Entravision Communications Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; dollar amounts below are in millions unless noted. Entravision operates digital advertising, U.S. Hispanic television, and audio businesses.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $239.0 | $197.2 | +21% |
| Operating income | $6.7 | $4.2 | +60% |
| Net income | $1.7 | $1.9 | −10% |
| Net income attributable to common stockholders | $2.0 | $1.9 | +8% |
| EPS, basic and diluted | $0.02 | $0.02 | No change |
| Operating cash flow | $36.7 | $53.2 | −31% |
| Capital expenditures | $8.6 | $1.5 | Higher |
| Consolidated EBITDA (non-GAAP) | $13.0 | $18.1 | −28% |
Digital advertising generated $196.5 million, or about 82% of revenue; television contributed $30.3 million and audio $12.2 million. Digital revenue rose 28%, while television revenue fell 2% and audio revenue fell 3%. Digital cost of revenue increased 29%, faster than segment revenue, but remained 85% of digital revenue. Segment operating profit declined 29% to $12.1 million: digital fell 40% to $3.6 million, television fell 13% to $7.6 million, and audio fell 56% to $1.0 million. Consolidated EBITDA margin decreased to 5% from 9%.
Cash and cash equivalents were $141.5 million and marketable securities were $38.4 million at March 31, 2023. The balance sheet reported total debt of approximately $212.8 million, including current maturities; the filing separately states $211.5 million outstanding under the new facility. Total current assets were $402.5 million and current liabilities $245.6 million. The company said available liquidity and operating cash flows should fund working capital, capital expenditures, and debt service for at least the next 12 months. Cash and cash equivalents plus restricted cash increased by $30.8 million during the quarter.
Material changes and unusual items
- Revenue growth was driven by digital commercial partnerships and contributions from entities consolidated in 2022 that were not included in the prior-year comparable results. Digital revenue outside the U.S. contributed to the company’s international exposure; 80% of Q1 2023 revenue was generated outside the U.S., versus 73% a year earlier.
- Operating income benefited from a $4.1 million gain from the lower fair value of acquisition-related contingent consideration, compared with a $5.1 million expense in Q1 2022. This favorable year-over-year swing supported reported operating-income growth.
- Interest expense rose to $4.0 million from $1.8 million. The company recorded a $1.6 million loss on extinguishment of debt related to refinancing.
- Operating cash flow was lower despite similar reported net income, with changes in working-capital items contributing to cash generation. Capital expenditures increased, primarily reflecting television investments.
- The company declared dividends of $0.05 per common share, compared with $0.03 in Q1 2022. It made no share repurchases during the quarter.
Debt, outlook, and risks
- On March 17, 2023, Entravision refinanced its prior facility with a $200 million senior secured Term A loan and a $75 million revolving facility, of which $11.5 million was drawn at closing. The facility matures March 17, 2028. Borrowings carried a 7.66% rate at quarter-end and are variable-rate debt. The company reported compliance with its financial covenants.
- The credit agreement sets a maximum total net leverage ratio of 3.25:1.00 and a minimum interest coverage ratio of 3.00:1.00, and restricts certain business actions. A hypothetical 100-basis-point increase in SOFR would increase annual interest expense and reduce operating cash flow by about $2.1 million, based on quarter-end debt.
- Management expected full-year 2023 revenue to increase, primarily because of digital growth and a full year of operations from certain digital entities. It also expected positive operating cash flow and approximately $19.5 million of capital expenditures, including an estimated $3.9 million reimbursement related to the new office lease. Management anticipated increased operating, selling and administrative, and corporate expenses.
- Management warned that digital margins face pressure from the shift toward programmatic advertising and negotiating dynamics with media partners. Based on communications with its largest commercial partner, the company expected a lower payment rate on sales for that partner beginning in the second half of 2023, reducing margins.
- A single global media company accounted for 51% of revenue, compared with 53% in Q1 2022; the company expects this dependence to continue. The filing also cites risks from digital advertising competition and rapid change, foreign currency movements, advertiser credit exposure, and the shift in audiences and advertising away from traditional TV and radio.
- On April 3, 2023, after quarter-end, Entravision converted its Adsmurai loan into a 51% equity interest and entered into a new loan and options arrangements related to the remaining interest. It also acquired the remaining shares of Jack of Digital. These transactions occurred after the reporting date.
- Management stated that ordinary-course legal claims were not expected to materially affect financial position, results, or cash flows. Disclosure controls and procedures were considered effective at quarter-end.
Key facts for investors to verify
- Whether digital revenue growth converts into sustained profit and cash flow given cost growth, declining segment operating profit, and anticipated lower partner payment rates.
- Terms and performance implications of the 2023 refinancing, including variable interest costs, covenant headroom, and the revolving facility balance.
- Revenue and collection exposure to the largest global media company, including the expected second-half 2023 rate reduction.
- Progress toward management’s 2023 revenue, cash-flow, and capital-expenditure expectations, and the results and financing implications of the post-quarter Adsmurai and Jack of Digital transactions.