Entravision Communications Corporation (EVC) Q1 2019 Earnings Call Transcript

Entravision Communications (NYSE: EVC) Q1 2019 Earnings Call May 16, 2019, 5:00 p.m. ET

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Entravision First Quarter of 2019 Earnings Conference Call. All participants will be in a 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 touchtone phone, and to withdraw your question, please press * then 2. And please note that today's event is being recorded.

And I would now like to turn the conference over to Mr. Walter Ulloa, Chief Executive Officer. Please go ahead.

Walter Ulloa -- Chief Executive Officer

Thank you, William. Good afternoon everyone and welcome to Entravision First 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.

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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 it was filed with the SEC on Form 8-K.

Our first quarter results were in line with our expectations with increased revenue in our television segment, partially offset by decrease revenues at both our digital and radio segments. Looking beyond the general business environment, our balance sheet continues to be solid with approximately $175 million in cash and marketable securities on the books versus the total debt of $245 million.

During the quarter, we are also active in buying back our stock with approximately 2.1 million shares repurchased at an average price of $3.65 per share. We also continue to return capital to our shareholders through our quarterly dividend.

Now turning to our financial performance. Revenues decreased 3% to $64.7 million in the first quarter. Consolidated operating expenses were down 4% and consolidated adjusted EBITDA was $8.1 million compared to $6.9 million last year. Free cash flow which we defined in our press release was $1.3 million compared to $1.6 million. Our capital expenditures in the quarter were two times more than last year's first quarter due to the FCC mandated repack of several of our television signals.

I am pleased to announce that this past Monday we have appointed Karl Meyer as Entravision's new Chief Revenue Officer. Karl is a 30-year media veteran with extensive radio, television, digital and advertising agency experience. He previously worked for Entravision from 2004 to 2014, first as a Vice President, General Manager of Entravision's Los Angeles radio cluster and later as Entravision's Executive Vice President of Integrated Marketing Solutions for the Western Region. We are excited to have Karl back and look forward to his leadership of our revenue teams and goals.

Turning to our television segment operating results. Television revenues were up 11% during the first quarter compared to the prior year. Revenue from advertising and retransmission consent was down 4% during the first quarter, primarily due to lower local sales. National advertising revenue was up 2%, while local advertising revenue was down 10% compared to last year's first quarter period.

Retransmission revenues decreased 1% during the first quarter. Revenue generated from spectrum usage rights totaled $5.1 million during the first quarter arising primarily from non-advertising revenue related to a non-advertising service agreement with a local telecom operator and spectrum leasing initiatives. Excluding retransmission spectrum usage rights and political revenues, core TV advertising revenues were down 3% with local down 8% and national up 4% during the quarter.

Automotive advertising was flat for our television segment and represented approximately 31% of our total television advertising revenue. We saw an increase of 10% in Tier 2 expenditures that were offset by declines both in Tier 1 and Tier 3.

Beyond automotive, top 10 advertising categories that generated growth during the first quarter were media, which increased 12%, groceries up 8%, and we saw a 32% increase in restaurants. Retail, travel and leisure and paid programming three of our top 10 categories for television were particularly soft in the quarter, producing double digit declines compared to the first quarter of last year.

Overall, we added 24 new advertisers who spent more than $10,000 during the first quarter, which totaled approximately $508,000 in advertising revenue. Notable new brands returning to our spot markets in the first quarter included Adventist Health Systems, Coca Cola, the General and AT&T-DirecTV.

Turning to our ratings performance. Our Univision television affiliates built upon their market leadership in the February 2019 sweeps. 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 plus one tie. In late local news, we finished ahead of Telemundo competitors among adults 18 to 49 in 10 markets among the 17 markets where we have head-to-head competition plus two ties. 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 combined have a cumulative audience of 4.1 million persons, 2 plus in our markets combined compared to Telemundo's 3.1 million persons 2 plus. We have 32% more viewers than Telemundo in our footprint, and I want to add to that that this advantage that we hold over Telemundo of having 32% more audience is consistent with past quarters.

During weekday prime time when comparing to all stations in total, we had higher ratings in at least one of the big four networks in 11 markets among adults 18 to 49. In 14 markets among adults 18 to 34 and in nine markets among adults 25 to 54.

Telecast for Univision's Premios Lo Nuestro music award show on February 2019 was among the top 10 prime time programs for the night among adults 18 to 34 in 14 markets. Among adults 18 to 49 and 25 to 54, the show ranked among the top 10 in nine and seven markets respectively.

Turning to our audio division. Audio revenue was down 15% during the first quarter compared to the prior year. Local revenues were minus 3% and national revenues decreased 32% in the quarter.

Automotive advertising declined by 1% for our audio segment and represented approximately 21% of our total audio advertising revenue. We saw an increase in Tier 1 and Tier 2 expenditures that were offset by decline in Tier 3.

Advertising categories increasing their ad spend with us year-over-year, during the first quarter were services which increased 4%, restaurants up 7% and paid programming saw an 8% increase. Travel and leisure and media and retail three of our top 10 categories for audio were particularly soft in the quarter producing double digit declines compared to the first quarter of last year.

Overall, our audio business added 14 new advertisers who spent more than $10,000 during the first quarter, which totaled approximately $272,000 in advertising revenue. Notable new brands in the first quarter included Shoreline Automotive, Nissan of Downtown LA, and City Beverage Distributors.

Looking at our audio division. Ratings performance for winter 2019 among Spanish language radio stations Erazno y La Chokolata is ranked number one in four of our six markets released for winter among Hispanic adults, 18 to 49 and Hispanic adults 18 to 34 and number one or number two in five markets among Hispanics 25 to 54. Across our six O&O stations, Erazno y La Chokolata show reached more than 590,000 Hispanics 18 to 49.

During the first quarter, we combined KLYY-FM, and KSSC-FM, and KSSD-FM in Los Angeles to create a superstation under the successful José format. With this strategic change, Entravision solidifies its position in the Los Angeles market.

Looking at first quarter 2019 averages, José ranked as a top five Spanish language radio station among Hispanic adults 18 to 49 during AM drive-time and a top four Spanish language station during PM drive-time.

Earlier this week, Nielsen released its April ratings release and the José format continues to perform in Hispanic adults 18 to 49, KLYY is tied for number one in morning drive, number five in midday, and number one in afternoon drive. With this continuous success, we should see better results from our Los Angeles cluster. Our LA cluster historically has been the engine pulling our radio assets. We expect to see our audio business improve in the coming quarters.

Now, let's move over to our digital business. Our first quarter digital revenues decreased 21% versus the same period last year. Our digital revenue declined greater than anticipated in Q1. Some of the decrease in digital revenue in Q1 versus the comparable period last year was due to our increased focus on producing greater cash flow from our digital businesses and therefore being more selective about the advertising transactions that headway pursues in order to enhance margins.

Last year, particularly in quarters one through three, there was more focused on driving revenue growth including low-margin transaction. We have shifted our focus to higher margin revenue transactions at the expense of revenue growth. The decrease in digital revenue in the quarter was also a result of an accelerated global trend of digital advertising moving over to programmatic platforms in recent months.

We anticipated this shift in digital advertising when we acquired Smadex in the middle of 2018. Smadex as a mobile first programmatic DSP, is the first programmatic platform fully optimized for mobile user acquisition and reengagement. Smadex's discovery engine finds the best performing audiences for advertisers' app and optimizes audience engagements with the app while filtering out audiences that are not relevant to the advertiser's business and goals. Smadex, our mobile-first DSP, was recently recognized by the objective mobile measurement platform Kochava for its excellent high value user acquisitions and long-term retention of users, earning a quality score of "A" and ranking second globally in the category of quality traffic.

We are confident with Smadex our programmatic business will grow in the coming quarters, as we continued to integrate Smadex' technology in the headway offering. As consumption and interaction trends evolve, digital platforms keep shifting to the center of advertisers marketing strategies. Client feedback shows an increasing interest in reaching users at different stages of the value chain from micro moments on mobile devices to television and radio. As it was mentioned in past calls, brands and advertisers are looking for a holistic approach to their marketing needs.

Entravision is in a unique position to provide omni-channel solutions that anticipate customers starting in one channel and moving to another in their journey. On the digital side, these solutions include influencer marketing. We are focusing on new way to engage with customers by expanding our influencer marketing platform to three new countries in Mexico, Argentina, and Colombia. We can provide marketers with more authentic ways of reaching their desired audiences.

We have plans to soon expand our influencer network to better support our core U.S. business, targeting Latino consumers. Out-of-home solutions results are driving growth on a quarter by quarter basis. As this initiative is currently helping us improve our product mix to reach consumers through various outdoor screens such as outdoor -- such as airports and business hubs. Claro, Toyota, Bimbo, Coca-Cola launched successful advertising campaigns on our out-of-home platform in Latin America.

Performance. Our mobile app promotion business when combined with our content offering provides a perfect mix for marketers to reach their desired goals. Personalization content marketing. As consumers are bombarded with more content, it is crucial that we better understand consumption and are able to personalize experiences to drive engagement.

Attribution model. In order to provide a successful omni-channel solution, it is key to have a clear attribution to follow methodology that provides insights for our campaigns. Entravision is leveraging technology and data to identify and assign value to key events across multiple touch points.

Complement our terrestrial touch points, we keep driving growth with our digital properties. This allows us to both support and enhance our core business. With the previous mentioned data-driven methodology, we are creating content that is appealing to our audience. We developed 4,800 original stories during the first quarter, which reviewed 14.6 million times across our owned and operated sites and produce 75 million video views on our social media footprint.

Regarding our digital audio business, we reached 816,000 unique users through our O&O digital audio footprint and saw a 17% increase in delivered hours when compared to the previous quarter hitting the 7.4 million mark.

We also saw a significant increase in our programmatic audio demand, which tripled the revenue as the same quarter of 2018. This is due to the growth of our audio business unit, AudioEngage and the strategic partnerships established during the quarter.

Entravision is committed to strengthening ties with our local communities. Social media platforms are a perfect complement for our current local media offering. Our footprint keeps growing steadily reaching the 12.3 million fans across Facebook, Instagram, and Twitter. Entravision will continue to complement its core business by further expanding its digital platform through new acquisitions, improved technology, and the development of data-driven quality content to engage with our communities.

Turning now to our pacings for second quarter. Our television business is currently pacing plus five in the second quarter. Our audio business is currently pacing a minus 11% in the second quarter. Digital revenues are pacing down 6%. All in all, total revenue for the company is pacing minus 2% for Q2 versus last year.

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 on our unique audience reach and targeting capabilities while proactively managing our cost. As we execute our multi-platform strategy, and strategically invest in our digital platforms and our content and distribution assets, we remain committed to maximizing our performance and enhancing our cash flows for the benefit of our shareholders.

I will now turn the call over to Chris Young 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 net revenue for the quarter was down 3% to $64.7 million, compared to $66.9 million in the same quarter of last year. Operating expenses decreased 4% to $42.7 million and consolidated adjusted EBITDA increased 16% to $8.1 million.

For the quarter revenues in our television segment were up 11% to $38.3 million, compared to $34.5 million in the same quarter of last year. The increase was primarily attributable to revenue generated from spectrum usage rights, which totaled $5.1 million during the first quarter, arising primarily from non-advertising revenue related to a service agreement with a local telecom operator. In addition to the spectrum leasing initiatives and an increase in national advertising revenue partially offset by decreases in local advertising revenue, and political revenue and a 1% decrease in retransmission consent revenue. We generated retransmission consent revenue of $8.8 million for the three-month period ended March 31, compared to $8.9 million in the same quarter of last year.

Radio net revenue for the quarter was down 15% to $12 million compared to $14.1 million in the same quarter of last year. The decrease was primarily due to decreases in local and national advertising revenue.

Digital net revenue for the quarter was down 21% to $14.5 million, compared to $18.2 million in the same quarter of last year. The decrease was primarily attributable to a growing trend of digital advertising moving over to programmatic platforms, both domestically and more recently in our international markets.

Operating expenses decreased 4% to $42.7 million for the three-month period ended March 31 from $44.3 million in the prior three-month period. The decrease was primarily due to certain expense control measures the company undertook in April of last year.

Corporate expenses for the quarter, we're up 15% to $6.9 million compared to $6 million in the same quarter of last year. The increase was primarily due to an increase in audit fees related to our late filing of our 10-K for the 2018 period.

Income tax expense was $1.1 million for the quarter while cash taxes paid was $0.6 million. Given the elimination of our full valuation allowance in the fourth quarter of 2013 future income tax expense will run at approximately 41% of pre-tax income, although most of this expense will continue to be noncash, given our NOL offsets.

Earnings for the quarter were a positive $0.02 per share compared to a negative $0.02 per share in the same quarter of last year. Free cash flow, as defined in our earnings release, decreased to $1.3 million for the quarter compared to $1.6 million for the same quarter of last year. Net cash interest expense for the quarter was $2.3 million compared to $2.4 million in the same quarter last year.

Cash capital expenditures for the quarter were $6.1 million, compared to $3 million in the prior year period. This increase was primarily attributable to actions related to the FCC auction repack.

Excluding capex to be reimbursed by the FCC, we anticipate that our capital expenditures will be approximately $14.5 million during the full year of 2019.

Turning to our balance sheet as of March 31, 2019 our total debt was $245.5 million. And our trailing 12 months consolidated adjusted EBITDA was $55.2 million.

Cash and marketable securities on the books was $174.6 million as of March 31.

Net of $75 million of unrestricted cash in the books our total leverage as defined in our 2017 credit agreement was 3.09 times as of March 31. Net of cash and marketable securities our total net leverage was 1.28 times.

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

Questions and Answers:

Operator

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

And today's first question or will be Michael Kupinski with Nobel Capital Markets. Please go ahead.

Michael Kupinski -- Noble Capital Markets -- Analyst

Thank you. Thanks for taking the questions. And good evening, good afternoon. A couple of questions here. In terms of the corporate expenses I know that the audit fees were probably in there. Could you remind me what was the total of those audit fees that were in that number?

Chris Young -- Executive Vice President and Chief Financial Officer

The incremental audit expense for first quarter was approximately $1.2 million, Michael.

Michael Kupinski -- Noble Capital Markets -- Analyst

Got you. I've gotten this question from some investors, why wouldn't you have viewed that as a onetime item so that obviously from continuing operations the numbers would have been even stronger?

Chris Young -- Executive Vice President and Chief Financial Officer

Well, there's a case to be made for that. I guess if you just err on the side of being conservative, we booked the expense and decided not to treat it as a onetime item. Going forward, the audit expense will be less than half of that on an annualized basis. We had encountered certain issues the end of the year last year during the close. That's what caused our K to go past the filing deadline. But that's a good point, Michael, that you could look at that as a onetime expense.

Michael Kupinski -- Noble Capital Markets -- Analyst

Got you.

Chris Young -- Executive Vice President and Chief Financial Officer

But the accounting, how we spend it and how it gets booked, I guess, thought that through a bit differently, but it still goes on the books as an expense.

Michael Kupinski -- Noble Capital Markets -- Analyst

Okay, thanks. And in the latest quarter the company had, as you mentioned, significant cost controls and costs were lower than I would have expected. You mentioned that the company will cycle through those cost cuts in April. Were there further cost cuts in the balance of the year, or into the first quarter, or are you cycled against all of the cost cuts in April?

Chris Young -- Executive Vice President and Chief Financial Officer

We've been making cuts throughout the year. We made cuts throughout the year that didn't necessarily get publicized. I mean, if you're modeling this thing out, I would look for total company operating expenses in the second quarter to be down in the low single digits, then will start to flatten out around Q3 and then maybe Q4 you're in kind of the positive low single-digit expense increase range.

Michael Kupinski -- Noble Capital Markets -- Analyst

Got you. And then in retransmission revenues, they were down in the first quarter. That should start to show an increase in coming quarters, right?

Chris Young -- Executive Vice President and Chief Financial Officer

That's exactly right. So, dish was not yet on in first quarter, came on in April. So, you will see approximately $700,000 in incremental. If you are just looking at sequentially between Q1 and Q1, you should see in additional around $700,000 in incremental retransmission revenue in Q2, as well as Q3 and Q4.

Michael Kupinski -- Noble Capital Markets -- Analyst

Got you. And then in terms of digital can you give a little more color on Smadex? It seems like it did it not participate in the shift in programmatic. Or are you saying that in future quarters it should? I'm just trying to understand what you were trying to say.

Walter Ulloa -- Chief Executive Officer

Michael, it's Walter. No, we did participate in the shift in programmatic. The acquisition of Smadex was certainly to be ready for the changing environment. But I will say that the shift from traditional to programmatic has moved at a faster pace than we anticipated. It takes a while to integrate this product or these products into our overall sales strategy. We didn't close on the acquisition until June of 2018, so we certainly worked through 2000 and the rest of 2018 to integrate Smadex, and we're starting to really gain traction with this programmatic offering. But again, it takes time. But we were well positioned. We will see an improvement in the coming quarters.

Michael Kupinski -- Noble Capital Markets -- Analyst

And given your shift in strategy in terms of going after more profitable business in digital and the shift that you're seeing toward programmatic, and so forth, does this change your view of the digital media segment, your thoughts in terms of growth, maybe your thoughts in terms of expansion of headway into the U.S., or your thoughts in terms of digital media as a percent of the total company revenue?

Walter Ulloa -- Chief Executive Officer

Well, I'll just say that to all of the questions you asked, we are feeling very positive about the potential for digital growth. And also, how we're going to use all of our experiences, particularly in Latin America and transfer these experiences, and tools, and products to the U.S. and address or deliver services to our core Latino consumer. So, overall, I think, we're pleased with the steps that we've taken to improve our digital performance. We did see again a decline in the first quarter, but we're working hard to turn this around and get back to growth here soon.

Michael Kupinski -- Noble Capital Markets -- Analyst

And I know that you indicated the pacing is down for the second quarter, but do you think that digital will by the end of this year reflect growth year-over-year by let's say the fourth quarter?

Chris Young -- Executive Vice President and Chief Financial Officer

Well I'll say we've budgeted to reflect growth. Growth was certainly less than last year which had plus 40% growth. But we all got together in November and made decisions around how we continue to grow the business but be more selective about the transactions that we are on. And therefore, not only produce better results for our clients and their advertising needs, but also better margins for our business.

Walter Ulloa -- Chief Executive Officer

Yes, I mean growth and revenue to be seen, but certainly we do expect growth in cash flow year-over-year from the digital business.

Michael Kupinski -- Noble Capital Markets -- Analyst

Got you. Alright, that's all I have. Thank you.

Chris Young -- Executive Vice President and Chief Financial Officer

Thank you, Michael.

Operator

As a reminder to everyone, it is * then 1 if you would like to ask a question today. And the next question or will be Gordon Hodge with Tracker Research. Please go ahead.

Gordon Hodge -- Tracker Research -- Managing Director

Good afternoon. Thanks for letting me through. Just had a couple of questions. One, I just wanted to clarify, Walter, on the second quarter pacings on TV. Was that strictly advertising or does that include the pickup in retrans as well from DISH and so forth?

Jeff Liberman -- President and Chief Operating Officer

That's all in Gordon.

Gordon Hodge -- Tracker Research -- Managing Director

That's all in. Okay, any sense for what the ad pacings are roughly under that?

Jeff Liberman -- President and Chief Operating Officer

I believe advertising is down low single digits for TV, just purely on the advertising basis.

Gordon Hodge -- Tracker Research -- Managing Director

Got you. Okay, very good. And then on the spectrum usage obviously it sounds like you had kind of an opportunistic situation there, but you do have ongoing spectrum usage fees too.

Jeff Liberman -- President and Chief Operating Officer

That's right.

Gordon Hodge -- Tracker Research -- Managing Director

Maybe you can highlight sort of breakout, how much of that revenue might be recurring in future quarters?

Jeff Liberman -- President and Chief Operating Officer

You'll have throughout the year about $1.2 million to $1.3 million in recurring multicast revenue that'll show up on that line. Then anything on top of that quarter-by-quarter will be that opportunistic play that should we still have to play out for the next couple of quarters. Not necessarily at the same level we saw in the first quarter.

Gordon Hodge -- Tracker Research -- Managing Director

So, there is opportunity for more like that in terms of...

Jeff Liberman -- President and Chief Operating Officer

Yes, there will be more -- they're already kind of in the works as we satisfy the obligations on our side, the revenue will be recognized.

Gordon Hodge -- Tracker Research -- Managing Director

Got you. Okay, very good. And then I guess the last question I had was just that you had an operating gain in the quarter of about almost $2 million. Is that FCC repack reimbursement?

Jeff Liberman -- President and Chief Operating Officer

Yes, so as we spend the capex, we filed the paperwork with the FCC and then it's usually a three to six months lag, but then they'll send us a check and then that'll be that same line item going forward. You'll see it.

Gordon Hodge -- Tracker Research -- Managing Director

Got you. Okay, very good. That's all I had. Thanks.

Jeff Liberman -- President and Chief Operating Officer

Thank you, Gordon.

Walter Ulloa -- Chief Executive Officer

Thank you, Gordon.

Operator

And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Walter Ulloa -- Chief Executive Officer

Thank you, William, and everyone for joining us on our first quarter 2019 earnings call. We look forward to speaking to all of you in early August when we will announce our second quarter results.

Operator

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

Duration: 29 minutes

Call participants:

Walter Ulloa -- Chief Executive Officer

Chris Young -- Executive Vice President and Chief Financial Officer

Jeff Liberman -- President and Chief Operating Officer

Michael Kupinski -- Noble Capital Markets -- Analyst

Gordon Hodge -- Tracker Research -- Managing Director

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Contents:

Prepared Remarks:

Questions and Answers:

Call participants: