Entravision Communications Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Entravision operates television, radio and digital media businesses focused on Hispanic audiences in the U.S. and certain Mexican border markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $57.5 | $58.1 | Down 1% |
| Operating income | $8.1 | $7.6 | Up 5% |
| Net income | $2.6 | $2.3 | Up 15% |
| Diluted EPS | $0.03 | $0.02 | Up $0.01 |
| Adjusted EBITDA (non-GAAP) | $12.6 | $12.6 | Essentially flat |
| Cash from operating activities | $12.9 | $10.5 | Up $2.4 |
- Operating margin was approximately 14.0%, versus 13.1% in Q1 2016; net margin was approximately 4.6%, versus 3.9%.
- Operating cash flow benefited from a $11.0 million reduction in accounts receivable; cash flow from operations exceeded net income.
- Cash and cash equivalents were $69.0 million at March 31, versus $61.5 million at December 31, 2016. Current assets were $129.1 million and current liabilities $28.6 million.
- Long-term debt, net of issuance costs and current maturities, was $285.9 million; current maturities were $3.8 million. The filing also reports approximately $291.9 million of debt outstanding. Effective interest rate was 3.5%; quarterly interest expense was $3.6 million.
- Net cash used in investing was $2.0 million, compared with $32.1 million in Q1 2016, when the company placed $30.0 million in a short-term certificate of deposit. Net cash used in financing was $3.4 million, including $2.8 million of dividends and $0.9 million of debt payments.
- Cash dividends declared were $0.03 per common share. The company reported a 3.9-to-1 total leverage ratio at March 31 and stated it was in compliance with the applicable covenant.
Changes versus the prior comparable period
- Television revenue rose 3% to $37.7 million, supported by national and local advertising and retransmission consent revenue. Retransmission consent revenue was $8.0 million, versus $7.4 million.
- Radio revenue fell 7% to $15.7 million, reflecting lower political, local and national advertising. Digital revenue fell 13% to $4.1 million, primarily due to lower national advertising.
- Segment operating profit was $15.0 million for television, compared with $13.2 million. Radio reported a $0.7 million operating loss, versus $0.3 million income; digital reported a $0.4 million loss, versus a $0.2 million loss.
- Operating expenses overall declined 2%, while corporate expenses increased 5% to $5.9 million, primarily from legal and financial due diligence costs related to a pending acquisition and stock-based compensation. Depreciation and amortization declined 12% to $3.5 million.
- Interest expense declined, which management attributed primarily to a loan principal prepayment in Q4 2016. Income tax expense increased to $1.9 million from $1.5 million; the reported effective tax rate was approximately 42%, versus 40%.
Outlook, significant events and risks
- Management expected positive operating cash flow for full-year 2017 and anticipated approximately $13 million of capital expenditures. It expected full-year retransmission consent revenue to exceed 2016 levels and described it as a growing revenue source.
- Management anticipated 2017 revenue growth from digital media and retransmission consent, while political advertising revenue was expected to decline from 2016. It also anticipated employee salary increases could raise direct operating and selling, general and administrative expenses.
- On April 13, 2017, the FCC finalized its broadcast spectrum incentive auction, with anticipated proceeds of approximately $264 million for Entravision, expected in the second half of 2017. The company said the spectrum changes were not expected to materially affect operations or results.
- On April 20, 2017, the company exercised an agreement to relocate WJAL-TV from Hagerstown, Maryland, to Washington, D.C., subject to FCC approval, for approximately $32.5 million.
- On April 4, 2017, Entravision completed its acquisition of Headway, a digital marketing solutions business. Consideration included an initial payment of approximately $12 million funded from cash on hand and up to $34.5 million in contingent earn-out payments.
- The Univision proxy agreement covering negotiation of retransmission consent terms had been extended through May 31, 2017. The company intended to seek a further extension or a new agreement, but gave no assurance that one would be reached or on what terms. Univision-affiliation agreements expire in 2021.
- Debt is primarily variable-rate. Interest-rate swaps fixed the LIBOR component on $186 million of debt through December 31, 2018; management estimated a 100-basis-point LIBOR increase would raise annual interest expense and reduce operating cash flow by approximately $1.1 million.
- Key risks include advertising demand and pricing, competition and shifts in digital advertising, substantial debt and credit-agreement restrictions, covenant compliance, dependence on Univision and retransmission consent arrangements, and media-license and regulatory risks. Management said interim results are not necessarily indicative of full-year results.
- Management considered ordinary-course litigation not likely to have a material adverse effect. A May 1, 2017 stockholder letter alleged a compensation committee member did not qualify as an “outside director” under Section 162(m); the board planned a review, and the company stated it believed it had complied with applicable requirements.
Important facts for investors to verify
- Whether the anticipated $264 million auction proceeds are received, when received, and how the company uses them.
- FCC approval, timing and total costs for the WJAL-TV relocation, including the approximately $32.5 million payment.
- Headway’s operating performance and the conditions and potential size of its earn-out payments.
- Whether Entravision and Univision extend or replace the proxy agreement after May 31, 2017, and the resulting economics of retransmission consent revenue.
- Debt repayment plans, variable-rate exposure, leverage and covenant headroom, particularly as acquisition and station-relocation spending proceeds.
- Trends in radio and digital advertising, including the impact of programmatic buying and video-advertising shifts on digital revenue and margins.