Entravision Communications Corporation (EVC) Q2 2019 Earnings Call Transcript

Entravision Communications Corporation (EVC -1.42%)
Q2 2019 Earnings Call
August 6, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Entravision second quarter 2019 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. 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.

Walter Ulloa -- Chief Executive Officer

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 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 prohibitive.

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 TB 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 39,000 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 DC. In these three markets, we have won a total of 44 Emmys. We will update you on the next call about our additional Emmys in 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 adjusted EBITDA was $12.6 million compared to $14.9 million last year. Free cash flow, which we define 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, 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, rising primarily from non-advertising 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 represent approximately 31% of our total television advertising revenue. We saw an increase of 5% in tier two expenditures that were offset by declines in both tier one and tier three. The growth in tier two was a result of increased spending by Ford Dealers Association, General Motors, Chevy Dealers, and Gulf Coast Honda Dealers.

Beyond automotive, transportation ten 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%. 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 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 18-49 in early local news, our Univision television stations finished ahead of their Telemundo competitor in 13 of 17 markets where we have head to head local news competition. Additionally, among adults 18-49, our early local newscasts are ranked number one or two against English and Spanish competitors in ten markets. Our late local newscasts are ranked number one or two against English and Spanish competitors in eight markets regardless of language.

During a full week, our Univision and UniMas television stations combined had a cumulative audience of 4 million persons, 2+ in our markets combined compared to Telemundo's 3 million persons 2+. We have 33% more viewers than Telemundo in our Univision and UniMas television footprint. During weekday primetime when comparing to all stations in total, we had higher ratings than at least one of the big four networks in ten markets among adults 18-49 and adults 25-54 and in 12 markets among adults 18-34.

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 that 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.

With change in format, national agencies need to see results usually four to six 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 18-49 and Hispanic adults 25-54 for the month of June 2019.

Jose also ranked as the number one Spanish language radio station in prime among Hispanic adults 18-49 and number two among Hispanic adults 25 to 54 for the same time period. This continue 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 radio decline was our radio network. Our nationwide ratings, which are released two 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. Service is our largest advertising category for audio. It was one of two 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 Abana Insurance, Metrolink, and Tenet Healthcare.

Looking at our audio division ratings performance in spring 2019 among Spanish language radio stations, our afternoon drive Erazno y La Chokolata show is ranked number one in seven of our eight markets released for spring among Hispanic adults 18-49 and Hispanic adults 25-54. High profile shows, El Genio Lucas and El Show de Piolin anchor our morning drive and midday time period on La Suavecita Network and Jose in Los Angeles and Riverside.

For spring 2019, Piolin ranked as the number one Spanish language midday show in six out of our nine markets released among Hispanic adults 18-34, 18-49, and 25-54. El Show de Genio Lucas was ranked number one or two among Spanish language radio stations in six out of eight markets among Hispanic adults 18 to 49 and Hispanic adults 25-54.

Now, let's talk about our digital business. Our second quarter digital revenues 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 five 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 revenues mostly associated to a growing trend among advertisers, removing their investments to programmatic buys 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 schematics, 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 midterm plans to evolve our schematics technology to place it front and center of our media offering in the US and internationally.

We're also putting more focus on our digital audio business, Audio Engage, which has search engine 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 a 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, we reached over 12.2 million fans, delivering 6,000 stories and 107 million video views from Entravision owned and operated digital touchpoints.

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 touchpoints as opposed to selling the siloed experiences that stayed within just one of our platforms. For us, the future is omnichannel.

Turning now to our basis for the third quarter, our television business is currently pacing at +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%. 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 multiplatform 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.

Chris Young -- Executive Vice President and Chief Financial Officer

Thank you, Walter and good afternoon, everyone. As Walter has discussed, ad 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 three-month period ended June 30th, 2019 from $43.8 million for the prior three-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 tax actually paid was $1.3 million. Earnings per share for the quarter were in negative $0.19 compared to $0.05 per share in the same quarter of last year. This was primarily due to an impairment charge related to our digital goodwill. Excluding the impact of this one-time non-cash 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 a higher than usual capex, capital expenditures during the quarter associated with the relocation of our station channel provisions in conjunction with the FCC broadcast auction.

Net cash interest expense was $2.5 million for the quarter, as it was 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 FCC, 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 30th, 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 30th.

Net of $75 million of unrestricted cash in the books, our total leverage as defined in our 2017 credit agreement was 3.21 times as of 6/30/19. Net of cash and marketable securities, our total net leverage was 1.49 times.

This concludes our formal remarks. Walter, Jeff, and I will now be able to take your questions. Nancy, I'll turn it back over to you for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Michael Kupinski from Noble Capital Markets. Please, go ahead, Sir.

Michael Kupinski -- Noble Capital Markets -- Analyst

Thank you. 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? 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 could 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 that you have to maybe make a few acquisitions to bolster the current business to have a more broader product suite to offer advertisers.

Walter Ulloa -- Chief Executive Officer

So, Michael, it's Walter. To answer the first question -- of our two digital 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 digital product. In addition to that, we did take steps to return to growth. We're on a better track in the third quarter. As I've 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 improve the proper margin. We remain confident in the business.

We continue to look for -- to answer your other question, we continue to look for those tuck-ins that will enhance our headway platforms. Smadex was one. We're looking perhaps at a supply side platform that would also create a more robust digital platform overall. We have great confidence in the business.

Michael Kupinski -- Noble Capital Markets -- Analyst

Thanks for that. I was just wondering, Walter -- I know you 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?

Walter Ulloa -- Chief Executive Officer

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

Michael Kupinski -- Noble Capital Markets -- Analyst

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

Walter Ulloa -- Chief Executive Officer

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

Michael Kupinski -- Noble Capital Markets -- Analyst

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

Chris Young -- Executive Vice President and Chief Financial Officer

Auto for the second quarter as a category for TV was down 1%, Michael, which is basically flat and kind of in line with where the rest of the industry ended up. It's representing about 31% of our total TV business. 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 minus 3%. It's still relatively resilient compared to what I think is happening in generally as far as the sector is concerned. Everyone knows that SARs are coming down. The spending seems to be pretty consistent quarter in, quarter out.

Michael Kupinski -- Noble Capital Markets -- Analyst

In spite of some weak revenues, you guys have been generating some pretty strong cash flow. This is a reflection of your expense reduction efforts. How do you see that in the second half. Can you 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?

Chris Young -- Executive Vice President and Chief Financial Officer

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

Michael Kupinski -- Noble Capital Markets -- Analyst

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

Chris Young -- Executive Vice President and Chief Financial Officer

All of that work is still on paper. We've not finalized any decisions on that front yet, Michael. We're still optimistic that there are more expense savings to come.

Michael Kupinski -- Noble Capital Markets -- Analyst

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

Operator

Again, if you have a question, please press * then 1. We have a question from Mr. Gordon Hodge from Tracker Research. Please go ahead.

Gordon Hodge -- Tracker Research -- Managing Director

Good afternoon. I had a couple of questions. One, I apologize, Walter, but my phone 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.

Walter Ulloa -- Chief Executive Officer

Digital for third quarter?

Gordon Hodge -- Tracker Research -- Managing Director

Yes.

Walter Ulloa -- Chief Executive Officer

It's pacing at minus 14%.

Gordon Hodge -- Tracker Research -- Managing Director

And then audio?

Walter Ulloa -- Chief Executive Officer

Audio is minus 14% as well.

Gordon Hodge -- Tracker Research -- Managing Director

Very good. A couple of things -- one, I was wondering on retrans, given that Univision 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, the fact that it's flat rather than up a little bit, or is that a function of sub losses elsewhere?

Walter Ulloa -- Chief Executive Officer

No, it's really a function of last year's $9.1 million, Gordon. We had some true-up payments totaling about...

Gordon Hodge -- Tracker Research -- Managing Director

Oh, that's right.

Walter Ulloa -- Chief Executive Officer

Now, in going forward, the comps get easier because we took about almost $1 million a quarter out in both Q3 and Q4 that we now have back in, not to the full extent of the $1 million -- call it $800,000 because of some sub-losses -- but we should have some meaningful growth year over year for the back end of the year.

Gordon Hodge -- Tracker Research -- Managing Director

Okay. Terrific. Then last two -- one, Walter, I'm wondering if you could just expand a little bit on the change in the way the local markets are being managed and organized. I think that was being advanced yesterday. Maybe just talk us through a little bit what's changing and what the approach is at the local level.

Walter Ulloa -- Chief Executive Officer

Well, we made a few changes here in the last several months, starting with the naming of Karl Meyer as head of our media group revenue. Karl is doing a great job. Karl has elevated Eddie Melendez to the President of Local Media. Eddie, his responsibility is to oversee our ten largest markets for local as well as both broadcast local and digital local.

Then Juan Navarro, who used to work with us a few years back just returned to the company and is going to be responsible for our mid to smaller markets. So, Juan will report to Eddie. Eddie reports to Karl. Then of course, Claudia Santana oversees our national and she'll report to Karl as well, as will Karina Cerda, who oversees sales and marketing, and Alejandra Martin del Campo, who oversees our research and business intelligence. Also, Jessica Martinez, who oversees our local digital effort, will report to Eddie Melendez.

So, we're very pleased with the way Karl has restructured the broadcast and local digital sales effort. I think we're on the right track now and we expect stronger results.

Gordon Hodge -- Tracker Research -- Managing Director

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

Walter Ulloa -- Chief Executive Officer

Certainly, there's definitely more emphasis on multimedia, more holistic approach to local sales, combining digital or broadcast, certainly in many cases leading with digital. There's definitely a greater emphasis and aligning that with our other marketing solutions like television and radio, obviously

Gordon Hodge -- Tracker Research -- Managing Director

Terrific. Last question, just as it relates to M&A. You made a small acquisition in, I guess, post-second quarter. It's quite small, I know, but I'd be curious what the plan is for that. Then there are a number of opportunities arising, one of which is with Univision, and I'm 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 that would present some opportunity for you.

Walter Ulloa -- Chief Executive Officer

Well, we have a close working relationship with Univision. We certainly understand their group platform well, local TV and [audio cuts out]. The process has just started in terms of whatever strategic alternatives they're going to seek. We're going to certainly monitor it. There's an opportunity along the way for us to increase particularly our television portfolio of Univision affiliates and UniMas affiliates.

Chris Young -- Executive Vice President and Chief Financial Officer

The TV acquisition -- we just made the announcement. We're filing with the FCC. We're 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 the process to play itself through before we announce what the plans are, Gordon.

Gordon Hodge -- Tracker Research -- Managing Director

Fair enough. Thanks very much.

Operator

And we have a follow-up question from Mr. Michael Kupinski from Noble Capital Markets. Please go ahead.

Michael Kupinski -- Noble Capital Markets -- Analyst

Thank you. Just one other question -- some of the broadcasters that have already reported have indicated 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 may be with some primary dollars, maybe that might flow in. Are you seeing political being booked at this point or is it still a little too early?

Operator

No, not yet, Michael. It's still early. We 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. That's going to be a very competitive primary in California. Whoever wins California could decide the democratic presidential nominee. So, we expect to see some political in the fourth quarter.

Michael Kupinski -- Noble Capital Markets -- Analyst

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

Operator

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

Walter Ulloa -- Chief Executive Officer

Thank you, Nancy. Thank you, everyone for participating in 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.

Operator

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

Duration: 34 minutes

Call participants:

Walter Ulloa -- Chief Executive Officer

Chris Young -- Executive Vice President and Chief Financial Officer

Michael Kupinski -- Noble Capital Markets -- Analyst

Gordon Hodge -- Tracker Research -- Managing Director

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