Entravision Communications Corporation (NYSE:EVC) Q3 2023 Earnings Call Transcript

Entravision Communications Corporation (NYSE:EVC) Q3 2023 Earnings Call Transcript November 2, 2023

Entravision Communications Corporation beats earnings expectations. Reported EPS is $0.04, expectations were $0.01.

Operator: Greetings, everyone, and welcome to the Entravision Third Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. [Operator Instruction] 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. You may begin.

Kimberly Orlando: Thank you, operator. Good afternoon, everyone, and welcome to Entravision’s third quarter 2023 earnings conference call. Joining me today are Michael Christenson, Chief Executive Officer; Chris Young, Chief Financial Officer; and Jeffery Liberman, 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. 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 forma 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-K. I will now turn the call over to Chris Young.

Chris Young: Thanks, Kim, and thank you all for joining us this afternoon. Jeff and I will cover our third quarter 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 third quarter results. On a consolidated basis, we had a record quarter advertising revenue of $274.4 million, up 14% year-over-year, slightly below our previously disclosed pacings of plus 15%. Our digital segment revenue was $231.5 million for the quarter, up 23% year-over-year. 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 forma basis, digital revenues improved 18% compared to the prior year period. During the quarter, digital operating cash flow was approximately $10.3 million 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. 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 our TV and audio business segments. Jeff?

Jeffery Liberman: Thank you, Chris. Let me start with our television segment. Television revenue was $29.6 million in the quarter, down 17% compared to prior year period, primarily due to declines in political revenue as we faced difficult comparisons versus last year’s strong political revenue performance of $6.4 million. While we saw continued pressure on national advertising spending, our local TV business remains 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 $8.9 million, which was flat year-over-year.

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 entertainment and retail. While softness on the national advertising front has persisted into October, we expect to see improvement in political spending in the fourth quarter. 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 first quarter of 2024. Now let’s shift to audio. Audio revenue totaled approximately $13.4 million for the quarter and decreased 19% year-over-year.

The decline in revenue was driven by lower national and local advertising revenue as compared to the third quarter of 2022, which included non-returning political advertising revenue of $1.5 million. On a core basis, excluding political, total revenue was down 11%, with local revenue down 11% and national revenue down 10%. 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 third quarter financials and fourth quarter pacings in further detail. Chris?

Chris Young: Thanks, Jeff. Let’s begin by reviewing our expenses. Cost of revenue in the quarter totaled $199.3 million, up 27% from $157.1 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 23%. Operating expenses in the quarter totaled $53.8 million, up 9% from $49.3 million in the prior year period. This increase was driven by various factors, including higher noncash 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 fully contribute to our financial results in our digital segment in the prior year period.

On a pro forma basis, cash operating expenses increased 4% compared to the prior year period. Corporate expenses increased by 40% to total $13.3 million for the quarter compared to $9.5 million 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 an RSU grant to our CEO and increases in professional service fees. Consolidated adjusted EBITDA totaled $14.2 million for the quarter, down 45% from $26 million in the prior year period. The decline was primarily driven by non-returning political revenue at our broadcasting business and sales mix. Free cash flow, as defined in our earnings release, was $4 million in the quarter or a conversion rate of 28% of consolidated adjusted EBITDA compared to $15.4 million in the same quarter of the prior year.

Net cash interest expense was $2.8 million for the quarter compared to $1.9 million in the same quarter of last year. Cash capital expenditures for Q3 totaled $5 million. We expect cash CapEx to total roughly $17.5 million for the full year. Cash paid for income taxes was $2.3 million for the quarter compared to $4 million paid last year. Diluted earnings per share for the third quarter 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. Turning to our balance sheet. Cash and marketable securities as of September 30, 2023, totaled $128.7 million. Total debt was $211.1 million. Our total leverage as defined in our credit agreement was 2.1 times as of the end of the third quarter.

Net of total cash and marketable securities, our total net leverage was 1.1 times. As we turn to our current pacings for the fourth quarter 2023, it’s important to note that we booked approximately $19.1 million in political revenue in the fourth quarter of last year that will not return this year. $14.8 million of that was on TV and $4.2 million of that was on radio with a 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. Factoring in acquisitions, our digital segment on a pro forma 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 plus 1%.

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 plus 4%. On a pro forma basis, our total revenue is pacing currently at a plus 5%. I will now turn the call over to Mike for concluding remarks.

Michael Christenson: Thanks, Chris. So as you’ve heard from Chris and Jeff, we’re working hard to finish 2023 with good momentum, 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, first, to maximize our political revenue. We have a large audience, nearly 1 in 5 of the 62 million Latinos in the U.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. Second, 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.

And then third, we’ll be very focused on improving the operating performances of our 3 digital businesses, Entravision digital services, Smadex and Entravision mobile growth solutions. For our capital allocation plans for 2024, 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. 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.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Michael Kupinski from NOBLE Capital Markets. Please go ahead with your question.

Michael Kupinski: 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. But — can you talk a little bit about political in the fourth quarter? I know that you gave guidance in terms of your pacing is down 30% or so. But what — how much of that is political? And then can you give us your thoughts about the level of political in 2024?

Jeffery Liberman: So Michael, we’re expecting somewhere between $300,000 and $400,000 of political in the fourth quarter. As I said in my remarks earlier, we do have some very key states that are coming up with primaries in the first quarter of next year, especially in 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 up of our spend probably right after the Thanksgiving break as we move forward into the primary election in the state of Nevada.

Chris Young: And Michael, since we gave up pace only as of today, that’s obviously not 100% factored in. We are running some presidential campaign campaigns now, but that pace is not reflective of stuff that might break late in the quarter.

Jeffery Liberman: Yes. And Biden — as Chris has mentioned, Biden already spending in the Nevada marketplace with us.

Michael Kupinski: And I know that you have several develop — 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. I was wondering if you could talk a little bit about the progress on that front? And where do you anticipate margins to be?

Chris Young: Sure. We did — cash flow margin for digital was 4.5% in the third quarter. That’s down at [indiscernible] from 4.7%. In the second quarter, we are gunning to get north of 5% in the fourth quarter. Right now, the way the revenue is coming in, we feel pretty comfortable with that number. 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.

Michael Kupinski: And then I know that in the — when we talked a little bit about the Facebook and some of the changes that you had there, that you indicated that there might be some additional markets that Facebook might give you. And I was just wondering if you kind of finished those discussions and others, 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?

Chris Young: 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.

Michael Kupinski: And then on the broadcast side, the auto being a real key component to some of 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?

Chris Young: So auto was up 14% for the quarter. It’s back to our largest segment. Even with the strike, what we’re noticed in this foreign auto — auto manufacturers are stepping in to take market share as a way to — with the weakness of the U.S. — on the U.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.

Jeffery Liberman: Also, that was Tier 2 and Tier 3, right? 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 health care also.