Entravision Communications Corporation (EVC) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining the Citi AppsEconomy Equity Conference. We are here for the 11:00 a.m. Eastern session with Entravision. It is my pleasure to introduce the team. We have Chris Young, who is the CFO and Treasurer. We have Juan Saldivar, who is their Chief Digital Strategy and Accountability Officer. And we have Jordi de los Pinos, who is the Founder and CEO of their DSP, which we'll hear more about shortly. So with that, I will start off. First off, great to have you guys.

And maybe, Chris, to you, I suspect a number of folks, attendees, may not be as 100% familiar with Entravision or may still associate Entravision with its linear TV and radio roots. Perhaps maybe a great place for us to start to hear today is just for you to talk about where Entravision is, where Entravision 2022, and we'll go from there.

Thanks, Derek, and thanks to Citi for hosting the conference and having us along. So yes, so no doubt, we've come a long way over the years in transforming Entravision from its linear TV and radio roots to where we are today. And today, where we are is we are a U.S.-based 25-year-old global marketing services enterprise. We're publicly traded on the New York Stock Exchange. And we have arguably what we believe is one of the strongest balance sheets in the industry. We've got over 1,200 employees in 30 countries worldwide, providing solutions to clients to -- in more than 100 countries. Our revenues are now weighted heavily towards our digital business with approximately 73% of our Q3 revenue comprising of global programmatic, big tech representations, performance, local SMB and digital audio services. So TV, actually, our next largest operating segment, is just under 20% of the business and then the remaining 7% is the radio revenue. So we really developed into a sophisticated sales organization with strong tech-based back-end systems with an aggressive global strategy targeting emerging economies, newly connected consumers and a rapidly growing digital advertising industry. We're fully invested in a future that we believe will revolve around mobility and an app-based economy, gaming and a rapidly growing digital video ecosystem. So through both organic growth and strategic acquisitions, we have an established track record that not only includes strong partnerships with companies such as Univision here in the U.S., but also unique partnerships with big tech marketing services players such as Facebook, Twitter, Spotify, LinkedIn, TikTok, Criteo and others on a global basis and throughout globally, including Latin America, Africa and Southeast Asia in addition to here in the U.S. So yes, we've come a long way over the past several years, that's for sure.

No doubt. And thanks for that introduction. Your digital revenue ramp-up has been spectacular and transformation, very impressive. No doubt. I mean I note 5 years ago, your digital revenues were less than $25 million and less than 10% of your total top line. Today, those numbers are close to $500 million and 70% of your overall business, also 5 years ago. And you noted this, your international growth has been tremendous. You were only in 2 countries 5 years ago. Today, you're in 30 countries across 4 continents, including Asia and Africa. How do you manage to do all this?

Juan, do you want to step in and talk about the digital efforts we've been doing?

Sure, Chris, and thanks also Citi for hosting this conference. Great to be here. Well, pretty much -- and thanks for the Q. I think there are 3 areas that stand out as initiatives that we have actually implemented for the past years. The first one is we decided to completely break out the ceiling when it came to the GDP potential that we were actually tapping into -- provided that we are virtually strong from being a U.S. Hispanic-centered organization. So the first move we made is, of course, we -- and the decision we made is how can we -- we should move into emerging economies and on top territories or underexplored territories when it came from the advertising and marketing services perspective. So we moved into Latin America. Soon after, we also decided to move into Europe and later into Asia and most recently into Africa. So Latin America by sales is worth 3x, 4x the size of the U.S. Hispanic territories. So -- that by itself, of course, opens a completely new territory when it comes to providing marketing services. The second thing is -- that we did strategically is we looked for great management, great projects and great endeavors and enterprises to invest in -- or invest alongside with. And as part of that, of course, we have been acquiring different companies, 5 or 6 companies in the past years. One of which is, of course, Smadex, which is Jordi de los Pinos, the Head the President of Smadex, here with us with a fantastic mobile user acquisition with proprietary technology endeavor based out of Barcelona. It's a good example of the type of endeavors and high-quality management that we have been integrating into our business. The third thing that we implemented, I think that it's also worthwhile discussing and that we feel very proud of, it has to do with how fast and how diligently we have been able to integrate this business into our organization. We strongly believe that Entravision above everything is a sophisticated sales operation that is very good at selling, collecting and reporting while using good technology, very strict accountability protocols and while also making sure that the planning systems work well. So pretty much those 3 things, Derek.

Right, thanks for that. Maybe double-clicking a bit down. Can you just drive kind of your type of digital businesses you offer and how you're structured today? And then maybe a bit of explaining how this whole global strategy comes together and then also the partnership model, which may be a little different for folks than what they're used to?

Oh, of course. Well, pretty much -- even though we have 6 business units independently -- that run independent P&Ls within our company. I would summarize the structure of the services we offer in 3. One is the, yes, what you just said, digital representations, which is pretty much representing the best of the best out there. The second one is providing general digital marketing services. And the third one is, of course, a double click and fully focused on mobile app performance and user acquisition within the mobile app space, which is -- I think it's an important double click of this conference today. Coming back to the representation business. As you know, we come from being -- for more than 20 years [Technical Difficulty] in the U.S. And so we're pretty much very good at managing partnerships and creative -- it's a value-creative ecosystems with partnerships. So with -- most recently, we've -- and through acquisitions and in direct negotiations, we have expanded our [ Ad business ] to include big tech companies, such as Facebook and Spotify and TikTok and Twitter and LinkedIn, Criteo as well, some very large and very successful global endeavors that have not only impressive reach, but also very sophisticated and very rich operations alongside what they have brought to the market. So we are proud to represent a lot of these -- I mean these platforms around the world in all continents, and that has proven to be -- and also a good way to grow. We strongly believe that the platforms we're partnering with are a road to growth and a road to great learning and especially a good road to providing high value-added services to agencies and brands around the world. So that's pretty much, I would say, the pillar #1 or the area one that we have. The second one, which is retail marketing services, which we actually offer around the globe. That comprise -- that includes, let's say, from ideation facility to marketing performance services that include the SMB ecosystem in the U.S. for discovery and all sorts of performance driven during advertising around the world. And I think one thing that is also important within this space is that we kind of -- we're very vertically integrated when it comes to bringing brands' value-added services. The third axis of our services includes mobile app performance, which we -- provided that we strongly believe that this is a world that is ran through apps. And a lot of what we do in our day-to-days including our managing, our business, our leisure, our friends and the way we run our day-to-day life, including our health, is ran inside a smartphone. The smartphone penetration in the world is impressive, and what's happening with the apps and it's even more so. And with that, of course, and within that ecosystem, we have different units, the most important one, I would say, and -- is Smadex even though we do also offer mobile app performance services throughout Latin America is what Jordi does in Smadex. Based out of Barcelona, and Jordi has grown more than 10x for the past 3, 4 years, which is an impressive growth. And actually, I'm going to ask Jordi to jump in and share a little bit about his project and what he's focused on right now. And Jordi, I'm also going to ask you a long question and why you're so passionate about mobile apps? And where do you see the big opportunity behind the mobile app and user acquisition space?

Thanks, Juan, and thanks, Citi, for having me. Folks that I work with know that I'm very passionate about this space. I'm always glad to have an opportunity to explain about it. The mobile is 75% of the digital app ecosystem and that, the digital advertising space is $450 billion. And so the mobile part is $340 billion more or less nowadays. That's huge, right? It's bigger than the GDP of most countries out there. And what's exciting about our position within Entravision Digital, very global and very diversified. We believe that much of this [ space would be executed ] by us. So the key for us to execute on that addressable market is very focused execution, a very good strategy and critical partnerships that we have developed across the board, especially with big tech companies that dominate this market. And this is valid both for Smadex and the rest of the digital units in Entravision Digital. Within the mobile app acquisition and mobile app performance market specifically, I believe that market of the $340 billion mobile advertising, right, the mobile user acquisition is probably $75 billion to $100 billion globally. That's also a huge number. And that's where Smadex most focus is on. And so we are part of like a huge market and opportunity for us is gigantic. Now looking at what we do as Entravision Digital, we have the explosive growth of TikTok and other social media platforms, and that's addressed by us. And so with that explosive growth, it's clear that mobile marketing will continue to be an essential line item in any company's marketing and branding budgets. It's just too big of a fish to ignore now by any company, and we will surely keep investing in this space for years to come. Also, this industry is growing 25% for comparable annual growth rate of -- these growth the mobile users since 2019, 25%, and expect it to continue until 2025. So within this pie, gaming represents close to 40%, and we are very invested in gaming, but also in other categories that are also growing a lot like fintech, delivery and e-commerce, of course. So these are top focus for us for Smadex and for the rest of Entravision Digital and our segments that are performing really, really well. So with all this in mind, 2022 is looking really good for us. We grew -- Smadex grew 75% year-over-year over -- from 2020 to 2021, and we certainly hope that 2022 will be similar. We are very focused in improving our platform and expanding our sales operation. Our main attributes are performance and transparency. And so with our continuous focus on building the best possible platform and leveraging the growth of the mobile ecosystem, we believe that we have a bright future for us.

Great. Thanks for that, Jordi. Maybe switching gears a little bit to your inorganic growth and some of your recent activity there. In November, you announced the acquisition of 365 Digital, which obviously expanded your business to Africa. So maybe you could just take us through the strategic decision there and your entry and then how you guys are thinking about Africa longer term.

Thank you very much, Derek. And of course, yes, this is a very interesting acquisition that we just made. We are very happy to have made this move. This happened, of course, after an acquisition back in July. So not that long ago. Also, we acquired and moved into the Asian territory based out of Singapore, MediaDonuts, which are -- that -- which is a very good operation based out of Singapore and covering Southeast Asia. Africa, for us, it's a very important space. We started off in the Sub-Saharan Africa territory, provided that we strongly believe that this is a continent that is with, I mean -- with 1.1 billion consumers, of course, of which half are already connected. This is going to be a very interesting continent that is going to be completely mobile-first. This is a continent that bypassed the dial-up and even the Pay-TV ecosystem from a connected TV ecosystem. So this is going to be a very interesting continent to focus on in the coming years. So we believe that the size of the market, the growth of the territories, the speed at which the mobile space and services and industries are going to evolve, the territory are going to be very fruitful. We acquired a company called, yes, 365 Digital has a very strong management. It also has the representation of TikTok in the region, and this rapidly going to be expanding into other territories in the Sub-Saharan territory, but do expect more movement in that area soon as well.

Great, Juan. Thanks for that. And it was fond to talk about all the growth and the new initiatives, but I probably would be negligent if I didn't bring it back a little bit and talk about COVID. Obviously, COVID continues to impact whole world and obviously lots of broad sectors, especially the TMT accelerating lots of change. Maybe you could just review for us how Entravision has weathered that storm, actions that you've taken, actions that you're taking to manage that.

To think 2.5 years ago, I never heard of COVID, right?

It's sad.

How the world has changed, right? So look, like everyone in the corporate world and all the -- every individual on the planet, we're taking our response to COVID one day at a time. Initially, when the pandemic set in, what we did was started tightening the belt as far as our expense structure was concerned. We were already in progress of radically changing our expense structure before that, but this just accelerated that. I'd say, over the past 2.5 years, we've taken about $20 million of expenses out of our model. And the bulk of that is going to end up being permanent as we move forward. So at some point in this pandemic, we'll -- this pandemic will go away. I don't know when that's going to be. But when we come out on the other side, we're going to be a leaner operation. And that will put us certainly in a much better position than we ever have been in our company's history to drive profitability and free cash flow.

Chris, thanks for that. I don't think any of us know when the pandemic will be over. But one thing we do know is that the 2022 is going to be a political year. Obviously, 2020 was a great political year for you, and I'm just curious what you can share around your perspectives as you guys look into 2022 about the political landscape and how you guys are managing that spending potential for harvesting some of the advertising.

Yes. 2020, it was a record political year for us. We've been close to $29 million in political revenue all in, which was way past our expectations. And look, that momentum, we think, is going to carry into the midterm cycle this year as well. So -- and here in the U.S., our local markets are all situated in states where -- which represent a huge opportunity as we see the importance of messaging to Latino voters from political candidates, facts and political issues and proposition, particularly here in California. So in short, California, Texas, Colorado, New Mexico and Nevada should all play a huge part in the election that we're looking forward to in the fall of '22. So -- and the preparation process for the political cycle, it never really stops. People think it's just that every other year, we start thinking about it. But that's not at all the case. It's an important part of our organizational mission: to empower and improve the lives of the communities where we serve. And as a result, even in the off-election years, we're always proactively preparing for the next cycle. So our sales folks work very closely throughout the year with Univision Political Action Group, Cox Reps for our TV stations and the Katz Media Group for radio to make sure we're aligned on the right candidates and issues, which will drive the political spend of our listenership. So we've -- we also have a local political playbook in each of our markets to make sure we're participating with all the local races and grassroots organizations, supporting state and county candidates as well. I mean it's a hyperlocal process as well, not just on the national front. So we continue to work with political consultants from both parties in California and Texas to further solidify Entravision's value proposition in reaching this pivotal voting segment. These were actually the same strategies that we implemented back in 2020 that helped us build what turned out to be such an incredible success -- incredibly successful political year. We're optimistic that the Latino vote will continue to be a key player in the upcoming midterm election. So we're excited about everything that we're seeing for 2022.

Great. Maybe one last question I have, and then we'll see if any of the participants of the conference have anything that they would like to send in. But with your strong performance and the free cash flow generation, a natural question is to turn to your balance sheet. It's obviously in great shape as you opened up with your liquidity and leverage stats. How are you thinking about capital allocation an optimal leverage and liquidity going forward?

Sure. So to summarize our Q3 balance sheet, we were sitting on in excess of $180 million of cash. We have $213 million of debt, and our total net leverage as of third quarter was 0.3x. That's not 3x. It's 0.3x as of third quarter. So we like where we are, obviously, when it comes to the balance sheet and our liquidity. Looking forward, look, we'll maintain a very balanced capital allocation strategy that we believe is in the best interest of all of our shareholders. And that includes reinvesting our growing free cash flow into high-growth acquisition opportunities in the global marketplace. I think we've been showing the world that we've been focused on that for the past couple of years now. We'll also invest organically within our business to continue to build our own internal operating momentum. And we'll also continue to provide returns to shareholders through methods such as the dividend. We had a share buyback program that we shelved pre-COVID. And the Board revisits both the dividend and the share buyback program on a quarterly basis. So stay tuned for that. So -- but look, at the end of the day, strong free cash flow conversion as far as EBITDA is concerned, it's been a hallmark of our business. We are a low -- from a capital-intensive structure, we've got low interest rates. We're not a capital-intensive business. Our tax rates, we still have plenty of NOL to shield us from the bulk of the tax burden as far as our net income is concerned. So all of the EBITDA -- most of the EBITDA gets driven through free cash flow conversion, which we're pretty proud of them. We think we have one of the best free cash flow conversion rate in the industry. So...

Thanks for that, Chris. Our first question from investors -- or from an investor is actually a great way to wrap this up. It's a part complement and part question. So it reads, "Solid revenue growth, new markets, digital trends, lots to like about the story. EBITDA margins have come in a bit. Where do you expect margins to shake out over time?"

Well, I think you have to look at the margins on a platform-by-platform basis. And we've talked about this on our conference calls. I think you should expect to see TV margins in the 40% range going forward, maybe in the high-40% range in a political year in the low-40% range in a non-political year. For radio, and that's really under -- on the most radical transformation, you can expect to see radio margins, we believe, going forward in the 30% range, call it mid-30% range. And for digital, the goal is to drive digital margins close to double digit in the 10% range. It's a different business, digital, but we see -- as we continue to scale, we see that momentum carrying our margins close to -- the goal is to get that from a high single-digit range to over the 10% threshold at some point in the next, we'll call it, 2 years.

Great. Thanks, Chris. [Operator Instructions] Give them a couple of seconds. And -- but if not, I think we've had a great discussion. And we're almost at the 0.5 hour.

Derek, thanks for your time. Thanks for having us.

Oh, it's been great. So thank you, and we wish you the best in 2022. Thanks for being at our conference. And hopefully, we'll get to do this again next year.

See you next year personally, hopefully, this time, right?

Yes. Let's hope.

Okay.

All right. Take care.

Take care. Bye.

Thank you very much, Derek.

Thanks, everyone.

Bye.

Bye.