EVC

Business Context and Reporting Period

Company: Entravision Communications Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Entravision is a diversified Spanish-language media company operating in three segments: television broadcasting (51 primary stations), radio broadcasting (47 stations), and outdoor advertising (~10,400 faces). The company reaches approximately 70% of U.S. Hispanics.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 5% ($4.0M) for the quarter and 1% ($3.2M) for the nine-month period compared to 2006.
  • Radio: Revenue dropped 12% ($3.3M) in the quarter, driven by the sale of Tucson and Dallas stations and the absence of World Cup advertising revenue seen in 2006.
  • Television: Revenue declined 2% ($0.9M) in the quarter due to lower national advertising sales and difficult comparisons to 2006 political activity and World Cup events.
  • Outdoor: Revenue increased 2% ($0.2M) in the quarter, aided by local sales growth in New York.
• Profitability Improvement: Operating income for the nine-month period turned from a loss of $131.9M in 2006 to a profit of $34.3M in 2007. This significant swing is primarily due to a $189.7M impairment charge recorded in the prior year (goodwill and FCC licenses) which did not recur in 2007.
• Interest Expense: Interest expense increased 27% ($3.9M) for the quarter and 47% ($10.0M) for the nine-month period. This increase is largely attributable to a $7.5M non-cash charge related to the decrease in fair value of interest rate swap agreements.
• Stock Repurchases: The company repurchased 4.8 million shares of Class A common stock for approximately $42.4 million during the quarter.

Guidance, Outlook, and Risks

• Outlook: Management anticipates net revenue will decrease by single-digit percentages or remain flat in Q4 2007 compared to Q4 2006, citing a weak advertising environment and difficult comparisons to 2006 political activity. Direct operating expenses are expected to increase in Q4.
• Capital Expenditures: Anticipated maintenance capital expenditures are ~$11M for full-year 2007, with an additional ~$5M for digital television conversion. The company expects to fund these via operating cash flow and cash on hand.
• Liquidity: The company maintains a $650M syndicated bank credit facility ($500M term loan, $150M revolver). As of Sep 30, 2007, $148M was available under the revolver. The company is in compliance with its maximum net debt ratio covenant (4.9 to 1 vs. 7.25 to 1 limit).
• Risks:
  • Univision Relationship: Univision owns ~15% of common stock (on a fully-converted basis) and acts as the exclusive sales representative for national advertising on Univision-affiliate stations. Univision must reduce ownership to 10% by March 2009.
  • Market Conditions: Exposure to general economic downturns affecting advertising spend and competition in Spanish-language media.
  • Regulatory: Potential impact of New York City Rule 49 on outdoor advertising faces.

Investor Verification Checklist

• Interest Rate Swaps: Verify the impact of the $7.5M non-cash interest expense increase related to fair value changes in swap agreements on future earnings volatility.
• Revenue Comparability: Assess the sustainability of revenue growth given the one-time nature of 2006 World Cup and political advertising revenues.
• Debt Covenants: Monitor the "maximum net debt ratio" covenant compliance, particularly as the company continues to repurchase stock and incur capital expenditures.
• Univision Ownership: Track the timeline and method for Univision's required reduction of ownership to 10% by March 2009.
• Radio Segment Performance: Evaluate the long-term impact of the Tucson and Dallas station sales on the radio segment's revenue base.