Grupo Televisa, S.A.B. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. Although the request metadata refers to 2017 Q4, this filing is an annual report; it presents full-year results and selected quarterly seasonality data. Financial statements are prepared under IFRS and reported in Mexican pesos unless otherwise noted.
Business context
Televisa operates four reportable segments: Content, Sky, Cable and Other Businesses. Its activities include television content and advertising, direct-to-home pay television, cable and telecommunications, publishing, radio, sports and entertainment, film and gaming. Most operations and assets are in Mexico.
Key financial metrics
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net sales | Ps.94.27bn | Ps.96.29bn | Down 2.1% |
| Operating income | Ps.14.24bn | Ps.16.60bn | Down 14.2%; operating margin 15.1%, versus 17.2% |
| Net income | Ps.6.58bn | Ps.5.33bn | Up 23.3% |
| Net income attributable to Televisa shareholders | Ps.4.52bn | Ps.3.72bn | Up 21.6%; basic EPS Ps.1.54 per CPO versus Ps.1.28 |
| Net finance expense | Ps.5.30bn | Ps.9.53bn | Improved by Ps.4.23bn, principally reflecting peso appreciation and derivative gains |
| Cash from operating activities | Ps.25.10bn | Ps.36.66bn | Down 31.5% |
| Cash used in investing activities | Ps.17.33bn | Ps.29.00bn | Capital expenditures were Ps.16.76bn |
| Cash used in financing activities | Ps.16.47bn | Ps.9.99bn | Included debt repayment, interest, dividends and share-plan funding |
| Cash and cash equivalents | Ps.38.73bn | Ps.47.55bn | Down Ps.8.81bn during 2017 |
| Debt, excluding finance leases and other notes payable | Ps.124.10bn | Ps.128.82bn | Includes current portion and interest payable; long-term portion was Ps.121.99bn |
| Total assets / total equity | Ps.297.22bn / Ps.99.66bn | Ps.309.05bn / Ps.96.28bn | At December 31 |
Temporary investments were Ps.6.01bn at year-end, in addition to cash. Finance lease obligations were Ps.5.62bn and other notes payable were Ps.3.68bn. The filing reports a net U.S.-dollar monetary liability position of US$2.93bn, after designated hedges.
Segment performance and changes versus prior year
- Content: Sales fell 7.3% to Ps.34.00bn and segment income fell 13.0% to Ps.12.83bn; margin was 37.7%, down from 40.2%. Advertising revenue decreased 10.8%, network subscription revenue decreased 7.8%, and licensing and syndication rose 1.7%.
- Sky: Sales rose 1.2% to Ps.22.20bn and segment income rose 2.1% to Ps.10.11bn; margin was 45.5%. Subscribers declined by about 24,000 to 8.00m, while revenue per customer increased 6.0% year over year.
- Cable: Sales rose 3.6% to Ps.33.05bn and segment income rose 6.0% to Ps.14.03bn; margin reached 42.5%. Total RGUs increased to 10.10m, led by 385,546 net broadband additions. The company revised its RGU-counting methodology, reducing the reported count by 207,000; it said this did not affect financial results.
- Other Businesses: Sales declined 5.1% to Ps.8.38bn and segment income fell 52.9% to Ps.0.49bn, with weaker publishing, soccer and film distribution results.
Revenue fell despite growth in Sky and Cable, principally because of Content and Other Businesses. Operating income was further pressured by depreciation and amortization, which increased 9.2% to Ps.18.54bn. Attributable net income increased despite lower operating income, helped by lower net finance expense and higher income from associates and joint ventures; higher taxes partly offset those benefits. Mexico’s peso appreciated 4.5% against the U.S. dollar in 2017, compared with 19.9% depreciation in 2016, while Mexican inflation rose to 6.8% from 3.4%.
Liquidity, debt, outlook and notable matters
- Operating cash flow was lower than in 2016, while cash and cash equivalents declined to Ps.38.73bn. Advertising deposits and advances for the following year were Ps.16.07bn, down 12.3% from year-end 2016; about 90% were short-term, non-interest-bearing notes.
- Televisa issued Ps.4.5bn of 8.79% notes due 2027 and raised Ps.6.0bn of Mexican bank debt in late 2017, primarily to refinance the US$500m 6.0% notes due 2018, which it prepaid in December. A US$583m-equivalent, three-year revolving facility was signed in March 2018 and had not been drawn as of the filing.
- Management expected 2018 capital expenditures of approximately US$950m, including about US$550m for Cable and US$250m for Sky. Funding was expected from operating cash, cash on hand and, if required, financing. A Ps.0.35-per-CPO dividend for 2018 was approved by shareholders in April 2018.
- Management said advertising sales moved to cost-per-rating-point pricing in 2018, billing advertisers based on ratings delivered rather than fixed prices. Management also reported that 2018 advertising deposits and advances, together with contracts concluded in January, were up 1.8% against the comparable prior-year period.
- Regulatory constraints remain material. Televisa was designated a preponderant economic agent in broadcasting and faces obligations involving infrastructure sharing, advertising terms, channel distribution and content rights. Its challenges to the preponderance measures remained pending. Separately, an IFT resolution issued in March 2018 concluded that it lacked elements to find substantial power in restricted television and audio services, replacing the prior adverse determination.
- Material weaknesses in internal controls over financial reporting were identified in IT access and program-change controls, segregation of accounting duties and certain revenue and receivables controls. Management began remediation, but the auditor concluded internal control over financial reporting was ineffective at December 31, 2017. The auditor gave an unqualified opinion on the IFRS financial statements.
- A purported U.S. shareholder class action filed in March 2018 alleges misleading disclosures concerning FIFA-related bribery and internal controls. Televisa disputes the allegations and said it intends to defend the suit. Management said other ordinary-course legal claims were not expected to materially affect the financial statements, but outcomes were uncertain.
- Other notable items included Ps.0.98bn of severance expense, publishing-trademark impairment charges, a Ps.0.30bn loss on disposition of a publishing business in Argentina, and a Ps.0.16bn expense related to prepayment of the 2018 notes. The carrying value of Univision warrants was Ps.36.40bn and depended on significant unobservable valuation inputs.
Most important facts for investors to verify
- Whether revenue, advertising demand and Content margins stabilized after the 2018 ratings-based pricing change, and how the new pricing affected cash collections.
- Progress and independent validation of remediation for the disclosed material weaknesses, especially revenue recognition and IT controls.
- 2018 capital spending, operating cash flow and debt funding relative to the US$950m capex plan and the available but undrawn revolving facility.
- The valuation assumptions and sensitivity of the Univision warrants, and developments in Univision’s financial condition and Televisa’s royalty arrangements.
- Outcomes of the broadcasting preponderance challenges, other regulatory proceedings, the shareholder lawsuit and any concession renewals or related fees.