Entravision Communications Corporation — Q3 2018 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2018. Entravision operates television, radio and digital media businesses, primarily serving U.S. Hispanic audiences; its digital operations also reach international markets. It owns or operates 55 television stations and 49 radio stations.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $74.6 million | $334.6 million | $215.7 million | $462.6 million |
| Advertising and retransmission revenue | $73.4 million | $70.6 million | $213.9 million | $198.6 million |
| Operating income | $6.0 million | $257.0 million | $15.5 million | $274.3 million |
| Net income | $2.2 million | $157.2 million | $5.2 million | $163.3 million |
| Diluted earnings per share | $0.02 | $1.71 | $0.06 | $1.78 |
- Revenue mix and trends: Digital revenue rose 31% in Q3 to $22.4 million and 66% for the nine months to $61.2 million, reflecting Headway growth and the Smadex acquisition. Television advertising and retransmission revenue declined 4% in Q3 and 6% year to date; radio revenue declined 7% and 5%, respectively. Retransmission revenue was $8.4 million in Q3 and $26.4 million year to date.
- Prior-period comparability: 2017 included $263.9 million of FCC spectrum-auction revenue, which did not recur in 2018. This largely explains the sharp reported revenue and profit declines. Excluding that item, advertising and retransmission revenue increased 4% in Q3 and 8% year to date.
- Margins and costs: Reported operating margin was approximately 8% in Q3 2018 versus 77% in Q3 2017, and 7% versus 59% for the nine-month periods; the comparison is heavily affected by the 2017 auction proceeds. Digital cost of revenue was 59% of digital revenue in Q3 and 58% year to date, with management citing third-party media costs and a higher mix of programmatic revenue.
- Cash flow and capital spending: Nine-month operating cash flow was $22.5 million, compared with $293.5 million in 2017. Investing cash outflow was $154.3 million, including $159.4 million of marketable-security purchases; financing cash outflow was $27.5 million. Capital expenditures were $11.5 million year to date.
- Liquidity and debt: At September 30, cash and cash equivalents were $101.8 million, marketable securities $132.4 million, and restricted cash $0.8 million. Current assets were $327.5 million and current liabilities $60.1 million. Variable-rate debt was $297.0 million outstanding; its balance-sheet carrying amount, net of issuance costs and discount, was $293.6 million. The term loan matures in November 2024. Reported total leverage was 5.0x at September 30, 2018, versus 3.5x a year earlier.
Material changes, outlook and risks
- Management expects 2018 revenue growth in digital, political advertising across segments, and television retransmission consent compared with 2017. It expects positive operating cash flow for full-year 2018 and approximately $22 million of capital expenditures, including about $10 million for FCC-mandated channel repacking, which it expects to be reimbursed.
- Management expects traditional television and radio advertising to continue facing pressure as advertising shifts to digital. It describes the digital advertising market as rapidly changing, including movement toward video and programmatic buying.
- The 2017 Credit Facility restricts certain indebtedness, acquisitions, asset sales and distributions, among other actions; it has no financial maintenance covenants. A 100-basis-point increase in the three-month Eurodollar rate would increase annual interest expense and reduce operating cash flow by an estimated $3.0 million.
- The company acquired television station KMCC-TV for $3.6 million and acquired digital platform Smadex in 2018 for $3.5 million net of cash acquired. Smadex contributed $3.5 million of Q3 revenue and $3.2 million of expenses. Headway contingent consideration was valued at $15.0 million; the company recorded a $1.1 million expense year to date and $0.1 million income in Q3 from fair-value changes.
- Argentina was treated as highly inflationary beginning July 1, 2018, and the functional currency for those operations changed to the U.S. dollar. The company reports foreign-currency exposure but says a hypothetical 10% adverse exchange-rate movement on foreign-denominated receivables would not be material.
- Disclosure controls were not effective at quarter-end because of a previously identified material weakness related to accounting resources and controls over complex or non-recurring transactions. Management implemented remediation measures but said they had not operated long enough to establish effectiveness.
- Management said ordinary-course legal matters were not expected to materially affect the company. The filing reports no material change in risk factors.
Investor verification points
- Assess underlying operating trends using advertising and retransmission revenue separately from the one-time 2017 spectrum-auction revenue.
- Verify the drivers and sustainability of digital growth, including acquisition contributions, programmatic mix and associated lower margins.
- Monitor variable-rate debt, the 5.0x reported leverage, cash generation and the effect of interest-rate changes.
- Track whether expected FCC reimbursement for repack-related capital expenditures is received and whether full-year cash-flow and capital-spending expectations are met.
- Confirm that remediation of the material weakness is tested and operating effectively; also monitor the final purchase accounting for Smadex and Headway contingent consideration.