Entravision Communications Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Entravision operates television, radio and digital media businesses serving Hispanic audiences, primarily in the United States.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $65.3 million | $69.3 million | $188.2 million | $188.7 million |
| Operating income | $13.3 million | $19.0 million | $34.2 million | $43.0 million |
| Net income | $5.4 million | $9.3 million | $13.4 million | $19.8 million |
| Diluted EPS | $0.06 | $0.10 | $0.15 | $0.22 |
| Operating cash flow | Not separately reported | Not separately reported | $38.9 million | $46.9 million |
- Q3 revenue declined 6%; operating income fell 30% and net income fell 42%. Nine-month revenue was nearly flat, while operating income declined 20% and net income declined 32%.
- Operating margin was approximately 20% in Q3 versus 27% a year earlier, and 18% for the first nine months versus 23% in 2015. Net margin was approximately 8% for Q3 versus 13%, and 7% for nine months versus 10%.
- Nine-month adjusted EBITDA, a non-GAAP measure, was $48.6 million versus $57.5 million, down 15%; its share of revenue declined to 26% from 30%.
- Cash and equivalents were $70.3 million at September 30, 2016, compared with $47.9 million at December 31, 2015. Current assets were $139.2 million and current liabilities $32.2 million.
- Capital expenditures were $6.9 million for the first nine months, versus $11.5 million in 2015. Financing cash outflow was $9.3 million, including $8.4 million in dividends and $2.8 million of debt payments.
- Long-term debt carrying value, net of issuance costs and current maturities, was $307.3 million; current maturities were $3.8 million. The filing reports debt fair value of $313.7 million and an effective interest rate of 3.5%. The stated leverage ratio was 4.4x, compared with 4.0x a year earlier; the company reported covenant compliance.
Material changes and operating drivers
- Television revenue declined 7% in Q3 and 3% for the first nine months; radio revenue declined 8% and 2%, respectively. Digital revenue grew 15% in Q3 and 30% for nine months.
- Lower television revenue reflected the absence of channel-modification revenue recorded in 2015 ($5.5 million in Q3 and $10.5 million for nine months), as well as weaker local advertising. Increased national, political and retransmission-consent revenue partly offset the declines.
- Radio weakness was primarily due to lower local advertising, partly offset by political advertising. Digital growth came from increased national and local advertising, while higher third-party media costs—particularly programmatic activity—reduced digital margins.
- Operating costs increased despite lower revenue: nine-month direct operating expenses rose 4%, SG&A rose 8%, and corporate expenses rose 7%. Management attributed increases primarily to salaries, with SG&A also affected by insurance and, in radio, bad-debt expense.
Outlook, risks and unusual items
- Management expected full-year 2016 revenue to increase from digital media, retransmission consent and political advertising, and expected positive operating cash flow. It forecast approximately $10.5 million of full-year capital expenditures. No specific total-revenue or earnings guidance was provided.
- Management expected direct operating, SG&A and corporate expenses to continue increasing in dollar terms during the remainder of 2016, primarily due to salary increases.
- Retransmission-consent revenue was $7.4 million in Q3 and $22.3 million for the first nine months. Management expected full-year 2016 retransmission-consent revenue to exceed 2015 levels. The Univision proxy agreement governing negotiations for these agreements had been extended only through November 30, 2016; Entravision intended to seek an extension or replacement, with no assurance of agreement.
- Substantially all television stations are Univision- or UniMás-affiliated; the affiliation agreements expire in 2021. Univision also owns approximately 10% of the company’s common stock on a fully converted basis and holds certain consent rights.
- Debt is variable-rate, although swaps fixed the LIBOR component on $186 million of debt through December 2018. The filing estimates that a 100-basis-point LIBOR increase would raise annual interest expense and reduce operating cash flow by approximately $1.1 million, based on debt outstanding at September 30.
- Other disclosed risks include advertising cancellations or rate declines, competition, digital-media changes, substantial indebtedness and covenant restrictions. Management said ordinary-course litigation was not expected to materially adversely affect the company; no material change to risk factors was reported.
- Entravision invested $0.3 million for a 3% interest in digital production studio Chanclazo, with conditional rights to make further investments. No shares were repurchased during the first nine months.
- Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether digital and retransmission-consent growth can offset ongoing weakness in local television and radio advertising, especially after the nonrecurring 2015 channel-modification revenue is excluded.
- Progress and terms of any extension or replacement of the Univision retransmission-consent proxy agreement before its November 30, 2016 expiry.
- Debt balance, leverage, covenant headroom and exposure to floating interest rates; distinguish the reported debt fair value from balance-sheet carrying value.
- Whether margin and cash-flow pressure continues as operating costs rise and digital growth brings higher third-party media costs.
- Delivery of management’s stated full-year expectations for positive operating cash flow, approximately $10.5 million of capital expenditures, and higher revenue from digital, retransmission consent and political advertising.