Q2 2023 Entravision Communications Corp Earnings Call

[music].

Greetings and welcome to the Entravision second quarter 2023 earnings Conference call.

As a reminder, this conference is being recorded.

Now my pleasure to introduce your host Kimberly Orlando with Investor Relations. Thank you you may begin.

Thank you operator, good afternoon, everyone and welcome to the Entravision second quarter 2023 earnings Conference call.

Joining me today are Michael Christiansen, 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 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 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 comparable GAAP measures in today's press release.

In addition, all pro forma figures noted throughout the prepared remarks include the contribution of various acquisition to the prior year period.

The press release is available on the company's website and was filed with the SEC on form 8-K, I will now turn the call over to Michael Kristian said.

Thank you Kimberly.

Excited and honored joined the Entravision team and to be here on my first earnings call as <unk> CEO .

Our provision 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 want to thank Chris for the heroic job he did leading edge revision as interim CEO and CFO during a difficult time for the company.

Today, Chris and Jeff will discuss our <unk> 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. Thanks.

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 second quarter results on a consolidated basis, we had a record quarterly revenue of $273 4 million, an increase of 23% year over year and ahead of our previously disclosed pacings, a plus 18% our digital segment revenue was $229 9 million for the quarter.

Up 32% year over year. 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 <unk>, which continued to face headwinds from crypto and Fintech advertising.

On a pro forma basis digital revenues improved 18% compared to the prior year period.

Our television and audio segments revenue declined, 8% and 9% respectively year over year as Jeff will address both the TV and audio segments continued to see weakness on the national front and faced tough comparisons as we comp against last year's strong political revenue performance, our local television business. However.

Main fairly resilient as the team has done a fantastic job executing despite challenging conditions.

Now I'll turn the call over to Jeff to speak further to our television and audio business segments. Jeff. Thank you, Chris Let me start with the TV segment television revenue was $29 9 million 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 3 million, which was up 3% year over year cash flow margins for our TV segment was 30.

6% for the quarter.

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 first quarter of 2024.

Now, let's shift to audio audio revenue totaled approximately $13 5 million for the quarter and decreased 9% year over year, largely driven by the lack of political AD revenue as well as national local revenue declines as compared to second quarter of 2022.

On a core basis, excluding political total revenue was down 6% with local revenue down five and national revenue down seven Fortunately Spanish language radio has been performing better than the general market and while our national clients are being very cautious based on the current economic conditions political spending may <unk>.

Kris and key states discussed earlier, which will help support our national sales.

I will now turn the call back to Chris to discuss our second quarter financials, and third 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 totaled $195 8 million up 35% from $145 million in the prior year period and was driven by the increase in our digital segment revenue on a pro forma 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 6 million up 20% from $47 4 million in the prior year period. This increase was primarily due to several factors first we had approximately $3 2 million in incremental expenses attributable to various acquisitions, which did not contribute to our financial results in the comparable period.

Last year.

Our rent expense was $1 $1 million higher than the prior year as we were in a temporary office space until we move to our newly renovated headquarters in Santa Monica at the end of June .

Third there was a 1.8 million increase in noncash stock based compensation as a result of the timing of the annual RSC Grant being in Q1 of this year compared to Q4 in the prior year and.

And fourth variable expenses associated with the increase in digital advertising revenue were up approximately 400000.

On a pro forma basis operating expenses increased 14% compared to the prior year period.

Corporate expenses increased by 41% to totaled $12 million for the quarter compared to $8 5 million in the same quarter of last year, which is mainly a result of the timing of the annual RSC Grant I, just mentioned and increases in professional service fees.

Consolidated EBITDA totaled $14 2 million for the quarter down 37% from $22 5 million 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.

Two.

Free cash flow as defined in our earnings release was $1 6 million in the quarter or a conversion rate of 11% of consolidated EBITDA compared to $14 3 million in the same quarter of last year.

Net cash interest expense was $3 2 million in the quarter compared to $1 2 million in the same quarter of last year.

Cash capital expenditures for Q2 totaled $8 1 million the increase compared to the same quarter of last year is mainly due to the buildout of our new headquarters in Santa Monica is completed during the quarter, we expect cash capex to total roughly $16 million for the full year.

Cash paid for income taxes was $3 5 million for the quarter compared to $6 2 million paid last year Duluth.

Diluted earnings per share for the quarter 2023 were negative two.

Compared to a positive turn in the same quarter of last year.

In addition, we were pleased that our board of directors once again approved a quarterly five cent dividend.

Turning to our balance sheet cash and marketable securities as of June 32023 totaled $126 5 million total debt was $212 6 million, our total leverage as defined in our credit agreement was one eight times as of the end of the second quarter net of total cash and marketable securities.

Our total net leverage was 1.0 times.

Turning to our pacings for the third quarter of 2023 as of today revenue from our digital segment is pacing plus 25% over the prior year factoring in acquisitions or digital segment on a pro forma basis is pacing at a plus 17%.

Our television segment is pacing minus 17% over the prior year period with core TV advertising, excluding political book, thus far in the quarter in 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 plus 15%.

On a pro forma basis. Our total revenue is currently pacing at a plus 11%.

To conclude looking ahead, we will continue to seek ways to drive growth and expand our footprint with an increased focus on organic growth.

TV and audio remains resilient 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.

Thank you for your time. This afternoon. We appreciate your continued support of Entravision and we'll now open up the call to questions operator.

Thank you we will now begin the question and answer session.

I ask a question you May press Star then one on your Touchtone phone.

If you are using a speaker phone we ask you. Please pickup your handset before pressing the keys.

To withdraw your question. Please press Star then two.

Once again, ladies and gentlemen that stars in the warm or if you have a question.

Ladies and gentlemen, our first question today comes from James <unk>, a retail investor. Please go ahead.

Hi, everybody.

Mike Welcome.

Okay.

Chris I'd tell you welcome back.

Year before.

Been here before.

Yeah.

Sure.

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 third quarter versus your internal expectations as we went into the year.

It is you hearing.

And what are you doing to advertisers across the segments locals more resilient the national National's really the problem of the mix local hanging in there.

The thinking is that agencies at the national level are waiting for some signs that this economies in a recovery mode, and then theyre 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 it start seeing that data come out before they start making commitments local has been.

Pretty resilient, we're still kind of in a positive particularly for TV.

That's part of the business that we have a bit more control over but national's really the problem and as far as digital is concerned look digital demand continues to be their meta our largest platform continues to outperform the they produced a plus 21% in Q2 up from a plus 15% in Q1 and up from a plus seven.

Set to Q4 last year, so there clearly with the meta platform on track for.

Our continued growth.

Okay, Great and then.

Just in terms of your margin expectations.

You know at least according to my model kind of broadcast actually despite the weakness was relatively in line in terms of cash flow digital did mess. 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 yes.

TB 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 four 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 six or seven ish range provided that revenue and the seasonality come through as we expect.

Okay great.

And then just one last one.

You know what are you seeing in terms of the M&A outlook across I guess, primarily digital.

But if there's anything else thats been popping up of interest.

What would that be.

I think right now James we're focused on organic growth, we're focused on digesting. The three deals that we did this past quarter as well as the rest of the portfolio. Mike has been working on that strategy and it has us all focused on working to improve the margins of our existing assets and that'll be our focus at least for the near term.

Okay, great. Thanks very much.

Thanks James.

Thank you and as a reminder, ladies and gentlemen, if you'd like to ask a question. Please press Star then one.

Our next question comes from David Marsh at singular research. Please go ahead.

Hey, Thanks for taking the question says they do well.

Yes.

To start.

Can you talk a little bit more can you give us a little bit more granularity around political and what youre seeing so far I mean I know.

Yeah in the market, but I sit in we're already starting to see some ads towards the 24 <unk>.

I'm, just hoping for a little bit more help around you know what you guys are seeing.

So David we are seeing a little bit of political not very much nothing to really know.

Account and but we do expect the second half of the year to become more robust there.

There are some key primaries in states that we operate our media properties in that are in the first quarter.

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 the third quarter, if not in the fourth quarter and 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 in vote, and so to get that message out in front of that March deadline that election day, you've got to start messaging in.

For October and that's when we expect that the advertising to come online.

And the political stuff will all be categorized morals are local.

Advertising product correct.

Usually are not.

National is where we classify it because it usually comes in from national agencies, except for any local waves in the individual market that we're in but we're happy in the future to give you the breakout of what national is without the political versus with the political as the new one okay.

Yep Yep.

Nationally are there any particular sectors that are actually.

Doing some meaningful advertising with you guys.

Broadly.

He in particular, but it will really really super sluggish and in.

In catalysts to perhaps get those awful off the bench.

Are you talking about verticals or specific advertisers.

Industry verticals, yes, sorry, yeah. 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 represents about 27% of our book retail is up 7% healthcare was up 7% the one cat.

Macquarie that's down for us, which was a bit of a surprise, but quick service restaurants, the likes of Mcdonald's and whatnot they 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.

Yeah, that's really helpful.

Lastly for me on the digital side, and just kind of a follow on the prior caller's question.

What is it that you guys could do to grow the margins on the digital business a bit I mean is there anything specifically from a lever pulling back.

Active that you all can do or is it just really a volume game for you well. It is a volume game, but what we have been doing over the past several quarters is tailoring back the head count in certain specific business platforms. So the head count's down around 60 people over the last two quarters as we kind of worked to.

<unk> some of our divisions that will likely continue into the back half of the year as we continue to work on that but.

Yes, so the margins will be largely to the extent that we have some control will continue to work on the head count and efficiencies, but in large part it's going to be the revenue that's going to drive those margins and our expectation is to get the.

The seasonality of the business really kicks into high gear in the fourth quarter, we will have those margins back into the kind of heights mid single digit range.

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

Thank you. Thank you.

Thank you and our next question today comes from Michael Kaplinsky with Noble capital markets. Please go ahead. Thank.

Thank you thank.

Thanks for taking my questions, Mike Congratulations and 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 in.

Particular changes do you think you would like to make possibly in terms of areas of growth acquisitions focus.

How maybe your perception of doubt radio television assets and so forth.

What I would say at this 0.3 or four weeks into the into the adventure is.

We're looking at off all of the businesses.

And as Chris mentioned.

<unk> 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.

And.

Could we assume that you would also look at acquisitions in both TV and radio or would you be concentrating on the digital assets.

Right now were.

We're really not looking at any acquisitions I mean, we're obviously watching.

Leading the company, we watch M&A activity in all 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.

Gotcha.

And then in terms of those margins I want to kind of go back to that question on the digital side.

Yeah, the margins change for any of your Facebook or metal relationships I know that there was 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.

That reflected in the margins and the digital margins already when.

Can you give us some thoughts about that.

Yes, Michael So we were.

We were informed by met a few months back that our commissions for our meta business would be dropping from 10% to 7%. So that's going to but that was effective July one. So that's not reflective in reflected in the Q2 print, but certainly it'll 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, but we really don't have anything of note to specifically speak to that point right now.

And Chris in terms of VIX potential expansion into new territories.

I'm certain that they probably gave you some insight on those would those be more than offset the types of.

Cash flow opportunities that you would have for from the margin improvement I mean could we looked in other words are we anticipating that.

That we would see substantial growth given those market opportunities that they are presenting it.

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 yes.

And then I know that.

You answered the question a little bit about the prospect for margins and how you want to focus on the digital side.

What do you think are the.

Our 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 of it seems like we're going to trend lower than that and I was just wondering if you have a new benchmark of what to do.

Digital margins.

Should be or whats sustainable margins might be.

I think we're going to have to Peel back that 10% goal given what happened with meta this year. The goal right now I think is somewhere between 7%, 8%, let's get to that target through efficiencies and through volume and then we're going to retool and go for another goal once once we achieve that target.

Gotcha, and then of course the free.

Free cash flow is still a significant at the company and was just wondering what might be.

Your thoughts in terms of our capital allocation at this point.

Given that your cash balance sheet looks pretty good I know that you're just now.

Now the dividend but.

What are your thoughts about capital allocation from 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 two those two primary allocations.

With share repurchases be off the table at this point.

Yes.

Okay.

That is all I have thank you.

Thanks, Mike.

Thank you and this concludes our question and answer session I would like to turn the conference back over to Michael Christmas and for any closing remarks.

Thank you for joining us today and for your support of Entravision.

Look forward to sharing our progress with you on our third quarter earnings call in November .

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