CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
2Q17 Script August 3, 2017 11:00 a.m. ET
PRE-RECORD OPENING SCRIPT
Operator: Good morning and welcome to Univision’s Second Quarter 2017 Earnings Call.
I would now like to turn the call over to Rainey Mancini, Senior Vice President of Finance and Head of Investor Relations. Go ahead, Ms. Mancini.
Rainey Mancini: Thanks and good morning, everyone. This morning we issued a press release detailing our second quarter 2017 results. Some of the information discussed today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties, including those highlighted in the forward-looking statements portion of our earnings release that may cause actual results to differ materially from these statements. Univision is under no obligation to update forward-looking information discussed on this call.
We will refer to Adjusted OIBDA in our prepared remarks as EBITDA. The press release provides further details on the definition of Adjusted OIBDA, the differences between Adjusted OIBDA and Bank Credit Adjusted OIBDA, how we define core revenue and core advertising revenue, the items we exclude when we reference core revenue or core EBITDA, and the reconciliation of Adjusted OIBDA and Bank Credit Adjusted OIBDA to GAAP net income or loss attributable to Univision Communications Inc., which we will refer to as net income or loss.
Additionally, the press release further details how we determine pro forma revenue, core revenue, core advertising revenue, Adjusted OIBDA and certain expense items for acquisitions completed in 2016. Unless we say otherwise, we are providing year-over-year comparison and for television ratings, it is among Adults 18 to 49 in primetime.
CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
With me on today's call are Randy Falco, President and Chief Executive Officer; Frank Lopez-Balboa, Chief Financial Officer, and Peter Lori, Deputy Chief Financial Officer and Chief Accounting Officer. I will now turn the call over to Randy.
Randy Falco: Thank you Rainey and welcome everyone. I'm pleased to report that total revenue in the quarter was nearly $765 million. Core revenue increased over 5% and nearly 1% on a pro forma basis. Net income increased 42% to $106 million in the quarter, net debt decreased approximately $200 million and cash from operating activities is up 24% in the first half of the year. We remain very focused on continuing to improve the financial profile of the company, while also driving operational improvements. Frank will update you further on the financial results.
In the second quarter, we widened our audience gap versus the Spanish-language competition. The Univision Network finished with an audience 40% higher than the closest Spanish-language competitor, and the combined audience of our bundle drivers – Univision, UniMás, Galavisión, and UDN – was 124% higher than our nearest competitor as we achieved nearly 60% of all Spanish-language television viewing.
During the May Sweeps, Univision was #1 for the 25th consecutive time. And for the first time ever in a major sweep, UniMás, our #2 broadcast network, beat Telemundo among people 2+ and we had the #1 and #2 most-watched Spanish- language networks in total audience, accounting for 63% of all Spanish-language television viewing.
The win on UniMás was primarily driven by our epic series “Moises.” We aired another successful epic series from the same producer on Univision in primetime. It was one of the top programs watched by U.S. Hispanics on all of television, regardless of language, in the quarter. We have exclusive rights to four additional epic series by the same producer that we plan to air over the next several years.
Meanwhile, Televisa continues to revamp their content pipeline with new comedies and dramas, which have had recent success in Mexico. We are very excited to launch some of these high-performing shows on Univision in primetime. CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
In addition to our entertainment and sports content, both our national and local news continued their strong performance. Noticiero Univision, our national evening news program, is the #1 news program among U.S. Hispanics, with an audience two times the size of the combined newscast of the English-language network evening news programs.
Our newsroom serves as a lifeline for our audience. The New York Times recognized the importance of Univision's role in empowering our community in June, with an extensive article detailing how Univision is meeting the needs of a concerned and information-deprived audience, something we make a top priority as part of being a mission-driven company.
It is no secret that the media landscape is rapidly evolving. We believe that the winners in this new ecosystem will be differentiated players that offer the best content and unique experiences for brands and advertisers to engage in multiple ways with consumers. Because of our high brand regard and diverse portfolio of content and consumer experiences, we believe we are well-positioned to capitalize on these shifting dynamics.
Across our current content ecosystem, we have a diverse set of consumer experiences serving one of the fastest-growing demographics in the country. These include: a portfolio of #1 Spanish-language linear assets with must-see programming for U.S. Hispanics across entertainment, news and sports; unique music and entertainment tent pole events that drive large live audiences; a leading portfolio of annual soccer rights that is uniquely targeted at a U.S. Hispanic audience that is passionate about soccer; local news teams that serve as a critical connection point interacting with communities in key markets across the U.S.; hundreds of in-person community and empowerment events attended by over 4 million people annually; an expanding Spanish-language and English- language digital portfolio that includes our owned sites as well as our content on social platforms; a growing direct-to-consumer platform; and increased third- party and proprietary research and data on U.S. Hispanic consumers, allowing us to collaborate with brands to drive growth in their businesses. CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
We are focused on driving our next phase of growth by leveraging emerging technologies and unique consumer experiences as the media and technology industries continue to converge.
One of the growth initiatives that we’ve been working to expand is our digital footprint within the Fusion Media Group. In the second quarter, our portfolio of digital assets reached 95 million monthly uniques, making us a leader amongst digital players such as Vice, BuzzFeed, and Vox. Our portfolio generated nearly a billion monthly page views and over 600 million video views.
This large audience translated into healthy advertising growth. Our digital advertising increased approximately 39% and core advertising was up 19% on a pro forma basis. As our digital business continues to grow at a relatively fast pace, it is becoming a more significant component of our overall advertising portfolio, approaching nearly 10% of our advertising dollars.
Even with the double-digit digital advertising growth, we believe there is more room for growth as we ramp up digital video capacity. We believe there are incremental growth opportunities in monetizing social video impressions by enhancing our branded content capabilities. We also believe that by leveraging existing expertise within our acquired digital assets, we can make e-commerce a more significant component of our digital revenue streams.
We are also continuing to invest in sports content as another investment to drive growth. In June, we announced the results of a research study conducted by Nielsen titled “Los Fanaticos.” The study showed that U.S. Hispanics consume more sports, spending 20 hours weekly across TV, digital video and radio versus 12 hours for non-Hispanics. 83% of bilingual sports fans prefer to view soccer in Spanish versus English. And finally, U.S. Hispanics are 33% more likely to say they buy products that they see advertised during sports programming.
With those results, the study strongly supports the value of our expanding sports rights portfolio. In 2017, we expect to air more than 700 live soccer matches and we expect that number to nearly double by 2019 with games across Liga MX, UEFA and MLS. CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
With Liga MX, the most-watched soccer league in the U.S. regardless of language, we now have the rights to 17 of 18 teams. Liga MX has two different seasons, meaning matches nearly 40 weeks out of the year. In the first half of 2017, the first season averaged 17% ratings increases over the prior season. We just launched the new season in July and look forward to our second successful season of the year.
Our focus on differentiating consumer experiences extends to our soccer coverage as well. We will air multiple games every Friday night on Univision Deportes, featuring Sábado Futbolero on Saturday night on Univision as well as on our direct-to-consumer app, Univision Now. And we will also feature games exclusively on Univision and other digital platforms.
The MLS has also performed well for us in the first half of 2017. Consistent with the Nielsen study findings, Univision garnered top ratings versus English-language broadcasts, outpacing ESPN and Fox Sports.
Following the end of the second quarter in July, we aired the successful Gold Cup soccer tournament. The tournament reached over 29 million viewers and we were the #2 sports network regardless of language in July. Our coverage in Spanish garnered three times the English-language audiences. In addition, we outperformed the equivalent Confederation Cup results in June.
We have become the home of soccer in the U.S. As a result, we believe brands will increasingly want to collaborate with us to access our unique soccer consumer experiences.
In summary, I'm very pleased with the operational progress we've made in the second quarter, and we are focused on positioning ourselves to remain differentiated in the rapidly evolving media ecosystem. We are also continuing our path to improve the financial profile of our company with a focus on reducing debt.
With that, I'll hand the call back over to Frank, who will discuss these efforts in more detail. CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
Frank Lopez-Balboa: Thank you Randy, and good morning everyone. Let me start with a few highlights for the quarter before we get into the details. Total revenue in the quarter was nearly $765 million. We grew core revenue over 5% and achieved nearly 1% core revenue growth on a pro forma basis, despite a strong quarter last year that was driven by both revenue from the Copa Centenario soccer tournament and 4% core advertising growth.
Our net income increased $31 million to $106 million, partly due to a $21 million decrease in net interest expense as a result of our reduction in net debt and our refinancing activities of the last year and a half, as well as certain non-recurring items that are referenced in our earnings release. These items included a $16.6 million pre-tax gain associated with a previously sold station and, in 2016, included the pre-tax impact of a loss on the extinguishment of debt of approximately $16.3 million.
EBITDA was flat at $329 million and core EBITDA on a pro forma basis decreased about 2% to $319 million.
I want to highlight the progress we are making on improving our leverage profile before moving on to the detailed second quarter results. In the first half of 2017, we generated $261 million in cash from operating activities and reduced our net debt by $214 million to $8.6 billion. And I’m pleased to announce that we have received proceeds of $376 million in net spectrum proceeds.
Now, let’s go through the second quarter financial results. Total revenue decreased approximately 4% to $765 million. The decline was driven by the advertising revenue that we received last year from the Copa Centenario tournament that did not recur in 2017 which is partially offset by the revenue contribution from the digital businesses that we acquired in the second half of 2016. On a pro forma basis, core revenue increased nearly 1% to $753 million.
Advertising revenue declined 17% to $468 million and core advertising on a pro forma basis declined over 8%, driven by declines in Media Networks advertising CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
due to revenue from the Copa Centenario soccer tournament as well as weak scatter volume and softness in the local television and radio businesses.
As a reminder, last year’s second quarter was a particularly strong quarter as we benefited from $66 million of estimated incremental revenue associated with the Copa tournament, as well as the positive impact we typically see on core advertising around a tournament as advertisers place more of their spend around these big events, thereby shifting the timing of their spend from other periods within the year.
Non-advertising revenue increased nearly 26% to $297 million. The growth is primarily driven by increases in subscriber fees as we work towards raising fees for the distribution of our content. The growth is also partially driven by the consolidation of Fusion into our financial results and somewhat offset by lower content licensing revenue due to the timing of revenue recognition. On a pro forma basis, core non-advertising revenue increased approximately 19%, driven by distribution contract renewals and contractual rate increases.
Switching to costs, direct operating expenses related to programming excluding the PLA decreased 15.5% to $159 million, or almost 27% on a pro forma basis. The decrease was driven primarily by the absence of $76 million related to the Copa tournament, which is partially offset by investments we've made in non-PLA content, including sports and entertainment. The addition of the acquired businesses of Fusion and Gawker Media contributed approximately $12 million to the $29 million reported increase in direct operating expenses related to programming, excluding the PLA.
PLA costs decreased over 10% to $74 million driven by lower revenue that I just discussed.
And SG&A increased 3% to $193 million primarily driven by an increase of $14 million from the addition of the acquired businesses I previously mentioned. These increases were offset by lower employee and other expenses. On a pro forma basis, SG&A costs decreased 3%.
CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
Let me quickly summarize the performance at our segments before turning the call over for Q&A. Our Media Networks segment total revenue declined 4% to $698 million. Total core revenue on a pro forma basis increased almost 2% to $689.5 million. The pro forma increase was driven by an increase in subscriber fees and a 19% increase in pro forma digital core revenue, offset by advertising and content licensing declines that I mentioned earlier.
Total revenue for Radio decreased close to 9% to $67 million. Total core revenue declined almost 10% to $64 million, driven by declines in National, Network and Local advertising.
In summary, I am pleased with the strides we have made over the last year towards paying down debt, which have lowered our interest expense by $21 million compared to the second quarter of last year. As we continue to reduce the interest expense that we pay, this accelerates our ability to further reduce our debt.
On the operational side, despite a challenging advertising market in the second quarter that we expected, I am pleased that we grew pro forma core revenue modestly given our continued double-digit subscriber revenue improvement.
In the third quarter, our advertising revenue will benefit from the return of the Gold Cup soccer tournament and our focus on monetizing our best-in-class content and consumer experiences across our existing new platforms. In addition, we will use our cash flow from operations and our spectrum proceeds to continue to reduce debt.
With that, I'll hand the call back over to Rainey for questions.
Rainey Mancini: Thanks, Frank. Operator, we are ready to begin the Q&A portion of the conference call. I want to remind you that we are in an SEC mandated quiet period so we will only be able to take a limited amount of questions this morning. First question please.
CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
Operator: Our first question comes from Aaron Watts with Deutsche Bank.
Aaron Watts: Hi everyone, thanks for taking the questions. It sounds like you're continuing to claw back share but that the broader TV ad environment is still a little bit sluggish. Can you give us a sense, Frank, please, on how things are trending in the third quarter? And if you're able to separate out kind of the local television and the network and then radio and digital that would be super helpful.
Frank Lopez-Balboa: OK, thank you, Aaron, good morning. So for the third quarter – well, actually let me start by saying that last quarter we talked about the impact of the calendar of last year's broadcasts Upfront and how that would move more into the third quarter versus second quarter last year. And that's actually what we're seeing thus far in the third quarter.
So let me give you the pacing for the Media segment and the Radio segment, and I'll give you a little bit more color within the Media segment. So on a core basis, the Media Networks segment is pacing up low single-digits. Radio is pacing down double-digits. So on the total UCI basis, on a core basis -- and again, this is pro forma -- we're pacing essentially flat to last year.
Now, within the Media Networks business, our digital businesses are actually pacing in a very robust basis. Our networks business is pacing nicely. And we're still pacing down in local TV. So when you add that all up, that results in the low single-digit increased pacing for the Media Networks. Now when you look at a total company basis, which includes the impact of the soccer tournament, the Media Networks business is pacing up mid single-digits. And on a company basis, we're pacing up strong low single-digits.
Aaron Watts: OK, great, that's helpful. And as we think about your subscriber base, can you just give us an update on the stability there and whether you're seeing any attrition from cord cutting or people moving to smaller bundles?
Frank Lopez-Balboa: From last quarter, we're down just slightly in terms of our sub numbers. So nothing major from what we're seeing.
CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
Aaron Watts: OK, great. And last one from me. As we think about your investment cycle and where your expense base is today, can you give us any parameters around how we should think about that going forward? I know you’re investing in some new content, but is there any guidance you can give on that?
Frank Lopez-Balboa: I think the guidance we’ll give is that we continue to look at all of our sources of programming to give our audience the best customer experience and we’re also mindful that we have a robust pipeline with our relationship with Televisa and would like to leverage that as much as we can. But we’ll look at all sources of content out there to deliver what our audiences want.
Then beyond the general entertainment, and as Randy talked about, sports has become a very big deal for us. We are the home of soccer. It’s something that’s very important to our client base and will continue to make investments in that area.
Aaron Watts: OK, thank you, Frank, appreciate it.
Operator: Ladies and gentlemen, as a reminder, for audio questions, please press star followed by one on your touchtone phone. Our next question comes from Davis Herbert with Wells Fargo.
Davis Herbert: Good morning, thanks for taking the questions. Frank, just going back to the pacing data real quick, when you say core, are you including the non-advertising piece to that equation?
Frank Lopez-Balboa: No, no, just core advertising.
Davis Herbert: Just core advertising. OK. That’s helpful. And so, on that front, if we look at the past two quarters on non-ad revenue, I think it was $292 million in Q1 and $296 million this quarter. Is that a good run rate to use as we look at the last half of the year here?
Frank Lopez-Balboa: It’s not going to be. You can’t calculate it on a ratable basis. We have the impact of contractual rate increases in our contracts, and as I mentioned in the last quarter, we did have the benefit of two renewals last year, so we’ll continue to see growth in that number. CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
I’m not sure if you can take the actual percentage number and calculate it, but we’ll see nice growth in those numbers in the balance of the year.
Davis Herbert: And the two renewals, were those done at the end of the year, meaning it fully benefits 2017?
Frank Lopez-Balboa: Yes.
Davis Herbert: OK. And in terms of where you are in the renewal cycle on retrans and just carriage fees in general, should we expect more, larger renewals to benefit ’18?
Frank Lopez-Balboa: Yes, we always have contracts that come due every year. We do that for obvious reasons, so we’re not bunched up. And so, I would expect that deals we get done next year will benefit 2018.
Davis Herbert: OK. And then, just moving to the ad environment, I think you said you were pacing down in local TV. How would you characterize the local ad sales environment, because it looks like you’re seeing some softness in radio as well? Do you think that’s ratings driven or is it just advertiser concern or any specific categories that are weighing on that? Can you just give a little more color there?
Frank Lopez-Balboa: Sure. Look, our weakness in local TV is affected by a couple of categories. Auto’s been weak, restaurants, foods. It’s also been impacted by weakness in some of our bigger markets, like LA and Houston. And so when you see that, it just affects the entire business. Our local business is performing a little bit better than the national business. And that’s both for Radio and TV, and so, we expect, and hope, for things to rebound, but it’s just general market weakness out there. Now, our ratings, as Randy talked about in his remarks, have been strong. We had a great February book, an excellent May book, and so the overall weakness we’re seeing out there, I think, is just general market weakness.
Davis Hebert: OK, that’s helpful. And if, Randy, if I could go to you on the strategic vision, especially in this regulatory environment we’re seeing, perhaps, local ownership relaxation, UHF discount. How are you guys thinking about potential TV acquisitions and as well as on the digital side, I think you’ve mentioned some very CONFERENCE CALL SCRIPT UNIVISION COMMUNICATIONS INC.
good growth on the page views and the impressions there, but do you feel like you have the scale you want in digital?
Randy Falco: Yeah, I think we have the scale to move forward. We have enough things to do in terms of integrating the acquisitions that we’ve made recently. So we’re not really looking for any major acquisitions going forward, but rather trying to operate the businesses that we’ve acquired in the recent past.
Davis Hebert: OK, any interest on the station side or TV in general?
Randy Falco: Honestly, we have a very big footprint at the local level, so anything that we would do would be opportunistic and maybe on a market-by-market basis but nothing major.
Davis Hebert: OK. All right, thanks so much.
Rainey Mancini: Thanks. That’s the last question we can take today. The IR team is available for any additional follow up questions. Thanks to everyone for joining us and have a good day.
Operator: Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect your lines and have a wonderful day.