Entravision Communications Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Unaudited consolidated results. Entravision operates television, radio and digital media businesses, serving U.S. Hispanic audiences and international digital markets.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / prior balance date |
|---|---|---|
| Revenue | $66.8 million | $57.5 million; up 16% |
| Operating income (loss) | $(0.3) million | $8.1 million |
| Net income (loss) | $(1.8) million; $(0.02) per share | $2.6 million; $0.03 per share |
| Operating margin | Approximately (0.5)% | Approximately 14.0% |
| Adjusted EBITDA (non-GAAP) | $6.9 million; 10% of revenue | $12.6 million; 22% of revenue |
| Operating cash flow | $3.6 million | $12.9 million |
| Cash and cash equivalents | $89.2 million | $39.6 million at Dec. 31, 2017 |
| Marketable securities / restricted cash | $157.8 million / $0.8 million | No marketable securities / $222.3 million restricted cash at Dec. 31, 2017 |
| Debt | $298.5 million principal outstanding; $294.9 million carrying amount, net of issuance costs and discount | $3.0 million current maturities |
Q1 investing cash outflow was $165.6 million, primarily reflecting $159.4 million of marketable-security purchases; financing cash outflow was $9.9 million, including dividends, debt payments, share repurchases and share-based compensation tax payments. The reported cash, cash-equivalents and restricted-cash balance at quarter-end was $90.0 million. The company declared dividends of $0.05 per share in Q1, versus $0.03 a year earlier.
Performance changes and business drivers
- Digital revenue rose to $18.2 million from $4.1 million, primarily because the 2017 comparison period preceded the acquisition of Headway. Digital segment operating loss widened to $1.0 million from $0.4 million. Digital media costs were 58% of digital revenue, versus 43% a year earlier.
- Television revenue fell 9% to $34.5 million as local and national advertising weakened; retransmission consent revenue increased to $8.9 million from $8.0 million. Television segment operating profit declined 28% to $10.8 million.
- Radio revenue declined 10% to $14.1 million, mainly due to lower local and national advertising. Its segment operating loss widened to $1.8 million from $0.7 million.
- Overall growth was more than offset, at the operating-income level, by higher costs, including digital media costs, and a $2.1 million charge for the increased estimated fair value of Headway contingent consideration. A $0.2 million foreign-currency loss was also recorded.
- Interest expense was $3.4 million, while interest income increased to $0.9 million, principally reflecting returns on securities. The Q1 income-tax benefit was $0.9 million; the company reported that the effective rate differed from the 21% statutory rate primarily due to foreign and state taxes and nondeductible expenses.
Debt, outlook, risks and unusual items
- The $300 million senior secured Term Loan B matures November 30, 2024, bears variable interest at the Eurodollar rate plus 2.75% or base rate plus 1.75%, and has no financial maintenance covenants. The company reported a 4.9-to-1 total leverage ratio at March 31, 2018, compared with 3.2-to-1 at March 31, 2017. A 100-basis-point increase in the three-month Eurodollar rate would increase annual interest expense by approximately $3.0 million, based on quarter-end debt.
- Management anticipated 2018 revenue growth versus 2017 from digital media, political advertising across segments and television retransmission consent. It expected positive operating cash flow for full-year 2018 and approximately $9 million of capital expenditures, excluding expenditures expected to be reimbursed by the FCC. These are expectations, not guaranteed results.
- In April 2018, Entravision implemented personnel reductions and discretionary expense cuts, expecting approximately $8 million of annualized savings beginning in Q2 and about $0.8 million of severance expense in Q2.
- After quarter-end, the company repurchased another 1.0 million shares for $5.1 million. On April 11, 2018, the board authorized an additional $15 million of repurchases, bringing total authorization to $30 million.
- Key risks include traditional television and radio advertising declines, rapid changes and lower margins in digital advertising, competition, reliance on Univision relationships and retransmission-consent revenue, substantial variable-rate debt, foreign-currency exposure, regulatory and spectrum-related matters, and debt-agreement restrictions. Litigation was described as ordinary-course and not expected by management to have a material adverse effect.
- Disclosure controls were deemed ineffective because of an ongoing material weakness in internal controls related to insufficient accounting resources and controls over complex or non-recurring transactions. Management was implementing remediation measures; it reported no material misstatement from the weakness.
Important facts for investors to verify
- Whether digital revenue and profitability can be sustained as Headway is fully integrated, including the effect of third-party media costs and programmatic advertising mix.
- Whether broadcast advertising declines are offset by retransmission consent, political advertising and digital growth, and how the 2018 outlook develops through subsequent quarters.
- Leverage, variable-rate debt exposure, cash generation and compliance with the secured credit facility’s covenants and repayment provisions.
- Progress in remediating the material weakness in internal controls and any subsequent updates to management’s assessment.
- The eventual amount and timing of Headway contingent consideration, and whether anticipated expense savings and share repurchases affect liquidity as expected.