Entravision Communications Corporation — Q2 2018 Form 10-Q
Business context and reporting period
The filing covers the three and six months ended June 30, 2018, compared with the same 2017 periods. Entravision operates television, radio and digital businesses, serving U.S. Hispanic audiences and global digital markets. It owned or operated 55 television stations and 49 radio stations. Figures below are in millions except per-share amounts.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $74.3 | $70.5 | $141.2 | $128.0 |
| Operating income | $9.8 | $9.3 | $9.5 | $17.3 |
| Net income | $4.8 | $3.5 | $3.0 | $6.1 |
| Basic and diluted EPS | $0.05 | $0.04 | $0.03 | $0.07 |
| Operating margin | 13.2% | 13.1% | 6.7% | 13.5% |
| Net margin | 6.5% | 5.0% | 2.1% | 4.8% |
Revenue rose 5% in Q2 and 10% in H1. Digital revenue grew 32% in Q2 and 97% in H1, primarily reflecting the Headway acquisition; television revenue declined 3% and 6%, respectively, while radio was flat in Q2 and down 5% in H1. H1 broadcast advertising fell, partly offset by higher digital and retransmission consent revenue. Digital costs and its comparatively lower margins tempered the revenue growth.
H1 operating cash flow was $16.9, down from $23.3 a year earlier. Investing cash outflow was $146.8, largely due to $159.4 of marketable securities purchases, partly offset by $25.0 of maturities; financing cash outflow was $22.3. At June 30, cash and cash equivalents were $108.9, marketable securities $132.4 and restricted cash $0.8. Current assets were $331.6 versus current liabilities of $59.2.
Debt was approximately $297.8 gross under the variable-rate senior secured Term Loan B, with a $294.2 carrying amount net of unamortized costs and discount. The loan matures November 2024; scheduled current maturities were $3.0. The company reported a 4.9x total leverage ratio at June 30, versus 3.3x a year earlier. A 100-basis-point increase in the three-month Eurodollar rate would increase annual interest expense and reduce operating cash flow by about $3.0, based on period-end debt.
Material changes and notable items
- Q2 net income increased, but H1 net income and operating income fell substantially year over year. H1 adjusted EBITDA, a non-GAAP measure, declined to $21.8 from $27.5; its margin fell to 15% from 21%, partly because digital represented a larger share of revenue.
- Retransmission consent revenue increased to $9.1 in Q2 and $18.0 in H1, from $7.5 and $15.4, respectively. Management expected full-year 2018 retransmission revenue to exceed 2017.
- Entravision acquired Smadex, a mobile programmatic advertising provider, in June for $3.6 cash consideration net of $1.2 cash acquired, and acquired Las Vegas station KMCC-TV in January for $3.6. Smadex contributed $0.4 of revenue and expenses in the reported periods.
- The company recorded a $0.9 Q2 gain from remeasuring Headway contingent consideration, but a $1.2 expense for H1. The contingent consideration liability was $15.1 at June 30.
- H1 included $9.0 of dividends paid and $7.7 of Class A share repurchases. The board authorized total repurchases of up to $30.0; about $13.0 had been spent since the program began.
Outlook, risks and controls
Management anticipated 2018 revenue growth from digital, political advertising and television retransmission consent, and positive operating cash flow for the year. It expected approximately $13.0 of full-year capital expenditures, including about $4.0 for broadcast repack work expected to be reimbursed by the FCC. Management stated that cash, operating cash flow and available credit were expected to cover anticipated needs for at least the next 12 months. No specific full-year earnings or revenue guidance was provided.
Management cited ongoing shifts of advertising from traditional television and radio to digital, rapid changes in digital advertising and programmatic buying, and lower digital margins from third-party media costs. Other risks include substantial variable-rate debt and credit-agreement restrictions, reliance on Univision-affiliated stations and arrangements, foreign currency exposure (including Argentine peso depreciation), and potential changes affecting spectrum monetization. The company had no material change to the risk factors disclosed in its 2017 Form 10-K. Management said ordinary-course litigation was not expected to materially affect the company.
Disclosure controls were deemed ineffective because of an unresolved material weakness in financial reporting controls, previously attributed to insufficient accounting resources and controls for complex or unusual transactions. Remediation steps included accounting hires and new enterprise reporting software, but had not operated long enough to establish effectiveness. Management nevertheless stated that the interim financial statements fairly presented the company’s financial position and results in all material respects.
Important facts for investors to verify
- Whether digital growth, including Headway and Smadex contributions, can offset continued weakness in traditional advertising while sustaining margins.
- Debt leverage, variable-rate exposure, covenant restrictions and the company’s ability to generate cash for debt service and capital needs.
- Progress in remediating the material weakness and whether controls are operating effectively.
- Realization and timing of expected FCC reimbursements for repack capital expenditures, and the expected level of 2018 capital spending.
- Performance-based Headway contingent consideration, final Smadex purchase-price valuation and integration results.
- The sustainability of retransmission consent revenue and the impact of Univision agreements and related-party arrangements.