Entravision Communications Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with the three months ended March 31, 2018. Entravision operates television, radio and digital media businesses, with a focus on U.S. Hispanic audiences. The unaudited interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $64.7 million | $66.8 million |
| Operating income (loss) | $5.0 million | $(0.3) million |
| Net income (loss) | $1.4 million | $(1.8) million |
| Diluted earnings (loss) per share | $0.02 | $(0.02) |
| Operating cash flow | $14.3 million | $3.6 million |
| Adjusted EBITDA, company-defined | $8.1 million | $6.9 million |
- Revenue fell 3% year over year. Operating margin was approximately 7.7%, versus negative 0.5% a year earlier; net margin was approximately 2.2%, versus negative 2.7%. Adjusted EBITDA margin increased to approximately 12.5% from 10.4%. Adjusted EBITDA is a non-GAAP measure.
- Cash and cash equivalents were $52.0 million, marketable securities $122.6 million and restricted cash $0.7 million at March 31. Current assets were $254.2 million versus current liabilities of $58.5 million.
- Debt was approximately $245.5 million in principal, with a $242.9 million carrying value net of issuance costs and discount. The secured Term Loan B matures November 2024; its reported rate was 5.09% at quarter-end. The company reported a total leverage ratio of 3.1x, compared with 4.9x at March 31, 2018.
- Operating cash flow was supported by a $13.7 million decrease in accounts receivable. Investing activities provided $4.4 million net, mainly reflecting $10.7 million of marketable-security maturities, partly offset by capital spending. Financing activities used $13.5 million, including $7.7 million of share repurchases, $4.3 million of dividends and $0.8 million of debt principal payments.
- Capital expenditures were $6.8 million, compared with $2.2 million in Q1 2018. The company declared dividends of $0.05 per common share, unchanged from the prior-year quarter.
Material changes and segment performance
- Television: Revenue rose 11% to $38.3 million, primarily from spectrum-usage-rights revenue and national advertising, partly offset by weaker local advertising. Segment operating profit increased to $15.3 million from $10.8 million. Spectrum-usage-rights revenue was $5.1 million, versus $0.1 million.
- Radio: Revenue declined 15% to $12.0 million, reflecting lower local and national advertising, with management citing ratings declines, changing audience preferences and migration of advertising to digital media. Segment operating loss widened to $2.7 million from $1.8 million.
- Digital: Revenue declined 21% to $14.5 million, due to domestic and international declines and the shift toward programmatic, self-service advertising. Cost of digital media revenue fell to $7.6 million from $10.6 million; it was 53% of digital revenue, down from 58%, as the company shifted toward lower-cost offerings. The digital segment operating loss widened to $2.2 million from $1.0 million.
- Broadcast advertising revenue fell to $34.7 million from $37.7 million; retransmission-consent revenue was nearly flat at $8.8 million versus $8.9 million. Corporate expenses rose 15% to $6.9 million, primarily due to higher audit fees. A $2.0 million operating gain related to required television-station channel relocation helped results; the prior-year gain was not significant.
Outlook, risks and unusual items
- Management expects 2019 revenue to benefit from higher retransmission-consent and spectrum-usage-rights revenue compared with 2018, while political revenue is expected to decline. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- Management expects positive operating cash flow for full-year 2019 and believes cash, operating cash flow and available credit will cover anticipated requirements for at least the next 12 months. Expected 2019 capital expenditures are approximately $20.3 million, including about $5.8 million for broadcast repacking that the company expects the FCC to reimburse.
- Management expects direct operating and SG&A expenses to decline for the year, citing personnel reductions and discretionary cost cuts begun in Q2 2018; corporate expenses are expected to increase, primarily due to audit fees.
- Digital advertising competition, programmatic pricing pressure, ratings and demographic shifts, advertising cancellations, foreign exchange exposure, reliance on Univision and substantial indebtedness are cited risks. A hypothetical 100-basis-point increase in LIBOR was estimated to increase annual interest expense and reduce operating cash flow by approximately $2.5 million.
- The company adopted lease accounting in Q1 2019, recognizing $45.8 million of right-of-use assets and $52.4 million of lease liabilities at adoption. At March 31, lease liabilities totaled $50.7 million. Management said the adoption materially affected the balance sheet but did not materially affect Q1 results or cash flows.
- Headway acquisition-related contingent consideration remained subject to final calculation for 2018; future fair-value adjustments may result. Q1 expense from changes in its fair value was $0.4 million, compared with $2.1 million a year earlier.
- After the company missed the deadline to deliver its 2018 audited financial statements, lenders waived any resulting credit-agreement defaults and extended the delivery deadline to May 31, 2019. The company filed its 2018 Form 10-K on May 7 and reported that it believed it had complied; it paid consenting lenders an approximately $0.2 million fee.
- Disclosure controls were deemed ineffective because of material weaknesses involving accounting resources, Headway controls and broadcast and digital revenue controls. Management reported remediation work in progress. Management said ordinary-course legal claims were not expected to materially affect the company.
Important facts for investors to verify
- Whether the expected FCC reimbursement for repacking costs is received, and whether related spectrum revenue and television advertising remain sufficient to offset weakness in radio and digital.
- Progress and independent validation of remediation for the disclosed material weaknesses, particularly revenue recognition and Headway financial reporting.
- Compliance with credit-agreement requirements and the company’s ability to service variable-rate debt; review the reported 3.1x leverage measure and its definition.
- Final Headway contingent-consideration calculations, and the impact of ongoing digital revenue declines and programmatic pricing pressure on margins.
- The sustainability of operating cash flow and the planned $20.3 million of 2019 capital expenditures, including the timing and certainty of the expected FCC reimbursement.