanish language radio station in prime among Hispanic adults 18 to 49 and number two among Hispanic adults 25 to 54 for the same time period. This continued success, we expect to see better national spot results in our audio business in the second half of 2019. The other area that contributed to the national revenue decline was our radio network. Our national -- our network nationwide ratings, which are released 2 times a year, saw declines. These declines led to lower revenues for Q2. Our affiliate stations, along with our owned and operated stations, have seen an increase in ratings that will be reflected in the spring release delivered to the industry in late summer.Besides the ratings increase that we are seeing, we also have added a number of affiliate stations to our lineup that will help us strengthen the overall ratings of our radio network. This will position us well for the radio upfront in October. Services, our largest advertising category for audio, was 1 of 2 categories that saw an increase in spending in the quarter, improving by 3%. Paid programming saw a 4% increase in spending. Increase in services came from increased spending by Matian Law Firm, Freeway Insurance and Geico Direct. All other categories were down, including auto.Overall, our audio business added 17 new advertisers who spent more than $10,000 during the second quarter, which totaled approximately $446,000 in advertising revenue. Notable new brands in the second quarter included Adriana's Insurance, Metrolink and Tenet Healthcare. Looking at our audio division ratings performance in spring 2019 among Spanish language radio stations or afternoon drive, Erazno y La Chokolata show is ranked number one in 7 of 8 -- of our 8 markets release for spring among Hispanic adults 18 to 49, and Hispanic adults 25 to 54.High-profile shows El Genio Lucas and El Show de Piolin anchor our morning drive and mid-day time period on La Suavecita network and Anna Jose in Los Angeles and Riverside. For spring 2019, Piolin ranked as the number one Spanish language midday show in 6 out of our 9 markets released among Hispanic adults 18 to 34, 18 to 49 and 25 to 54. El Show de El Genio Lucas was ranked number one or number two among Spanish language radio stations in 6 out of 8 markets among Hispanic adults 18 to 49 and Hispanic adults 25 to 54.Now let's talk about our digital business. The second quarter digital revenue saw a decrease of 18% versus the same period last year. Obviously, this was disappointing. It is no news that the marketing and media landscape has changed more in the last 5 years than in the previous 50, with most of the focus going to digital channels. Total digital ad spending is growing at a fast pace, and many companies in the industry are adapting their strategies around these dramatic shifts. Entravision is no stranger to that trend. Reduction in digital revenue is mostly associated to a growing trend among advertisers who are moving their investments to programmatic buyers and seeking more transparency and control over their budgets. We're also seeing a higher demand for content marketing and unique solutions that provide consumers with experiences beyond pure transactional buys. These shifts have affected some of our top digital products such as mobile performance and ad network results.In order to adapt these trends, we are currently undergoing a significant restructuring of our digital division. The objective of this change is to achieve greater profit margins and efficiencies by providing meaningful and holistic solutions to our clients through a more aligned product offering. Through our newly aligned digital structure, we are focusing on finding solutions to the current challenges of the industry by investing in products that have been delivering results and removing those that are not delivering results. Significant focus is in developing Smadex, our proprietary demand-side platform so that Entravision can engage with the increasing programmatic demands. This platform continues to grow at a steady pace and is currently generating 30% of our digital ad revenue. There are short and mid-term plans to evolve our Smadex technology to place it front and center of our media offering in the U.S. and internationally.We're also putting more focus on our digital audio business, AudioEngage, which has last -- which has seen an 82% revenue increase when compared to the first quarter of 2019. We have also seen a 161% increase in profit, thanks to innovation in our programmatic business model and an expansion in our publisher agreements that are driving positive changes in margins. Regarding our O&O audio solutions, we are seeing solid results through our in-house third-party distribution alliances, delivering over 6.7 million hours of content to over 900,000 users. Our podcast initiative is playing a major role in the success story as we are growing our content offering and have seen downloads climb to 1.8 million in Q2, which represents a 36% increase over the first quarter.We strongly feel that staying close to our local communities continues to be of paramount importance, and we are happy to report that in Q2 reached over 12.2 million fans, delivering 6,000 stories and 107 million video views from Entravision owned and operated digital touch points. As I mentioned before, the need for media companies to provide value to customers through consumer experience is driving Entravision to spearhead a digital transformation with the objective of providing a more holistic solution to our advertisers. Our approach is to offer reach throughout the company's different touch points as opposed to selling siloed experiences that stay within just one of our platforms. For us, the future is omnichannel.Turning now to our pacings for the third quarter. Our television business is currently pacing at plus 2% in the third quarter. Our audio advertising revenue is currently pacing down 14% in the third quarter. Digital revenues are currently pacing down 14%, too. Total revenue for the company is pacing down 5% for Q3 versus last year. In summary, our second quarter results were largely in line with our plans, and we remain on track in executing our strategy to further build on our unique audience reach and targeting capabilities while proactively managing our costs. As we execute our multi-platform strategy and strategically invest in our content and distribution assets, we remain committed to maximizing our performance and enhancing our cash flows to the benefit of our shareholders.I will now turn the call over to Chris to take you through the numbers.

Thank you, Walter, and good afternoon, everyone. As Walter has discussed, net revenue for the quarter was down 7% at $69.2 million compared to $74.3 million in the same quarter of last year. Operating expenses decreased 1% to $43.2 million, and consolidated adjusted EBITDA decreased 15% to $12.6 million. For the quarter, revenues in our TV segment were up 4% to $38.1 million compared to $36.5 million in the same quarter of last year. The increase in our TV segment revenue was primarily attributable to revenue generated from spectrum usage rights, which totaled $4 million during the second quarter, arising primarily from non-advertising revenue related to a service agreement with a local telecom operator and spectrum leasing initiatives, and an increase in national advertising revenue, partially offset by decreases in local advertising revenue and political revenue.Retransmission consent revenue for the quarter was $9.1 million and was flat over the prior year period. Radio net revenue for the quarter was down 17% to $14.4 million compared to $17.2 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 as well as the absence of World Cup revenue achieved in the prior year period.Digital net revenue for the quarter was down 18% to $16.8 million compared to $20.6 million in the same quarter of last year. The decrease was primarily due to a growing trend of digital advertising moving over to programmatic platforms in recent months, both domestically and more recently in international markets. Operating expenses decreased 1% to $43.2 million for the 3-month period ended June 30, 2019, from $43.8 million for the prior 3-month period. The decrease was primarily attributable to a 10% decrease in our radio division expenses arising from certain expense control measures the company undertook in April of last year, partially offset by a 1% increase in operating expenses at our TV division and a 9% increase at our digital division arising primarily from severance costs. Corporate expenses for the quarter were up 4% to $6.5 million compared to $6.3 million in the same quarter of last year. The increase was primarily due to an increase in audit fees relating to our late filing of our 10-K for the 2018 period.Income tax expense was $2.3 million for the quarter, while cash taxes actually paid was $1.3 million. Earnings per share for the quarter were a negative $0.19 compared to $0.05 per share in the same quarter of last year. This is primarily due to an impairment charge related to our digital goodwill. Excluding the impact of this onetime noncash charge, EPS was $0.07 per share. Free cash flow, as defined in our earnings release, decreased to $1.9 million for the quarter compared to $8.9 million for the same quarter of last year. This decline was primarily driven by higher-than-usual CapEx, capital expenditures during the quarter associated with the relocation of our station channel positions in conjunction with the SEC broadcast auction.Net cash interest expense was $2.5 million for the quarter and as it was at the same quarter of last year. Cash capital expenditures for the quarter were $7.9 million compared to $2.7 million in the prior year period. Excluding CapEx expected to be reimbursed by the SEC, we anticipate that our capital expenditures will be approximately $14.5 million during the full year 2019.Turning to our balance sheet. As of June 30, 2019, our total debt was $244.8 million and our trailing 12-month consolidated adjusted EBITDA was $52.9 million. Cash and marketable securities on the books was $166 million as of June 30. Net of $75 million of unrestricted cash in the books, our total leverage as defined in our 2017 credit agreement was 3.21x as of 6/30/19. Net of cash and marketable securities total, our total net leverage was 1.49x.This concludes our formal remarks. Walter, Jeff and I will now be happy to take your questions. Nancy, I'll turn it back over to you for questions.

[Operator Instructions]. And our first question comes from Michael Kupinski from NOBLE Capital Markets.

First, I was wondering in the digital media segment, if you can break down for me where you're seeing the most trouble? Is it Headway? Is it Pulpo? And since you did take an impairment charge and anticipate that you're looking for a slower growth in that business, I was wondering if you can -- obviously, you're going to be cycling against your strategy over the course of the next year, but kind of looking forward, if you can give us your thoughts on whether or not this division can begin to grow based on the current environment that you're seeing? Or is it that you have to maybe make a few acquisitions to kind of bolster the current business to have a more broader product suite to offer advertisers.

So Michael, it's Walter. To answer the first question, the -- of our 2 digital, call it, units, Headway saw the biggest decline, and that was just attributable to the changes that I spoke about in my remarks about more advertisers moving to programmatic away from our Mobrain traditional product. In addition to that, we did -- looking at the business in totality and dusting it -- and taking steps to return to growth. We're on a better track in the third quarter -- expenses. As I said, we're also putting increased focus on Smadex, which is our machine learning, artificial intelligence programmatic product. That seems to be coming along nicely. So I believe that for Headway, in particular, the second half will be better than the first half.We are more prudent about the business that we take in terms of campaigns that we involve ourselves in to make sure that we're producing the proper margin. But we remain confident in the business. We continue to look forward -- to answer your other question, we continue to look for those tuck-ins that will enhance our, I'll call it, Headway platform. Smadex was one. We're looking perhaps at the supply side platform that would also give us more -- create a more robust digital platform just overall. So we have great confidence in the business and -- part of the process here of -- back to growth.

And I was just wondering, Walter, I know that you've set parameters on how much you think that digital revenues would contribute to total company revenues, do you have any thoughts in terms of updating that prospect or your goals for the digital segment going forward?

Well, I'll just answer it this way. We want -- I mean, our goal is to get our digital business to 30% of total revenue, and we're certainly headed in that direction. We've had a bit of a -- track here in the first half, but we expect to get back to that target here in the second half. That said, we're also being -- I said we're being careful in terms of the business that we take to make sure that -- the campaigns that we engage in are going to give us the right margins.

Got you. And then in terms of just in -- on the TV side, if I could turn to that for a second. The pacing data that you gave, the 2% growth for TV, does that include the spectrum agreements, service agreements as well?

It does, Michael. It includes all revenue streams, multicast, one-offs with the mobile telecom and advertising and retrans.

Got you. And in terms of just the core business, what are you seeing -- is auto the problem? Because I know that auto as a percent of total advertising revenues tend to be higher for you than even some of the English language TV stations. And can you just kind of give us your thoughts on where auto is -- what auto is doing? And as a percent of total revenues, more particularly as -- how big of a category is it now for you?

Auto, for the second quarter, as a category for TV was down 1%, Michael, which is basically flat and kind of in line with, I think, where the rest of the industry ended up. And it's representing about 31% of our total TV business. So it's kind of consistent with what we've seen historically as far as that total percentage is concerned. For Q3, the auto is pacing at a minus 3. Like a 2-point drop, but still relatively resilient compared to what I think is happening in the industry in general as far as the sector is concerned. Everyone knows that cars are coming down, but the spending seems to be pretty consistent quarter in, quarter out.

Got you. And in spite of some weak revenues, you guys have been kind of generating some pretty strong cash flow, and this is a reflection of your expense reduction efforts. How do you see that in the second half? Can you just kind of give us some thoughts on when you might start to cycle against some of the expense costs that you've already taken beginning last year?

Sure. I'll just break it out segment by segment and give you some high-level color. I mean, radio, generally speaking for the second half of the year should be kind of in the flattish range. They are cycling up against that change that we made back in the second quarter of last year. And the same goes for TV, by those range, if you blend both Q3 and Q4 together. For digital -- yes, just to follow up on that point, digital, we should be seeing slightly easier comps on the expense side, so flat to slightly negative.

And Chris, I think that you may have mentioned that there was some further opportunity -- that there might be some further opportunity to cut cost in the radio and maybe in other areas. Have those initiatives already been factored into your thoughts on the expenses? Or is that a prospect that might be a positive surprise?

No, that's still -- all of that work is still on paper. We've not finalized any decisions on that front yet, Michael, but we're still optimistic that there are more expense savings to come.

[Operator Instructions]. We have a question from Mr. Gordon Hodge from Tracker Research.

Just had a couple of questions. One, I apologize, but Walter I -- my phone I think got garbled when you were giving out the audio pacings and the digital pacings, and I was wondering if you wouldn't mind repeating those.

So digital for third quarter?

Third quarter.

Yes, the third quarter.

Yes, it's pacing at minus 14.

And then audio?

Oh, audio is minus 14 as well.

Oh, it was. Okay. Very good. So I guess, a couple of things. One, just I was wondering on retrans. Given that innovation was back on DISH in, I believe, the full second quarter, I was just curious on the retrans trends for you. Is that a function of your arrangement with Univision? It -- the fact that it's flat rather than up a little bit. Or is that a function of sub-losses elsewhere?

So it's really a function of last year's $9.1 million, Gordon. We had some true-up payments totaling about -- those are actually high as your comp. Now going forward, the comps get easier because we took about, call it, almost, almost $1 million a quarter out in both Q3 and Q4 that we now have back in to the full extent of the $1 million, call it $800 million because there's some sub-losses, but it should have some meaningful growth year-over-year for the back end of the year.

Okay, terrific. And then last two. I guess, one, Walter, I'm wondering if you could just expound a little bit on the change in the way that local markets are being managed and organized? I think that was announced yesterday. Maybe just talk us through a little bit what's changing and sort of what the approach is at the local level?

Well, we've made a few changes here in the last couple of months, starting with the naming of Karl Myer as -- our Media Group revenue. Karl is doing a great job. In fact, he did -- Karl has elevated Eddie Melendez to be President of Local Media. And Eddy is -- his responsibility is to oversee our, I'll call it, 10 largest markets for local and as well as both broadcast local and digital local. And then we just -- Juan Navarro, who used to work with us a few years back, just returned to the company. And Juan is going to be responsible for, I'll call it, our mid to smaller markets. And so Juan will report to Eddie, Eddie reports to Karl. And then, of course, Claudia Santana is -- oversees our national and she'll report to Karl as well and as well Carina Serna and -- who overseas sales and marketing, and Alejandro Martin Del Campo, who oversees our research and business intelligence. Also, Jessica Martinez, who overseas our local digital effort will report to Eddie Melendez. So we're very pleased with the -- Karl has restructured the broadcast and local digital sales effort. I think we're going to be on the right -- we're on the right track now, and we expect longer results in this.

Have they made any concrete changes to the way the sales are done? Is it -- are they combining? Is it a multimedia sales approach? Or is there any change there? Or is it too early to talk about that?

No. Certainly, there's definitely more emphasis on multimedia, more holistic approach to local sales, combining digital with broadcast, certainly, in many cases, leading with digital. So there's definitely a greater emphasis on -- and then combining that with the other -- with our other marketing solutions like television and radio ops.

Okay. Terrific. And then last question, just as it relates to M&A, you made a small acquisition in the -- I guess, post the second quarter, just to be curious, it's quite small, I know, but just be curious what the plan is for that. And then there are a number of sort of opportunities arising, one of which is with Univision. And I'm just curious if you think there might be some opportunity if they were to sell off the parts as opposed to sell off the entire company, whether you -- that would present some opportunity for you?

Well, we have a close working relationship with Univision. We certainly understand their, I'll call it, group platform, well, their local TV and -- the process has just started in terms of whatever strategic alternatives they're going to seek. We're just going to certainly monitor it. And if there's an opportunity along the way for us to increase our -- particularly our television portfolio of Univision affiliates and UniMás affiliates, we'll see.

And then any comments on the Texas acquisition?

The TV acquisition. Yes, we just made the announcement. We're filing with the FCC. We'll going to wait for the FCC to rule on that and give us the green light. We do have plans for it but I think we want that process to play itself through before we announce what the plans are, Gordon.

And we have a follow-up question from Mr. Michael Kupinski from NOBLE Capital Markets.

Just one other question. Some of the broadcasters that have already reported have indicated that they were actually seeing political being booked even for the presidential election. I was wondering if you have any visibility on political. Certainly, the prospect for you in the fourth quarter maybe with some primary dollars kind of maybe that might flow in. Are you seeing political being booked at this point? Or is it still a little too early?

No, not yet, Michael, it's still early. We do have -- don't have it in our budgets for sure, but we do have expectations that we'll see fourth quarter political. As you know, the California primary has been moved up to March. So we -- and that's going to be a very competitive primary, certainly in California, if everyone's California could decide the running presidential nominee. So we expect to see some political in the fourth quarter.

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, Nancy, and thank you, everyone, for participating on our second quarter 2019 investor conference call. We look forward to speaking to all of you in November when we will announce our third quarter results.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Enjoy the rest of your day.