Entravision Communications Corporation (EVC) Earnings Call Transcript & Summary

Okay. We will get started. Very pleased to have Entravision back with us again this year. From the company, we have Chief Financial Officer, Chris Young. I'm Aaron Watts, the credit media analyst from Deutsche Bank. Chris, thank you for being here today.

Aaron, thanks for having us.

I'm going to turn it over to you to get us started, and then we'll jump into some Q&A.

Sounds great. So I like visuals. And when you have numbers to brag about and put them in visuals, I always think that's a good way to start a conversation. So I'll go through a handful of slides here. There's plenty of other good stuff in the appendix that is posted online. Investors can go through it at their leisure. But I just want to hit on a couple of key points just to get a conversation going and then we'll go from there. So please take note of safe harbor. I will be making forward-looking statements. No reps and warranties with respect to the accuracy of such statements. So who we are, where we are and where we aren't. So a lot has happened over the past 3 years, and we'll talk about that in a couple of minutes. But we are now a leading global advertising media and ad tech solutions company, connecting brands to consumers through partnerships with top platforms and publishers. We founded in 1996. We IPO-ed in 2000. We've got almost a little over 1,100 employees. And you see the map there of all of our locations. Obviously, you've got our core business, our broadcasting business in North America, but we have since expanded significantly. And you see that geographic expansion on the globe there. Where we are not notably is Russia and Ukraine, no exposure to that part of the world. Just thought I'd get that out of the way. So we've been busy with acquisitions over the past several years. Again, we were founded in 1996. Here is a time line of some of the more meaningful acquisitions that we've made over time. Went public in 2000. Things really started to get interesting in, call it, 2018, we acquired a programmatic DSP called Smadex, I'll talk about that in a minute. In 2020, we acquired a group called Cisneros Interactive. It's a digital marketing firm primarily in the business of marketing services for Facebook. And then MediaDonuts later on in the year -- later on in 2021, I should say. And then lastly, most recently, 365 Digital, a company that markets the advertising wares of TikTok amongst others in South Africa. A lot of information on this slide, so I'm not going to touch on every point, and we're going to get into most of this in our Q&A. But look, in 2021, we're very proud of our performance. We had record revenue. We had record free cash flow generation. We've got ample liquidity. We've got what I consider to be the best balance sheet in the business. We've got a long-term contract with Univision through the end of 2026. And we've got an experienced management team. There are pretty faces. No reps and warranties to the pretty faces. But everyone here on the senior staff has been around, for the most part, at least 20 years. So we've been through the '08/'09 recession. We've been through COVID. We're coming out of COVID. So we've been around the block a few times. These are my favorite slides. So our digital division, and we'll get into this, but now represents $555 million of our full year 2021 revenue. We'll talk about how that's come about. Television, our second largest division that generated $147 million in revenue in 2021. And then lastly, our audio division represented about $58 million of revenue in 2021. That's a big change over the past 3 years as we'll get into. Let's just look very high level at the financials of the organization. So our revenue over time has been scaling nicely. 2019, we posted $273.7 million of revenue. This past year, when we had our earnings call a couple of weeks ago, we posted $760 million of revenue. That's a CAGR of 67%. EBITDA has improved nicely from $41.2 million in 2019 to $88 million. It's been nice growth both on the revenue front and the EBITDA front. And what's being -- what's attributing to the bulk of that growth? Well, it's our digital efforts. Our digital division who's -- a look back Q4 between 2021 and 2020 and then back to 2019, you've got $11.5 million of EBITDA generated from our digital division in 2021. That compares to 1.7 back in that should be 2019. If you look at full year, we didn't generate any EBITDA out of our digital division. Now it represents pushing $30 million of EBITDA on an annual basis. That's a fun slide. It's been a fun 3 years, like I said. But near and dear to my heart is the free cash flow generation that's resulted. So here, you've got a nice trajectory where you've got $8.3 million free cash flow generated in 2019, growing to where we hit a record free cash flow of $78.7 million in 2021. We're very proud of that free cash flow conversion. Better still is our balance sheet. At year-end, we had $185 million of cash on the books against $212 million of debt. So on a gross basis, 2.4x debt; on a net basis, 0.3x. I'd argue that's the best balance sheet in the business. And then we talked about our pace on the Q1 call -- Q4 call, excuse me, a couple of weeks ago. Our digital division was pacing at a plus 52%. TV was pacing at a minus 16%. There's an explanation that we'll get into in a minute. Radio was pacing at a plus 7%, all in pacing at a plus 32%. So we're off to a good start as of Q1. Yes, there's uncertainty in the air with respect to what's happening elsewhere in Ukraine and Russia. But so far, so good and the hope is, what we're gunning for is to go for another record year as far as revenue generation and cash flow generation is concerned here at Entravision. So with all that said -- and again, there's an appendix with lots of interesting data. I will let everyone go through that at their leisure. I'm going to leave this on the cover page and we'll do Q&A.

Okay. Great. That's sets the stage. So Chris, it's been too long and challenging years since we were last sitting on this stage together.

It's been 3. Well, 2 years ago, this was the first conference that canceled, right?

3 years. Yes. But as I think about the companies that are here at the conference, it's hard for me to think of 1 that's evolved and pivoted its focus as much as Entravision has during that time frame. Given all that change and you kind of just walked us through the different parts of the company now, what are the main priorities as you look ahead for the next year or 2? And what's going to drive the growth?

Well -- that's a loud speaker. What I tried to imply during the slides is how much our digital transformation has progressed. We're moving beyond just a traditional broadcasting company. Today, we've got a talented, experienced and energetic team of professionals on the digital side of the equation and in the broadcasting side in over 30 countries with the expertise and resources to continue to grow this business into the future. The main drivers of this business of our growth going forward are going to be these digital businesses, whether it's coming out of our demand-side platform, Smadex, or by Facebook advertising in Latin America, or by TikTok advertising in Asia and/or Africa. Those are the businesses that are going to drive Entravision's growth in the future.

Okay. And we were painfully joking about what it is costing us right now to fill up a gas tank or buy wine. But in the current -- in light of the current macro backdrop, remind us how inflation has impacted your business in the past, and I know it's been a long time since we've seen some of these conditions. But what should investors expect the impact on the business to be in the year ahead?

The only one area that we're -- like most companies, particularly sensitive to are wages, right? And so we've been addressing wage pressures as we've gone about, and we've correspondingly been pricing our services and track with that. So look, I've been in this position with Entravision since 2008. I've never had to really deal with material inflation. So that could be a plus. That could be a minus. But we're going to cycle through this with the rest of the world and figure out where it takes us. But right now, we feel like we're on top of the issue as far as just making sure that you keep track of what's happening on the wage front with what your pricing structure is for your clients.

Okay. Found something new to happy deal with, right, after all these years?

Exactly.

All right. Let's dive into the digital business. For all the years we've been doing this, I've always started with TV. But now it seems appropriate to start with digital. It's now a majority of your revenues. So let's dive in. You have added and developed programmatic digital solutions over the last couple of years with your DSP business, Smadex, if I said that right?

Smadex. Yes.

Smadex. And now have built on that with your acquisitions of Cisneros and MediaDonuts. What should investors be focused on with each of these businesses? And how do they gel together to enhance the value of the platform as a whole?

So just to kick that conversation off, we talked about on our fourth quarter call how the digital segment was pacing at a plus 52%, including the businesses that we've acquired with a look-back on prior year. On a pro forma basis, that's pacing at 39%. So it's really exciting for us. For the digital marketing businesses that we have, that's Cisneros, that's MediaDonuts, and that's 365 Digital. It's about introducing new advertisers to our partnership programs like Facebook, Twitter and TikTok and less mature, growth-oriented markets overseas. For Smadex, like you said, it's our Barcelona-based DSP. It's about delivering programmatic results for clients in dynamic industries such as gaming, fintech and mobile delivery, while maximizing both ROI and transparency. Smadex, by the way, has become a highly competitive product. And it's interesting even -- Smadex was really their first and then we've been acquiring these other businesses. On a stand-alone basis, they're producing really great results. We haven't even begun to explore -- well, we've begun to explore, but it's the early stages of introducing the Smadex product to clients and all of those other platforms we've only recently acquired, and that's really exciting for us.

Okay. Now what makes Cisneros different than other digital advertising companies? Maybe you can talk to the competitive environment as well as some of your key partners and customers in that arena.

Well, Cisneros is a digital commercial partnership business that delivers the capability for local clients in Latin America to execute large volume digital ad campaigns on Facebook and Spotify in Latin America. So compared to The United States, Lat America is still in the early stages of digital advertising and marketing growth, and it's showing impressive industry growth and potential. I'd say that region generally is about 5 years behind consumer trends and online consumption patterns here in the U.S. So it's in high-growth mode, and we're there on the front line selling for a global platform that's still got a lot of room for growth in that region.

Okay. And so with Facebook driving a majority of the digital revenues, how does your arrangement with them work? What can you share with us in terms of contract length or different economics there?

Yes, this is a fairly new industry. So we're all kind of just -- over the past 5 years is when this industry started to come around. Our contracts with Facebook are generally 1 to 2 years, it's short term in nature. But that's the way the industry is set. And I'll note, we've never lost a Facebook contract due to competition. You have to make sure that Facebook is happy with the services that we're providing, but also making sure that you've adequately trained your local agencies on how to execute the buys on Facebook. And as long as you keep those 2 entities happy, you don't have to worry about losing the business.

Okay. MediaDonuts, similar type of business as Cisneros. How does the client base and competition compare similar growth drivers across the 2?

Similar growth patterns. It's the same business model, except it's in a different part of the world, and instead of Facebook, they're selling the likes of TikTok and Twitter, and they're training their clients based on how they've been trained by these platforms on how to execute buys effectively. Different part of the world, similar sales model -- similar business model.

Okay. This may be a naive question. But as I think about the learnings that you've had from working with these partners and just the relationship you've built, how expandable are these relationships to new territories as you move forward?

There's plenty of room for growth in Latin America. Facebook is not in every market in Latin America. They're planning carefully how they want to roll out those partnerships. And in turn, TikTok -- and there are also opportunities elsewhere besides Latin America that we think we can pursue with Facebook. And then TikTok as well, one of the main interest that we had in acquiring 365 Digital was it was a beachhead for TikTok in -- on the continent of Africa, and that's really interesting to us. In other words, that's the first country where TikTok has decided to launch its sales operations through our partnership. And now what we're doing is trying to figure out in what other regions of the continent can we also expand. So there's lots of opportunities for partnership expansion.

Okay. Smadex, a bit more seasoned within your portfolio. How do you continue to drive growth on that platform and expand? And which categories are most important there?

The big categories for Smadex, gaming, fintech and mobile delivery. Those are -- and gaming, in particular, is really getting interesting traction, particularly here in The U.S. You've got the likes of Activision and others. And so Smadex had an unbelievable quarter in the fourth quarter with revenue ramping up 120% over prior year and its numbers thus far for the first quarter are equally compelling. And like I said, we're just in the early stages of this unit really beginning to scale. It's interesting. We're thinking back this morning. When we were doing the due diligence on this entity back in 2017, they were doing $5 million of revenue. They're going to push through $50 million of revenue this year, perhaps even more. And it's just really been taken off. It just has only begun to take off on us, which is exciting.

Yes. So on that note, as you showed us, you had a strong 2021. You finished the year with 40% pro forma growth in the fourth quarter. You're guiding similar gains to start off 2022. What type of normalized growth are you expecting over the next couple of years? And how big do you anticipate your digital business can get?

Well, let me put it to you this way. Instead of putting specific numbers on digital, look, we're excited about the 40% pro forma growth. We think we've got the potential to continue something similar at least for the next quarter or 2. But we're focused on becoming a $1 billion revenue company in the near term and digital is going to enable us to get there. I mean, that's clear, and we're excited about it.

Does that type of target require further acquisitions and tuck-ins? Or do you think you can drive that organically?

No. The plan is to get there organically through driving both volume with existing and new clients on our existing global platforms. We talked about expanding partnerships in other regions. That also comes into play, but that's not something we're counting on to get to that $1 billion goal that we have internally. And obviously, if there are acquisitions out there that would only add fuel to the fire. But no, you're talking about the existing assets that we have, we feel to have that potential in the near term.

Okay. All right. Let's turn the page to your television segment. You have around 50 TV stations that generate 17% of your revenues, but still the bulk of your cash flow. As you mentioned earlier, you're the largest affiliate group of Univision. But before we talk about performance, to level set, can you briefly explain what happened with 3 of your Univision affiliates in D.C., Orlando and Tampa? And what's the impact that will have on the top line and the bottom lines for this year?

So we just renewed our master affiliation agreement with Univision for all of our stations. It's 1 agreement, and that renewed beginning January of 2021. As part of that deal, all of our stations renewed with the exceptions of Orlando, Tampa and D.C. And the backdrop to that story is Univision to another transaction over 15 years ago actually bought stations in those markets. And the way we had put the arrangement together is we were already there. So we operated our station and Univision station on their behalf, and we split the cash flow in the form of [ JSA ]. Univision opted in this rounds to convert those stations to [ own house ] in those markets. There wasn't really a lot we could do about it, and that was a condition by which we renewed the master affiliation agreement. So look, it's an approximate loss of annual revenue and cash flow, respectively, of around $20 million and $10 million. Nonetheless, the digital growth that we're seeing is going to more than make up for that loss in cash flow.

Okay. And it sounds like based on the way you just described it, there's not a risk of more stations being pulled back?

No, we don't think so.

Okay. And what's the plan for those stations now in terms of programming?

We're running independent programming on a short-term basis in those markets as we figure out long term, what we want to do with those station assets.

Okay. And with the Univision relationship representing a majority of your TV revenue, you spoke how your agreement now goes through 2026 with them. How would you describe the relationship with new ownership team at Univision? And how would you say the content is registering with viewers now in your markets after what I think we can agree was a couple of choppy years on that.

Yes. The relationship with new management -- new ownership is solid. We're in constant communication. And look, the ratings are up. The content has gotten sharper and it's resonating. And you've also got -- this year, you've got world cup qualifier matches that are also going to drive ratings. And that's all a good thing.

Okay. And any early thoughts on how Univision's new streaming offering they recently introduced called VIX may impact your business, whether from a viewership or ad spend perspective.

No, look, we think it's a great idea. That's obviously where the industry trends are headed. We're excited for Univision to be able to launch that product in the next, I think, 30 days. I think that's what their plan is. I think it's a great idea on their behalf. As far as our business is concerned, the majority of our viewership are over the air watchers and cable subscribers. And we don't think that, that's going to have a material impact on our operations for the foreseeable future.

Okay. So the TV segment produced around 2% core ad growth in the fourth quarter. And I believe improved over the comparable 2019 period, which is nice to see. You guided to 4% growth in the first quarter, excluding the former Univision stations?

That's right.

Can you speak to recovery of some of your larger ad verticals that are fueling that -- those gains? And perhaps on the other side, also comment on auto, which has obviously been lagging due to some supply chain issues.

Yes. The insurance category, which is legal -- the services category, which is technically legal and insurance was the #1 category for a TV. That grew 8% year-over-year, represents it's our #1 category, now 22% of our total revenue. Media, retail, quick service restaurants also showed meaningful growth in the quarter. Auto is now our #2 category. It was down about 30% year-over-year in the fourth. In Q1, auto is still pacing down in the mid-teens. But from everything we're being told by the dealerships that tend typically to advertise with us in that category, the expectation is high that, that would start turning around in the next quarter or 2 as the supply chain issues get addressed.

Yes. All right. And political, you had record levels of spend with you in 2020. What are you expecting for 2022 relative to what you saw in the last midterm?

So we did 12 main in political in the last midterm. Now you have to factor out 2 meaningful political markets, Orlando and Tampa. So if you factor that out, and we talked about this on our call the other day, the expectation internally is around $11 million in that area for the midterm election. You've got, particularly in California, some interesting opportunities there is being put on the ballot is sports -- online sports gambling in California, and there's going to be a lot of money spent on that initiative. And that could be caused from some upside to that $11 million. We'll have to wait and see how it plays out.

Okay. And then last question I wanted to ask for the TV segment. What are the underlying pace up trends you're seeing in your markets? And relatedly, what should we expect from your retransmission fee growth this year?

So the -- cutting the cord on a gross basis, the rate is based on fourth quarter. It's about 7% to 8% on an annualized basis. That's on the high side. What I'm not counting there is the conversion, the recapture of those on the virtual side. And I don't have that data to kind of net against that. But you are recapturing a portion of those loss subs on the virtual side. But that's where it's going to be for the foreseeable future as far as we can tell. And as a result, our retrans will likely be -- our expectation for retrans for the year will probably be down 1 or 2 points year-over-year because of that. We're getting offset increase in pricing, but not -- probably not enough to overcome the sub losses on the cable side.

And how will you benefit from the addition of virtual subs. Does that flow through to you?

Yes. It flows through to us. We have deals going on with YouTube TV, with FuboTV. So we're getting the recapture of those loss subs to a certain extent with other virtual deals.

Okay. Let's talk about your radio business. It had a solid bounce back year in 2021, capping off with 20% growth in core during the fourth quarter versus 2020, and, I think, around 16% up versus 2019. For first quarter, as you showed us earlier, you're guiding revenues up 7%. What's behind the better performance for that segment? And is the positive growth sustainable once comparisons normalize.

We're just doing a better job on the content side of the audio business from an execution standpoint. That's driving ratings. And as you drive ratings, our sales organization is much better organized than it was 2 years ago. They're able to convert those enhanced ratings into revenue growth. And that's the bottom line. That's how it's all shaken out. It's not rocket science.

Similar themes in terms of what categories are up and down?

Yes. Pretty much the same. Services up, retail up. Travel and leisure, back, right? Travel and leisure was gone in the fourth quarter of 2020. And quick service restaurants, right? They're all back.

Okay. Let's flip the script over to kind of the expense and margin discussion. Can you highlight some of the cost-out actions you've taken over the past 18 to 24 months? And how much of those cost out should we expect to be permanent in nature going forward?

We actually started reengineering our cost structure back in 2019 pre-COVID, particularly with our audio division, automating back-office operations, figuring out how to do more with less. And so if you take -- no division was unscathed from that process. We've taken about $20 million in annual costs out of our operating structure over the past 3 years. And the bulk of that is permanent. You just have to learn how to do more with less. And as I spoke to that headcount at the beginning, 3, 4 years ago, we had 1,200 people in our broadcasting division. That's down to 600. So it's been a radical change in how we operate to enable us to get that cost structure right, consistent with the revenue environment that we're living in.

Right. And so the follow-on question for you on that front would be how should we think about the EBITDA margins for each of your 3 segments relative to pre-pandemic? And particularly for digital, which has obviously been in growth mode, where do those margins set on?

So TV margins pre-COVID were in the mid-40% range. They should do something along those lines this year although the Orlando and Tampa loss may put some downward pressure on that. Radio margins in 2019 were basically 0. We didn't have a cash flow -- meaningful cash flow out of our radio division. Now with all of the cost cuts that we've talked about, we're back firmly in the mid-30% range as far as cash flow margins are concerned. And digital, margins, similar situation, basically 0 cash flow margins in 2019. And you're going to see, last year, we finished with digital margins right on 7%. As that division continues to scale, we expect that margin to start creeping up above 7%, potentially to 8%, even slightly higher.

So to around 10% or potentially even more?

Yes, I don't want to put 10% on the table yet, but let's get from 7% to closer to 8%, then 9%, and then we'll talk about 10%.

Okay. Got it. A couple of questions on your capital structure, capital allocation policies. You ended the year with a good-sized word, just $185 million of cash and marketable securities. Correct me if I'm wrong, but I think you should also be comfortably free cash flow positive this year and beyond. How should we think about the appropriate level of liquidity to keep on hand, A? And then B, what are your priorities for cash over the medium-term horizon?

Well, as far as free cash flow is concerned, positive year-over-year. We don't give guidance for free cash flow or EBITDA. So I'll kind of -- I won't get into that. But what I will say is we've inputted -- we've got strong free cash flow generation. We're a low capital -- we're not a very capital-intensive business. We still have NOLs in lace that will shield us from taxes for at least the next year or so. So there should continue to be strong free cash flow conversion as far as a percentage to EBITDA. Now allocating between shareholder returns. You've got 2 components of that. We've got a buyback program that's in place, a $20 million that we announced on our earnings call. That plan is working as we speak. How quickly that gets executed will depend on the share price progression. The quarterly dividend, we'll continue to revisit that quarter-by-quarter as we get deeper into 2022. On M&A, we're working on several potential transactions, whether we pull them across the finish line or not will remains to be seen. And as far as the debt is concerned, we kind of feel like where we are right now is probably the level to maintain at least for the foreseeable future.

Okay. If I put my credit hat on, I love seeing almost 0 net leverage, which is nice. But is $185 million of cash, the right kind of amount to keep on hand...

Well, it's opportunistic, right? We're looking at the world that's changing minute by minute. And COVID created a lot of interesting opportunities out there that I don't think anyone foresaw. And in this strange environment with war out there in the works, who knows what kind of opportunities that can create. So we're going to probably -- we're going to keep more cash on hand than perhaps most people would think would be necessary. But we see that as the ability to execute quickly on transactions, should they become available.

Yes. And I suppose from a defensive standpoint as CFO, it probably helps you sleep at night as the R word starts to get mentioned a little bit out there.

I didn't have any gray hair in 2008, 2009. I do now. Yes. Correct.

All right. Gross leverage, 2.5x, a little under that. Is that -- it sounds like you're comfortable with it living in that area?

Yes. I think anything under 3.5x on a gross basis, it should be considered the safe zone. On a net basis, at 0.3x, again, like I said at the beginning of the conference, the best balance sheet in the business, room to comfortably grow leverage if there's an opportunity that comes around that's compelling.

Okay. Let me wrap up with a couple of questions around M&A, which I know you said was one of the potential uses of your cash. There's been a good amount of industry consolidation in the TV space, perhaps less so on the radio side. And you have been more active on the digital front. Do you expect further M&A activity in the industry this year? I know there's a couple of deals cooking at the moment? And how should we think about Entravision taking part?

Look, there will be more deals in I think both the TV and radio business. Look, we're open to anything that's accretive as long as it falls within our strategy. And you know what, certainly, we're going to be working on more digital deals as they fit into our strategy. But look, we're going to work on anything that makes sense to us that's ultimately accretive for shareholders. Whenever we're going to say no to a deal at first, we're going to take a look at everything that's out there. So I don't want to give you specifics, but I think digital first and then broadcasting second is kind of where this business is headed.

As we think about potential transactions in your mind, I think you mentioned anything up to 3.5x is kind of where your comfort level sits. Is that how we should think about with M&A, you're comfortable taking it up to around that point?

I think so. I mean it depends on how compelling an opportunity it is, right? If you have to entertain something with a 4-handle on it, okay, sure. But that's got to come down fairly quickly from our point of view.

Okay. Chris, that wraps up for me. I really appreciate you being here.

Aaron, thank you. Nice to see you again.

Of course, it is.

In person.

Like to see you, too.

Okay. Thank you.

Thank you.