Entravision Communications Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unless otherwise noted, amounts are in U.S. dollars. Entravision operates digital advertising businesses globally and television and audio businesses focused on U.S. Hispanic audiences.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $221.7 million | $178.4 million | $418.9 million | $327.3 million |
| Operating income | $13.4 million | $16.2 million | $17.6 million | $27.6 million |
| Net income | $8.5 million | $10.5 million | $10.4 million | $17.5 million |
| Net income attributable to common stockholders | $8.5 million | $7.9 million | $10.4 million | $13.3 million |
| Basic and diluted EPS attributable to common stockholders | $0.10 | $0.09 | $0.12 basic; $0.12 diluted | $0.16 basic; $0.15 diluted |
- Q2 revenue increased 24%; six-month revenue increased 28%. Digital revenue drove the increase, including contributions from MediaDonuts and 365 Digital, acquired in 2021.
- Digital revenue rose 34% in Q2 to $174.4 million and 42% for the first half to $328.1 million. Digital cost of revenue was 83% of segment revenue in Q2 versus 84% a year earlier, and 84% for both six-month periods.
- Television revenue fell 5% in Q2 and 10% for the first half, primarily reflecting lower advertising and retransmission revenue following the December 2021 expiration of network affiliation agreements in Orlando, Tampa and Washington, D.C. Audio revenue rose 6% in Q2 and 8% for the first half.
- Operating margin declined to 6.1% in Q2 from 9.1%; for the first half it was 4.2% versus 8.4%. Management attributed the pressure in part to contingent-consideration remeasurement, higher corporate and selling, general and administrative costs, and foreign-exchange losses.
- Six-month adjusted EBITDA, a non-GAAP measure defined under the credit agreement, was $40.6 million versus $32.0 million, or 10% of revenue in both periods. Segment operating profit was $40.1 million versus $41.4 million.
Cash flow, debt and liquidity
- Operating cash flow for the first half was $62.9 million, up from $44.4 million. Investing cash flow was a $77.3 million outflow, principally reflecting $87.2 million of marketable-security purchases; financing cash flow was a $60.8 million outflow, including $43.6 million of contingent-consideration payments and $11.3 million of share repurchases.
- At June 30, cash and cash equivalents were $110.0 million and marketable securities were $74.3 million; total cash, cash equivalents and restricted cash were $110.7 million. Cash and equivalents declined from $185.1 million at year-end, largely alongside investment purchases and acquisition earn-out payments.
- Current assets were $406.9 million and current liabilities $240.8 million, implying working capital of approximately $166.0 million. Management said available resources and operating cash flow should cover operating needs, capital expenditures and debt service for at least the next 12 months.
- Variable-rate debt outstanding was $210.8 million; the balance-sheet carrying amount, net of issuance costs and discount, was approximately $211.0 million. The loan matures November 30, 2024, bore interest at 3.81% at quarter-end, and has no financial covenants. Management reported a 1.4-to-1 total leverage ratio, compared with 1.7-to-1 a year earlier. A 100-basis-point rate increase would raise annual interest expense and reduce operating cash flow by approximately $2.1 million, based on the quarter-end balance.
- The company repurchased 1.8 million Class A shares for $11.3 million during the first half under a new $20 million program. It declared dividends of $0.03 per share for Q2.
Outlook, risks and unusual items
- Management expects full-year 2022 revenue to increase, primarily from digital growth and a full year of MediaDonuts and 365 Digital operations; it also expects political advertising revenue to increase and continue rising during the remainder of the year. It expects positive operating cash flow and approximately $16.4 million of capital expenditures, of which about $3.6 million is expected to be reimbursed in connection with the new office lease. These are expectations, not guarantees.
- Management expects digital cost and operating expenses to rise with growth and acquisitions. It cautioned that digital advertising is shifting toward programmatic, higher-volume, lower-margin business and that competitive and negotiating pressures may continue to weigh on margins.
- Contingent-consideration remeasurement generated $6.1 million of expense in the first half, including $1.0 million in Q2. The quarter-end contingent-consideration liability was $77.4 million; acquisition-related payments totaled $43.6 million during the first half.
- One global media company accounted for 52% of revenue in both Q2 and the first half, down from 59% and 57%, respectively, in the comparable 2021 periods. The filing warns that losing a substantial portion of this business could materially affect liquidity and cash flow. Digital operations also bear collection risk because Entravision may owe media partners for inventory regardless of whether advertisers pay.
- The affiliation-agreement expirations are expected to reduce retransmission consent revenue in the affected markets over the next two years, after which it will be eliminated. Other disclosed risks include shifting audiences and advertising away from traditional media, foreign-currency exposure, variable interest rates, inflation and economic uncertainty.
- COVID-19 had minimal reported Q2 impact, though management remained cautious about possible resurgence and economic effects. Ordinary-course legal matters were not expected by management to materially affect the company. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether digital revenue growth and acquisitions translate into sustainable operating income and margins, given the high digital media costs and expected programmatic mix shift.
- The financial and contractual exposure associated with the largest media-company relationship, including the durability of the commercial arrangement and the company’s ability to collect advertiser receivables.
- The schedule, assumptions and potential cash requirements for the $77.4 million contingent-consideration liability, including future earn-out payments.
- The pace and amount of retransmission-revenue declines following the affiliation expirations, and whether political advertising offsets those declines.
- Debt-service capacity through the November 2024 maturity, sensitivity to higher interest rates, and liquidity after dividends, buybacks, capital spending and acquisition payments.
- The filing’s full-year outlook and capital-spending assumptions against subsequent results; the filing provides expectations but no specific full-year revenue or earnings guidance figures.