Entravision Communications Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Entravision Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Orlando with Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to Entravision's 2nd quarter 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 call will contain forward looking statements that are subject to risks and uncertainties that could cause actual results to differ. Please refer to Entravision's SEC filings for a list of risks and uncertainties that could impact actual results.

Speaker 1

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 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.

Speaker 1

The press release is available on the company's website and was filed with the SEC on Form 8 ks. I will now turn the call over to Michael Christiansen.

Speaker 2

Thank you, Kimberly. I'm excited and honored to join the Entravision team and to be here on my first Earnings call as Entravision's CEO. Entravision has great opportunities for growth and value creation in each of its business segments and I'm looking forward to being part of that effort. I also want to thank Chris for the heroic job he did leading Entravision Today, Chris and Jeff will discuss our 2Q results and answer your questions, and I'll be here as well if you have any questions for me. But for now, Chris, over to you.

Speaker 3

Thanks for the kind words, Mike. We're excited to have you on board and look forward to our continued growth and success under your leadership. Let's begin with an overview of our 2nd quarter results. On a consolidated basis, we had a record quarterly revenue of $273,400,000 An increase of 23% year over year and ahead of our previously disclosed pacings of +18%. Our digital segment revenue was $229,900,000 for the quarter, up 32% year over year.

Speaker 3

The main drivers were our commercial partnership business With revenue up 26%, our digital audio business, which saw a revenue increase of 13% and various acquisitions, which Did not contribute to revenue in the comparable period. This increase was partially offset by a decrease in our programmatic business, primarily due to the performance of Smadex, which continued to face headwinds from crypto and fintech advertising. On a pro form a basis, digital revenues improved 18% compared to the prior year period. Our TV and audio Segment's revenue declined 8% 9%, respectively, year over year. As Jeff will address, both the TV and Audio segments continue to see weakness On the national front and face tough comparisons as we comp against last year's strong political revenue performance.

Speaker 3

Our local TV business, however, remained fairly I'll now turn the call over to Jeff To speak further to our Television and Audio business segments, Jeff? Thank you, Chris.

Speaker 4

Let me start with the Television segment. Television revenue was $29,900,000 in the quarter, down 8% compared to prior year period, largely due to decline in political revenue And continued pressure on national advertising spending. On a more granular basis, core television revenue increased 1%, National core revenue decreased 12% and local core revenue increased 4% year over year. Retransmission revenue for the quarter was 9,300,000 Which was up 3% year over year. Cash flow margins for our television segment was 36% for the quarter.

Speaker 4

While we continue to see softness on the national advertising front, which has extended into July, we may see improvement in political Spending for the back half of the year in key states like California, Arizona, Colorado, Nevada and Texas, which all have primaries In the Q1 of 2024. Now let's shift to audio. Audio revenue totaled approximately $13,500,000 for the quarter And decreased 9% year over year, largely driven by the lack of political ad revenue as well as national and local revenue declines as compared to Q2 of 2020 2. On a core basis excluding political, total revenue was down 6% with local revenue down 5% and national revenue down 7%. Fortunately, Spanish language radio has been performing better than the general market.

Speaker 4

And while our national clients are being very cautious based on the

Speaker 3

I will now turn the call back to Chris to discuss the 2nd quarter financials and 3rd quarter pacing in further detail. Chris? Thanks, Jeff. Since we already covered revenues for each of our segments, let's move to expenses for the quarter. Cost of revenue in the quarter $195,800,000 up 35 percent from $145,000,000 in the prior year period and was driven by the increase in our digital segment revenue.

Speaker 3

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 22%. Operating expenses in the quarter totaled $56,600,000 up 20 percent from $47,400,000 in the prior year period. This increase was primarily due to several factors. First, we had approximately $3,200,000 in incremental expenses attributable to various acquisitions, which did not contribute to our financial results in the comparable period last year. 2nd, our rent expense was $1,100,000 Higher than the prior year as we were in a temporary office space until we moved to our newly renovated headquarters in Santa Monica at the end of June.

Speaker 3

3rd, there was a $1,800,000 increase in 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. And 4th, Variable expenses associated with the increase in digital advertising revenue were up approximately $400,000 On a pro form a basis, Operating expenses increased 14% compared to the prior year period. Corporate expenses increased by 41 to total $12,000,000 for the quarter compared to $8,500,000 in the same quarter of last year, which is mainly a result of the timing of the annual RSU $2,000,000 I just mentioned and increases in professional service fees. Consolidated EBITDA totaled $14,200,000 for the quarter, down 37 from $22,500,000 in the prior year period. The decline was primarily driven by a combination of both non returning political revenue at our broadcasting business, Coupled with an increase in cost of revenue, operating expenses and corporate expenses that I just spoke to.

Speaker 3

Free cash flow as defined in our earnings release was $1,600,000 in the quarter or a conversion rate of 11% of consolidated EBITDA compared to $14,300,000 in the same quarter of last year. Net cash interest expense was $3,200,000 in the quarter compared to $1,200,000 in the same quarter of last Cash capital expenditures for Q2 totaled $8,100,000 The increase compared to the same quarter Last year is mainly due to the build out of our new headquarters in Santa Monica completed during the quarter. We expect cash CapEx to total roughly $16,000,000 for the full year. Cash paid for income taxes was $3,500,000 for the quarter compared to $6,200,000 paid last year. Diluted earnings per share for the quarter 2023 were negative $0.02 compared to a positive $0.10 in the same quarter of last year.

Speaker 3

In addition, we were pleased that our Board of Directors once again approved a quarterly $0.05 dividend. Turning to our balance sheet. Cash and marketable securities as of June 30, 2023, totaled $126,500,000 Total debt was $212,600,000 Our total leverage as defined in our credit agreement was 1.8x as of the end of the second quarter. Net of total cash and marketable securities, our total net leverage was 1.0x. Turning to our pacings for the Q3 of 2023.

Speaker 3

As of today, revenue from our digital segment is pacing plus 25% over the prior year. Factoring in acquisitions, our digital segment on a pro form a basis is pacing at a +17%. Our TV segment is pacing minus 17% over the prior year period with core TV advertising excluding political book thus far in the quarter and the prior year pacing at a minus 10%. Lastly, our Audio segment is pacing minus 15% over the prior year period With core audio excluding political book thus far in the prior year quarter pacing at a minus 12%. All in, our total revenue compared to last year is pacing at a +15%.

Speaker 3

On a pro form a basis, Our total revenue is currently pacing at a +11%. To conclude, looking ahead, we will continue to seek ways to drive growth and And while macro conditions are uncertain, Entravision continues to be well positioned to benefit from increased political ad spend in the back half of this year. Lastly, I'd like to note that we were pleased to announce during the quarter that Entravision once again earned the Great Place to Work certification. This certification speaks to our strong company culture, and I would like to thank all of our employees for their contribution and dedication to our success. Thank you for your time this afternoon.

Speaker 3

We appreciate your continued support of Entravision, and we'll now open up the call to questions. Operator?

Operator

Thank you. We will now begin the question and answer session. And ladies and gentlemen, our first question today comes from James Dix, a retail investor. Please go ahead.

Speaker 5

Hi, everybody.

Speaker 6

Mike, welcome. Chris, I tell you welcome, but you're here before. I guess, just in terms of Just looking at the demand versus expectations, just on the revenue side, and I guess in particular on advertising, I mean, it's looking like TV and radio on a core basis are a little weaker than expected, digital maybe a little stronger. Is that the way you see demand at the moment as you look at the Q3 versus your internal expectations as you went into the year? And what are you hearing from?

Speaker 6

Yes. And what are you hearing from advertisers across the segments?

Speaker 3

Locals more resilient than national. National is really The problem of the mix, locals hanging in there. The thinking is that agencies at the national level are waiting For some signs that this economy is in a recovery mode and then they're going to start committing budgets on a longer term basis in the second half of the year. The feeling, the sentiment is that We're through the worst of it, but now agencies want to see start seeing that data come out before they start making commitments. Local has been pretty resilient.

Speaker 3

We're still kind of in the positive, particularly for TV. That's part of the business that we have a bit more control over, but national is really And as far as digital is concerned, look, digital demand continues to be there. Meta, our largest platform, Continues to outperform. They produced a +21 percent in Q2, up from a +15% in Q1 and up from a +7 Last year, so they're clearly with the Meta platform on track for continued growth.

Speaker 5

Okay,

Speaker 6

great. And then just in terms of your margin expectations, At least according to my model, kind of broadcast, actually despite the weakness, was relatively in line in terms of cash flow. Digital did miss. So how are you thinking about margins going into the back half of the year, In particular, on the digital side of things, especially given what you've said previously about Changes in commission rates from partners potentially?

Speaker 3

Yes. TV margins should continue to be kind of in that high 30% Range before corporate radio should be back into kind of the mid to high 20% range in the back half of the year. But to your point digital, we were south of 5% at 4.7% in Q2, probably expect to see something along similar lines for Q3. Seasonality wise, Q4 is usually a breakout quarter for us for digital. So expect those margins to be more in the mid single digit kind of in the 6 Or 7 ish range, provided that revenue and the seasonality come through as we expect.

Speaker 6

Okay, great. And then just one last one. What are you seeing in terms of the M and A outlook across, I guess primarily digital, but if there's anything else that's been popping up of interest, what would that be?

Speaker 3

I think right now, James, we're focused on organic growth. We're focused on digesting the 3 deals that we did this past quarter as well as the rest of the portfolio. Mike has been working on that strategy and has us all focused on working to improve the margins of our existing assets.

Operator

Thank you. Our next question comes from David Marsh at Singular Research. Please go ahead.

Speaker 5

Hey, thanks for taking the questions, guys.

Speaker 6

Hey, Dave.

Speaker 5

Just to start, Can you talk

Operator

a little bit more, can you give us

Speaker 5

a little bit more granularity around political and what you're seeing so far? I mean, I know Yes. In the market that I sit in, we're already starting to see some ads towards the 2024 election. Just hoping for a little bit more help around What you guys are seeing?

Speaker 3

Yes. So David, we are seeing a

Speaker 4

little bit of political not very much, nothing to really count And but we do expect the second half of the year to become more robust. There are Some key primaries in states that we operate media properties in that are in the Q1, such as California, Arizona, Nevada, Texas, Colorado, which we do feel that we're going to start seeing money maybe very close to the end of 3rd quarter, if not in the 4th quarter.

Speaker 3

California, in particular, should be a big deal for us because that's A lot of the initiatives here in California are done by mail and vote. And so to get that message out in front of that March deadline, That's Election Day. You've got to start messaging in September, October, and that's when we expect that advertising to come online.

Speaker 5

And the political stuff would all be categorized more as a local advertising product, correct?

Speaker 4

Usually, national is where we classify it because it usually comes in From national agencies, except for any local rates in the individual market that we're in.

Speaker 3

But we're happy in the future Give you the breakout of what national is without the political versus with the political. It's the nuance. Okay.

Speaker 5

Yes, yes. Nationally, are there any particular sectors that are actually doing some meaningful advertising with you guys And broadly, any in particular that are just really, really super sluggish and any catalyst to perhaps Get those off the bench.

Speaker 3

Are you talking about verticals or specific advertisers?

Speaker 5

Yes, industry verticals. Yes, sorry.

Speaker 3

Yes. Well, so services is our number one category. They were flat, but that's kind of the legal and insurance services business. Automotive is finally coming back around. It was up 14% for a TV.

Speaker 3

It represents about 27% of our book. Retail is up 7%, healthcare is up 7%. The one Category that's down for us, which was a bit of a surprise, but quick service restaurants, the likes of McDonald's and whatnot, they've pulled back somewhat. But that's really the only blip on the screen as far as the major categories are concerned. That's for TV.

Speaker 5

That's really helpful. Just lastly for me, on the digital side, I mean, just kind of a follow on the prior I mean, what is it that you guys could do to grow the margins in the digital business a bit? I mean, is there anything specifically from a lever Pulling perspective that you all can do or is it just really a volume game for you?

Speaker 3

Well, it is a volume game, but what we have been doing over the past Several quarters is tailoring back the headcount in certain specific business platforms. So the headcount is down around 60 people Over the last two quarters, as we kind of work to restructure some of our divisions, that will likely continue into We have some control. We'll continue to work on the headcount and efficiencies. But in large part, it's going to be the revenue that's going And our expectation is to get as the seasonality of the business really kicks into high gear in the Q4, we'll have those margins back into the kind of high Mid single digit range.

Speaker 5

Got it. That's really helpful. Thanks, guys.

Speaker 3

Thank you.

Operator

Thank you. And our next question today comes from Michael Kupinski with Noble Capital Markets. Please go ahead.

Speaker 7

Thank you. Mike, congratulations. I look forward to working with you. I know this might be a little early for you to opine on this, but How do you view the company and what particular changes do you think you would like to make possibly in terms of areas of growth, acquisitions, focus, Maybe your perception about radio, the TV assets and so forth?

Speaker 2

What I'd say at this point, 3 or 4 weeks into the adventure is, We're looking at all of the businesses. And as Chris mentioned, we've been active on the acquisition front over The past few years and we're going through the portfolio and looking for organic growth opportunities. So that's the priority For now, figure out ways to grow revenue and grow free cash flow organically. And we're looking at every business to find those opportunities.

Speaker 7

And would I assume could we assume that you would also look at acquisitions in both In both TV and radio or would you be concentrating on just the digital assets?

Speaker 2

Right now, We're really not looking at any acquisitions. I mean, we're obviously watching leading the company. We watch M and A activity In all of the sectors where we're a participant to help kind of formulate our own strategy and make our own decisions, Understand valuations in the marketplace, but we are not looking at any specific transactions at this point. We're focused on our own portfolio.

Speaker 7

Got you. And then in terms of those margins, I want to kind of go back to that question on Did the margins change for any of your Facebook or Meta relationships? I know that there were some talk about Meta looking at efficiencies and so forth and was just wondering if how those discussions went or if you had them And if we are seeing that reflected in the margins in the digital margins already, can you give us some thoughts about that?

Speaker 3

Yes, Michael. So we were informed by Meta a few months back that our commissions Our Meta business would be dropping from 10% to 7%. So that's going to that was effective July So that's not reflective in reflected in the Q2 print, but certainly it will put some margin pressure in the back half of the year. To offset that, we are in discussions with Meta about expanding our relationship with them into new territories. We really don't have anything of note to specifically speak to that point right now.

Speaker 7

And Chris, in terms of the Potential expansion into new territories, I'm certain that they probably gave you some insight on those. Would those We more than offset the types of kind of missed cash flow opportunities that you would have for From the margin improvement, I mean, could we look in other words, are we anticipating that we would see substantial growth Given those market opportunities that they're presenting

Speaker 3

you? It's too early to tell, but our hope is yes, but we don't have that in writing at this point. But that is obviously the goal.

Speaker 7

Yes. And then I know that you answered the question a little bit about On the prospect for margins and how you want to focus on the digital segment, what do you think are the sustainable margins In the digital segment and what maybe you are trying to drive toward? I know that in the past you had indicated that 10% margins was kind of like what you would anticipate in the digital segment. It seems like we're going to trend lower than that. And I was just wondering if you have a new benchmark of what The digital margins should be or what sustainable margins might be?

Speaker 3

Yes, I think we're going To peel back that 10% goal given what happened with Meta this year, the goal right now, I think, is somewhere between 7% And through volume, and then we're going to retool and go for another goal once we achieve that target.

Speaker 7

Got you. And then of course, the free cash flow is still significant at the company and was just wondering what might be Your thoughts in terms of capital allocation at this point, given that you've got a lot of cash, Balance sheet looks pretty good. I know that you just announced the dividend, but what are your thoughts about capital allocation from

Speaker 2

Here. Invest in organic growth inside the company. We're obviously committed to the dividend. And at that point, that's what we're focused on, those 2 primary allocations.

Speaker 7

Would share repurchases be off the table at this point? Yes. Okay. That is all I have. Thank you.

Speaker 3

Thanks, Mike.

Operator

Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to Michael Christensen for any closing remarks.

Speaker 2

Thank you for joining us today and for your support of Entravision. We'll look forward to Sharing our progress with you on our Q3 earnings call in November.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Key Takeaways

  • Record Q2 revenue of $273.4M, up 23% year-over-year, led by a 32% increase in digital revenue to $229.9M driven by commercial partnerships, digital audio and recent acquisitions.
  • TV revenue declined 8% to $29.9M and audio slipped 9% to $13.5M, weighed down by softer political and national ad spending despite local TV core growth of 4% and strong Spanish-language radio performance.
  • Digital segment margin was just 4.7% in Q2 due to partner commission cuts (e.g., Meta), with mid-single-digit margins expected in Q4; digital revenue is pacing +25% in Q3 (+17% on a pro forma basis).
  • Consolidated EBITDA fell 37% to $14.2M and free cash flow dropped to $1.6M (11% EBITDA conversion) amid higher costs and non-returning political revenue, resulting in a net leverage ratio of 1.0x.
  • Q3 total revenue is pacing +15% YoY (+11% pro forma), full-year CapEx is guided to $16M, no new M&A is planned as the focus shifts to organic growth, and a political ad spend recovery is anticipated in late H2.
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Earnings Conference Call
Entravision Communications Q2 2023
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