Entravision Communications Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 7 speakers on the call.

Operator

Greetings, everyone, and welcome to the Entravision Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity As a reminder, today's conference call is being recorded. It is now my pleasure to introduce your host, Kimberly Orlando, Investor Relations. Thank you.

Operator

You may begin.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to for Vision's Q3 2023 Earnings Conference Call. Joining me today are Michael Christensen, Chief Executive Officer Chris Young, Chief Financial Officer and Jeffrey Lieberman, President and Chief Operating Officer. Before we begin, I must inform you that this conference Please refer to Entravision's SEC filings for a list of risks and uncertainties that could impact actual results. This call is the property of Entravision Communications Corporation.

Speaker 1

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 comparable GAAP measures in today's press release. In addition, all pro form a figures noted throughout the prepared remarks include the contributions of various acquisitions to the prior year period. The press release is available on the company's website and was filed with the SEC on Form 8 ks.

Speaker 1

I will now turn the call over to Chris Young.

Speaker 2

Thanks, Kim, and thank you all for joining us this afternoon. Jeff and I will cover our Q3 financial performance, and we will then turn it over to Mike to discuss Entravision's key focus areas and capital allocation priorities. Let's begin with an overview of our 3rd quarter results. On a consolidated basis, we had a record quarter advertising revenue of $274,400,000 up 14% year over year, slightly below our previously disclosed pacings of +15%. Our digital segment revenue was $231,500,000 for the quarter, up 23% year over year.

Speaker 2

The main drivers were our commercial partnerships business with revenue up 19% our mobile growth Solutions business, which saw revenue increase 19% and various acquisitions, which did not contribute to revenue in the full comparable period. Both our programmatic and digital audio businesses were up modestly year over year. On a pro form a basis, digital revenues improved 18 percent compared to the prior year period. During the quarter, digital operating cash flow was approximately $10,300,000 with a margin of approximately 4.5%. Next, I'd like to highlight 2 new partnerships we recently executed to further diversify our digital operations with Match and Pinterest.

Speaker 2

In September, Entravision was named the exclusive sales partner to Match Media, the group that powers ads for brands such as Tinder, OkCupid and Match across Africa. Through our local team of experts on the ground in South Africa, we are able to more effectively assist customers to deploy their advertising investments more efficiently to drive sales growth. Subsequent to quarter end in October, we entered in an international sales partnership with Pinterest to offer advertisers outreach and campaign management in various countries where Pinterest has not been serving ads across Southeast Asia, Latin America, Africa, Europe and the Middle East. We look forward to partnering with these marquee brands and continuing to grow our portfolio of digital solutions. I'll now turn the call over to Jeff to discuss for TV and Audio Business segments.

Speaker 2

Jeff?

Speaker 3

Thank you, Chris. Let me start with our Television segment. Television revenue was $29,600,000 in the quarter, down 17% compared to prior year period, primarily due to declines in political revenue as we face difficult comparisons versus last year's strong political revenue performance of $6,400,000 While we saw continued pressure on national advertising spending, our local TV business remained fairly resilient as our team has been doing a great job executing in a challenged environment. On a more granular basis, core television revenue increased 1%, Local core revenue increased 7% and national core revenue decreased 14% year over year. Retransmission revenue for the quarter was $8,900,000 which was flat year over year.

Speaker 3

Operating cash flow margin for our TV segment was 35% for the quarter. We saw growth in the auto category of 14% in the quarter compared to the same period last year. This growth was propelled by Tier 2 and Tier 3 spending. Unfortunately, this growth was offset by declines in media and entertainment and retail. While softness on the national advertising front has Into October, we expect to see improvement in political spending in the Q4.

Speaker 3

The Nevada primary election is on February 6 and the political window for this primary opens on December 24. Besides Nevada, there will be key elections in states like California, Arizona, Colorado and Texas, which all have primaries in the Q1 of 2024. Now let's shift to audio. Audio revenue totaled approximately $13,400,000 for the quarter and decreased 19% year over year. The decline in revenue is driven by lower national and local advertising revenue as compared to the Q3 of 2022, which included non returning political advertising revenue of $1,500,000 On a core basis, excluding political, Total revenue was down 11%, with local revenue down 11% and national revenue down 10%.

Speaker 3

Based on the current economic conditions, as I said earlier, we expect political spending to increase, which will help support our national sales efforts. I will now turn the call back to Chris to discuss the Q3 financials and Q4 pacing in further detail. Chris?

Speaker 2

Thanks, Jeff. Let's begin by reviewing our expenses. Cost of revenue in the quarter totaled $199,300,000 up 27% from $157,100,000 in the prior year period and was driven by the increase in our digital segment revenue. On a pro form a basis, Factoring in recent acquisitions, which did not contribute to cost of revenue in the prior year period, cost of revenue increased 23%. Operating expenses in the quarter totaled $53,800,000 up 9% from $49,300,000 in the prior year period.

Speaker 2

This increase was driven by various factors including Higher non cash stock based compensation as a result of the timing of the annual RSU grant being in Q1 of this year compared to Q4 in the prior year. Increased expenses associated with higher digital advertising revenue, higher salary expenses and the result of various acquisitions in 2023, which did not increased 4% compared to the prior year period. Corporate expenses increased by 40% to total $13,300,000 for the quarter compared to 9 point in the same quarter of last year, which is mainly a result of the timing of the annual RSU grant I just mentioned as well as EBITDA totaled $14,200,000 for the quarter, down 45% from $26,000,000 in the prior year period. The decline was primarily by non returning political revenue at our broadcasting business and sales mix. Free cash flow as defined in our earnings Release was $4,000,000 in the quarter or a conversion rate of 28 percent of consolidated adjusted EBITDA compared to $15,400,000 in the same quarter of the prior year.

Speaker 2

Net cash interest expense was $2,800,000 for the quarter compared to $1,900,000 in the same quarter of last year. Cash capital expenditures for Q3 totaled $5,000,000 We expect cash CapEx to total roughly $17,500,000 for the full year. Cash paid for income taxes was $2,300,000 for the quarter compared to $4,000,000 paid last year. Diluted earnings Share for the Q3 2023 were $0.03 compared to $0.11 in the same quarter last year. Our Board of Directors also approved a quarterly $0.05 dividend.

Speaker 2

Turning to our balance sheet, cash and marketable securities as of September 30, 2023 totaled $128,700,000 Total debt was $211,100,000 Our total leverage as defined in our credit agreement was 2.1 times as of the end of the 3rd quarter. Net of total cash and marketable securities, our total net leverage was 1.1 times. As we turn to our current pacings the Q4 of 2023, it's important to note that we booked approximately $19,100,000 in political revenue in the Q4 of last year that will not return this year. $14,800,000 of that was on TV and $4,200,000 of that was on radio with the balance of approximately $100,000 being booked on digital. As of today, revenue from our digital segment is pacing plus 15% over the prior year.

Speaker 2

Factoring in acquisitions, our digital segment on a pro form Pro form a basis is pacing plus 13%. Our TV segment is pacing minus 32% over the prior year period with core TV advertising excluding political booked in the prior year pacing at a +1 percent. Lastly, our audio segment is pacing at a minus 30% over the prior year period with core audio again excluding political both in the prior year quarter pacing at a minus 11%. All in, our total revenue compared to last year is pacing at a +4%. On a pro form a basis, our total revenue is pacing currently at a +5%.

Speaker 2

I will now turn the call over to Mike for concluding remarks.

Speaker 4

Thanks, Chris. So as you've heard from Chris and Jeff, we're working hard to finish 2023 with And we're in the process of building our plans for 2024. 2024 will be a very important year for Entravision. Our priorities for the year will be: 1st, to maximize our political revenue. We have a large audience, Nearly 1 in 5 of the 62,000,000 Latinos in the U.

Speaker 4

S. Are in our TV and radio broadcast markets. This is a critical audience for the 2024 elections, Congress, the Senate and Presidential. We cover 5 of the 20 closest states in the 2020 presidential race. 2nd, we're investing to increase our local news capacity, adding morning news in all of our markets and weekend news in San Diego, Las Vegas and Denver.

Speaker 4

And then third, we'll be very focused on improving the operating Performances of our 3 digital businesses, Entravision Digital Services, Our most important allocation is our dividend. We are committed to the dividend. Then after covering the dividend, the balance will be reinvested in our businesses. We are making investments in adding AI and machine learning capabilities to our technology businesses, particularly Smadex, applying those capabilities to how we manage and analyze all of our businesses. Again, 2024 will be an important year for Entravision.

Speaker 4

However, I think it's important to remind everyone that all of our businesses are correlated with global ad spending and this will likely be a challenging year from an economic and geopolitical perspective. So with that, we want to thank you for joining us today and for your support of Entravision. And now we'll open up the call to take your questions.

Operator

Ladies and gentlemen, we'll now begin that question and answer session. We'll pause momentarily to assemble the roster. Our first question today comes from Michael Kupinski from NOBLE Capital Markets. Please go ahead with your question.

Speaker 4

Thank you. Thanks for taking my questions. Good afternoon. A couple of questions. Political advertising, I noticed some presidential political advertising already Being spent in Florida, which is kind of unusual at this time of the year.

Speaker 4

But can you talk a little bit about political in the Q4? I know that you gave guidance in terms of your pacings down 30% or so, but how much of that is political? And then can you give us your thoughts about the level of political in 2024?

Speaker 3

So Michael, we're expecting somewhere between $300,000 $400,000 of political in the 4th As I said in my remarks earlier, we do have some very key states that are coming up with primaries in the Q1 of next year, especially Nevada, which is a very contested race and that political window actually opens up on Christmas Eve this year. So we're expecting to see a ramp of our political spend probably right after that Thanksgiving break as we move forward into the primary election the state of Nevada.

Speaker 2

And Michael, since we give out pace only as of today, that's obviously not 100% factored in. We are running some presidential Campaigns now, but that pace is not reflective of stuff that may break late in the quarter.

Speaker 3

Yes. And Biden as Chris has mentioned, Biden is already in the Nevada marketplace.

Speaker 4

Got you. And I know that you have several development metal markets in your digital business, but Can you talk a little bit about the margins? I know that you've indicated in the past that improving digital margins was a priority for the company. Was wondering if you could talk a little bit about the progress on that front and where do you anticipate margins to be?

Speaker 2

Sure. We did cash flow margin for digital was 4.5% in 3rd quarter. That's down a smidge from 4.7%. In the 2nd quarter, we are gunning to get North of 5% in the Q4. Right now, the way the revenue is coming in, we feel pretty comfortable with that number.

Speaker 2

And then obviously, we're still going through budgets here for 2024. So that's going to be a work in progress. But obviously, the goal is to continue to ramp that higher.

Speaker 4

Got you. And then I know that in the when we talked a little bit about the Facebook and some of the changes that you have there, You indicated that there might be some additional markets that Facebook might give you. And I was just wondering if you kind of finish those discussions and other And if you have, if you can kind of give us some thoughts about what markets that you're likely to get from Facebook and then also The market opportunity from those markets?

Speaker 2

Yes. Nothing to announce as of right now. It's still a work in progress and we'll keep the market updated as that continues.

Speaker 4

Got you. And then on the broadcast side, the auto being real key component to some what's driving some of the core advertising. Is that the largest Can you just kind of give us a flavor of what you're outside of the political and TV, what's driving the core revenue?

Speaker 2

So auto was up 14% for the quarter. It's back to our largest segment. Even with the strike, what we're noticing is foreign auto manufacturers are stepping in to take market share as a way to So stepping in to take market share as a way to with the weakness of the U. S. On the U.

Speaker 2

S. Auto side with the strike, they're looking to Capitalize on a unique situation. That's really what drove auto in the quarter 14% for TV.

Speaker 3

Yes. Also, that was Tier 2 and Tier 3. So that's the dealer associations and also the local car dealerships in our marketplaces. And you did ask from a category standpoint, besides Being positive in auto. We also did see the services category go up a little bit in healthcare also.

Speaker 4

Got you. And then there's a lot last question, I promise. There's a lot of distressed broadcasters out there that are obviously not in a financial position like you are. Is there any thoughts in terms of M and A at this point or is the Concentration is still going to be on the digital or would you take a look in the broadcasting side? 2024 is going to be about focusing on our own internal businesses.

Speaker 4

The work to And cover the political opportunity. We think it's going to take a lot of time and attention and money. And then we want to improve the operating performance of the digital portfolio that we have today. So that's what we're focused on for 2024. We'll get through 2024 and then figure out where we go through that from there.

Speaker 4

Thanks, Mike. That's all I have. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from James Dix from Industry Capital Research. Please go ahead with your question.

Speaker 5

Thanks very much. Just looking at the top line for the moment, I mean, looking across your 3 segments, How is demand in the quarter versus your expectations? And then how is that looking in the 4th Quarter versus your expectations. I'm just curious as to where you're seeing the variances versus what you thought and what might be driving that?

Speaker 2

Yes. Well, the sales rep business, James, was up 19% in the quarter. We were pretty pleased with that. That's really being driven by Latin America. And so far, that's come down a little bit so far in the quarter, looking more at a low teens pace for 4th.

Speaker 2

So that's come down a little bit. Otherwise, you've got mobile growth and branding. We're both up double digits. That's generally in the 10% range. So then you've got our brand new unit, ADSMRI, which was up close to 40%.

Speaker 2

So that should give you some color behind the digital moving parts.

Speaker 5

Okay, great. And then I think in the past You've spoken about focus on organic growth initiatives as distinct from M and A and things like that. My understanding is that was primarily on the digital side. Any color you can offer on what types of initiatives You're thinking about and timing and things like that?

Speaker 4

So in our as we said, Pretty much all of our energy right now is on political. It is a very big piece of our business in 2024. We're also expanding our news capacity. So we're adding news in Again, as I said earlier, focusing on improving the performance of our 3 core digital businesses.

Speaker 5

Okay. And then just speaking of political, this might be for you, Chris. When you look at the core, Like for last year, for example, should we be assuming that all of that was incremental and how you're calculating it? It almost seemed to me like you were making maybe some assumption that it wasn't all political and that's how we should be thinking about the base for calculating core growth now.

Speaker 2

And then I'd go with core growth at 100 the political being 100% incremental.

Speaker 6

Okay.

Speaker 5

So we should pull all of that all of last year's out in coming up with the base for Testing the pacings.

Speaker 2

I think that's right. Yes.

Speaker 5

Okay. And then like for next year, I mean, obviously, a Potentially much bigger year. Any thoughts as to how we should be thinking about or how you're thinking about the incrementality of that when Kind of gauging the return on the investments you're going to be making to get more political?

Speaker 2

Well, certainly, we're going to have some markets That are going to have crazy political and the expectation is that core is going to be down as a result because you just can't jam that much political in Such a short amount of time. So but again, it's just easier to think about this as being 100% incremental.

Speaker 3

Yes. In the midterm election, we did a really good job managing our core versus political too, and we're All focused on doing the same thing in the upcoming election.

Speaker 5

Okay. And then I guess finally, just internationally, just Since you're global, just trying to get some sense as to like what countries and regions have been outliers Either positively or negatively in terms of your growth.

Speaker 2

Yes, I've got Latin America was up in 3rd 18%, Asia was up 24%, Europe was up 19%, Africa was down close to 30%. And then in the U. S. On the digital side, it was up 1%. And then we also did some business in the Middle East as well, and that

Speaker 5

was up About 4x, but

Speaker 2

that's our jackup digital business in Pakistan.

Speaker 5

Okay. And are you seeing much Change in terms of the mix of the growth across those geographies as you look toward the end of the year? Or is that should we be looking for somewhat something similar?

Speaker 2

Yes. I think as you look into Q4, I think all of those regions have come down a little bit Q4 versus Q3 in general. So maybe take it down a couple of points. But clearly, particularly with Meta, Meta did In LatAm, something to the tune of, I think, LatAm and they break out LatAm, Africa and the Middle East, they were plus 30 for We did a +18. So it's still the growth versus they did a +7 or 8 in the U.

Speaker 2

S. So it's still in our markets, Facebook, Meta, it's still the growth engine in these regions and we expect that to continue.

Speaker 5

Okay, great. Thanks so much.

Speaker 2

Thank you.

Operator

Our next question comes from Mike Albanese from E. S. Hutton, please go ahead with your question.

Speaker 2

Yes. Hey, guys.

Speaker 6

Just a couple of quick ones. I want to dive back in, I guess, to the kind of sector level. You mentioned that auto services and I think healthcare have all been showing good trends. I mean, on the flip side of that, is there anything standing out or any pockets of weakness that you're seeing or maybe even just kind of give us a sense of the variation between what you're seeing at top level, which I guess maybe auto and and sectors that are underperforming.

Speaker 3

Yes. So from the

Speaker 2

categories that

Speaker 3

are not performing as we would like them to be, It's really travel and leisure as to retail and also restaurants.

Speaker 2

So a lot of those have to

Speaker 3

do with the economic conditions that we're in currently.

Speaker 6

Got it. Okay. Thanks. And then just to dive back into 2024 priorities, more specifically capital allocation, Reinvesting, drive organic growth. You mentioned expanding news capacity.

Speaker 6

You mentioned AI. Maybe you could talk Give us a sense of how you intend to use AI or maybe just add a little bit more color into that. And then in terms of just CapEx needs in 2024, historically high this past year as expected, right? And I mean, kind of You're expecting that to really be the same in the next year or come back down more towards

Speaker 4

historical levels, I guess?

Speaker 2

Yes, CapEx, I'll cover. CapEx will be more normalized next year in the $11,000,000 to $12,000,000 range, down from where it This year because of the move that we did here in Los Angeles.

Speaker 3

And then the AI question,

Speaker 4

I think. In really in all of our digital businesses, AI and machine learning are now a critical part of The capabilities of the products that we deliver to advertisers. So we have to invest to be competitive in all of those businesses or even to establish some competitive differentiation. So that's across the board. Having committed to making that investment, what we're also doing is saying can it apply to other areas of our business?

Speaker 4

Can we operate the company more efficiently and or smarter using those capabilities. So Like every company, this is now a critical area of investment and we need to keep up.

Speaker 6

Yes, I guess just regarding internally with operational efficiencies,

Speaker 2

is this something you're just

Speaker 6

you're Looking into a view identified ways, I guess, where you believe that you can implement AI technology and find efficiencies and improvement.

Speaker 4

We are implementing and improving in our tech businesses, so in somatic And our Mobile Growth Solutions, it's that work has been underway for probably more than a year at this point and we've definitely put more behind it in the last quarter, and it will be an important area of investment for us again in 2024. The application of that to broader Entravision, including how we manage our broadcast businesses, That's just that's a new effort. That will be something that we do in 2024. Again, if we're going to have this capability, we're going to use it in

Speaker 6

Okay, thanks. And then Mike, just you've been here for A few months now, I really had a chance to kind of dive under the hood. I know it's

Speaker 3

a fluid process, but just

Speaker 6

I guess very broadly, any major learnings or

Speaker 4

It's a great company with a lot of opportunity. I'm more excited now after finishing my quarter and getting to know the people and the businesses, and I'm very optimistic about what we can accomplish in 20 So anytime you go into a new situation, there's pluses and minuses. And in my case, the pluses have definitely outweighed the minuses. And I'm excited about the opportunity.

Operator

Great. Thanks, guys. Thanks for the time.

Speaker 2

Thank you.

Operator

And our next question comes from Chris Stocchi from Singular Research. Please go ahead with your question.

Speaker 5

Yes. Hi. I'm in for Dave Marsh.

Speaker 4

Can you talk about For political ad

Speaker 5

spending, which of the 3 segments would perform the best?

Speaker 2

Yes, TV by far and away. And I've said this publicly, we've got an internal budget of about $40,000,000 Political next year, it's a budget. We'll see how we do vis a vis budget. But TV should be good for about 30 of that. Radio should be good for the other 10 and maybe we'll do a couple of $100 in digital, but it's really a TV driven process.

Speaker 6

Okay, great. And then can

Speaker 5

you talk about any potential acquisitions that you're seeing out there?

Speaker 4

Not in 2024. 2024 is going to be about organic growth and improving our operations.

Speaker 5

Can you talk about your digital revenue and it slowed. So can you talk about why And what should we be expecting there over the next couple of quarters?

Speaker 2

Well, we've been very acquisitive over the past several years. To my point, we're in right now just working on harmonizing those acquisitions and driving up margins. But really the growth has come from The acquisitions that we've been active with for the past 4, 5 years, plain and simple.

Speaker 5

Okay, great. Thanks for the

Speaker 2

answers. Good thing.

Operator

And ladies and gentlemen, with that, we'll be ending today's question and answer session. I'd like to turn the floor back over to Michael Christensen for any closing remarks.

Speaker 4

Just want to thank you all for joining us today and for your support of Entravision. We look forward to sharing further details on our progress with you on our Q4 earnings call, which will be in March. So thank you.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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