Grupo Televisa, S.A.B. (NYSE:TV) Q1 2024 Earnings Call Transcript April 26, 2024

Grupo Televisa, S.A.B. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning everyone and welcome to Grupo Televisa's First Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Before we begin, I would like to draw your attention to the press release, which explains the use of forward-looking statements and applies to everything we discuss in today's call and in the earnings release. Please note, this event is being recorded. I will now turn the call over to Mr. Alfonso de Angoitia, Co-Chief Executive Officer of Grupo Televisa. Please go ahead, sir.

Alfonso de Angoitia: Thank you, Elsa. Good morning everyone and thank you for joining us. With me today are Francisco Valim, CEO of Cable and Sky; and Carlos Phillips, CFO of Grupo Televisa. As you may recall, one of the strategic pillars approved by our Board of Directors was to streamline Grupo Televisa's operations and simplify our asset structure. I am delighted by the progress we have achieved on this front so far this year. On February 20th, we concluded the spin-off of Ollamani and its listing on the Mexican Stock Exchange under the ticker symbol, AGUILASCPO, unlocking significant value to our shareholders. And on April 3rd, we announced that we reached an agreement with AT&T to acquire its minority stake in Sky Mexico, subject to regulatory approvals.

Following the conclusion of these two milestones, Grupo Televisa will not only be a pure telecom company from a consolidated standpoint with massive opportunities to take advantage of Sky's exclusive sporting content rights in our Cable segment and generate significant synergies and efficiencies through the integration of these two businesses, but also the largest shareholder in Televisa Univision, the world's leading Spanish language media and streaming company through our unconsolidated 44% stake with huge potential to create value. Regarding the agreement with AT&T to acquire its minority stake in Sky Mexico, I would like to ask Valim to walk you through the plan that we will pursue to fully merge Sky with our Cable operations, materially strengthening the competitive and financial position of the combined company.

Valim's mandate as recently appointed CEO of Sky as well as CEO of our Cable operations, is to completely integrate the two companies benefit from Sky's exclusive sporting content, to improve the competitive position of the combined company, extract as many OpEx and CapEx synergies as possible, expand free cash flow generation, and therefore, increase returns on invested capital. Having said that, let me turn the call over to Valim as he will elaborate on this restructuring plan.

Francisco Valim: Thank you, Alfonso. Good morning everyone. We view of integration of Sky with our Cable operations as a great opportunity to create value for Grupo Televisa's shareholders as there are significant synergies and efficiencies to be achieved from the revenue, OpEx, and CapEx standpoint. The proposed merger is something that we have been analyzing for some time already. Therefore, we have done extensive work to map the integration process and execute as quickly as possible. So far, we have outlined a new organizational structure for the combined company that will allow us to retain top talent and optimize duplicated roles. We have also identified several areas to implement synergies and efficiencies, including commercial, sales commissions, programming, IT, technology, marketing and others.

The main enablers of savings will be the economies of scale, a wider offering of products and service, reduced overlap of commercial infrastructure and call centers as well as real estate and redundancies of duplicated systems and functions. This integration will also allow us to standardize regions, sales channels and commission schemes, have a better customer base management, increased productivity, achieved across selling and upselling, improved penetration of triple play services, reduced churn and leverage on Sky's exclusive sporting content in cable further differentiating our video packages from those of our competitors. All in all, after full implementation of our structure integration, most of which is expected to occur in the second quarter of 2024, we estimate potential savings of around 15% of Sky's combined annual OpEx and CapEx. We project these synergies will gradually be more evident beginning in the third quarter of 2024, when we estimate OpEx savings of approximately MXN 400 million.

Moving onto the operations and financial performance of our cable operations, we ended March with a network of 19.7 million homes, after passing around 137,000 new homes during the quarter. In the first quarter, we continued to execute our strategy to focus on value customers rather than volume, while improving customer retention and satisfaction. This contributed to achieving a sequential reduction in churn of around 5%. As a result, our first quarter net adds accelerated to 10,700 in broadband and 2,800 in video compared to 600 and 100 net adds, respectively, in the fourth quarter of 2023. As we keep working on further churn reduction, we project to gradually deliver stronger net adds over the coming quarters. During the quarter, net revenue from our residential operations decreased by 2.3% year-on-year as our subscriber base was 6.7% lower due to the cleanup that we did in the third quarter 2023 and because of the ongoing negative impact from Hurricane Otis in Acapulco, given that an important amount of our customers are not paying their dues yet.

On the other hand, net revenue from our enterprise operations increased by 4.1% year-on-year. To sum up, net revenue from our cable segment of MXN 11.9 billion fell by 1.8% year-on-year, while operating segment income of MXN 4.7 billion declined by 8.7%. Our cable segment margin of 39.2% contracted by 300 basis points year-on-year, mainly driven by inflationary pressures in labor and content-related costs but it expanded by 60 basis points sequentially due to ongoing efficiency measures that we have been implementing since the third quarter of 2023. Excluding the negative impact on revenue and EBITDA from the Hurricane Otis in Acapulco, revenue from our cable segment would have declined by 1.2% year-on-year, while operating segment income would have been 7.6% lower.

So our recurring cable segment margin would have been 39.5%. A better subscriber mix with an increased proportion of high-value customers, price increases implemented in April to pass-through inflation and the phase out of our subscriber-based agreement should allow us to recoup net revenue growth at our residential operations in the third quarter of 2024, while our cable segment profitability should remain relatively stable at current levels. With regards to CapEx, our cable segment investment of MXN 1.6 billion during the first quarter fell by 47.7% year-on-year. So, our cable CapEx to sales ratio of 13.7% was 1,200 basis points lower than that of the first quarter of 2023. Finally, operating cash flow for our Cable segment, which is equivalent to EBITDA minus CapEx, was MXN 3 billion in the first quarter, increasing by 52.1% year-on-year and accounting for 25.5% of our sales.

This basically means our Cable segment operating cash flow margin increased by 1,000 basis points year-on-year. The 2024 CapEx budget for our Cable segment remains unchanged at $630 million, including $30 million for the reconstruction of our network in Acapulco, which we expect to be reimbursed by the insurance company. However, a more efficient CapEx deployment focused on higher investment returns and a relatively stable profitability at current levels led us to feel confident that our organic operating cash flow margin for 2024 will increase by around 300 basis points compared to that of 2023. Now let me walk through Sky's operating and financial performance. During the first quarter, we lost 251,000 revenue generating units, mostly coming from prepaid subscribers that have not been recharging their service.

However, we expect integration with our Cable segment to gradually contribute to reduced churn, driven by better customer base management and cross-selling and up-selling opportunities, as previously discussed. Sky's first quarter revenue of MXN 4.1 billion fell by 12.3% year-on-year, slowing some from the 15.3% revenue decline experienced in the fourth quarter of 2023. The Sky's operating segment income of MXN 1.2 billion decreased by 24.4% year-on-year, while its margin of 29.8% contracted by 370 basis points. The Sky's first quarter operating income continue to be affected by the cost and expenses related to the launch of Sky Más, including the advertising campaign. Nevertheless, we experienced a sequential expansion of profitability of 250 basis points.

We got CapEx deployment, the Sky's investments of MXN 0.4 billion in the first quarter fell by 48.9% year-on-year. Therefore, Sky's CapEx to sales ratio of 10% was 720 basis points below that of the first quarter of 2023. Lastly, Sky's operating cash flow was flat year-on-year at MXN 0.8 billion in the first quarter, representing 19.8% of sales. So Sky's operating cash flow margin expanded by 250 basis points year-on-year. Our 2024 CapEx budget for Sky was $145 million, equivalent to over 16% of sales. However, given our restructuring integration plan, now we think that Sky's CapEx to sales is more likely to be below 14% this year.

Alfonso de Angoitia : Thank you, Valim. You're doing a great job. Given the operating and financial performance of our two consolidated businesses, Grupo Televisa's consolidated revenue reached MXN 16 billion, representing a decline of 4.8% year-on-year, while operating segment income reached MXN 5.9 billion, equivalent to a year-on-year decrease of 12.5%, mainly driven by the lower revenue and inflationary pressures. Now let me walk you through TelevisaUnivision's first quarter results released yesterday morning. The company delivered another solid quarter from a top-line perspective, with revenue of over $1.1 billion, growing by 7.3% year-on-year. However, EBITDA of $329 million fell by 8.9% due to continued streaming investments for VIX and the comp of a non-recurring bad debt expense reversal.

Excluding the bad debt expense reversal, TelevisaUnivision's EBITDA would have only declined by 5%. It is important to highlight that TelevisaUnivision's direct-to-consumer losses continue to decline this quarter and that we are on track to deliver our goal of profitability in the second half of this year. During the quarter, revenue growth at TelevisaUnivision was driven by solid increases in consolidated advertising and subscription and licensing revenue of 7% and 9%, respectively. While consolidated advertising revenue increased by 7% year-on-year, in the US, advertising revenue was flat as growth in direct-to-consumer was offset by some softness in our linear networks. In DTC, we delivered exceptional growth as we were very effective in monetizing the increased engagement on VIX with strong sell-through rates of over 80% and significant CPM premiums to linear.

At our linear networks business, our results were mixed. We saw strength in sports and certain categories where we have traditionally had low penetration, such as financial and pharma that contributed to solid scatter volume. However, we experienced softness in the CPG, retail, and tech categories, along with some pressure from ratings declines that were not fully offset by price. In Mexico, advertising revenue growth of 19% year-on-year was driven by the appreciation of the Mexican peso, and because starting this quarter, we acquired some third-party ad inventory which contributed with 500 basis points of growth that will be accretive to bottom line. In Mexico, the public sector was impacted by advertising restrictions ahead of presidential elections in June.

Still, this was offset by strength of private sector advertising as we kept adding new clients through the scattered market. In addition, we experienced strong advertising growth in our DTC business. FX-neutral advertising revenue in Mexico increased by 9% year-on-year. Consolidated subscription and licensing revenue increased by 9%, primarily driven by VIX's premium subscription streaming tier. In the US, revenue was flat as growth from VIX was offset by linear subscription revenue declines. In Mexico, growth of 34% was driven by the appreciation of the Mexican peso and by solid revenue increases from VIX and content licensing. FX-neutral subscription and licensing revenue in Mexico grew by 24% year-on-year. Looking ahead, we're very well positioned to deliver a record political year from an ad sales perspective and a profitable streaming business in the second half of the year.

This should then return our company back to overall EBITDA growth for the full year and allow us to continue to focus on strengthening our balance sheet through organic de-leveraging and by extending and smoothing our maturities. To wrap-up, Bernardo and I are confident that the strategy to streamline our operations and simplify our asset structure at Grupo Televisa, and the execution of our digital transformation strategy at TelevisaUnivision will allow us to improve our operating and financial performance in 2024. At Grupo Televisa, we're putting a lot of effort into rethinking our corporate structure to unlock value, including the integration and restructuring of our consolidated businesses to come out stronger from the current environment.

This strategy is focused on strengthening our competitive position, extracting as many OpEx and CapEx synergies as possible and enhancing free cash flow generation. The preliminary assessment of the Sky integration with our cable operations looks promising and is expected to be concluded very quickly to start benefiting from significant synergies during the second half of this year. And at TelevisaUnivision, we continue to be very excited about the prospects for 2024. Our DTC business is growing and scaling and our most important metrics kept trending in the right direction. We added users, grew engagement, reduced churn and generated significant marketing savings as a result of our efficient customer acquisition funnel through our free tier.

Looking forward, we have very clear objectives in place, a profitable DTC business in the second half of the year and to end 2024 with an organic reduction in leverage. Now we are ready to take your questions. Elsa, could you please provide instructions for the Q&A?

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