Entravision Communication
Overview
Entravision Communication (EVC) is a leading global media company that, through its television and radio segments, reaches and engages U.S. Hispanics across acculturation levels and media channels. Additionally, its digital segment, whose operations are located primarily in Spain, Mexico, Argentina and other countries in Latin America, reaches a global market. The company's operations encompass integrated marketing and media solutions, comprised of television, radio and digital properties and data analytics services. For financial reporting purposes, the company report in three segments based upon the type of advertising medium: television, radio and digital. The company's net revenue for the three-month period ended September 30, 2019 was $68.8 million. Of that amount, revenue attributed to its television segment accounted for approximately 53%, revenue attributed to its digital segment accounted for approximately 26% and revenue attributed to its radio segment accounted for approximately 21%.1
As of the date of filing this report, own and/or operate 55 primary television stations located primarily in California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Nevada, New Mexico, Texas and Washington, D.C. The company own and operate 49 radio stations in 16 U.S. markets. The company's radio stations consist of 38 FM and 11 AM stations located in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas. The company also operate Entravision Solutions as its national sales representation division, through which the company sell advertisements and syndicate radio programming to more than 100 markets stations across the United States. The company also provide digital advertising solutions that allow advertisers to reach primarily online Hispanic audiences worldwide. The company operate a proprietary technology and data platform that delivers digital advertising in various advertising formats and which allows advertisers to reach audiences across a wide range of Internet-connected devices on its owned and operated digital media sites; the digital media sites of its publisher partners; and on other digital media sites the company access through third-party platforms and exchanges.
The company generate revenue primarily from sales of national and local advertising time on television stations, radio stations and digital media platforms, and from retransmission consent agreements that are entered into with MVPDs. Advertising rates are, in large part, based on each medium’s ability to attract audiences in demographic groups targeted by advertisers. The company recognize advertising revenue when commercials are broadcast and when display or other digital advertisements record impressions on the websites of its third party publishers or as the advertiser’s previously agreed-upon performance criteria are satisfied. The company do not obtain long-term commitments from its advertisers and, consequently, they may cancel, reduce or postpone orders without penalties. The company pay commissions to agencies for local, regional and national advertising. For contracts directly with agencies, the company record net revenue from these agencies. Seasonal revenue fluctuations are common in its industry and are due primarily to variations in advertising expenditures by both local and national advertisers. The company's first fiscal quarter generally produces the lowest net revenue for the year. In addition, advertising revenue is generally higher during presidential election years (2020, 2024, etc.), resulting from significant political advertising and, to a lesser degree, Congressional mid-term election years (2022, 2026, etc.), resulting from increased political advertising, compared to other years.
The company's FCC licenses grant it spectrum usage rights within each of the television markets in which the company operate. The company regard these rights as a valuable asset. With the proliferation of mobile devices and advances in technology that have freed up excess spectrum capacity, the monetization of its spectrum usage rights has become a significant part of its business in recent years. The company generate revenue from agreements associated with these television stations’ spectrum usage rights from a variety of sources, including but not limited to agreements with third parties to utilize excess spectrum for the broadcast of their multicast networks; charging fees to accommodate the operations of third parties, including moving channel positions or accepting interference with broadcasting operations; and modifying and/or relinquishing spectrum usage rights while continuing to broadcast through channel sharing or other arrangements. Revenue generated by such agreements is recognized over the period of the lease or when Entravision Communication has relinquished all or a portion of its spectrum usage rights for a station or have relinquished its rights to operate a station on the existing channel free from interference. In addition, the company will consider strategic acquisitions of television stations to further this strategy from time to time, as well as additional monetization opportunities expected to arise as the television broadcast industry anticipates advances in ATSC 3.0.
The company's primary expenses are employee compensation, including commissions paid to its sales staff and amounts paid to its national representative firms, as well as expenses for general and administrative functions, promotion and selling, engineering, marketing, and local programming. The company's local programming costs for television consist primarily of costs related to producing a local newscast in most of its markets. Cost of revenue related to its television segment consists primarily of the carrying value of spectrum usage rights that were surrendered in the FCC auction for broadcast spectrum. In addition, cost of revenue related to its digital segment consists primarily of the costs of online media acquired from third-party publishers and third party server costs. Direct operating expenses include salaries and commissions of sales staff, amounts paid to national representation firms, production and programming expenses, fees for ratings services, and engineering costs. Corporate expenses consist primarily of salaries related to corporate officers and back office functions, third party legal and accounting services, and fees incurred as a result of being a publicly traded and reporting company.
Financial Highlights
During the third quarter of 2019, its consolidated revenue decreased to $68.8 million from $74.6 million in the prior year period, primarily due to a decrease in advertising revenue. The decrease in advertising revenue was partially offset by an increase in revenue from spectrum usage rights and retransmission consent revenue in its television segment. The company's audience shares remained strong in the nation’s most densely populated Hispanic markets.2
Net revenue in its television segment remained constant at $36.4 million for the three-month periods ended September 30, 2019 and 2018. The company had increases in revenue from spectrum usage rights and retransmission consent revenue, partially offset by a decrease in local advertising revenue, as a result in part of ratings declines and changing demographic preferences of audiences. Additionally, there is a trend for advertising to move increasingly from traditional media, such as television, to new media, such as digital media. The company also experienced a decrease in political advertising revenue, which has not been material in 2019.
Net revenue in its radio segment decreased to $14.8 million for the three-month period ended September 30, 2019 from $15.8 million for the three-month period ended September 30, 2018. This decrease of approximately $1.0 million, or 6%, in net revenue was primarily due to a decrease in national advertising revenue, as a result in part of ratings declines and changing demographic preferences of audiences as well as the absence of revenue from the 2018 FIFA World Cup in 2019 compared to 2018. Additionally, there is a trend for advertising to move increasingly from traditional media, such as radio, to new media, such as digital media. This trend has had a more significant impact on its radio revenue as compared to television revenue, and the company expect that this trend will continue.
Net revenue in its digital segment decreased to $17.6 million for the three-month period ended September 30, 2019 from $22.4 million for the three-month period ended September 30, 2018. This decrease of approximately $4.8 million, or 21%, in net revenue was a result of declines in both international and domestic revenue. Entravision Communication has previously noted a trend in its domestic digital operations whereby revenue is shifting more to automated self-service platforms, referred to in its industry as programmatic revenue, and this trend is now growing in markets outside the United States. As a result, advertisers are demanding more efficiency and lower cost from intermediaries like it, which is putting pressure on margins. In response to this, Entravision Communication has started to offer programmatic solutions to advertisers and strategically shift the focus of its other digital offerings to focus on generating revenue with lower associated cost of revenue. This has contributed to a decline in the volume of revenue but led to improvement in the gross margin percentage. Notwithstanding the foregoing, the digital advertising industry remains dynamic and is continuing to undergo rapid changes in technology and competition. The company expect this trend to continue and possibly accelerate. The company must continue to remain vigilant to meet these dynamic and rapid changes including the need to further adjust its business strategies accordingly. No assurances can be given that such adjustments will be successful.
Due to lower than anticipated performance of its digital reporting unit, and updated internal forecasts of future performance of its digital reporting unit, the company determined that triggering events had occurred during the third quarter of 2019 that required interim impairment assessment for its digital reporting unit. As a result of this assessment, the company incurred an impairment charge related to goodwill in its digital reporting unit in the amount of $5.3 million for the three-month period ended September 30, 2019. This impairment charge is in addition to an impairment charge the company incurred during the second quarter of 2019.
During the third quarter, as a result of changes in regulations in Mexico, the company were required to prepay the license fees for its Mexico broadcast licenses for a period of 20 years. The company elected not to make the required prepayment for station XHRIO-TV serving the Matamoros/Harlingen-Weslaco-Brownsville-McAllen market before the deadline to make such prepayment. As a result, the company currently expect to stop broadcasting on this station at the end of the current license term, which expires on December 31, 2021. As such, the company determined that triggering events had occurred during the third quarter of 2019 that required an interim impairment assessment for this broadcast license. As a result of this assessment, the company incurred an impairment charge related to indefinite life intangible assets in its television reporting unit in the amount of $3.5 million for the three-month period ended September 30, 2019.
Univision
Substantially all of its television stations are Univision- or UniMás-affiliated television stations. The company's network affiliation agreement with Univision provides certain of its owned stations the exclusive right to broadcast Univision’s primary network and UniMás network programming in their respective markets. Under the network affiliation agreement, the company retain the right to sell no less than four minutes per hour of the available advertising time on stations that broadcast Univision network programming, and the right to sell approximately four and a half minutes per hour of the available advertising time on stations that broadcast UniMás network programming, subject to adjustment from time to time by Univision.
Under the network affiliation agreement, Univision acts as its exclusive third-party sales representative for the sale of certain national advertising on its Univision- and UniMás-affiliate television stations, and the company pay certain sales representation fees to Univision relating to sales of all advertising for broadcast on its Univision- and UniMás-affiliate television stations. During the three-month periods ended September 30, 2019 and 2018, the amount the company paid Univision in this capacity was $2.0 million and $2.2 million, respectively. During the nine-month periods ended September 30, 2019 and 2018, the amount the company paid Univision in this capacity was $6.0 million and $6.4 million, respectively.
The company also generate revenue under two marketing and sales agreements with Univision, which give it the right to manage the marketing and sales operations of Univision-owned Univision affiliates in six markets – Albuquerque, Boston, Denver, Orlando, Tampa and Washington, D.C.
Under the current proxy agreement Entravision Communication has entered into with Univision, the company grant Univision the right to negotiate the terms of retransmission consent agreements for its Univision- and UniMás-affiliated television station signals. Among other things, the proxy agreement provides terms relating to compensation to be paid to it by Univision with respect to retransmission consent agreements entered into with MVPDs. During the three-month periods ended September 30, 2019 and 2018, retransmission consent revenue accounted for approximately $8.8 million and $8.4 million, respectively, of which $7.0 million and $6.5 million, respectively, relate to the Univision proxy agreement. During the nine-month periods ended September 30, 2019 and 2018, retransmission consent revenue accounted for approximately $26.6 million and $26.4 million, respectively, of which $20.7 million and $21.5 million, respectively, relate to the Univision proxy agreement. The term of the proxy agreement extends with respect to any MVPD for the length of the term of any retransmission consent agreement in effect before the expiration of the proxy agreement.
Univision currently owns approximately 11% of its common stock on a fully-converted basis. The company's Class U common stock held by Univision has limited voting rights and does not include the right to elect directors. Each share of Class U common stock is automatically convertible into one share of Class A common stock (subject to adjustment for stock splits, dividends or combinations) in connection with any transfer to a third party that is not an affiliate of Univision. In addition, as the holder of all of its issued and outstanding Class U common stock, so long as Univision holds a certain number of shares of Class U common stock, the company may not, without the consent of Univision, merge, consolidate or enter into a business combination, dissolve or liquidate its company or dispose of any interest in any FCC license with respect to television stations which are affiliates of Univision, among other things.
Recent development
Extension of Partnerships
On February 10 2020 Entravision Communications Corporation announced that the extension of its long term partnerships with Oswaldo Diaz and Eddie "Piolín" Sotelo. Entravision entered into a new two-year affiliation agreement with Oswaldo Diaz for his hit "El Show de Erazno y La Chokolata" to be carried on its radio stations. Also, under the separate agreements, Entravision has extended its programming and advertising representation agreement with Eddie "Piolín" Sotelo and his hit midday program, "El Show de Piolín." Piolín's contract extension will run through December 2020.
