Entravision Communications Corporation (NYSE:EVC) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good afternoon, and welcome to the Entravision First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Kimberly Esterkin with Investor Relations. Please go ahead.

Kimberly Esterkin: Thank you, operator. Good afternoon, everyone, and welcome to Entravision’s first quarter 2023 earnings conference call. Joining me today are Chris Young, Interim Chief Executive Officer and Chief Financial Officer; and Jeff 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 the most comparable GAAP measures in today’s press release. 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: Thank you, Kimberly, and good afternoon, everyone. We appreciate you joining our first quarter 2023 earnings call. In the first three months of the year, Entravision saw the continued strength of our digital businesses combined with the resiliency of our TV and audio segments. Revenues for the quarter totaled $239 million, an increase of 21% year-over-year, and ahead of our previously disclosed pacing’s of plus 16% for our consolidated business. This performance is particularly impressive given the current difficult macroeconomic conditions, along with the anticipated year-over-year headwinds from decreased political spend in our broadcast business. These results are also a strong testament to our ability to evolve our business and adapt to the rapidly evolving technology, media and entertainment industries.

I want to thank our entire team and Entravision for your hard work this past quarter in making this growth possible. For the quarter, digital comprised 82% of total revenue and was up 28% as compared to the prior year period. TV accounted for 13% of revenue and declined 2% year-over-year, while audio made up the remaining 5% of revenue and declined 3% year-over-year. As Jeff will speak about shortly, both the TV and audio segments saw weaknesses on the national front as advertisers became more cautious with spending, particularly in light of the recent regional banking crisis. That said our local TV and audio businesses remained fairly resilient, even without the benefit of political advertising during the quarter. Consolidated EBITDA for the quarter totaled $13 million, a decrease of 28% year-over-year.

This decline in our consolidated EBITDA is largely the result of both non-returning political revenue at our broadcasting business coupled with increased operating and corporate expenses which I will cover in more detail later on the call. In addition, during the quarter we entered into a new $275 million credit facility, extending the maturity of our debt to March 2028, while increasing the flexibility of our balance sheet. We remain well capitalized and with this new facility combined with our free cash flow generation, we continue to have significant dry powder to be opportunistic on the M&A side. Speaking of free cash flow during the first quarter free cash flow totaled $3.9 million or a conversion rate of 30% of consolidated EBITDA. Also, the company’s Board of Directors approved a $0.05 dividend, which is in line with our pre-pandemic levels.

Let’s begin our discussion with our largest revenue segment, Digital, which comprised 82% of first quarter revenues. Digital revenue was $196.5 million for the first quarter, improving 28% year-over-year. Entravision provides a full suite of digital marketing services in 40 countries, including traditional brand awareness solutions along with transactional and performance-driven services. In the U.S., our digital solutions include digital audio, lead generation, over-the-top digital video solutions and branded content production capabilities that complement our existing TV and audio offerings with result-driven services for local clients. Outside the U.S., Entravision’s client-centric philosophy, extensive audience reach and superior campaign performance technology generated strong results for our clients.

We partner with premier global marketing platforms including: Meta, Spotify, TikTok and Twitter as well as providing branding services and performance solutions for more than 4,000 clients in emerging high-growth economies. These platforms have reported layoffs in the U.S., but we continue to add sellers as needed pushing forward our growth path in new markets across the globe. Latin America and Asia, in particular led to revenue growth for the quarter. In addition, we also saw our mobile user acquisition business grow 40% due to our industry-focused approach, client retention strategies and best-in-class technology. In terms of regions that contributed to digital revenue growth, our Latin America business unit improved 15% year-over-year, largely driven by our exclusive commercial representation partnership with Meta, and our Asia business revenue grew 35% year-over-year mainly driven by success with TikTok along with strong performance of our mobile user acquisition operation.

We are now serving 11 countries in Southeast Asia, including our latest addition in Mongolia. We also see growing demand for our digital advertising services in Singapore, the Philippines and Vietnam. Our mobile user acquisition programmatic demand-side platform Smadex declined 11% versus the prior year period, mainly due to decreased revenue in the crypto and fintech verticals. However, we remain optimistic as the other industry verticals such as gaming and online gambling are ramping up their ad spend. Also following the end of the quarter, in April, Entravision converted an outstanding loan and acquired a majority stake in Adsmurai, a leading social commerce and e-commerce marketing service provider which is headquartered in Barcelona. For the quarter, on a pro forma basis, Adsmurai revenues improved 94% compared to the prior year period.

This investment in Adsmurai strengthens Entravision’s client-centric solutions portfolio. We believe that commerce and retail-related marketing will play a critical role in the future of advertising. Adsmurai optimizes digital catalogs for online retailers in the fashion, wellness, beauty and education verticals. Moreover, Adsmurai provides technology solutions that empower its clients to connect to its payment accounting, logistics and most importantly social commerce strategies by leveraging a SaaS model. Brands can optimize campaign investment while also having access to real-time campaign performance data. We look forward to scaling Adsmurai’s operations throughout our regions over time. I’ll now turn the call over to Jeff Liberman to speak further to our TV and audio business segments.

Jeff?

Jeff Liberman: Thanks Chris. Let’s turn to our Television segment, which comprised 13% of the revenue for the first quarter. Television revenue was $30.3 million in Q1, down 2% compared to the prior year period, largely due to national advertising revenue declines and the declines in political revenue as compared to the prior year’s quarter. Core television revenue increased 2%. National core revenue decreased 8% and local core revenue increased 2% year-over-year. Retransmission revenue for the quarter totaled $9.6 million, which was up 5% year-over-year. Operating cash flow margins for the TV segment was 34% for the quarter. Following the failure of Silicon Valley Bank, we saw a number of national television advertisers pause their marketing efforts.

Although this slowdown for our national television business was not as drastic as the effect of the 2008, 2009 financial crisis, the softness in national advertising has continued into April. With that said, we expect to see improvement in the second half of the year. With an open Senate seat in California, we anticipate this race to heat up in the late summer or early fall. We should see a boost in political revenue, helping improve national TV advertising dollars for the year. Lastly, our audio segment comprised the remaining 5% of first quarter consolidated revenue. Audio revenue totaled approximately $12.2 million for the first quarter and decreased 3% year-over-year, again largely driven by the lack of political ad revenue as compared to the prior year’s first quarter.

Local audio was down 1% for the quarter, while national audio declined 6%. On a core basis, excluding political total local and national revenue were all down 1%. Overall, Spanish language radio has been performing better than the general market. And while our national clients are being very cautious based on the current economic conditions, we expect increased political spending in key states such as California, Arizona, Colorado, New Mexico and Texas, which will help support our national sales particularly in the back half of the year. I will now turn the call back to Chris to discuss the first quarter financials and second quarter pacing in further detail. Chris?

Chris Young: Thanks Jeff. As we already covered the segment’s revenues, let’s jump to operating expenses for the quarter. Operating expenses in the first quarter of 2023 totaled $52.6 million, up 20% from $43.9 million in the prior year period. This increase was primarily due to several factors. First, we had expenses attributable to our recent Adsmurai and Jack of Digital investments, which did not contribute to our financial results in the comparable period last year. Second, our rent expense was significantly higher than the prior year as we are currently in a temporary office space until we combine our offices here in Santa Monica. Third, there was an increase in non-cash stock-based compensation as a result of the annual RSU grant being done in Q1 this year compared to Q4 in the prior year.

Fourth, variable expenses were up associated with the increase in digital advertising revenue. Excluding the expenses related to Adsmurai and Jack of Digital expenses were up approximately 13%. The Corporate expenses increased by 20% to total $10.5 million for the quarter compared to $8.7 million in the same quarter of last year, which is mainly a result of non-cash stock-based compensation given the annual RSU grant timing I just mentioned, an increase in professional service fees and an increase in audit fees. Consolidated EBITDA totaled $13 million for the first quarter, down 28% from $18.1 million in the prior year period. Free cash flow, as defined in our earnings release was $3.9 million in the quarter or a conversion rate of 30% of consolidated EBITDA compared to $18.1 million in the first quarter in the prior year.

Diluted earnings per share for the first quarter 2023 were $0.02, consistent with the same period last year. Cash paid for income taxes was $100,000 for the first quarter. Net cash interest expense was $3 million for the first quarter compared to $1.2 million in the same quarter of last year. Cash capital expenditures for Q1 totaled $6.8 million. The increase compared to the same quarter of last year is mainly due to the build-out of our new headquarters in Santa Monica, which is expected to be complete by the end of the second quarter as we combine our two Los Angeles area offices into one. We expect cash CapEx to total roughly $15 million for the full year. Turning to our balance sheet. Cash and marketable securities as of March 31, 2023 totaled $179.8 million.

Total debt was $212.8 million. Our total leverage as defined in our credit agreement was 1.7 times as of the end of the first quarter. Net of total cash and marketable securities, our total net leverage was 0.3 times. Turning to our pacing’s for the second quarter of 2023. As of today, revenue from our digital segment is pacing plus 25% over the prior year. Factoring in our Adsmurai and Jack of Digital revenue generated in Q2 of 2022, our digital segment on a pro forma basis is pacing plus 14%. Our TV segment is pacing minus 9.5% over the prior year period, with core TV advertising excluding political booked thus far in the prior year quarter pacing at a minus 1%. Lastly, our audio segment is pacing minus 5% over the prior year period with poor audio, excluding political booked thus far in the prior year quarter pacing at a minus 1% as well.

All in our total revenue compared to last year is pacing at a plus 18%. On a pro forma basis our total revenue is currently pacing at a plus 10%. To close out our prepared remarks, while we remain cognizant of the current macroeconomic environment, our double-digit top line growth in the first quarter coupled with a solid balance sheet and strong free cash flow position us well for the remainder of 2023. We continue to seek out opportunities including acquisitions that will further enhance our offerings and strengthen our ability to compete in the international markets. Latin America and Asia are both proving to be very strong contenders for continued growth. Africa is showing solid pockets and strength and our mobile acquisition business continues to outperform.

Television and audio remain resilient and while national advertising will continue to be a headwind in this difficult economy, Entravision is in a great position to benefit from increased political spend in the second half of the year. Thank you for your time this afternoon. We appreciate your continued support of Entravision, and we’ll now open up the call to questions. Operator?

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Michael Kupinski with NOBLE Capital Markets. You may now go ahead.

Operator: Our next question will come from James Dix with Industry Capital Research. You may now go ahead.

Operator: [Operator Instructions] Our next question will come from Edward Reily with EF Hutton. You may now go ahead.

Operator: Our next question will be a follow-up from Michael Kupinski with NOBLE Capital Markets. You may now go ahead.

Operator: Our next question will come from David Marsh with Singular Research. You may go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chris Young for any closing remarks.

Chris Young: Thank you, Anthony. Thanks, everyone for joining us today. We look forward to sharing with you our progress on our second quarter earnings call in August. I also hope to see some of you next week at the EF Hutton Conference in New York. Everyone, be well, and we’ll talk to you soon. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.